Depending on how you look at the world, the whole Trump thing, the tsunami that has all but overwhelmed us since his inauguration in January is either very good or very bad. Sure, the uncertainty he has created, not to mention the tariff war, has not been too clever although if your name happens to be Karin Keller-Sutter – and you happen to be racing around Washington DC without an invitation or a meeting scheduled with the Donald whilst trying to find a way out of the 39% punitive tariffs that are to be imposed on all imports from Switzerland as of tomorrow – then not too clever doesn’t by a country mile cover the level of uncertainty with which you are dealing.
On the plus side, and my commodities guru has done much to highlight this, Trump has shaken up the complacency with which the West has been liberally indebting itself in order to maintain a standard of social welfare and of government spending that has for a long time exceeded its fiscal capacity. Trump’s and Musk’s DOGE initiative might not have turned out quite the way it had been hoped but it has forced not only the American people to think about what the state can realistically be expected to deliver and where and how to rein in often unchallenged expenditure. I long ago noted that the first time a benefit payment is made it becomes an entitlement. The time has maybe come to arrest the ratchet, not that Trump’s One Big Beautiful Bill, now enacted, has actually done much for the country in terms of fiscal discipline.
Before moving on, I do wonder whether Ms Keller-Sutter is somehow related to John Augustus Sutter, the 19th century pioneer who set up Sutter’s Fort, later to become Sacramento, the state capitol of California, and on whose land at Sutter’s Mill in 1848 gold was found. The gold rush that followed in time overwhelmed Sutter’s New Helvetia colony, bankrupted him and he died a broken man. Sutter is today largely forgotten but he was an incredibly colourful character. It is not often that one encounters a non-Spanish name in the making of pre-gold rush California but it is worth looking up the guy. Sutter spelt with a double-T is not common. I do just wonder but I also digress.
Back here in Britain, the fiscal imbalances appear to find themselves more starkly profiled than elsewhere. Thus it is that the London-based National Institute for Economic and Social Research, the country’s oldest properly independent economic research think tank, has just thrown a hand grenade into Chancellor Rachel Reeves’ carp pond.
Reeves, that famous ex-Bank of England economist, purports to be a follower of the Rt Hon Gordon Brown, former Chancellor and later Prime Minister. As unsuccessful as he was in the role of the latter, the same cannot be said of the former. Hardcore Conservatives would argue that he was handed inherently sound government finances by his Thatcherite predecessors and that he blew the surpluses on building a social security network that would be in normal economic circumstances and when needing to be funded out of current income unaffordable. I would not be quite so harsh and I even have a soft spot for the late Alistair Darling who served as Chancellor when Brown took over the premiership from Tony Blair. Reeves became the first Labour Chancellor since her party lost office in May 2010. It is not her fault that she has inherited a fiscal clusterf*ck but it is her fault that she has with little doubt and with no particular political bias made a bad job worse.
She arrived at Number 11 Downing Street, the official residence of the Chancellor, banging on about her cast-iron fiscal rules and about the £22 billion “black hole” that she had found in government finance. Brown arrived at the Treasury and in the first week announced the independence of the Bank of England. Reeves’s big first call was the revocation of the pensioners’ universal winter fuel payment. Having nailed in the election manifesto that she would not raise taxes on “working people” – that being income tax, Value Added Tax and employees’ National Insurance contributions – she had to find the money from other sources, ones she described as being “broad shoulders”.
It is fairly widely assumed that Reeves saw pensioners as tendentially more likely Conservative than Labour voters and thus as fair game, a miscalculation that has proven to be not only fiscally but also reputationally incredibly damaging. At around £12,000 per annum, the UK has one of the OECD’s lowest basic state pensions so the winter fuel payment was to many of those who depend on their peppercorn pension a significant boost. The pushback was huge and ‘ere long Reeves has had to conduct a U-turn.
The NIESC paints a grim picture and one which Ms Reeves will not like. According to its forecasts, the presumptive black hole of £22 billion is about to grow to £51 billion and Reeves is rapidly running out of options to soak business and the rich to get the national finances back in order. It sees few options other than to break the election promise and to raise one or all of the three universal taxes which between them supply around 70% of all the government’s revenue by enough in order to increase overall fiscal income by not much less than 5%. Over the weekend, we had a houseguest, a retired educationalist, himself like Reeves and Oxford PPE – Philosophy, Politics and Economics – graduate who frankly declared: “She lied on her CV and lying on a CV always comes out”. Did she really oversell her skillset to her party? Did they take at face value that she really was a highly rated ex-Bank of England economist and did nobody question why she apparently voluntarily moved from the Old Lady to a middle-ranking retail banking position at the Halifax?
The report goes on to highlight her dilemma or, as it notes in its title, her trilemma. It forecasts UK GDP growth for 2025 of 1.3% and in 2026 of 1.2% although it also notes that if she raises taxes in line with its own expected deficit the drag on growth needs to be included in the calculation. The NIESC then goes on to remind that the third element in the trilemma is the acceptance of her policies by the financial markets. Although the media love to paint Reeves as sitting between a rock and a hard place, in reality it is the entire country that is squeezed in there with her.
There seems little doubt across the City that the Bank of England will tomorrow cut Bank Rate from 4.25% to 4.00% despite inflation remaining stubbornly high with the June reading at 3.6% and with little prospect of it in the immediate future going much lower. If nothing else, the Bank can look at the eurozone where real interest rates are now negative which does not say anything nice about the economic and monetary backdrop.
So where does that leave the government and the British taxpayer? A good few years ago, I joined a business venture in Portugal. There I met an English ex-Goldman Sachs girlie who had junked it all to set up an estate agents focused on selling Portuguese properties to Brits. She had by dint of circumstance grown up in Brazil and was entirely bi-lingual. In a quiet moment, she opined that Portugal’s biggest problem was that long ago anybody with a bit of get-up-and-go had in fact got up and gone and that not only since accession to the EU but as far back as the colonisation of Brazil. She felt that this ongoing mass-migration of the brightest had – her words – depleted Portugal’s residual gene pool. This is by all accounts a problem currently being faced by New Zealand where again the brightest and best are leaving the country in search of a wider range of opportunities than their home country can offer them, leaving behind a gap which will over time have New Zealand trailing further and further behind its friends and relations. Britain next?
The Danish philosopher Soren Kierkegaard – an existentialist but not as many believe a nihilist – once wrote that if he sticks his finger in the ground and smells it he knows where he is. If, however, he sticks it into his soul he smells nothing at all. I detect a similar sense amongst many of our ambitious young who fear there to be no future for them in this country and who think it to be becoming a soulless place in which they will morally and financially be punished for any success they might have. That sentiment is redolent of the 1970s and, as much as the traditional Left might kick and scream, it was under Margaret Thatcher that a sense of “can do” was revived and, as much as the Conservatives will also kick and scream, it was during the Blair years that the country felt even more confident in its abilities.
In this context, there was a week back an article by Patrick Barrow in Reaction, well worth reading, titled “Managerial fatalism is the defining feature of Britain’s political class” and subtitled “More troubling than the noise of decline is the silence and resignation”.
On the subject of Reaction, it is with great sadness that I yesterday received the news from its editor and all-round supremo Iain Martin that the online magazine that has for a few years republished some of my musings is to fold in its current form. I have been honoured to have had my teenage scribblings published along with the work of the likes of Tim Marshall, Adam Bolton, Gerald Warner, Maggie Pagano, Iain himself, the hugely talented deputy editor Caitlin Allen and many, many others.
Iain and I spoke at length about the problematic future of proper journalism – AI is busily snapping at its heels – and about where I am to go next. I shall of course plough on. Ongoing correspondence with readers remains encouraging. Thus it was that I received an email yesterday which read “I can imagine sometimes when you send off your Good Morning Letter, you wonder how many people read it. I just wanted to assure you that in my case I think your commentary and perspectives are routinely quite the most insightful and helpful analysis available anywhere to understand what’s going on. Accessible, interesting, timely, pithy and clear!”. Thank you for the kind words. My alarm clock shall remain set on 5:00 am.
