"The markets won't allow it"

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Faced with rising energy costs, largely as a result of Trump’s disastrous war in Iran, the former Tory Chancellor, Jeremy Hunt, told us that: “The markets wouldn't allow the kind of intervention I was able to do in 2022”, and suggested that any assistance to households would have to be far more targeted. There are, of course, good arguments both for and against targeting of assistance, and that’s an argument which will continue for the foreseeable future, whether in relation to energy costs or any other policy. Governments will make choices; the question, however, is whether they will make those choices on the basis of their own judgement as to what is right, or whether they will follow the neoliberal line that ‘the markets’ have such a stranglehold on policy that they will make the decision. Sadly, the current Chancellor seems to be as much in hock to that neoliberal argument as her predecessor.

Markets, as argued here previously, are an effective way of matching buyers and sellers, and can perform a highly valuable role in any economy. But markets which constrain, or even determine, government policy have ceased to be a tool of society and have set themselves up, instead, as our masters. ‘Markets’ are not objective arbiters of right and wrong, they don’t come out of nowhere with rules set entirely by themselves. They are, rather, a human construct, designed and built by people with the aim of facilitating economic activity. They are not impersonal forces which react in a considered way to events in accordance with predictable rules – market movements are the agglomeration of a large number of individual bets about the probable direction of future movements or, rather, bets about the way in which other participants will bet on those future movements. The idea that governments should allow their policies to be determined by markets which have been captured by gamblers and speculators is a complete abdication of responsibility, and a capitulation to vested interests.

Giving credence to the idea that ‘markets’ can and should control what governments can do comes naturally enough to those who support neoliberal economics and the obsession with abiding by arbitrary fiscal rules. The problem that we face is that the government and the official opposition are united in swallowing the lie – Reeves and Hunt are interchangeable. Austerity and economic inequality are two sides of the same coin – we’ll only escape from both when we re-establish the role of markets as servants rather than masters.

Volatility and spooking aren't exactly the same thing

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Last week, just before the Budget, the Guardian published this article about the ‘power’ of the bond markets over governments. Whether it entirely supports the contention that the government must at all costs avoid ‘spooking’ the markets is another question. Indeed, one trader made it clear that “What you really crave in this industry is movement, volatility”. It’s the opposite of what the government wants, but speculative traders thrive on it. Volatility, of the sort which is described as ‘spooking’, is what helps the speculators to turn small margins on huge trades into profits for themselves. Those speculators actually want the government to surprise them, in the hope that they are better placed to react than their competitors and make a killing – stability is boring and largely unprofitable.

As with so many aspects of the financial markets, the underlying issue is that markets created to fill valid social needs have been captured by people who are driven by a culture of greed and gambling. The government takes in peoples savings in return for bonds on which it offers savers a fixed long term interest rate; large institutional investors hold those bonds as part of pension funds and life insurance funds. For all of those players, market stability is a definite plus, enabling them to plan with confidence. But the gamblers and speculators who use those markets for their own purposes want no such thing; they want the sort of volatility in which they are each trying to second guess each other and from which some make a profit and some make a loss by making multiple large trades in rapid succession. Far from being ‘spooked’, they are actually delighted by what they see as opportunity.

The question we should be asking is not about how we limit what governments can or should do to keep the markets stable, but about what we need to do to control and manage markets in a way that they serve social needs rather than constrain policy options. To date, humanity has not found a better way of matching buyers and sellers than using markets, and markets perform a useful social function. There is, though, no such thing as a ‘free’ market: all markets work under a set of rules. The issue is who sets those rules and in whose interests they operate, and to what extent those markets should be allowed to become the playthings of gamblers and speculators rather than performing the socially useful function of facilitating exchange. What Reeves and Starmer have decided – like all the other Tories in the recent past – is that they are happy for those markets to be captured by selfish interests, and for those interests then to have a veto on what government policies are, or are not, acceptable. The argument that there is no alternative is merely an excuse to justify what their ideological perspective tells them to do anyway.

Buying shares isn't the same as investing

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For most people, the reduction announced in the budget yesterday to the limit on cash ISA’s, from £20,000 to £12,000 per annum, is an academic question. There can’t be many on an average salary who have even £12,000 available to save, let alone £20,000. The tax-free status of interest on such accounts is effectively a subsidy to those who do have that sort of money to put aside. As ever, the taxation system in the UK works to promote the flow of money from those who have less to those who have more. Who ever said that Conservative politicians – of whatever stripe – don’t believe in redistribution? They do – just in the wrong direction.

The argument for that subsidy was always that ‘saving’ was a ‘good thing’ for people to do, and should be encouraged. Reeves has effectively being saying for some time that ‘saving’ isn’t such a good idea after all – what we really need is investment. She’s right in principle, but utterly wrong in the implementation. She is arguing that those who are in a position to put aside the full £20,000 must put the remaining £8,000 into stocks and shares, but defining that as ‘investment’ is just plain wrong. Certainly, if someone buys shares in a start-up, that is an investment: the money goes into the company and is used to pay the initial costs. In return for that, the investor owns a chunk of the company in the form of shares and can expect dividends paid out of profits if the company is a success. But when they sell those shares, even if the person buying them pays two or three times as much for them, not one penny of the payment for those second-hand shares goes into the company for further investment. That doesn’t mean that the new owner doesn’t own a chunk of the company, nor that (s)he won’t receive dividends, merely that the transaction doesn’t represent a new investment in anything. It creates no added value at all.

It might, though, lead to an inflated share price. If Reeves’ approach leads to more ISA monies being used to purchase existing stocks and shares, the price (and therefore the apparent value) of those stocks and shares will increase, in line with the basic rules of supply and demand. That in turn has two effects: firstly, it increases the disparity between the ‘value’ of the shares and the underlying value of the company and its assets, and secondly it makes it more likely that those shareholders will lose some of their apparent wealth if the shares crash. And the greater the disparity, the more likely it is that there will be a crash, or at least a ‘market correction’ at some point, probably as the result of an external shock. Reeves is not only trying to force more people to risk their capital by saving in ways where the price can go down as well as up, she’s also increasing the level of that risk. All because of a dodgy definition of investment.

She’s right, though, in saying that the UK needs more investment. But if we define investment as being the creation of new assets – for instance, new companies, new equipment, new infrastructure – there are better ways of doing it than persuading people to put their money in the hands of market speculators and gamblers. Public sector investment in infrastructure is one of those, but you wouldn’t know that from listening to the Chancellor.

Where do you want to be shot?

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When ‘news’ papers have a space to fill, one common response is to report the results of some survey or other listing the world’s favourite **** (insert item of your choice here). The extent to which the findings are meaningful is an open question. Passing through Heathrow a few weeks ago, I spotted this advert urging people to vote for Heathrow as their favourite airport.

And there was a similar message (for a different airport, obviously) at the destination. Respondents are self-selecting (none of this demographic weighting stuff), and are not required to have actually visited any other airports – or, even, the one for which they are voting. And the appeal of the message is a clear one – vote for ‘your’ airport. More of a loyalty test than a scientific survey. It's a reminder that we should always be questioning the context and methods used in any survey, even professionally conducted opinion polls, before blindly accepting the headline summary.

Which brings me to a report in yesterday’s Sunday Times about a More in Common opinion poll which suggested that 67% would prefer the Chancellor’s budget this week to fill the fiscal black hole by cutting spending rather than increasing taxes on working people. It’s hardly a surprising result – as a general rule, people seem to naively believe that spending cuts somehow affect ‘other people’ whereas tax cuts impact them directly. But, in reality, it’s a bit like an assassin asking whether you’d prefer to be shot in the head or in the heart: it avoids the much more important question about whether you really want to be shot at all. The existence of Rachel Reeves’ black hole isn’t questioned, and nor is the need to fill it by balancing the budget. In effect, the reporting of a simple opinion poll (which I’m sure was conducted professionally in terms of its methodology) manages to confirm and reinforce the Overton window for debate around government finances, confining it to the assumptions made by the UK’s three right-wing parties (Tories, Reform and Labour), all of which are signed up to the ridiculous household analogy for government finances.

For all the leaks, briefings and speculation, we don’t yet know what Reeves will announce this week, but whether she opts for spending cuts, tax rises, or some combination of the two, the effect will be much the same: she will be reducing the purchasing power (and therefore the standard of living) of millions of people in pursuit of an ideological position which imposes upon her an entirely arbitrary set of rules which she herself has designed. And the post-budget debate will revolve around whether the totals she’s arrived at are correct and whether there’s a better combination to achieve the same outcome. But who will be asking whether we really want to be shot at all?

Carts, horses, and the Chancellor of the Exchequer

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One central element of the Chancellor’s economic strategy is the pursuit of growth, as measured by GDP or GVA. Growth is good, according to her. But is that necessarily true – can some types of growth be more valuable than others – and can some types even be a bad thing? One element of her pursuit of growth is the suggestion that pubs, clubs and restaurants should be able to remain open until the early hours. It doesn’t necessarily follow that she is arguing that more drunkenness is a good thing from a health perspective (health professionals have certainly expressed their concerns), but she is certainly arguing that it is a good thing from an economic perspective. More spending on alcohol boosts GDP – that’s inarguable (although a more rounded view might just query whether there might be an impact on productivity and absenteeism). It’s the sort of position which someone gets into by looking only at narrow economic considerations.

There’s another sense in which it takes only a narrow view as well. Implicit in the proposal (which has clearly been inspired and promoted by the ‘hospitality’ sector) is the assumption that people have the financial ability to spend more money on food and drink, and the only thing preventing them from doing so is restricted licensing hours. That is simply not the reality for many: more money spent on meals and drinks out means less money to spend on other things. When money is tight, people make choices, and the result – in economic terms – is that an apparent boost in GDP in one sector leads to a drop in GDP somewhere else. Households aren’t like governments – they can’t simply expand the supply of money to purchase the available resources of food and drink.

Whether extended opening hours are a good thing or not is a separate question. The idea of restricted hours is an echo of a more puritan past, and if extended hours cause no problems for local residents and if proprietors can make them financially viable, then why not allow them to do so? But believing that creating more opportunities for people to spend is the solution to growth is putting the cart before the horse. For people to spend more money they first need to have more money: consumer-led growth depends on people’s financial resources. Yet much of Reeves’ programme seems to be directed at reducing those resources rather than increasing them.

Sucking money out of the economy

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We won’t know exactly how much money Rachel Reeves is planning to suck out of the UK economy until she stands up and delivers her budget on 26 November. There is a sense in which the actual number matters little – the underlying principles remain the same. One of the big ‘ideas’, a term which can only be used loosely, is to cut spending on benefits. It is true, of course, that, if the government spends less on benefits, then the gap between spending and income will reduce, and (assuming that to be a ‘good thing’, which seems to be the position of both government and opposition), the overall government finances will look ‘better’ as a result. But the thinking of those looking at government finances – whether Reeves or the Tories – seems to stop at that point, as though government finances can be considered in isolation. In reality they can’t.

Reducing benefits reduces the spending power of some of the poorest in society, which – in economic terms – reduces overall demand in the economy. (To those not glued irrevocably to economic mantras, it also impacts people’s lives, health and welfare, but I don’t really expect either Reeves or the Tories to worry unduly about that.) One of the key differences between the Tories and Labour on this is that the Tories seem committed to ‘giving away’ part of the money saved in the form of tax cuts, whilst Labour seem more committed to larger reductions in the current account deficit. Superficially, in overall economic terms, reducing taxes decreases the size of the hit to the economy of that reduced demand, but that ignores the way in which the costs and benefits are distributed. Reducing the spending power of the poorest (which is what benefit cuts do) whilst increasing the spending power of the richest (which is what tax cuts do) means that inequality continues to rise. It’s where simplistic economic analysis starts to break down – the total numbers tell us one simplistic story about the overall impact, but the detail tells us that there are winners and losers. That detail is important. Well, to most of us it probably is. But most of us includes neither Reeves and Starmer nor the Tories.

Reeves is sidestepping the real question

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One of the neat rhetorical tricks used by politicians is to present an inaccurate view of what their opponents say and show how easy it is to dismiss. It helps them ‘score a point’ as well as allowing them to fail to engage with the underlying argument. The Chancellor, Rachel Reeves, was at it this week, refuting the suggestion that governments can simply create all the money that they need and then spend it. She’s right in principle; but I’m not aware that anyone has actually made the argument that she dismissed. Of course there are constraints on how much government can spend, but the debate is about what those constraints are, not whether or not they exist.

She argues that the constraints are twofold, which are closely interlinked: the amount of money which the government receives through taxes etc. and the need to abide by the fiscal rules she has laid down. But, in the first place, the rules she has laid down are entirely arbitrary. She has set them, and she could remove them or vary them. The UK never had any fiscal rules at all until Labour introduced them in 1997, and they have been changed regularly ever since, usually when a new Chancellor takes office, and sometimes during the period of tenure of a single chancellor. And a government which controls its own currency, and whose debt is mostly denominated in that currency, can create as much money as it wants to, any time it chooses, and can always repay any debts it incurs. Since money is merely a means of measuring and trading debt, and all debt has to be matched by an asset somewhere, the total net debt in an economy, in its simplest form, is always zero. It’s an over-simplification, yes, but it doesn’t matter how much extra money the government creates, the total net debt in the economy will always be zero. It cannot be otherwise. There is a non-trivial issue, of course, about how that debt and those assets are distributed, but that’s another issue which the chancellor seems wholly unwilling to address, and it doesn’t affect the simple fact that money creation is potentially unlimited.

That doesn’t mean that there are no constraints on the goverment, just that ‘money’ isn’t one of them. The real constraint on money creation and spending is the availability of real resources in the economy. If there are unused resources which could be put to work, the money to do that can be created. If there aren’t then the most basic rules of economics apply – more money competing for the same resources causes inflation. The question which we should be asking is not whether the government can create and spend money to improve services and improve living standards, but whether and to what extent the resources needed to do those things are available in the economy. It’s not an easy question to answer. As one example of the impact of government spending, increasing benefits (by, for instance, scrapping the two child cap) puts more money into the economy which will then be spent, potentially driving employment - in this case, largely in the retail sector. Roughly 4.7% of the working age population in the UK are currently unemployed, but how many of them are really available and suitable for the right work in the right places when the government spends more money, before generating demand no longer soaks up unused human resources but starts to compete for existing employed resources? The best answer that can be given without a lot of work is ‘some, but not all’.

But being a difficult question to answer is no excuse for not asking it and trying to find an answer; hiding behind her own rules and an alleged lack of money is just a very lame excuse for avoiding the question.

The Chancellor's double ended telescope only produces mirages

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When, as a child, I first discovered the wonder of telescopes, it was like a form of magic. Making far away things seem closer, or small things look bigger, was fascinating enough, but then to discover how the opposite happened when I looked through the ‘wrong’ end of one of these marvellous devices was an added bonus. But nothing that I ever discovered about telescopes could have prepared me for the amazing lenses possessed by the Chancellor of the Exchequer, which were on display yesterday as she announced the outcome of the spending review. She – and, apparently, most of the others around her – are in possession of a device which enables them to look through both ends simultaneously, magnifying those things which she wants to magnify, and minimising those which she would rather forget.

There can surely be no-one, not even the Chancellor herself, who seriously believes that the nuclear power station which she announced (or should that be ‘re-announced’?) will be built in anything like the costs or timescales quoted. One doesn’t need to be some sort of Nostradamus to be able to predict, with a degree of confidence indistinguishable from 100%, that the eventual costs and timescales will be higher, and considerably so, than any figure which escaped her lips yesterday. The degree of confidence that the sums quoted for all the other infrastructure projects announced yesterday will be exceeded might be slightly lower, but still a pretty safe bet. All the timescales and costs announced yesterday have been examined through the wrong end of the telescope.

When it comes to the advantages, however, the right end of the telescope has been deployed with a vengeance. The improvements to people’s standard of living, the number of jobs created: these are things which have been miraculously magnified. There will be no surprise if, like another announcement from recent years, they are quietly revised downwards in due course.

Some of the government’s over-excited comments on the flood of electricity which the new power stations will generate come close to the promise in the 1950s of electricity ‘too cheap to meter’. Even if the phrase has been misunderstood, and its original author was actually talking about fusion rather than fission, the phrase was widely used at the time – including by proponents of nuclear expansion – to describe an impossible energy utopia. In yesterday’s announcements, the costs of decommissioning the stations at the end of their lives, and of handling and storing the radioactive waste seem to have been subjected to their customary level of examination: none. Those issues remain where they have always been – a problem for future generations. Unlike the national debt, however, these are foreseeable liabilities which are not balanced by matching assets; they really are a financial black hole. Throwing good money after bad on nuclear power might look good on a spreadsheet keeping a running total of ‘investment’ spending, but the real cost is in not doing the other things that could be done instead. And probably more quickly.

If I had to pick a stand-out impression of what the government had to say yesterday, it would revolve around that timescale issue: it’s all jam tomorrow, with the lack of butter today being glossed over. The timescales – let alone the consequent benefits – of the capital spend are largely beyond the event horizon for the current government. If there’s one thing that’s almost as certain as the cost and timescale over-runs which are going to occur, it is that future governments (even if, by some miracle, of the same party) will delay or cancel some or all of the projects for which funding was announced yesterday. None of that means that some of the announcements are wrong in themselves: both Wales and the UK need the investment in infrastructure such as rail, for instance. But the belief that promising such investment over a lengthy timescale will somehow persuade people to tolerate the austerity measures baked in to yesterday’s review suggests a complete lack of connection and empathy with people who need relief today.

Rachel Reeves is no Dick Barton.

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It was 45 years ago that the Commercial Union insurance company used the slogan “we won’t make a drama out of a crisis”. In fairness, given that she wasn’t born until 1979, the Chancellor of the Exchequer has a plausible excuse for not remembering the slogan. But not being old enough to remember the advert is not much of an excuse for not understanding the meaning of the message. The handling of the winter fuel allowance (WFA) for pensioners has now gone beyond simple drama, and is rapidly becoming a long-running soap, with a cliff-hanger at the end of every episode as viewers attempt to work out how on earth she will extract herself from this week’s latest plot twist. Where’s Dick Barton’s “one bound” when you need it?

Her reluctance to give a handout to millionaires is understandable in principle, although her initial attempt to prevent that by limiting the payment to only the very worst off pensioners was something of a sledgehammer approach. Her latest approach – setting the cut-off at £35,000 a year – isn’t a whole lot better. Given that the average full time earnings before tax in the UK are a little over £37,000, the new cut-off point is going to exclude a lot more people than those who are really millionaires – unless the definition of ‘millionaire’ is now being changed to include everyone on average earnings or above, a definition which will come as something of a surprise to most working people, let alone pensioners.

In order to implement this ‘new improved’ version (as the advertising companies would surely try and present it), she’s inventing a whole new tax rate of 100% which only applies to a tiny part of people’s incomes and which comes into effect at a completely new threshold, unused for anything else in the tax system. It’s hard to envisage any approach she could have taken which would be more complex to implement, and probably end up costing a significant chunk (in terms of staff and IT costs) of the claimed savings to implement – as well, potentially, as requiring a couple of million extra pensioners to file annual tax returns which someone will then need to process.

I’ve never been a fan of the WFA anyway; it’s always struck me as a bit of a gimmick. Simply adding £300 a year to the state pension (even if paid once annually rather than as part of the weekly pension) would mean that those who most need it get it tax-free, whilst pensioners with other income would effectively pay tax on it at up to 45% anyway. It’s true that ‘millionaire pensioners’ would still end up pocketing 55% of £300 (£165), but it would be a great deal easier and cheaper to administer using existing systems. I don’t know how many ‘pensioner millionaires’ there are, but given that a cut-off at £35,000 (well short of millionaire status) will only exclude around 2 million people, we can reasonably assume that it’s a lot less than 2 million. Even 2 million net payments of £165 would only cost £330 million – a drop in the ocean for the Treasury. And lower administration costs reduce that further.

Still, for fans of long-running dramas, where the heroine of the piece finds herself tied in ever more complex knots at the end of every episode, why cut the serial short when the pain and agony can so easily be prolonged?

Markets and casinos shouldn't be the same thing

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Here’s a statement that some might be surprised at me making: Markets work. As a way of matching buyers and sellers, or capital with investment opportunities, markets are an effective and efficient method, better than anything else humanity has managed to devise thus far. There are, however, two caveats.

The first is that there is no such thing as a completely ‘free’ market. All markets have rules by which they operate. One of the reasons for that is that the assumptions used by theoretical economists when considering markets – that all participants have equal power and that all have perfect knowledge of what is happening – are blatantly inaccurate. Markets can only work effectively if those (and other defects) are corrected, so we have rules which must be followed. There will always be disagreements about what those rules should be, but the key issues are who makes the rules and in whose interests they operate. Those arguing for completely ‘free’ markets are invariably arguing for markets which are slanted in favour of those with the most power and the most knowledge. No surprise there.

The second caveat is that a real market is about those basics mentioned above, such as matching real buyers with real sellers, exchanging real things. Yet, when it comes to the world’s financial markets, most trading is nothing to do with that; it is, instead about gambling and speculation, with people trying to leverage large trades for very small profit margins on a day-by-day or even hour-by-hour basis. And in some cases, what is being ‘traded’ (i.e. being bet on) isn’t even something with any real existence beyond acting as a gambling chip. Crypto currency is a case in point. It has no real ‘value’ and its price fluctuates wildly. As a means of winning (or losing) a fortune in  short time, it’s ideal, but its value as any sort of ‘investment’ is doubtful, to say the least. Yet, lured by the improbable apparent ‘value’ of these ethereal ‘assets’, some governments are trying to pretend that they are real enough to be treated as investments by the man or woman in the street.

It's perhaps obvious why Trump would wish to do this – he has after all issued his own bit of crypto, from which he’s made a lot of money at the expense of his cult followers. It’s less obvious why the UK Chancellor would be considering anything similar. There’s nothing wrong with seeking to regulate crypto currencies as such (although the whole point of some of them is to set them up in such a way that they are very difficult to regulate effectively, not least in order to facilitate tax evasion), just as other types of gambling are regulated, including for the safety and protection of the punters. Seeking to regulate them as though they were ‘investments’, however (which is what she seems to have in mind) is dangerous, and risks creating the impression that an inherently risky proposition has somehow been rendered safe. It’s a bad message to be giving out.

Planning on the basis of blind faith

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The establishment of the Office for Budget Responsibility by George Osborne in 2010 was a cunning plan to embed orthodox neoliberal economic thinking into the UK economy; to guarantee, in effect, that no non-Conservative government (for which, read Labour) could ever try to follow a different path. He never intended that it would trip up a Conservative government but, in fairness, who could honestly have foreseen Liz Truss? When the inevitable happened, and a Tory Party riven by Brexit, broken by lies, and displaying utter incompetence eventually gave way to a Labour government, the plan worked like a dream. Lacking in sufficient imagination to realise that she could just abolish the OBR (other countries manage without one), appoint different people to run it, or simply change its remit, all of which are in the power of the government, Reeves has chosen instead to do exactly what Osborne planned, and treat its conclusions as though they were written on tablets of stone handed down from on high.

She wanted to count her benefit cuts as saving £5 billion, but the OBR calculated that they would only save £3.4 billion, so off she dutifully went to lop another £1.6 billion off future spending plans. Experience tells us one clear truth – both her original estimate and that of the OBR are wrong. We don’t know by how much (or even in which direction), but planning on the basis that either one is correct five years in advance would be stupidity of the highest order (and therefore, apparently, a basic tenet of government financial planning). As JK Galbraith so succinctly put it, “The only function of economic forecasting is to make astrology look respectable”.

It’s interesting to note, though, that Reeves’ faith in the power of economic forecasting is selective. When a forecast produced by the OBR ‘forces’ her to do what she wants to do anyway (and anyone who believes that she really doesn’t want to cut benefits needs to get out more), it’s an immutable law of economics; when another forecast by her own government tells her that the result of her actions will be to push 250,000 more people (including 50,000 children) into poverty, she demurs, and claims that they’ve got it wrong because her benefit cuts will miraculously result in more people being in work. The forecast almost certainly is wrong, of course (back to Galbraith), but by how much and in which direction we won’t know for some time to come. What we do know, without having to wait any time at all, is that we have a Labour government which is remarkably relaxed about putting more people into poverty when it’s entirely within their own control not to do so.

Helping the medicine go down a different throat

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As I remember childhood, being given a spoonful of sugar with, or immediately after taking, some particularly unpleasant medication was a common practice. Today’s health experts probably wouldn’t approve of giving a child a spoonful of pure sugar in any circumstances, but then medicines tend not to be so foul-tasting these days, and have largely been replaced by bland taste-free pills of one sort or another anyway. I’m aware of no circumstances, though, under which the spoonful of sugar would have been given to a completely different child instead of the one who was suffering from whatever disease was being treated.

But then I’m not Chancellor of the Exchequer, so what would I know? According to modern economic theory of the Reevesian kind, spending £2 billion to build 18,000 affordable homes for one group of people will sweeten the pill represented by the £5 billion in benefits being removed from an entirely different and much larger group of people. It’s an ‘interesting’, if somewhat unscientific, proposition, but it would never survive the sort of thorough testing required for the acceptance of any new approach to medical treatment, with its concomitant stress on empirical data. It also looks unlikely to survive the rather less thorough (and completely untested) implementation which is about to happen. It makes sense only as an exercise in dividing people into groups and encouraging them to blame other groups for any problems they might have.

Cutting in the right place isn't as easy as it sounds

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Many years ago, when I was working as a Systems Analyst designing computer systems, I ended up talking to an administrator in one department and looking at all the information she collected and collated into reports. One report was particularly complex, and was going to pose problems in ensuring that all the data was available in the right place and format to produce it; as things stood it was taking her a week or so every month to locate and compile the information. I asked what happened to the report when she had produced it and she pointed to the cabinet where it was filed. In response to the follow up question about who looked at it afterwards, the reply I got was along the lines of “No-one. But the Director asked for it once a few years ago and we didn’t have it. So now we make sure we’ve always got it.”

It's a small example of the way in which large organisations can accumulate tasks and activities which serve little purpose, but the people performing them don’t have the authority to stop them, and those who do have the authority usually don’t even know they’re happening. And it’s one of the reasons why there is almost always scope, in any large organisation, to eliminate certain activities (and the people performing them) with zero impact on the overall performance. So when someone – like for example, the Chancellor – claims that there are too many people in the civil service and that the number can be easily reduced, part of my reaction is to think that she’s probably right. In principle. What she does not (and cannot) know, however, is how many are surplus to requirements and which ones they are. One of the consequences of that is that an arbitrarily imposed top-down target almost invariably ends up removing at least some of the ‘wrong’ people, whilst those busily engaged in preparing obscure reports ‘just in case’ carry on regardless.

The ‘savings’ aren’t easy to quantify either, and depend at least partly on the method used to identify those who will get the chop. If the reduction is achieved by removing some of the oldest people, then in a hierarchical organisation like the civil service they may well turn out to be both the most senior and the most highly-paid, for whom a redundancy package and early retirement may look attractive. And since both the redundancy payments and the pensions come out of different pots, the ‘savings’ can appear to be quite high. But whatever the Chancellor may say about targeting ‘back office’ functions rather than front line operations, that isn’t the way arbitrary targets work out in practice, and the total savings at a macro level may well be considerably less than they appear looking at a single budget line.

In essence, her thinking doesn’t seem to be that different from that of Musk, even if not so scattergun an approach or so deep a level of cuts. But both of them start from the assumption that public spending adds no value, and is an ‘overhead’ on the rest of the economy. The US administration is even thinking in terms of redefining GDP itself to exclude government expenditure, which is a somewhat drastic approach. It's neo-liberal economic claptrap, of course. The public sector contributes a great deal to the well-being of citizens. Once upon a time, a Labour government would have seen that as a good thing.

Rock, paper, scissors

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The Chancellor and Prime Minister seem to be increasingly fond of telling us that nothing will stand in the way of their ambition for growth. According to Reeves, “Growth trumps other things”, including the commitment to a net-zero economy. Leaving aside any questions about whether a commitment to net zero actually hinders growth in any event (there are reasonable arguments to be made that it can change the nature of economic growth rather than inhibit it, but that’s a subject for another time), the government’s own actions make it clear that there are some things which growth does not trump. The most obvious example concerns the UK’s relationship with the EU. One of the easiest things that a UK keen on economic growth could do would be to re-enter the customs union and single market. It's something which could be done without ‘betraying’ Brexit, given that prominent Brexiteers argued at the time that Brexit didn’t mean that we had to leave them in the first place. However, growth might trump net zero, but Brexit trumps growth. If only net zero could trump Brexit, we could play a sort of rock, paper, scissors game. A neat closed circle into which Starmer and Reeves could quietly disappear. But Starmer's much-vaunted 'reset' of relationships with the EU appears to be little more than a Labour version of cakeism, under which the EU gives the UK a better deal without the UK conceding anything.

It is being widely reported that Reeves will announce tomorrow that, in pursuit of that magical growth, the government will give the go-ahead to building a third runway at Heathrow. Or rather, they will give the go-ahead to starting a process which means that the third runway might be in place in about 10 years from now, assuming that the project goes rather more smoothly than any large UK infrastructure project in recent decades. In terms of her self-imposed and arbitrary fiscal rules, the operational ‘benefits’ from Heathrow expansion will start to flow only a decade hence, well outside the 5 year timescale of those rules, and only after at least two general elections have taken place. Since the planning phase is going to take a minimum of 2-3 years, there’s unlikely to be any sort of boost to the economy, even in terms of the relatively short-term construction phase, until after the current government has faced the electorate.

The argument for expansion is usually presented in terms of showing that the UK is open for business. It conjures up images of businessmen jetting off to far-flung places to sell their wares to grateful foreigners, or of rich foreigners jetting in to invest their fortunes in UK businesses (preferably without anyone enquiring too deeply about the source of those fortunes), and encourages us to believe that, if only there were an extra runway, more of both of those things would happen. It isn’t quite the reality though. Estimates of the proportion of business traffic passing through Heathrow vary. This one suggests it’s around a third of all passengers; other estimates put the figure as low as a fifth. Despite its carefully cultivated image, Heathrow is, first and foremost, an airport used for leisure travel. And many of the travellers come from elsewhere in the UK, not exclusively from the London area, even if that’s where the majority come from. There’s another aspect to that last part as well. Whilst it’s obviously true that an airport contributes to GDP in a variety of ways, including shops and restaurants as well as the jobs involved in processing passengers and planes, an airport which sucks in passengers from further afield than the local catchment area also concentrates GDP geographically around itself.

Like so much else of what the current government is doing, a decision to expand Heathrow looks largely performative. Taking – or, rather, being seen to take – tough decisions (a phrase which seems to be a euphemism for decisions which will upset as many potential Labour supporters as possible) has become an end in itself. The belief that doing so will somehow magically lead rich foreigners to pour their zillions into the UK is more an act of blind faith than anything else. But it’s not the sort of faith likely to survive contact with economic reality.

Is Reeves doomed?

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Starmer’s initial response yesterday to the question about whether Rachel Reeves will remain Chancellor for the whole term of his government was to say that she enjoyed his full confidence, a line which he repeated several times before, eventually, one of his spokespersons gave the requested confirmation. As promises go, it’s about as trustworthy as his manifesto for the last election, and the Chancellor could be forgiven for feeling a bit like a football manager who knows that the club’s owner only has to declare his complete confidence twice more before the inevitable sacking.

She may be able to defy the laws of political gravity for a while longer, but four years is a long time, and in any event defying the laws of basic arithmetic will inevitably prove to be beyond her capability. Her claim that she could repair and sustain public services, not increase taxes or borrowing, and at the same time reduce the government deficit (which is what her entirely arbitrary but ‘non-negotiable’ fiscal rules say must happen) always depended on the assumption that the UK economy would grow such that tax revenue increased without changing tax rates. And not just grow, but grow in a way which is unprecedented in recent history and for which there is no basis in policy to justify. Reality and wishful thinking aren’t the same thing, no matter how hard the spin doctors might try to convince us otherwise. Something will have to give, and the easiest thing to change, politically, is those fiscal rules. There’s nothing strange in that – they invariably change when the Chancellor changes; and even Starmer will eventually work out that that is the cost he will have to pay.

The question is about how much damage is done in the meantime, since it is becoming increasingly clear that her response will be to stick by the rules and cut spending instead. She will claim – indeed, the government is already claiming with its target of a 5% spending reduction – that this will be achieved by cutting out ‘waste’. But defining ‘waste’ isn’t as obvious as it sounds: for most politicians, ‘waste’ is any spending with which they disagree. Whether school breakfast clubs, keeping libraries and theatres open, or even implementing reduced speed limits are wasteful or not depends on your political perspective. About the only thing we can say with certainty is that an imposed budget cut – whether of 5% or any higher figure which Reeves will announce in the next month or two – is rarely effective at reducing what the average layman would call waste, and invariably ends up with cuts to services. Calling it ‘fiscal prudence’ rather than austerity is a bit like calling a hungry tiger a big cat. Big cat sounds more friendly, but it will still be happy to eat you.

Do businesses actually pay any tax at all?

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It looks like a silly question. Look at the accounts of any business, and you’ll certainly see tax payments being recorded. And money actually passes from the business’s accounts into the government’s accounts. But who is really paying those taxes? From a business perspective, tax is just another operating cost and, at its simplest, profit is simply revenue earned by selling goods and services less the cost of production of those goods and services. It follows that (again, at its simplest) price is simply cost of production plus profit, and the financial success of a business depends on the price being sufficiently high to generate an acceptable level of profit. If an extra tax were being paid by the owners/ shareholders of the business, then profits would fall; if profits don’t fall, then it’s because the extra tax is being paid by the customers of the business, through rising prices.

It isn’t always as immediate or obvious as this story about Halfords might suggest. It’s usually more subtle and gradual, but when any business considers its pricing, it inevitably takes account of any increases in its costs. It obviously also considers what its competitors are doing and how much of an increase it thinks it can introduce at a given point in time without losing customers and revenue, but ultimately the dominance of return on capital asserts itself, and increased taxes invariably work through into increased prices. A company threatening an immediate price increase in response to a tax increase looks to be more about politics than accounting, but that’s about presentation.

None of that is to argue that businesses shouldn’t pay taxes. They depend on the infrastructure and services provided by public expenditure, and it is entirely appropriate that those costs should be reflected in the costs of doing business, and thus in the prices of goods and services. We just shouldn’t delude ourselves into believing that ‘taxes on business’ are somehow a free source of money which don’t impact us as individuals. The Chancellor’s mantra that she isn’t increasing taxes on working people is ‘true’ in the sense that they’re not directly paying those taxes – they’re simply facing price increases. Theoretically it’s entirely different; in practice the impact ends up being much the same in aggregate. One of the key differences, though, is that a direct tax on income is related to ability to pay, whilst an increase in the price of everyday goods is not: those on lower incomes are hit hardest.

Why is the return so low?

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The first job I had after leaving university was with an insurance company which specialised in agriculture. During the time I was there, the company introduced a new type of policy for farmers, namely Consequential Loss. The basic idea was that, if a farmer lost stock, a building, or whatever due to storm, fire or some other insured peril, they could claim not only the value of what had been lost, but also for any loss of profit which ensued. A meeting was convened in Cardiff to which the local inspectors from the southern half of Wales were summoned to hear a presentation on the benefits of the policy and to help them sell it. After the presentation, Johnny, ‘our man in Carmarthen’ as he was, quietly asked a question about the information that farmers would have to provide to get the insurance. Specifically, which figure would they have to give about their profit – the one they gave the Inland Revenue or the actual one. After hearing the explanation that both the premium and any payout would be based on the figure that they put on the application form so it needed to be an accurate figure, and that, in any event, providing inaccurate information could invalidate the whole policy, Johnny shook his head briefly before declaring, “Well, I’ll never sell any of that in Carmarthen”. Some might see that as a foul calumny against the honest farmers of Sir Gâr, to which all I can say is that Johnny was astute, was good at a job of which he had decades of experience – and he knew his customers well.

An alternative, and rather more charitable, interpretation of the point that he was making is that the way numbers are presented, and the assumptions used to derive them, can sometimes depend on the purpose for which they are to be used. I wonder, however, if that little anecdote might still help to explain the gulf between the farmers’ understanding of the impact of the changes to inheritance tax (IHT) and that of the Treasury. I don’t recall many farmers ever underestimating the negative impact of any change that they don’t like (which at times seems to cover any proposed change), let alone being optimistic. That’s another way of saying that it’s just possible that they may be ever so slightly overstating their case. On the other hand, the idea that Rachel Reeves and a few allegedly ‘clever’ economists at the Treasury understand agricultural finances better than the average farmer is risible; the probability that the government are significantly underestimating the impact of their proposals is high. But unless we start from a set of commonly agreed and understood assumptions, we will not close that gap in perceptions.

If we assume that the average family farm in Wales really is worth the millions of pounds which would start to attract IHT, and that the average farm income really is as low as some are saying, then in purely financial terms, farmers in that position would be better off selling up, buying a house in the nearest town or village, and putting the rest of the money into a building society from which they would enjoy a much better income. Those are big caveats though. (And the issue isn’t purely financial either. Family farms are the backbone of many rural communities and a major factor in the survival of the Welsh language in the rural north and west of Wales. Few of us would want to see that undermined.)

But if the return on capital from farmland is so poor, why is the price so high? Conventional economics would suggest that low return on an asset should lead to lower asset prices. Part of the reason for the high price of agricultural land is precisely the current exemption from IHT, an exemption which makes it attractive for the very wealthy to put part of their wealth into an asset which, unlike their other assets, will not be taxed on death. And part of the problem with Rachel Reeves’ proposal is that she’s only doing half a job. Not only will her changes not be enough to deter the transfer of non-agricultural wealth into farmland, they will therefore also not do enough to stop the artificial inflation of farm land prices, and will as a result catch many more farmers in the net than the government are claiming.

They also don’t address the real underlying issue – why are the rewards from such an essential enterprise as agriculture so low for those engaged in it? But that’s a whole other question, and not one about which the Chancellor seems particularly bothered.

Vigilantes and gamblers

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The Guardian carried a story the day before the budget, wondering whether ‘bond vigilantes’ would punish Rachel Reeves with a Truss-style market meltdown. Curious word, vigilante, with at least three different connotations that I can think of. The first – showing my age – takes me back to watching Mr Pastry on the TV as a child on a Saturday afternoon. There was one episode where, misunderstanding everything as usual, he wanted to become a village aunty. It has a warm, cosy feel to it – the idea that kindly people are looking out for others. A more dystopian version is where gangs of vigilantes roam the streets imposing their own version of the law, by force if necessary, meting out punishment to those who refuse to comply with their rules. Somewhere in between the two lies the concept of people acting together to assist the enforcement agencies in upholding the law.

The ’bond vigilantes’ referred to by the Guardian don’t fit any of those categories. These are people who are looking to turn a penny by trading bonds, in massive quantities, with the intention of leveraging the odd few pennies here and there – multiplied, of course, by the millions of bonds involved. They are more akin to gamblers and speculators than law enforcement officers. They claim to be using their judgement on financial events, such as the budget, to guess as to whether rates of return will go up or down as a result. In truth, they aren’t really even doing that – they’re actually guessing about whether other traders will guess that rates will go up or down and placing their bets accordingly.

Bond market speculation isn’t like betting on the geegees though. When it comes to horses, the number and size of bets placed may affect the odds that the bookies will give you, but they don’t make the horses run any faster. In the financial markets, the bets placed directly affect the outcome as well. If enough people buy and sell bonds in a way which anticipates a rise in the rate of return, then the rate of return will rise, and vice versa. The sad part is that the neoliberal governments, of whichever party, with which we have been saddled for decades believe that things have to be this way, and they have no choice but to follow the dictats of the markets. Their power is constrained mostly by their own lack of imagination.

Chickens, eggs, and confused Chancellors

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There is a report today that the Chancellor is pressurizing the Office of Budget Responsibility to use planned but not yet implemented planning reforms to change its estimate of the rate of UK growth. If they agree, then she will be able to spend more money without breaking her own arbitrary fiscal rules. It doesn’t mean that there will actually be any more money, of course; merely a forecast of extra government revenue at some future date. If they agree to roll over and do as she asks, she will then spend that extra non-existent money on investment in the UK economy. Planning and implementing the spending will, as it always does, precede the actual receipt of the money (always assuming that it is eventually received), and in the short term, that spend will be presented in the accounts as though the money has been ‘borrowed’, even if it’s actually simply been created out of thin air by the Bank of England.

There’s nothing new or unusual about that as a process, it’s what always happens, no matter how much the politicians attempt to deny it. Government spending always precedes government revenue. But here’s the twist: spending the extra money will expand the economy (i.e. create economic growth), thereby validating, to a greater or lesser extent, the original assumption about higher growth. The cause of that growth may not be the one stated when it was first built into the assumptions. But in terms of the outcome, that’s unimportant. Government spending creates economic growth, which eventually leads to increased government revenue.

She could, of course, achieve the same thing by simply adjusting the arbitrary fiscal rules to which she is working. She is, however, too confused about the order of chickens and eggs, and too deeply imbued with Treasury and Bank of England orthodoxy. Maybe it doesn’t matter too much (unless the OBR refuse to play ball), because as long as she abandons her obsession with insisting that the income must precede the expenditure, she does actually stand a chance of achieving the magical growth on which everything, apparently, depends. Whether it’s the right type of growth, in the right places, is a question for another day…

The generosity is all one-sided

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Any display of excessive generosity towards a decision-maker is always likely to look suspicious, even if there is no obvious or immediate way in which his or her decisions are likely to benefit the donor. In dealing with gifts and hospitality in the context of business relationships with suppliers, the key word that was always drummed into me was ‘reciprocity’. That is to say that no gift or hospitality should be accepted if it was of a higher value than I would be able to offer, and wherever possible, reciprocation should actually take place. So, gifts such as calendars or desk diaries from suppliers or would-be suppliers were acceptable, but bottles of whisky or cases of wine were not. And if a supplier took me to lunch after a meeting, it was expected that I would take him or her to lunch after the next. It’s low level stuff, and even then can never completely erase a potential perception of buying favours, but it's a clear enough rule, and it was always fairly easy to understand where the lines were drawn.

It's that reciprocity which is completely missing in the relationship between donors and politicians. If Starmer were spending thousands of pounds on Christmas and birthday gifts for Lord Alli, it might just about be possible to say that they were simply very generous friends. There is, though, no suggestion that that was the case – and if it had been, I’m sure it would have been wheeled out as a defence by now. Whilst we’ve had a grudging decision that Labour ministers will no longer accept gifts of clothing from donors, that is just a small part of the freebies being accepted. It’s true, of course, that there’s nothing new in this. Politicians (of all parties) have been accepting freebies such as accommodation and tickets to events for years. But ‘everybody’s doing it’ is acceptable as an excuse only until it isn’t. The expenses scandal some years ago, affecting politicians of multiple parties, shows how the line of acceptability can and does move.

The line has moved again, even if only slightly, with the decision to not accept gifts of clothing, but Labour’s politicians still seem to be lining up to argue that ‘no rules were broken’, and that the key thing is ‘transparency’, even if transparency about the purpose of gifts was notably lacking in the cases of Rayner and Reeves. Reeves came up with the line that she wasn’t into clothes or shopping, so when a good friend offered to do the choosing and shopping on her behalf, she readily accepted. It’s not a bad answer – to the wrong question. The issue isn’t who did the physical work of choosing and shopping – she’s lucky to have a friend who can be trusted to do that for her – but why the friend ended up doing the paying as well. It’s a question which the answer neatly and completely sidesteps. In any event, simply not breaking the rules cannot absolve those receiving hospitality and gifts from considering for a moment whether doing so is ethical or might be perceived to be a little dodgy. Getting donors to pay for something else other than clothes may conform to Labour’s new rule, but if the effect is to put the same amount of additional spending power into the same pockets, it changes nothing; it merely relabels the same donation.

Donations have always been an important part of political funding in the UK, and short of a system of state funding of parties, they will continue to be so. Maybe it’s just that there is more reporting and visibility, but there is certainly an impression that the extent to which those donations and gifts are going into individual pockets rather than just into party campaign funds seems to have increased. As far as we can tell, there is no obvious quid pro quo for the generosity of Lord Alli, but the question that the recipients should have been asking themselves is a very simple one: ‘if I were not Leader of the Opposition / Deputy Leader / Shadow Chancellor, or even just MP, would I be getting this hospitality or gift?’ There can only be one honest answer to that question, and no amount of transparency or rigid conformity to ‘the rules’ can change that. At some point, maybe not yet because the stench isn’t strong enough, the rules will be changed. That reciprocity test would not be at all a bad place to start.