The Mess We're In

How Britain became ungovernable and, perhaps, unfixable.

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Over the course of the past 15 years the United Kingdom of Great Britain and Northern Ireland has had six prime ministers and I don’t think it’s breaking news to observe that none of the five who’ve been and gone are remembered especially fondly and that the sixth, Sir Keir Starmer, is currently on track to be dismissed as just another failure to be added to the long, long, list of prime ministerial disappointments. Why, right now his approval rating is as low as Boris Johnson’s when Johnson was at his lowest ebb. That’s some kind of an achievement, I suppose, at the end of your first year in office and when you have a parliamentary majority of 165.

David Cameron became prime minister because of the 2008 financial crisis that, while bad everywhere, was especially bad for a country like Britain that was a medium-sized power with an outsized financial services sector. Britain was tiring of Labour and much of the electorate never much loved Gordon Brown anyway but even then Cameron could only govern with the support and coalition assistance of Nick Clegg’s Liberal Democrats. Gosh, it all seems so long ago.

Yet compared with what would follow Cameron’s government was a relative success. There were five - five! - Tory prime ministers in 14 years and Cameron was clearly the best and the most successful of them. Yes, even despite Brexit.

(You may say this is a third-rate bauble to claim and you might have a point. Still, Theresa May never managed to escape the Brexit maze; Boris Johnson got Brexit “done” but was psychologically ill-equipped for life in Downing Street; Liz Truss was Liz Truss, and Rishi Sunak was charged with leading a reclamation project that was too little, too late, and doomed almost from the start. Cameron wins because Cameron had a plan and managed to achieve some of it.)

Of course many people will never forgive Cameron for the Brexit referendum but the problem was losing it, not holding it. You may argue he placed too great an emphasis on party unity but without the promise to hold a referendum it’s quite possible the Conservative party would have split. And of course he thought it an easy promise because he did not expect to win a majority at the 2015 general election.

Yet earlier in the century Labour and the Lib Dems had each favoured an In/Out plebiscite so the idea was hardly novel or absurd. The problem was, first, placing far too much weight on a “renegotiation” with the EU that could never satisfy eurosceptics or even solidify support for Remain amongst Tory waverers. And then, second, allowing cabinet ministers to campaign against the government while remaining in the government. Would Johnson and Michael Gove have sacrificed their posts for the outside chance of securing Brexit? Maybe. But also, well, maybe not.

Regardless, if we are kind enough to ignore how it ended, the Cameron ministry was more successful than anything which followed it. Then again, those that followed had to deal with the consequences of the way in which Cameron’s time in office ended.

The “austerity” imposed by Cameron and George Osborne is unfashionable now and typically judged a mistake. Britain could borrow cheaply then yet preferred to restrain spending. This, we are told, was an error. Yet borrowing costs were low at least in part because it was understood that the government would at least attempt to borrow as little as possible. Looser policy might easily have become more expensive policy too.

Politically, however, Cameron and Osborne won the argument. The country had lost the run of itself and run out of money. A period of reflection, of belt-tightening, was required and also, ultimately, what we deserved. Not pleasant, perhaps, but there you have it. Time to fix the roof, whatever the weather. You might disagree, but the public broadly bought this.

But you can see the problem we have now, can’t you? Borrowing for growth is one thing but borrowing without getting the growth quite another. Here’s that chart on a longer timescale:

Deficits that are normal these days would previously have been reserved for exceptional circumstances and recessions. This is one consequence of the series of shocks which have struck Britain - and peer countries - in recent years. Unfortunately, they have struck Britain more severely than most.

The scale of the problem is made clear in the Office for Budget Responsibility’s latest report. It makes for bleak but necessary reading. The single line verdict is a tough one: “The scale and array of risks to the UK fiscal outlook remains daunting”. We have too many commitments and not enough money to meet them.

As the OBR notes, Britain now has the third-highest borrowing costs, the fifth-largest deficit and, as measured against GDP, the sixth-highest national debt of any of the world’s 36 leading open economies. It is the combination of these troubles which causes the problem. High debt at a low rate of interest is obviously more manageable than high debt at higher levels of interest. This is not complicated but also something beyond the grasp of too many Members of Parliament.

Fraser Nelson, my old boss at The Spectator and now colleague as a columnist on The Times, recently wrote about this on his own Substack. We are spending more than £100bn a year on debt interest payments and last year this amounted to almost nine percent of government spending. Note that this chart, created by Fraser, shows the real terms cost of debt interest.

Covid obviously plays a part in this. Direct support for workers and other covid spending amounted to almost half a trillion pounds over 2020 and 2021. But covid is only part of it. For it turns out that around 25 percent of UK debt is inflation-linked. That’s not a problem when inflation is low; it very quickly becomes one when it isn’t. No peer country has anything like as much index-linked debt as us. (France and Italy have half as much; the US rather less than that and only around five percent of Germany’s debt is tied to inflation. This is why we are in a worse position than them.)

The Russian invasion of Ukraine further exacerbated an inflationary that was likely coming anyway. Capping household energy bills cost another £60bn or so - more than we were spending on defence - and added yet more debt to the pile. Plenty of things can be put on the never-never but at some point they have to be paid for. Whether we like it or not, that time is now.

And it is this which constrains Rachel Reeves. Labour MPs grousing that too much attention is paid to arbitrary fiscal rules have a point: the rules are arbitrary. They could be changed. But they can’t be changed on a cost-free basis.

The people who lend money cannot be expected to do so without contemplating the fiscal credibility of the people borrowing the money. The less credibility, the more expensive the rate of interest charged is going to be. Reeves’ first budget increased taxes by around £40bn but it increased spending by even more than that. The deficit remains an issue and it is this, not simply the usual Treasury parsimony, that helps explain why the chancellor has such limited “fiscal headroom” in the run-up to this year’s gloomy budget. Either spending has to come down or taxes are going to have to go up. Or, more probably, both.

The reality of the mess we’re in has persuaded the media class that something must be done. As always, diagnosis is easier than cure and the press is stronger on the former than the latter. But at least diagnosis is a start.

Unfortunately, many MPs and most voters remain in denial. This is the context in which to understand the tempests that have raged over tiny budget items. Scrapping the universal winter fuel payment for the richest cohort of pensioners in British history was only going to save around £1.5bn; the welfare “cuts” were in reality an attempt to trim the rate of increase in welfare spending by a mere £5bn by the end of the decade. Each of these things, comparatively trivial in the greater scheme of matters, proved politically impossible.

Some of this is the prime minister’s responsibility. Sir Keir Starmer is not a great groundsman. He is not very good at preparing and rolling the pitch. Nor is he inclined to actually make a case for his own government’s priorities. He acts as though it must be self-evident that his policies are sensible because if they were not they would not be the kind of policies favoured by a sensible fellow like Sir Keir Starmer.

But this is not obvious to voters and the result is a government trussed-up by its own contradictions. It desires a bit of this and a bit of that but not too much of anything. Starmer is not a salesman but if a prime minister won’t, or can’t, sell his own agenda he should not be surprised if nobody else can, or will, either.

Every zig requires a zag. So growth is the only way out of the mess Britain finds itself in but the need to increase spending means increasing taxes and since voters won’t wear higher income taxes this means business must be clobbered instead. By serving two masters, the government serves none. Starmer is no Cameron and Reeves no Osborne: they haven’t won permission for their own preferences.

On welfare, for instance, the government suggested reforms to disability payments were needed because we need to save money. Well, yes, but this is only half the argument and, worse, the wrong half to focus upon. If it’s just about saving cash, no wonder many people thought it meant taking money from people in wheelchairs.

As is often the case, arguments are won when they are approached obliquely. The welfare argument should have been about fraud and need, not money. Saving money is what happens when you win arguments about need and fairness.

And, look, when you have law firms advertising that they will do the paperwork for people claiming welfare in exchange for a ten percent cut of the monthly benefits cheque then, come on, it should be easy to demonstrate that we are currently handing out welfare payments to many people who would not previously - ie, five years ago - have been considered remotely unwell or disabled. Markets in everything, of course, and the genius of capitalism is to find, or create, these markets but sometimes the existence of the service demonstrates the rot within the system. This is one such instance.

But Labour didn’t make these arguments about who deserves welfare and who doesn’t. It did not make this an argument about fairness. And so it lost the argument about saving money too. And now you can’t cut anything and since you can’t raise taxes on “working people” you can’t fix either half of the tax-and-spend relationship. Which means you are, to use the technical term, completely screwed.

Other countries have some of these problems too but few have all of them concurrently. Perhaps Britain is actually leading the way, demonstrating the extent to which the post-war social democratic welfare state is edging close to breaking point.

In certain respects Britain increasingly resembles France, albeit a France with lower productivity and without the French states’s ability to GET THINGS DONE. Still, just as the French hate all their politicians, so the British now loathe theirs. Unlike the French, however, we don’t tend to put ours in jail. At least, not yet.

Still, French sclerosis was for many years the kind of thing British commentators enjoyed looking down upon. Look, for instance, at the power of French trades unions. Crazy! Look at how difficult it has been to persuade French voters they might have to work beyond the age of, zut alors, 62! Yes, Macron has increased it to 64 but everyone knows this is not enough and everyone also strongly disapproves of the measure.

Our own pension follies mean we can’t even shake our heads at this any longer. The triple lock will be costing an extra £15bn a year by the end of the decade, three times more than was originally estimated. Yet even this isn’t enough to prompt some truth-telling. Here too everyone knows it’s unsustainable and yet no-one has the courage to do anything about it.

Politicians increasingly suspect voters can’t handle the truth and, you know what, the politicians are probably right about that. This is what happens when you have four seismic shocks in 17 years. The 2008 financial crisis, Brexit, the pandemic, and the war in Ukraine have all weakened Britain while also sapping voters’ energy.

Given all this, perhaps we should be less surprised by the rise of the Outsiders (Reform and the Greens) than we appear to be.

Could Nigel Farage become prime minister? The polls certainly suggest Reform could be the largest party in the House of Commons. Then again, I am also old enough to remember that the polls also once indicated that David Owen and David Steel would be running the country. That they failed does not mean Farage will; it merely means that we should perhaps not assume that what is happening now will continue to happen in the future.

Reform is the flavour of the moment but there is a significant difference between dating and marrying. At some point voters will begin to pay attention to what Reform actually promises. At present, that appears to be both a significant increase in welfare spending and an enormous increase in the tax-free allowance. Lifting the latter to £20,000 while spending even more money on pensions (in particular) almost certainly guarantees fiscal calamity.

Here we see Farage becoming a populist version of Jeremy Corbyn. Yes, voters might have liked Labour’s old promise for free broadband for everyone but no, they never thought it remotely credible. The pledge became a symbol of Corbyn’s lack of seriousness. Something similar may happen to Farage. You cannot increase spending and cut taxes at the same time and expect nothing bad to happen. The Laffer Curve is real but it does not apply at every level of taxation or in any and all circumstances; cutting taxes cannot possibly always raise more revenue.

Yet the electorate’s willingness to indulge, and flirt with, Farage is a symptom of a wider failure. Every complex problem has a solution which, as dear old Henry Mencken put it, is “neat, plausible, and wrong”.

We see this on the left now. The depth of the predicament in which the United Kingdom finds itself is such that it can only be solved by a great and grand and sweeping solution. Hence the enthusiasm for a cockamamie idea like a wealth tax. Extravagant promises are made for this. Some suggest it might raise £24bn a year; others settle for £10bn. As always, it will be all upside and no downside and if you believe this you may well believe anything.

But the right is just as asinine. Yes, spending discipline will be required but trimming a little here and a little bit more there isn’t remotely good enough. Nor - to put it mildly - is it obvious that the ever-increasing costs of an ever-older population can be paid for by the kinds of tax cuts that will, allegedly, unlock the economic growth that has been notably absent for more than a decade now.

This is another summer of grumbling apprehension, marked by the vague but profound sense the state has ceased to work as effectively as it should. Again, this is not just a British problem but it is felt especially acutely here.

None of this is entirely cheerful or especially encouraging but if the government won’t tell voters some hard truths we should not be surprised if voters increasingly swallow populist fantasies from the left and right alike.

We can’t go on like this but it is also the case that, at present, we can’t go anywhere else either.

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