The Johnson philosophy, that we could have our cake and eat it too, was always a fiction, sustained by the free money of near-zero interest rates. With immaculate timing, the Office for Budget Responsibility reminds us that spending the money is the easy bit. Trying to put the brakes on the future cost of the public sector is, it seems, not only painful but may not even be possible. In addition to the usual begging bowl from the NHS, social services and a myriad of good causes, here come two more spending monsters in the shape of energy and defence.
Added to the rising cost of providing for the elderly (see below) the obligations threaten a runaway deficit in the public finances. Looking out half a century, the OBR sees debt at 250 per cent of gross domestic product, a level it describes, with commendable understatement, as “unsustainable.” Long before that level had been reached, the markets – the providers of finance to incontinent governments – may have concluded that only cuts in public spending, tax rises or both will be enough to persuade them to keep coughing up.
No projection for half a century forward has any chance of being right, but the direction of travel signalled by the OBR is hard to dispute. The worst-off in the community must be protected, but the new prime minister and his chancellor will have to tell the grim truth that inflation is not easily defeated without much higher interest rates, our standard of living is going to fall, and that any tax cuts which can be risked should be concentrated on the productive part of the economy. Governments do not generate wealth. They can only set the conditions to encourage others to do so.
Just as important is the avoidance of the gross policy errors which littered the Johnson years. From HS2 (of course) and the farce over smart meters to Test & Trace and the bungled contracts following the arrival of Covid, each one of these misguided projects wasted tens of billions of pounds. They made us poorer in ways which are only now being reflected in disappointing growth rates, high taxes and squeezed living standards. No government ever gets everything right, but one which makes hard choices early will have a better chance of delivering us from our current malaise. It is a rare chance for a fresh administration with two years before the next election. As the OBR concludes, miss it and the outlook is pretty grim.
A country for old men
It seemed such a good idea at the time. Urge people to put more into their pension whenever they could, to build up a big enough capital sum to see them comfortably through old age. Tax relief, encouragement from employers and (more recently) semi-compulsory contributions have all helped a generation in their 50s today to face retirement with equanimity.
Now look what these people have gone and done. The Institute for Fiscal Studies reckons that 250,000 former workers aged between 50 and 60 have decided to stop working, or in the terminology of the experts, become “economically inactive.” They have decided they can do without the rat race and live comfortably off their savings.
Clare Lombardelli, the Bank of England’s chief economic adviser, reckons that 500,000 people have left the workforce since the start of the pandemic. If half are from that key cohort, it would explain why businesses are struggling to fill vacancies in the middle ranks, or having to bid up to lure defections from rivals. The result is another twist in the employers’ cost spiral, who have raised prices wherever they think they can get away with it.
Lombardelli is not on the Monetary Policy Committee, but her comments are something else for its members to worry about. Their task, keeping inflation near to 2 per cent, is already a distant dream, and there’s not much they can do to persuade these refuseniks back into the workforce. In many cases, it seems that the middle-affluent middle-aged have decided they can muddle through on what they’ve got, buttressed by the windfall equity fortune in the houses they bought long ago.
Britain needs to raise its growth rate, and if these potentially-productive people are leaving the workforce in their fifties, then even getting back up to the UK’s pedestrian pre-Covid growth rate is going to be difficult.
The Over 65s now account for 18.6 per cent of the population, up from 16.4 per cent in 2011, which is surely the cynical justification for the recent decision to keep the “triple lock” and raise the state pension (to the elderly voters who predominantly vote Conservative) in line with inflation, when almost everyone else is seeing a real-terms cut in pay. No equality of misery here, then.
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Were these comfortables to find a job attractive enough to get out of bed at 6.30 to brave dearer and less reliable rail services, they will find themselves taxed at 40 per cent on each marginal pound of earnings, plus the irritation of semi-compulsory payments towards another pension. This brutal combination of a high-tax economy and a Pooterish decision by half a million workers to settle for a life of modest affluence is terrible for the economic growth on which public services depend, but it is only too understandable for those with the money to live it.
Nuclear goes green
Good news and bad for the nuclear industry this week. The European Union has officially decided that nuclear power is green after all, giving up the fantasy that Europe can run entirely on solar panels and windmills. Gas is also in from the cold, just when Russia is toying with shutting the main pipeline into the bloc.
The bad news was official acknowledgment that nuclear power remains too expensive and too risky for any private sector company, however large. EDF, the developer of Hinkley Point in Somerset, has finally succumbed to its debt load and is to be nationalised by the French government. For shareholders, this is a mercy killing.
It was effectively a state pensioner already, 84 per cent owned, with a radioactive portfolio of late and over-budget projects, but the move illustrates once again that affordable nuclear power is still over the horizon. Despite a very generous UK government guaranteed price for its output from Hinkley Point, the company is finding that delays and cost overruns are making the sums look grim.
The UK’s next throw of the nuclear dice effectively puts the risk back onto the taxpayer. A final decision on a £20bn development at Sizewell was due this week, although it’s anybody’s guess now. Oh, along with nuclear, the EU has now decided that gas is part of the world’s energy solution, rather than the problem. Whatever next. Oil?