There’s an entirely respectable career to be made in conjuring up prophecies of economic doom for Britain. The past few years have offered plenty of raw material. Still, that’s a temptation I mostly prefer to resist. Permit me, though, a brief exception—a moment to indulge my inner perma-bear. I think it’s worth the lapse.

I want to air a possibility that has been troubling me for the past year1: that Britain could make a real mess of the AI age. Certainly, there are plenty of great AI-adjacent British institutions, like AISI2, ARIA, Arm and (further into the alphabet) DeepMind. But that does not, alone, mean that Britain’s wider economy, or its political system, is well-placed to navigate the shocks coming. On the contrary, I worry that Britain is especially exposed.

Here are a few scenarios. They almost certainly won’t all happen, and aren’t even always entirely mutually consistent. But, hopefully, the exercise pulls open a few windows into how the coming years could go wrong for Britain. (A common starting-point isn’t quite AI doom or rapid takeoff, but a case where much of the economy does get remade rather quickly.)

1. First, AI kills the lawyers

If there is one defining fact about the British economy, it is that services dominate. That, one could fairly reply, is true of every advanced economy, no matter the hopes of the manufacturing nostalgics. But the skew to services in Britain is remarkable, even compared with its peers. No other G7 country has services made up much more than a third of total exports. In Britain, that figure is over half.

That trade comes mostly in the dull, professional sectors you’d expect: banking, law, insurance and the like. Naturally, un-bylined articles about the economy comprise a small but vital slice thereof.

When tariffs started raining down, that tilt offered an under-appreciated advantage: Donald Trump doesn’t seem to believe in services and has largely exempted them from his trade war. Both of the charts above come from a piece of mine from last April, explaining why Britain was well-insulated from tariffs as a result3.

The same cannot be said for the impacts of AI. Here, instead, the shape of Britain’s economy leaves it vulnerable. Take a look at the chart below, which slices similar data in a slightly different way: looking at the share of Britain’s total output that is services exports—about a fifth, triple the share of 30 years ago4.

Expensively slinging emails across the Atlantic surely ranks high on the list of tasks that firms are already looking to automate. And when firms abroad do that automation, the productivity gains land entirely elsewhere (New York, say); Britain loses out.

2. Rising returns to dynamism

A fair riposte would be to say that this downbeat framing is not inevitable. British companies, after all, could use AI to turbo-charge their own offerings, boosting productivity at home and competitiveness abroad. If Britain’s advantage in legacy professional services persisted (and perhaps grew) through the internet era, why shouldn’t the same go for AI?

I’d argue the opposite claim is more compelling: that Britain’s economy is becoming less dynamic, exactly when dynamism is becoming more critical. The faster the world is changing, the greater the gains for the agile—and the perils for the sluggish. Take a look at the past few years. There are plenty of explanations jostling about for America’s recent outperformance. Certainly, Europe’s natural gas shock in 2022-3 didn’t help things. But if I had to pick one factor5, I’d probably go with B2B SaaS6. That is, the effective deployment of technology in unsexy sectors across the economy, what the Resolution Foundation calls (in a great and under-discussed report from last year comparing growth in Britain and America) “tech-using, rather than tech-producing services”.

I remember laughing when, during the late 2010s, a college friend interning at Goldman Sachs told me that the internal slogan of the day was “Goldman is a tech company”. Now, I rather think the bankers had a point. Or (to blow one of my own grievances out into an economic microcosm) just compare the quality of the United or Delta apps to the buggy mess on offer from BA.

You can see all that in the two charts below. Already, the core drivers of American outperformance compared to Britain (and, indeed, most of Europe and the Anglosphere) are in the high-end services that Britain thinks it excels in. Already, investment growth in tech and software has been twice as high in America. And, much as I grudgingly respect the Salesforces, Zooms and Workdays of the world, these figures come from a pre-ChatGPT period when the technology on offer was much less impressive than what we have now, and the returns from taking it seriously correspondingly much lower.

Tack that on to a longer trend, too, of declining dynamism across the British economy, which has been played out for decades. The next two charts measure that fall in two different ways. The first, which I published in June 2024 (for a cover arguing, in hindsight not unfairly, that Labour’s growth agenda was all-leaf-and-no-carrot), shows that fewer businesses are being born and, probably more important, fewer are dying.

And the second, cribbed again from the Resolution Foundation, shows something similar over a longer timeframe: people are ever less likely to switch industry. A churning, fast-growing, competitive, dynamic economy should not have seen sector-hopping drop by half in twenty years.

In AI terms, that backdrop puts Britain in a double-vice: on one side, incumbents adopt new technology sluggishly (and slower than international peers—against whom they compete in the export market); on the other, not enough new competitors spring up to beat them. Britain’s consultants and lawyers of tomorrow could look like the European carmakers of today, crouching behind trade barriers while faster-moving foreign competitors use new (here, electric) tech to build a better and cheaper product.

One more cause for angst: labour regulation. An advantage that Britain has long held, especially compared to mainland Europe, is a fairly flexible jobs market7. The government is working to change that. I’ve stolen the charts below from a great piece by my colleague Matthew Holehouse. At exactly the wrong time, the Employment Rights Act will make Britain’s jobs market less competitive and more European (on labour policy, that is seldom a compliment).

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3. Hoarders, not investors

So Britain’s firms may well struggle to navigate AI. Troublingly, the same goes for Brits themselves. British households stand out internationally for holding lots of savings in cash, property and pension schemes (themselves often in low-risk fixed-income assets).

Conversely, British portfolios tend to be lighter on stocks. Happily, what equities British households do hold tend to lean more global than peers elsewhere (though successive governments have tried cooking up ill-conceived schemes to change that8.)

Contra their reputation as risky assets, a basket of stocks is probably (not investment advice!) just about the best thing to hold if the world turns upside down. Last week, I was reading “Wealth, War and Wisdom” by Barton Biggs, a Morgan Stanley strategist. He traces how financial markets responded to the Second World War. Then, inflation and financial repression made cash and bonds a poor bet. For pure wealth preservation, land was a good call (or a Swiss bank account). But over the long run, it’s hard to do better than simply having a stake in a slice of the real economy, which is what equities offer9. Even in countries ravaged by Nazi occupation, over a multi-decade timeframe stocks did very well.

What does that mean in an AI boom? To Biggs’s point, equities work well as a chaos hedge. Otherwise, almost certainly, real interest rates go up10, tracking a rise in productivity growth. So holding bonds (prices fall as yields rise) is not a great idea. Cash or land, especially near economic centres, probably does OK. Stocks in industries disrupted by AI might take a hit. For most others, their value might be crimped a bit by higher interest rates (knocking down the present value of future earnings), but that will almost certainly be swamped by the offsetting earnings boost from a productivity boom. Stocks in sectors poised to benefit from the AI productivity uplift, or selling bottlenecks to AI deployment, should do phenomenally well.

Compare that to the average Brit’s portfolio, and you see something pretty poorly-structured for this future: lots of cash and property, and (via pensions) fixed income. Not only might Britain’s economy lag if AI starts to seriously matter, but its wealth could too.

4. All R, no G

An AI boom could also have worrying implications for government debt. (I’ve stolen this observation from Luis Garicano, which he applied to mainland Europe. But Britain would face the same issues.) What happens if an AI boom raises global interest rates, but doesn’t correspondingly raise productivity everywhere?

Global bond markets are highly correlated, and becoming more so, as the chart below shows. If the yields on US treasuries soar, Britain and Europe won’t be spared. That has fairly nasty implications for governments’ ability to service their already-hefty debt loads. Then, failure to adapt to AI wouldn’t just mean a relative loss of competitiveness, but an outright decay in laggard countries’ public finances.

The broader macroeconomic ripples would be unpleasant, too. Playing out the full scenario gets rather fiddly, but an AI-led cycle that raises global yields could well also impose inappropriately high long-term interest rates on laggard economies, constricting access to credit. There is a halfway-parallel to the 1990s-era anxieties about America damaging emerging markets by exporting its monetary cycle: less about importing capital flows and currency crashes—more getting stuck with other countries’ interest rate environment while lacking their growth.

5. A net compute importer

Living in Washington, conversations about data centres are just about inescapable. (I can heartily concur with my friend Jasmine Sun’s observation from her expedition here a few weeks back: “People are truly, truly obsessed with data centers”.) Warehouses of chips are mushrooming up just about everywhere, gobbling up power, spurred by ever-higher estimates of compute needs. Big tech is now doing more capital investment than the entire oil and gas industry.

Back in London, data centres come up rather less frequently. Expensive energy and the usual tale of onerous land-use rules has muffled the data centre boom in Britain. Britain is missing out on a wave of foreign investment, in the aspect of the AI revolution that (so far) has had by far the clearest macroeconomic impact. Another AI loss to chalk up.

And here’s another concerning parallel. 15 years ago, the shale gas revolution looked a bit like the data centre one: a new technology suddenly, and quickly, sprouted up in physical form. In America, that led to energy independence and—in a roundabout way—granted a freer hand to sanction Russia after its invasion of Ukraine, or (for better or worse) attack Iran this week. Britain and most of Europe, meanwhile, have been bogged down by their failure to adapt and stuck paying through the nose to import gas. (France, with its nuclear fleet, is a notable exception.)

Being a net importer of a core commodity in the modern economy is seldom an excellent place to be, even if global markets are deep and liquid as they are for energy. Perhaps, compute will be so overbuilt and so cheap that this won’t matter. But it pays to be cautious. We don’t know yet whether the profits from AI advancement will land mostly with model-builders, compute-providers, the companies actually deploying the technology, or some jumble of all three. We do know that net energy importers haven’t had a great time of things in the 2020s. What will being a net intelligence importer look like in the 2030s?

6. The two cultures

Last, never let it be said that there is anything wrong with people mostly trained in essay-writing dabbling in coding and chart-making. (I’d never dream of talking myself out of a job.) But Britain does, long-standingly, have an elite class rather light on scientists, or on those who take scientific knowledge seriously. This is best elucidated in The Two Cultures And the Scientific Revolution, a lecture given by the novelist and chemist CP Snow in 1959, as the atomic age beckoned:

“But I believe the pole of total incomprehension of science radiates its influence on all the rest. That total incomprehension gives, much more pervasively than we realise, living in it, an unscientific flavour to the whole ‘traditional’ culture, and that unscientific flavour is often, much more than we admit, on the point of turning anti-scientific. The feelings of one pole become the anti-feelings of the other. If the scientists have the future in their bones, then the traditional culture responds by wishing the future did not exist. It is the traditional culture, to an extent remarkably little diminished by the emergence of the scientific one, which manages the western world. This polarisation is sheer loss to us all.”

Plenty of countries reckon with this anxiety. America’s congressional hearings on social media or AI, where octogenarian House representatives quiz Silicon Valley executives, are frequently excruciating. Dan Wang unflatteringly compares America’s “lawyerly society” to China’s “engineering state”.

But, Britain today has an especially bad dose (as it did in Snow’s day). Probably the clearest way to see the issue is less in amateur sociology, and more in outcomes. Britain, in large part as a consequence of that elite skew, does not seem to excel at tech regulation. See the failed efforts by the Home Office to persuade Apple to put a backdoor into its products. Or the mess of over-zealous policing of online speech. Or the chaotic rollout of the Online Safety Act.

The policy dilemmas that AI does, and will, raise won’t be easy—and I know and respect a number of people in and out of government in Britain who are thinking about them. But getting the policy response right will mean swimming against the stream of the knee-jerk technophobia of Britain’s political culture.

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To be honest, one danger I’ve been quite conscious of in writing this piece is using AI as an excuse to argue for things that I believe in anyway. Had large language models never been invented, I’d still doubtless be banging on about Britain’s problems with business dynamism or how high energy prices were crimping the economy. Plenty of the issues blocking data centres apply to all sorts of other infrastructure, and have for decades.

So let me close by trying to zero in on something more specific. The single strongest temptation as AI disruption intensifies will be to lock things in place and buy time to think. Slow-walk the rollout of self-driving, so taxi and lorry drivers aren’t out of a job; clog up AI adoption in law or accounting with licensing schemes and regulations.

That impulse is understandable, and the political pressure to lean that way will be vast. There will be obvious precedent in the Covid furlough scheme, which was (I’d argue—though I’ll leave it to another post to justify that conclusion) an economic disaster, but briefly made Rishi Sunak the most popular politician in the country.

Repeating that playbook would be a serious mistake. Unlike Covid, there is no rowing back on AI. Other countries will be moving faster, and happily gobble up Britain’s market share. I hope Britain doesn’t let them.

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After fiscal events, I tend to keep a running list of what I missed, or under-emphasised, the first time around. Last year it was the brutal bond market reaction, which I nodded to briefly in my initial writeup, but ended up one of the dominant themes of that cycle.

This time around, the economic story was (I think) fairly clear. Not much in my thinking has changed since what I wrote yesterday, linked below. But there’s certainly more to say than I did on how politics interacts with the economics, as well as a few interesting ancilliary points that stuck with me while reading others’ analysis. I figured I’d lay that all out here.

The best way, I’ve decided, to think about this Budget was that there were really two of them. The “first Budget” covers the three years between now and 2028. Its audience was the Labour back-benches and the party faithful. Spending went up, by about £15bn (0.5% of GDP), largely funded with more borrowing. Money for welfare, a bit more capital spending and a few other pots of cash here and there. A Labour government being Labourish.

Then there was the “second Budget”, which covers the end of this parliament and into the next. The audience there was the bond market. There, tax rises dominate, mainly via frozen thresholds. Those lift taxes by letting inflation push more people into higher brackets. In total, the extra taxes are worth £22bn (0.6% of GDP) in 2029/30, outweighing higher spending and pushing borrowing down1.

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Each side, the chancellor seems to have hoped, would appreciate their slice: Labour gets more social spending, bond vigilantes get a thicker (if back-loaded) fiscal buffer.

But all that was crisis management, keeping the wolves away. And the crisis being managed was political, not economic. After all, the Office for Budget Responsibility’s much-vaunted productivity downgrade turned out to have rather less bite than feared: the nudge down in forecast growth was counteracted (in its effect on tax receipts) by higher projected inflation, real wage growth and employment—meaning more earnings, sitting on average in higher tax brackets.

In simple economic terms, the government could have done nothing and still (narrowly) complied with their fiscal rules2: March had left a £10bn buffer, and yesterday’s underlying forecast changes would have shaved £6bn off, leaving a slim-but-positive £4bn left. You can see that in the left half of this chart from the IFS.

Remarkably, even though the government had much more freedom-of-movement than was signalled, there was virtually no affirmative agenda of any sort. I, of course, would have wanted to see some pro-growth tax reforms. No joy there3. But even last year’s budget had a theory of a sort: that a big boost to state spending, especially capital spending, could mend public services and somehow (the mechanics never entirely convinced) lure in private capital too. The government even persuaded the OBR that all that spending would appreciably boost the supply-side of the economy through capital deepening, albeit more over ten years than five.

This time around, there was really no theory or narrative at all. My colleagues at The Economist framed that gap as “party over country”: delivering another year of inertia that a stagnant country can ill afford. Political survival beat sound economic policy.

And that “second Budget”, the later years of fiscal prudence to keep markets happy, also coincides with the next election. I worry that it would take the self-control of a saint not to—with Farage at the gates of No 10—hand out a few pre-election goodies and delay any restraint by a few more years. The lack of market backlash to that obvious fiction speaks, I think, to rock-bottom expectations. Goldman Sachs, diplomatically, wrote in its post-Budget note that “the backloaded nature of the incremental consolidation … could lead investors to question whether it will ultimately be fully realised”4.

What else?

Having now read through plenty of the overnight analysis on the Budget, I thought I’d also highlight a few more themes that I didn’t fully get to the first time around:

• The intergenerational unfairness of the threshold freezes is truly remarkable. Student loan thresholds will be frozen for three years, raising £400m or so a year5. And then the big freezes on personal taxes, of course, mainly hit labour income—earned by people of working age. (Putting a £2,000 cap on salary sacrifice pension contributions whacks that same group too.) Meanwhile, the state pension rate, far from being frozen in cash terms, continues to ratchet up in line with the Triple Lock: the highest of inflation, wages, or 2.5%. This government was voted in with fewer pensioner votes than just about any British government ever, but is still far, far more comfortable raiding the young than the old6.

• The markets’ sigh of relief after the Budget was appreciable. By Deutsche Bank’s calculations (see below), it was the biggest differential fall in gilt yields after a Budget in decades. Note, too, the contrast with Labour’s last budget (black line on the right panel below), where there was less focus on the bond market reaction in the lead-up, but a worse reaction later on. My read is that this mainly speaks to the credibility of the OBR, inadvertent early release of its forecast aside. The OBR concluded that the government’s fiscal hole was a bit smaller than widely expected, and that explanation was broadly accepted. Good news for the perceived credibility and competence of at least one important British economic institution.

• The limits on salary sacrifice interact unpleasantly with the odd kinks in Britain’s marginal tax schedule (high rates around the withdrawal of child benefit, the personal allowance taper and the withdrawal of subsidised childcare hours). Salary sacrifice at least makes it more painless for earners near those cliff-edges to cram money into their pension to stay on the right side. Credit to Dan Neidle for pointing this out.

• Paradoxically, the government’s own sluggishness in delivering its Employment Rights Bill bailed it out. The OBR initially planned to score the growth impacts of the package, which would almost certainly be sharply negative, at this budget, but has judged that there still isn’t enough detail. That could well be a landmine, though, at the next fiscal event.

• The decision to levy the new surcharge on expensive homes in “slabs”: from £2,500 per year when a home hits £2m in value, up to £7,500 when it hits £5m, creates lots of unpleasant discontinuities of the sort that tax economists hate. One smart take from Josh Bailey of the EIU is that this may have been done to reduce the number of valuation challenges. Perhaps deluded optimism, but I also hope that getting any sort of regular tax on the current-ish value of a home is one step towards normalising the stamp-duty-for-property-tax swap that Britain obviously needs. (See proposals on that from Tim Leunig and from the Centre for British Progress.)

• Peculiarly, the OBR will still produce two sets of economic forecasts per year, but only assess the government against its fiscal rules in one of them. That will lead to the slightly strange outcome of every wonk doing their own DIY arithmetic on the OBR spreadsheets to work out for themselves how much headroom the government has, given pretty much all the necessary underlying information would be there. But perhaps that dials down the political heat if the government is close to the line, and certainly Britain needs less fiscal fine-tuning, not more.

• The government was disappointingly non-commital in its response to the Fingleton Review, an excellent set of proposed reforms to nuclear power. One to watch, where a bit of boldness could go a long way.

• Day-to-day spending growth towards the end of parliament has been pared back from about 1% per year to 0.5% per year. The government has promised “efficiency savings” will drive this, but re-opening 2028/9 spending after it was notionally finalised in the spending review over the summer isn’t a great look. More from the IFS’ Bee Boileau.

  

• The government will start absorbing special-needs education spending pressures later on this parliament, rather than continuing to dump them on local councils. That is a good thing, and should align incentives well to reform the current unworkable system. But the prospect of a nearly 5% decline to per-pupil spending in mainstream schools when that happens, as the OBR forecasts, is pretty hair-raising.

• The two-child limit is a parable of how to get unpopular things done in this government: a concerted campaign of pressure from within the Labour party. Stephen Bush notes in the FT that:

  “But compared with the two-child limit, very few of those unpopular policies have enough power brokers and organisers within the Labour party to campaign for and drag the government into taking action. There is no equivalently powerful Labour caucus saying “for goodness’ sake, stop putting more cost pressures on to businesses if you want growth and you want action on the cost of living”.

  There is no equivalently powerful Labour caucus for NHS reform. And there is no equivalently powerful caucus for putting the public finances in a sustainable position. Given that, it seems unlikely that this government will be dragged towards meeting even its own objectives, let alone anyone else’s.”

• And, to wrap up, I would have loved to sit in on a Budget lesson7. Ailbhe Rea in the New Statesman reports that in the lead-up to yesterday, “there were “Budget lessons”, aiming to teach MPs how debt interest works and why borrowing more would result in more money going to US hedge funds”. I would add that, if those hedge funds do their job well, most of that money should eventually go to US public sector pension funds and the like. But perhaps the California teachers aren’t quite as convenient a bogeyman.

That’s, at this point, I suspect truly more than enough Budget parsing for all but my most fiscally-obsessed readers. I do plan to return to a slightly more regular posting cadence on here (with a mixture of US and Britain-focused writing) over the next month or two, though. So please do subscribe for that, if you haven’t already.

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The best place, naturally, for a top-to-bottom read on how to interpret Rachel Reeves’s latest offering is the pages of The Economist—you can read what my colleagues thought here, here and here.

Still, seeing as this is the first British fiscal event in a while where it’s no longer my job to write something up for those pages, I thought I’d freelance a little. So here are a few rough, day-of, impressions of the Budget, pinged over from across the Atlantic. Speed beats structure1 here, I concluded, so forgive the slightly haphazard layout.

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1. What a mess at the OBR

Pretty much every quarter, pretty much every public company manages to announce its market-moving earnings without accidentally uploading them early and botching things. The fact that the Office for Budget Responsibility seemingly cannot, and managed to put out its full assessment and forecast hours before the Budget, is an utter disaster.

Cock-up rather than conspiracy, I assume, but anyone who caught it early could have made a fortune trading on the information. All rather unedifying—if helpful to those of us trying to churn out budget analysis on a deadline.

2. More spending, more taxing, more borrowing

But more important, what was actually in the Budget? After all, two landmark fiscal events, plus a messy fudge last March, should be enough to give a sense of how this government operates.

Add up everything the government has done, across all three fiscal events so far, and you get the chart below. The story is pretty clear, and this budget mostly adds to it: higher taxes, more in extra spending than those higher taxes raised, and extra borrowing to make up the difference. The totals involved are pretty vast: about £79bn (2.2% of GDP) in extra tax receipts, £96bn (2.7% of GDP) in extra spending and £17bn (0.5% of GDP) in borrowing by the end of parliament.

Big moves, for a government often criticised for doing too little2. This time around, the mix skewed more tax-heavy, allowing the Chancellor to slightly narrow end-of-parliament borrowing and build up a thicker fiscal buffer.

3. Quite the front-load

To get a better measure of this budget, though, it helps to look at the years that don’t determine the Chancellor’s fiscal margin.

Over most of the next five years, the budget leans lighter on tax and more on spending. Clear echoes, here, of the “fiscal fictions” with which Labour so vigorously criticised the last few Tory budgets. Few can resist the eternal temptation to kick the can down the road and borrow more in the short run.

The result is this quite entertaining chart from the OBR. £20bn in extra borrowing for three more years, before tax rises swing in just in time to rescue the Budget’s compliance with the fiscal rules. A rather entertaining definition of “borrowing falling as a share of GDP in every forecast”, as Reeves boasted in her Budget speech.

Governments have, of course, been playing this game forever. Here’s a chart the IFS put together a few years ago showing that, come rain or shine, the first three years of a forecast period get a spending boost. Chancellors then fiddle with the last year to ensure fiscal compliance. No wonder that, if you talk to folks actually involved in gilt trading, they pay far more attention to new issuance over the next few years than any tenuous claims about what the government will do in five years’ time.

To give the chancellor her credit, she is gradually moving towards a three-year fiscal horizon, which ought to help with this dynamic a little. But in the mean-time, she is happily capitalising on the room for fudge that the fiscal rules leave.

4. The bond vigilantes’ verdict

The fact that every fiscal event in Britain is now conducted with half an eye on the same-day reaction of the gilt market is a pretty remarkable cross-party failure. With that said, where did the vigilantes land?

This time around, the verdict appears to be merciful—at least relative to the rather-glum expectations that had already been priced in. Gilt yields are down marginally, and actually down especially relative to the US. So far, a much more reassuring market reaction than the last budget. It helps that the wider headroom margin that Reeves has bought for herself should prevent any more messy corrective fiscal events like the one in March.

It’s become increasingly popular to say that the importance of the bond market reaction to a budget has become a democratic problem—see Andy Burnham a few months ago, and Zack Polanski more recently.

Two quick thoughts on that, one uncontroversial, one rather more provocative. To start: having to pay attention to whether people are willing to lend you money is hardly an unusual condition. Running big deficits is a policy choice, and one plenty of governments have opted against in the past. Then needing to pay attention to whether the people lending the government that money expect it to be paid back is simply the straightforward consequence of that action.

But also—I’d venture that bond vigilantes are essentially a good thing. Both politicians and voters have obvious temptations to spend now. For governments, dealing the ultimate consequences will probably be left to their successors and they can get a popularity boost in the meantime. For voters, the lack of popular memory of any real fiscal crisis in Britain (outside the somewhat disanalogous currency issues in the 60s and 70s) makes it easy to simply keep pushing for more spending.

A mechanism that prices in the consequences of running unsustainable fiscal policy now, rather than when it’s too late to fix, strikes me as a pretty desirable thing to have in a system of government. And that is, in effect, all the bond vigilantes do.

5. A bigger state…

So the sum total of Labour’s fiscal choices has been to expand the state. Over the last ten years, on average state spending was 41.6% of GDP. That has now risen to 44-45%, reflecting more spending and a higher debt interest bill. The chart below shows just how appreciable that shift is.

The OBR also put out its own chart, making a similar point on the rise in spending and disaggregating the causes.

6. … but so far, without much to show for it

People can disagree philosophically plenty about what the right size of the state is. The question for Labour, though, is what that boost to spending is achieving. In my Budget verdict last year, I wrote.

“Across taxes, borrowing and spending, the government is betting big: that tens of billions in extra NHS spending will make a difference, that Britain’s workers and firms can bear ever-higher taxes, that markets will support a big fiscal expansion. Those bets will come good only alongside equally ambitious reforms to the tax system, to public-service provision, to the planning system and more. On that, this heavyweight budget was alarmingly light.”

So far, there still isn’t much to see. The Chancellor had few concrete improvements to public services, aside from a small decline in NHS waiting lists, to point to. Certainly, one can argue that delivering visible change takes time. But pushing almost £100bn a year extra in state spending ought to show up, somewhere. Time to start asking questions if the government isn’t capable of pointing to where, exactly.

One slightly more systematic tracker of this is run by some of my colleagues at The Economist. We’ve pulled together a range of quantitative measures that voters, when polled, say they care about, like small-boat arrivals, A&E wait times, energy bills and more. Overall, there has been no perceptible improvement so far this parliament.

The government needs a better answer to that disjunct—a sizeable boost in state spending and little improvement in state outcomes.

7. That growth downgrade

The other hefty change this budget was one which was looming for a while, a downgrade in growth expectations by the Office for Budget Responsibility. The Chancellor is right to say that this is mostly a verdict on the past decade, not this government. (I wrote a long look at the issue of over-optimistic OBR forecasts before the last election.)

Even now, though, the OBR has moved from vastly out-of-consensus on growth to only mildly so. It remains among the most optimistic forecasters of growth out there, as the chart below shows. (The OBR points out that the BoE is now, also, on the optimistic end compared to the private sector.)

And I did enjoy this longue-duree chart from the OBR in their supplementary productivity note. It makes the point, which is worth repeating when one gets too pessimistic about Britain, that no era lasts forever. Today doesn’t look great, and is about as poor any point since the growth slowdown of the late Victorian era on this chart. But at any given point, the right mix of policy and technology can turn things around.

I should add, too, that I did think Reeves approached the forecast downgrade, philosophically, in exactly the right way: by promising to beat the forecasts. “We beat the forecasts this year and will beat them again.” That, not whinging about the unkindness of the OBR, is the right way to deal with this sort of challenge.

And, as I’ve also written about before, it still strikes me as silly that the OBR produces an entirely de novo macroeconomic forecast, rather than being forced to anchor to market consensus for concepts like GDP growth, inflation, and so on where there exist entire industries dedicated to forecasting those measures well. That would have sidestepped this problem altogether.

8. Back to fiscal drag

It certainly helped, though, that the overall impact of the OBR’s macroeconomic forecast changes wasn’t as damaging for the government as widely expected. Part of that came from changes to expected employment levels.

But also, like Jeremy Hunt in 2023, Reeves paradoxically benefitted from higher expected inflation and wage growth, pushing more income into higher (frozen) tax brackets—a dynamic called “fiscal drag.” The OBR uses the diplomatic language of more “tax rich” nominal growth when discussing it.

9. What was in it?

But what did the Budget actually do, at a policy level? The table below is the key summary, for the real geeks. I’d pull a few key bits out.

On the spending side, by a distance the largest single change was the reversals on previously-announced welfare cuts, plus the removal of the two-child benefit cap.

On the tax side, there’s more going on. I’d highlight:

• Personal tax rises, mostly back-loaded freezes to thresholds (meaning inflation pushes more people into higher tax brackets) but also applying national insurance to salary sacrifice pension contributions and charging higher income taxes on property, savings and dividend income.

• A range of other smaller bits, most notably new electric car taxes (good, better to get them in before there’s a bigger group of EV-owners to lobby against them), higher taxes on online gambling (good, I think), more money from better tax compliance (a classic fudge, I’ll defer to the tax lawyers on how credible that looks) and a few smaller soak-the-rich measures (which I’m less sure about).

10. The fingerprints of the Resolution Foundation

Torsten Bell, who formerly ran the Resolution Foundation think tank, was reportedly closely involved with this budget. RF often does great work, but—reflecting the 2010s era when it really came to the fore—leans very heavily into worries about inequality.

You can see quite a few measures in this Budget where that worldview is at play. Rather than reform property taxes entirely, for instance, we got a fudge to add a special extra surcharge to expensive houses (and do so with an inelegant wedge that is sure to cause distortions). Tax on property and savings income was singled out to be raised; narrowing the gap between the taxes on labour income and assets is a longstanding RF focus. The £2000 cap on salary sacrifice pensions had a similar focus.

One worry I have with that sort of approach is that, as the FT’s John Burn-Murdoch laid out in a great pre-Budget piece, Britain actually already has a tax system that, if anything, under-taxes the middle classes and over-taxes the rich. (At least compared to other similar countries.)

11. The motor-tax landmine

The new tax on electric cars was, as I mentioned above, good news. But Britain still has a huge issue coming: fuel duty is actually a decent-sized tax, despite this and prior governments’ habit of constantly promising to un-freeze it and then failing to deliver.

As EVs proliferate, that tax base goes away, and motoring in general will get cheaper relative to other forms of transit. The new tax will need to be quite a bit higher to make up that gap, and stop the appearance of an inadvertent subsidy for driving (perhaps a fair one, since EVs are less polluting than gasoline cars, but one that should be discussed and not happen invisibly.)

12. The wrong way to discusss inflation

Another complaint of mine that extends well beyond this Budget is how British politics discusses inflation: far too much focus on one-off bodges to administered prices to manipulate the headline rates, far too little on the overall stance of fiscal and monetary policy—which actually determines where inflation lands in the long run.

There was plenty of that in this budget, but I just wanted to highlight this peculiar chart. Conveniently, the inflation impact of this budget is highly negative in the immediate future when some energy bill giveaways land. I’m sympathetic to the notion that the politics of affordability are difficult, and politicians need to be seen to be doing something. But entrenching the notion that inflation can and should be dealt with by the government fiddling with prices is a real problem.

13. The absences

I won’t re-hash my tax policy wish list. As it happens, it is (boringly) not too far off from this joint report from a range of think tanks (and several friends of mine) laying out a cross-party agenda for tax reform.

Safe to say, like last year, there was pretty much nothing in this budget in the way of meaningful growth-boosting reform. I’m a touch more bearish than the consensus in Britain on how central tax problems (vs wider regulatory problems) are to holding back British growth, but the lack of effort is pretty unforgiveable.

Labour could, maybe just, have argued last October that they had a big fiscal hole to fill and didn’t have time to take stock of the right reforms before their first budget. More than a year later, they have no such excuses.

14. “Unprotected departments”: Jeremy Hunt redux

Another bit of Jeremy Hunt nostalgia in the budget was the return of cuts to “unprotected” departments. Because department-by-department spending is allocated less frequently and less far out than the overall “envelope” of total spending planned by the government, opportunities arise to pencil in long-term cuts to flatter the aggregate numbers. Those then, almost invariably, get massaged away before they really happen by raising short-term spending and pushing restraint further into the future.

The last few OBR reports on Conservative budgets always had charts like the one below, making the point that if once you incorporated all the government’s department-by-department commitments, there was not enough money left to fund everything else (unsexy bits of spending like policing, courts or local government) without cuts. We’re now seeing the same dynamic from Labour, with probably-undeliverable spending cuts now provisionally laid out for some departments after the next election.

15. Under-the-radar squeezes

And finally, the OBR has helpfully called out a few of the most potent fiscal landmines affecting the British state. Getting a grip on the cost of asylum and special-needs schooling in particular is tough but vital. Expect those issues to recur.

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Do forgive the Substack silence over the past month and a half or so. My partial excuse for slow posting is that I’ve spent the summer switching both jobs and home cities. I’ll now be doing The Economist’s coverage of the US economy, based out of Washington, DC. After a fair few flights and rounds of Airbnb-hopping, the bulk of that move is now thankfully done.

Which, for better or worse, lets me get back to Substack. Since I’ve spent much of the past few months with half my mind on Britain and half on America, I thought it’d be interesting to hop briefly through what I’ve written—and line that up with a few of the big themes facing each economy. This post is a fairly long one, so I’d recommend treating it as a buffet. Hover around and see which courses (charts) most inspire.

At the end of this post, I’ve also left a logistical note about how I plan to use this Substack going forward. In brief: expect more of a mix of British- and American-focused writing. And there is a way to opt out of pieces on either country, for subscribers who’d rather not bore themselves with happenings on the opposite side of the Atlantic.

Let’s start with Britain.

There were a few topics that I thought had been under-covered in journalistic and policy writing about the British economy, which I was keen to touch on before I wrapped up that job.

Of those, energy is probably the most consequential.

Britain now has real issues with energy costs and scarcity. (Anyone who has already read my spiel on this, feel free to keep scrolling.) Until a few years ago, electricity was about as expensive in Britain as in continental Europe, and had been for decades. Today, bills are sharply higher in Britain. Reasonable people can disagree about exactly how much of a problem that is, but I worry.

Unlike, say, housing costs, which have been a problem for a long time—if an ever-worsening one—this energy issue is relatively new. Britain is still learning what the economic and political consequences of having some of the world’s costliest power will be.

But, it’s safe to say that Britain is now in uncharted territory. No other country has been this rich while consuming this little energy, as the chart below shows. That trend could well be spun positively, as a triumph for energy-efficient growth. My suspicion, though, is that this is an issue: adding an energy constraint to an already-faltering economy could be a problem for future growth.

The comparison with Europe is particularly illuminating, since other European countries are faced with the same (high) wholesale natural gas prices as Britain. So the standard explanation for high electricity prices in Britain, which pins almost the entirety of the shift on still-high gas prices following Russia’s invasion of Ukraine, is clearly incomplete.

A decent share of the blame, in my view, goes to each of: gas prices, historical policy decisions (no new nuclear power since the 1990s, pushing coal off the grid in the 2010s), and current ones (the sprint to clean power by 2030). Particularly worrying is the fact that the workhorse technology of Britain’s energy transition, offshore wind, seems to have stopped getting cheaper.

The most in-depth critical response my piece received was from Andrew Sissons. Do give it a look; I’m grateful he took the time to engage. I don’t want to get into too much of a tit-for-tat, or mess with the flow of this piece, but you can see some of my responses in the footnote here1.

That’s a fairly brief tour of a complex and messy area. To wrap up, I’d add two observations.

First: the politics of net zero are likely to get tougher from here. Polling commissioned by my colleague James Fransham found that voters say energy bills will do more than any other measure to determine which party they support in 2029.

“For example, the biggest vote-swinger is lower energy bills: 54% of adults of all stripes said they would be more likely to support Labour if prices fell; just 13% said a clean-power target would increase their support.”

And, irrespective of one’s views of the merits of current net zero policy, those costs are almost certainly going to making up an ever-larger share of electricity bills.

Second: Britain’s power as an exemplar goes two ways. I ended my piece on this note:

“These days, Britain’s carbon emissions are not far off a global rounding error. By phasing out coal so quickly, Britain has also already cut emissions by more than just about any rich country. The bet behind today’s clean-power push is that Britain can be a trailblazer, and show how to painlessly decarbonise the grid even without much cheap solar power. But taking that prospect seriously also means entertaining the opposite risk. A botched transition would be not a model but a warning.”

That was rather a lot on energy! Not a topic that’s easy to dip quickly in and out of, though. I promise the rest of the what-I-wrote-this-summer tour will be briefer.

The other main topic was what I call “Bargain Britain”.

Amid all the gloom about Britain’s economic prospects, I’d been keen to find a slice of optimism. One framing I found myself returning to was whether it was time to “buy the dip”: was Britain looking like a bargain? That’s what I argued on our “Welcome to Poundland” cover in July.

That story has two angles. There has clearly been dip-buying in the labour market. Britain’s cheap but well-educated workers fuelled something of a post-Brexit boom in services exports. The scale of growth there, especially in the context of Britain’s otherwise-anemic economy, is pretty staggering.

But Britain’s assets are also looking cheap, too. Whether they’re a bargain, though, is more in the eye of the beholder. There are lots of good reasons to think that Britain today is also a riskier jurisdiction to invest in than it may once have been, starting with the Liz Truss experience. You can see that in equity pricing, where Britain looks cheap even after adjusting for its lack of technology companies.

And you can also see that risk reflected in the co-movement of British assets. In particular, capital flight-style market dynamics, where British stocks, gilts and sterling all fall together, seem to have become more common.

But in all that risk, and cheapness, potentially lies opportunity! I tried to sketch out what a “Poundland strategy” for economic growth might look like in the accompanying cover leader article.

“The doomsters are right, but failure also contains a copper lining. Call it the “Poundland” strategy, after the bargain retailer that originally priced all items at just £1 ($1.36). Britain is cheap—cheaper than warranted by the obvious risks. If the government can seize the opportunity, then being value for money offers Britons a pathway to better economic growth.”

Where does all that leave Britain’s government, one year in?

Last month marked the first anniversary of Labour’s election win. Stepping back, how has the government done? The Economist’s overall verdict was: not terribly well. This is where my colleague Matthew Holehouse landed:

“The first birthday of Britain’s Labour government on July 4th will be a miserable, cakeless affair. The party’s polling is dreadful, trailing Reform UK, an insurgency from the right led by Nigel Farage. Promises to cut hospital waiting-lists, build more houses and stop migrant boats are off-track. And on July 1st Sir Keir Starmer was humiliated by a huge rebellion, as Labour MPs gutted a bill to cut sickness and disability benefits. In Parliament the next day his chancellor wept and yields on Britain’s debt soared. The prime minister has never looked weaker.”

I looked specifically at how the pursuit of economic growth, notionally Labour’s top “mission” had gone. My tone echoed Matthew’s. A year on, there wasn’t all that much to point to. A landmark planning bill had been watered down. Little progress had been made on softening post-Brexit trade barriers, and even less on tax reform.

I warned about learning the wrong lessons from that faltering first year.

“Before pronouncing supply-side reform futile, Labour should first give it a proper go.”

Certainly, the cleanest measure of success on growth: whether Labour had persuaded GDP forecasters to get any more optimistic, wasn’t looking great.

Since then, there are a few reasons to be a touch more cheerful. The latest round of GDP figures and PMI surveys came out better than expected. (And would probably make the chart above look better if it was more up-to-date. Sadly I don’t have a Bloomberg terminal to hand right now to re-make it and check.) And there’s been a fair amount of reporting that the PM is keen on a second go at planning reform. Here’s to a better Year Two.

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And then America

Britain’s economic issues are mostly structural and slow-moving. Correspondingly, my focus when writing about Britain has tended to be wide and thematic. America is in a bit of a different position. The five- or ten-year story is a strongly positive one: recent American growth has outrun every one of its peers. But zoom in on 2025 specifically and things look shakier.

I’ve spent my first few months writing about the US trying to take stock of that potential slowdown from a range of angles.

Have tariffs hit growth?

In early July, I wrote that some American economic data was starting to look weak. Since then, revised payroll figures have confirmed that impression (although, interestingly, the gauge I show below—the private consumption and investment slice of the Atlanta Fed’s GDPNow tracker—is now a touch stronger, at 1.9%).

A more fun measure of economic weakness is the “switcher premium”: how much higher pay growth has been for people who moved jobs, versus those who stayed put. Not a good time to job hop at the moment, it turns out!

What about the rest of the economy?

The classic interest-rate-sensitive sector in America (and elsewhere) is housing. A slowdown there can be an early warning signal that monetary policy is looking tight, and further economic pain may be coming.

Today, housing looks very soft. Home prices have fallen in three-quarters of big American cities over the past few months.

Interestingly, there is a regional pattern to that weakness: the Northeast and Midwest are holding up better than the South and West. You can see an interactive version of the map below here.

Part of the story (there’s lots going on, do read my full piece) is that a big post-Covid trend seems to be cooling down: the vast domestic migration from the coasts to the Sun Belt. If that reversal continues, a fair few political narratives premised on that trend (particularly a sort of red state triumphalism) may need to be rethought.

Conversely, a newer slice of the economy is doing extraordinarily well: the AI buildout. Growth in data centres and related equipment has been big enough to account for roughly half of America’s growth so far in 2025, and a sixth over the past full year. For a sector that makes up 1.5% of GDP, that’s pretty remarkable.

That growth has probably even been strong enough to keep interest rates higher, and so squeeze down other sorts of investment. Housing developers are a lot more responsive to interest rates, it turns out, than superintelligence-builders.

There is one asterisk to that story, which I didn’t emphasise as much in the piece but this chart from Gavekal captures well: the GDP impact is not totally straightforward, since a good share of the components for that AI buildout are imported.

How shaky is America’s overall economic credibility?

A theme I’m increasingly concerned about, now that I’m back in America, is the scale of institutional rot. (Plenty of British institutions by contrast certainly have a competence problem, but aren’t under political threat in quite the same way, at least so far)

Core to that is the Federal Reserve. For the moment though, despite the blows the Fed is sustaining, markets are very far from treating Jerome Powell as a lame duck. One way to see that is by looking at just how far priced-in expectations for a rate cut moved after Powell gave a hawkish press conference at the last FOMC meeting (see the growing blue bar). Since I wrote that piece, softer data and a dovish tone from Powell at Jackson Hole have yanked pricing back to roughly where it was at the end of June, on the far left of this chart.

Another worrying theme is the emergence of a risk premium in the dollar since “Liberation Day” in April. There’s a fair bit of disagreement about how real this is (here’s Robin Brooks arguing there’s not much to see), but at a first pass the dollar has traded below where you’d expect interest-rate differentials alone to leave it since April.

Drama in the cities

One piece of the new job that I’ve been looking forward to is the chance to tell a few more hyper-local stories. I started, in June, with New York, the city in America I know best. Despite having spent several years as a victim of New York’s high grocery prices, I was sceptical that Zohran Mamdani’s solution of city-run supermarkets had much promise:

“At best, then, these stores might sell groceries a smidge more cheaply than conventional grocers, largely due to back-door taxpayer funding. For a government concerned about affordability for the poorest New Yorkers, indiscriminately part-financing the grocery haul of anyone who steps into one of Mr Mamdani’s stores is a curious way to do it.”

Meanwhile, while house-hunting in DC, I found myself far more charmed by the ideological underpinnings of the NoMa neighbourhood (large-scale and rapid apartment-building, the stuff of pro-housebuilding YIMBY dreams) than by the architecture itself (rather blocky and bare).

“Persuading yuppies to move to “Swampoodle” was always going to be an uphill battle. So when the ex-industrial zone next to Washington, DC’s main railway station was slated for redevelopment in the 1990s and 2000s, the authorities ditched the neighbourhood’s original 19th-century name, which had already fallen into disuse. Instead, they christened the wider area “NoMa” (“north of Massachusetts Avenue”), a syllable or two away from trendy locales like NoMad (in New York) and Soho (in each of New York, London and Hong Kong).”

But, the scale of building there has been remarkable. I’d encourage anyone interested in this to spend five minutes clicking around Google Street View anywhere nearby Union Market, and comparing the skyline today to a decade ago. Here’s a street around there that I picked pretty much at random in 2016 and last December.

That neighbourhood also, I argued, carries lessons for the country.

“America will need many more NoMas. After a century of mainly expanding outwards, cities across the country are nearing the limits of suburban sprawl. Next comes building upwards. NoMa was YIMBYism on easy mode. Cracking the politics of that shift elsewhere may well be a tougher task.”

Hopefully there were titbits of interest on that tour. My next few posts on here should be more structured, and take less than a month and a half to arrive.

As promised, a quick operational note to end, on what to expect from this Substack going forward.

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Despite the new job, I don’t expect the broad formula of what I write here—riffing and expanding on themes that I cover for The Economist—to change much. But the focus probably will shift. Still, do stay subscribed!

I expect something like half of what I now put on here to be America-focused, drawing on my writing in the same way previous posts here on Britain have. The other half will stay Britain-focused. (Time permitting, I’m planning to write some more zoomed-out and thematic surveys of the big obstacles for Britain’s economy, and at which policy solutions do or don’t look promising.)

As that switch happens, I’m conscious that not everyone will want everything landing in their inboxes: By default, subscribers will still get every post, but for those who would like to choose, I’ve added the option for people to turn off emails for either Britain- or America-centric pieces.

You can find this menu by clicking on your account picture on the top right and then going to “Manage subscription”, and scrolling down to “Notifications”.

And more than usual now, I’m planning to play around a bit with the format and length of posts. Do let me know, either in comments or by email, what if anything you find most valuable as a reader, and what I could get away with doing less of.

They can’t say they weren’t warned. After an embarrassing backbench revolt on welfare cuts and a messy prime minister’s questions, yields on gilts spiked. Within hours, they rose around 10 basis points1 (0.1 percentage points, see chart 1)—a move that was mostly specific to Britain.

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The cause of these ructions is not hard to deduce. Despite its 166-seat working majority, Britain’s government failed to push through a set of welfare cuts worth under £5bn per year, in the context of a working-age welfare bill projected to rise far more than that by 2029. Fiscal prudence has taken a back seat to party management.

This was the latest in a now worryingly frequent set of squalls in the gilt market. Yields rose by 25 basis points after October’s budget, where Rachel Reeves, the chancellor, loosened her fiscal rules to raise borrowing by £30bn. They spiked again in January, as anxiety about Donald Trump’s big-spending agenda yanked bond yields up globally. Britain was hit especially hard, and Ms Reeves was forced to rush out growth-friendly announcements like a third Heathrow runway to change the narrative. Britain was also particularly exposed to the swings after Mr Trump’s “Liberation Day” tariff announcements.

One reason the latest moves are especially troubling is that they reflect not just a response to a particular policy–the amounts involved in the welfare cuts were ultimately not vast–but a wholesale reassessment of whether the Labour party can be trusted to get Britain’s public finances in order. However strong Ms Reeves’s commitment may be, the broader party does not appear to be behind her. Nor, potentially, is Sir Keir Starmer. The prime minister initially declined an opportunity in parliament to guarantee her job was safe. (He eventually did, later in the afternoon.)

Across the world, governments are spending big and bond yields are rising. Isabel Schnabel of the European Central Bank spoke in February of a “global bond glut”, a reverse of the 2010s-era dynamic where seemingly insatiable demand for bonds from savers pushed yields down. In Britain, the investor base in gilts has also shifted more towards flighty foreign capital in recent years.

That sets the stage for a difficult budget in the autumn. The typical Westminster debates, which focus on the government’s “headroom” against its fiscal rules, will be something of a mirage. That headroom is around £10bn in theory, though the reversals on welfare will have narrowed that sum considerably. Higher yields will eat away too, as will the impact of US tariffs on growth, not yet incorporated into the Office for Budget Responsibility’s forecasts. The OBR is also looking at its productivity projections over the summer, which are more optimistic than the vast majority of independent forecasters, and may move those down too, potentially adding tens of billions to the hole.

But focusing on self-imposed fiscal rules is a luxury that Britain’s government can no longer afford. If the goal of setting such rules was to persuade bond markets that Britain’s fiscal conditions were in safe hands, and investors could safely treat budgetary news as a non-event (as has usually been the case in past decades), then they have manifestly failed. The Liz Truss debacle in 2022 had already made the situation challenging, but this government’s choices have not helped either.

Gilt vigilantes are now watching. Staving off ever-higher yields will now be a central priority for this government. Already, higher debt servicing costs account for a bit under half of the rise in government spending since 2019. Britain’s bonds have higher yields than any other G7 economy (see chart 2), having been middling before the Covid pandemic. Learning to think that way will be difficult for Labour’s MPs, many of whom came of age politically in the low-rate environment of the 2010s, when government debt was cheap. But it will be essential.

Ever since the Brexit vote, the question of whether to treat Britain like an emerging market has been a running joke among investors. Briefly, during Liz Truss’s tenure, Britain behaved like one–gilt yields spiked as sterling sold off, the telltale sign of EM market dynamics. But this government has now set itself up to be the first British government in decades whose policy programme will be subject to such constant scrutiny by the bond market. Mr Starmer and his colleagues may soon yearn for the luxury of being considered boring.

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Naturally, I am contractually obliged1 to say that the best place to go to understand Wednesday’s spending review—where the British government decided what to fund through early 2029—is what I and colleagues wrote for The Economist in the hours afterwards.

But with a few days’ distance, and the benefit of also reading others’ analysis, I thought it’d be worthwhile to pull together something a bit more detailed (and wonkier) for here.

The best way to think about the spending review, I think, is through the finance-world line “don't tell me what you think, show me what’s in your portfolio.”2 The government has had almost a year to tell voters what it cares about. But doling out cash forces choices, and makes clear where priorities really lie.

So, here’s that piece in—God forbid—listicle form.

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1. Let’s begin with what to ignore. I’d pay pretty close to zero attention to Rachel Reeves’s actual speech.

Here’s what I wrote about it at the time.

“For almost an hour on June 11th the House of Commons felt like a bingo hall, or perhaps an auction house. Rachel Reeves reeled off a dizzying list of wildly varying numbers and time horizons, covering programme after programme funded in Britain’s spending review. … All that razzle-dazzle served a purpose: to pull eyes away from the harsh trade-offs the government had actually made in allocating money across departments.”

More than most British fiscal events, I also thought this was one where much of the press coverage largely missed the point.

Lots of outlets (not that I’d ever name names) seemed to get a little taken in by the government’s strategy of announcing exciting-sounding projects, promising a generational programme of investment and so on—without realising that money was tight and the fact that one railway or power plant was funded said little about the more significant question of what happened to overall transport or energy spending.

2. There is one exception. Rhetorically, that was the most protectionist speech that I’ve seen Reeves give since becoming Chancellor, by some margin.

Take the passage below.

“I have long spoken about what I call ‘securonomics’:

The basic insight that, in an age of insecurity, government must step up…

…to provide security for working people…

…and resilience for our national economy.

Put simply: where things are made, and who makes them, matters.” (emphasis mine)

I’m hardly an expert Labour-whisperer, so won’t dwell long on the internal politics of that shift, but clearly the Reform threat and the feeling that momentum is with Labour’s “soft left” seem to be having an impact.

From a policy point of view, I never found Reeves’s cod-Bidenomics “securonomics”—which was all over Labour’s campaign materials in 2023 and early 2024, before mostly getting canned3 ahead of the election—to be vastly convincing. Whatever one thinks of a government-funded push to reshore production in America4, Britain’s smaller scale and more limited fiscal firepower would always make that especially tough here.

The actual policy shifts accompanying that change in rhetoric so far don’t look vast, but a few details look troubling. Pushing Heathrow to only use British-made steel is exactly the sort of everything-bagel nonsense that Britain needs to be moving away from. Nor should governments be putting price controls on school uniforms, as Reeves also proposed.

3. Money-wise, there were two clear winners: defence and health.

I framed this earlier as Britain getting closer to becoming “a hospital with an army”. Emily Fry from the Resolution Foundation helpfully refined that to “doctors and nurses with a lot of jets and tanks”, since the boost to health came in day-to-day spending and the boost to defence came in capital spending.

You can see that pretty clearly in the chart below, which I made on the day. This pulls together both day-to-day and investment spending. Purely in percentage terms, health and defence already visibly come out best. That is even more pronounced in cash terms given how big the two are, especially health, which is getting a budget of nearly £250bn by the end of the spending review period.

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4. The government has doubled down on the bet that fixing the NHS is its route to re-election.

That actually marks a striking continuity with previous Tory governments—which were generally much happier squeezing the rest of the public sector than the NHS.

The conversations around whether Labour was delivering “austerity” were always a distraction; calling an October budget that raised planned annual spending by 2% of GDP “austerity” is clearly foolish. But the government’s fund-the-NHS-at-all-costs strategy has more in common with its predecessors than either side would probably be willing to admit.

The chart below from Bee Boileau at the IFS lays that out well. Those cuts to departments outside the NHS would also look even bigger in per-person terms, taking into account population growth5.

Regular readers of this Substack, insofar as those exist, will know that I’m a bit uncertain about that strategy, and tend to think there may be cheaper and easier wins by putting cash into things like basic local government services, rather than putting every electoral egg in the NHS basket.

5. “Invest-to-grow” has become mostly a mirage.

Coming out of October’s budget, the narrative from the government was that it was dialling up investment to grow the economy. The OBR was persuaded to produce charts like the one below, going beyond its usual five-year forecast window to show how an uplift in investment would have big supply-side implications further out.

Then, Donald Trump was elected and focus shifted to defence spending. There’s a long literature in economics on what spillovers defence spending has to the rest of the economy, which I’ll largely elide here. But suffice it to say that growing the economy is clearly not the point of defence spending (nor should it be), and that tanks and munitions clearly boost Britain’s productive capacity by less than roads, railways and power stations.

Ben Zaranko at the IFS did a pretty helpful rough-and-ready breakdown of where investment went, which you can see below. Note how small the circles on the bottom right, for explicitly growth-focused areas, are. And he is showing the numbers in cash terms—transport would be negative if these were adjusted for inflation.

In fact, if you cut out “financial transactions” (loans etc., more on this later), the Resolution Foundation calculates that non-defence investment will actually see real-terms cuts between 2025-26 and 2029-30.

Another peculiar implication of the government’s decision to use investment as the vehicle to raise defence spending is that the composition of defence spending has now changed quite a bit, from 25:75 investment versus day-to-day to more like 40:60, as the chart below shows (also from Bee at the IFS). A rather odd case where the edge-case quirks of Britain’s fiscal rules may literally reshape how its military works.

6. The Sizewell C nuclear plant is a noble exception to that lack of growth-y investment.

Sizewell makes up a decent chunk of the “energy and net zero” bubble above, and should provide 7% of Britain’s electricity once it opens in the early 2030s.

The fact that the government has had to take a majority stake in the project is a little worrying, suggesting that the private sector isn’t vastly keen on financing large-scale nuclear power in Britain. Still, what matters most is that the project is moving along. I’ll save further thoughts on nuclear in Britain for a later post.

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7. The government’s thinking on the housing crisis seems to have moved backward.

Reassuringly, this government’s diagnosis of the problems in the housing market has usually sounded basically right—that housing supply is too low, largely due to over-onerous planning regulations. There’s still lots to quibble with on their actual policies, which underrate the importance of building in city centres, are too top-down and target-driven, and don’t go far enough on moving away from a site-by-site discretionary process.

But the huge focus on a £39bn fund for social and affordable housing struck me as a bit of a return to the largely-debunked idea that housing is expensive because not enough of it is “affordable”, rather than that it’s in too short supply. Housing is also a place where—with appropriate deregulation—the private sector can quite easily take the lead. So at a time when government cash is so tight, that struck me as a slightly strange place to allocate scarce public funds6. Better, I’d say, to focus on something like big infrastructure projects where government involvement is inevitable.

Besides, as my colleague Henry Curr points out in a great leader article, Britain already has more social housing than most peers.

8. Watch the government’s use of “financial transactions” to squeeze out more borrowing.

One feature of Public Sector Net Financial Liabilities, the debt-adjacent concept that one of Reeves’s fiscal rules now targets7, is that transmuting projects into financial instruments like loans or equity stakes (versus simply paying for them) means the Treasury can net off their value and not add to total “debt”.

Thus, for the narrow purposes of fiscal rules, that spending is near-free. (Not quite, since higher interest costs from more borrowing do also flow into the fiscal maths. And the bond market, which is what actually matters, cares far more about the volume of borrowing than its categorisation.)

For now, the amounts involved aren’t huge, but the government is planning to ramp them up, especially for energy and housing. Here’s a quick-and-dirty chart of mine showing the breakdown. Something to watch.

9. The spending review figures rely on continued 5% increases in council tax.

The parlous state of local government finances in Britain is well-reported (and is something of a fixation of mine). So most councils are already raising council tax by 5%, the maximum they can without calling a referendum. The figures in the spending review presume that continues.

At some point, I think there’s a good chance that the ever-upwards ratcheting of council tax starts becoming a real political problem, particularly if the local government services most people use don’t improve.

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10. London lost out.

One of the more inexplicable features of Britain’s fiscal system is the inability of cities to raise their own revenue, either through local taxes or borrowing. That forces them to show up with a begging-bowl to the Treasury for funding. This time, the loser was London, which got neither of its two big requests, as my colleague Joel Budd writes.

“When the chancellor’s spending review mentioned London, it was often in the context of promises to close government offices and move civil servants out. The capital had two big requests, for money to extend the Docklands Light Railway and the Bakerloo Underground line. Both got short shrift. The contrast with Birmingham and Greater Manchester, which will be able to extend their tram networks, is plain.”

11. What noisy macro variables give, they can also take away.

I always find myself slightly offended by how shamelessly governments (of all stripes) are in claiming credit for short-term macro changes they had little-to-nothing to do with. So Reeves’s speech had the line:

“And the latest figures showed we are the fastest growing economy in the G7”

The chancellor neglected to add that this was only for the first quarter of 2025. On any longer time-frame, even just looking back a year, Britain’s growth is far shabbier. Quarter-to-quarter GDP movements aren’t quite random, but certainly aren’t stable enough that a government should be putting all that much stock in them.

So there was a certain irony when on Thursday, the day after the spending review, we got another month of GDP figures which recorded a -0.3% month-to-month fall, wiping out Britain’s lead.

12. The next budget is shaping up to be a real mess.

And finally, there was a slight air of unreality about a spending review that doled out money based on a set of forecasts which were put together before ‘Liberation Day’, when Donald Trump’s tariff antics started to seriously look like a threat to world (and British) growth.

The OBR, as I’ve written before, may well (and should, I think) revise down its unrealistically-high growth estimates for Britain. But doing so could easily knock out tens of billions in fiscal headroom. The chart below shows quite how much of an outlier the OBR now is.

That conversation will pick up over the summer. But for now just bear in mind that the messiest, and most consequential, fiscal event of the year is probably still to come.

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Here’s one of my most crankish investing views (not financial advice!): for most Brits, the optimal allocation in their savings to UK assets is 0%, in other words to hold no domestic stocks or bonds at all1.

That’s not because of any particularly dire prognosis about Britain. But diversifying holdings across countries2 is one of the few truly costless ways to lower risk and raise expected returns in a portfolio. Plus, if you take a more holistic view of people’s “portfolio”—to include their home3, the present value of their future earnings (net of future spending), potential eligibility for a state pension and so on—almost everyone is inescapably vastly over-allocated to the place they live. No point adding to that exposure with investments too.

The chart below, from my former employer, illustrates the stakes. A globally diversified return stream (the red line) has for decades been a higher-returning strategy with less volatility than choosing one specific country (the grey lines).

You could even take the logic further. Given the scale of their personal exposure to Britain through wages and so on, should Brits in fact have a negative allocation to UK assets—in other words go short the FTSE to raise cash to build an even bigger position in the S&P 500, Eurostoxx and Hang Seng? Perhaps there’s a niche fintech product in that…

All this is mostly a provocation, but I do find the logic fairly compelling. And in reality, most investors, both in Britain and elsewhere, do the opposite. They exhibit substantial “home bias”, over-allocating to their own market relative to its size.

In fact, Britain over the past decade is a perfect case study for why home bias is so damaging. Weak growth has pulled down wages and also hit British businesses, so UK equities have underperformed. Even British-listed international businesses (like many on the FTSE 100) have lost out, since investors have grown more cautious about sterling-denominated assets after Brexit and the Liz Truss episode.

No-one living and working in Britain was able to avoid the former hit (slow growth hurting wages), but people could choose whether their investments reinforced that shock (by holding lots of British assets, which underperformed for the same reasons) or counterbalanced it (by holding global assets, which weren’t affected4).

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Instead, the position of successive British governments, including Labour today, is that British savers need yet more home bias. That has long struck me as profoundly misguided. Last Thursday, the Pensions Investment Review put out its final report, reaffirming that position and arming the government with tools to make pension funds comply.

I’ll walk through those briefly, but want to spend the bulk of this post having a go at taking apart the arguments in favour of actively pushing more Brits to invest domestically.

Start with Thursday’s pensions report. Much of what’s in there is highly sensible and long overdue, especially on consolidating smaller schemes to realise the benefits of scale. I do want to re-emphasise that none of what I write should be read as defending the chaotic and underperforming status quo in the British pension world.

But on the home bias question, the proposals are rather less promising5.

• The government has decided not to go ahead with explicit mandation—i.e. forcing schemes to hold a certain share of British assets. (Good!)

• But: that is only because of promises (the Mansion House commitments) that some of the largest pension schemes have made, and the government is creating a “reserve power” to force mandation later on. (Less good!)

That, to be clear, smells a lot like backdoor mandation: the government waves about the threat of forcing pension funds to hold more British assets, before generously deciding not to fully exercise it once funds get the message and “voluntarily” make sure to allocate the money within Britain anyway.

The refusal to acknowledge that this choice involves tradeoffs also particularly rankled me. How, exactly, can forcing fiduciaries to buy assets they wouldn’t otherwise have chosen be “consistent with the principles of fiduciary duty”?

Better to simply embrace the tradeoff and pick a side. My bid would be to make the single guiding question for pension policy: what needs to be done to make sure British savers are getting the highest returns in the world?

Clearly, that’s not where the government is. Nor is that attitude something specific to Labour. The Conservatives’ “Brit ISA”, a now-ditched tax break to persuade ordinary people to buy more British shares, stemmed from similar thinking. It’s worth understanding that cross-party enthusiasm. As I see it, there are three main planks:

1. A lack of domestic capital hurts growth, since some good projects and companies don’t get funded.

2. Even when foreign capital does come in, having an overseas investor base is a problem. Valuations suffer and promising companies may eventually follow their investors and move overseas.

3. Those effects are substantial enough to outweigh the benefit of chasing higher returns to make British savers richer.

None of the three holds up, in my view. Let’s walk through them.

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Premise 1: Capital is a bottleneck to growth in Britain

To believe that we need to force more British savers to invest at home, we’d need to think that there are high-return investments—infrastructure projects, expansions by companies, start-up funding, and so on—that are being held back by an inability to get investors interested.

One way to sense-check that view is to ask companies. Thankfully, Britain has long-running surveys that do exactly that. I took a look at one, the CBI’s Industrial Trends Survey, last year when writing about the National Wealth Fund (another initiative premised on financing being a big bottleneck to British growth). The CBI asks a panel of manufacturers why they aren’t investing more in capital, like new machines and buildings.

Almost always, as you can see in the chart below, the overwhelming issue is a lack of sufficiently appealing opportunities (“uncertainty of demand”, “inadequate return”). Cost-of-finance worries (“shortage of internal finance”, “cost of finance”, “inability to raise external finance”) were among the least popular responses.

Intuitively, that makes sense. Whatever one’s quibbles about Britain’s financial system, it remains one of the deepest and most liquid in the world. You don’t have to be an efficient-markets purist to find it difficult to believe that vast, sophisticated international investors are foolishly overlooking countless exciting opportunities in Britain, an English-speaking country with robust rule of law.

Back in April, BlackRock’s Larry Fink told The Times that lots of British assets looked cheap, now that the political situation had stabilised, and that he was putting money in. Make Britain a genuinely appealing economy and both domestic and international investors will be happy to pony up cash.

Meanwhile, Britain is full of straightforwardly damaging real-economy bottlenecks to growth, like the planning system. Making progress there would do far more good.

Perhaps, for instance, investors would be keener to put money into Britain if it didn’t take over four years and the personal intervention of the Deputy Prime Minister to get (still-outstanding) approval to build some film studios on the site of a former landfill in Buckinghamshire.

Premise 2: Having an overseas investor base is a problem

A subtler version of the argument accepts that projects and companies can get investment, but frets that getting money from overseas bodies like Canadian and Australian pension funds (for whom, critically, exposure to Britain is genuinely diversifying) is a problem.

Certainly, there has been a big shift in who owns British equities, as the chart below shows.

You generally come across three views on why that’s a problem. (The first two are, in my view, more serious than the third).

1. That valuations are low on British equities because there isn’t a stable base of domestic buyers. The mechanics of that have always felt a bit hand-wavy to me6. More significantly, it fails a basic timing sense-check. In public markets, British equity valuations started lagging those in the US from the mid-2010s onward. But the big upswing in foreign ownership started far earlier in the 1990s and was done by 2010 or so. If foreign ownership was a problem for valuation, why were valuations well-behaved throughout the period where foreigners were taking over the market?

   Regardless, until 2022 or so, the UK-US valuation gap was mainly explicable by the fact that British equities had less exposure to tech, the big growth success story of the 2010s/2020s, relative to US equities. You can also get a good way towards explaining the wider post-2022 discount as: (a) a lingering post-Truss hangover, and (b) the fact that UK-listed tech has far fewer AI beneficiaries than US-listed tech.

2. That having a foreign investor base inevitably means that companies move more of their operations overseas. You hear this most on start-ups, where Britain does have a real lack of domestic scale-up capital. Frankly, I’m not totally unsympathetic to this argument—you can probably imagine scenarios where there is some path-dependency in founders wanting to be closer to investors, and that influencing where the headquarters end up.

   But I’m not sold that the effect of investor location specifically, as opposed to the broader appeal of the American market (larger than Britain’s, and with businesses anecdotally more willing experiment with software), is huge. Nor does it feel realistic, even if a very large share of British pension assets were pushed by mandation into UK VC, that the majority of investors in many start-ups and scale-ups wouldn’t be foreign, and probably American.

   Anyway, presuming that businesses are guided mainly by business imperatives (and not the geography of their investors) in deciding where to move their operations still strikes me as a broadly reasonable baseline.

3. That having non-Brits profit off “British success stories” is a problem. You hear this a lot, even though the logic is pretty spurious. Two obvious issues:

   1. What really matters for economic growth is that productive activity is happening in Britain, not who funds it.

   2. This claim neglects the counterfactual: if Brits have instead invested elsewhere, and done so because that option had the highest expected return, then Britain is hardly the loser in that interaction.

Besides, there are better places to start if your concern is revitalising British capital markets. One I’d flag, which probably should be discussed more often, is stamp duty on shares, a 0.5% financial transaction tax. Unlike much of this pensions business, there is fairly persuasive evidence that this tax depresses the prices of UK-listed equities.7

Premise 3: Those effects are more important than higher returns

Let’s say you are persuaded by some of those arguments though, or other similar ones. The next question is how large the effect sizes of a policy of mandation actually are. If you believe markets are even moderately efficient (and so most investment opportunities are already getting funded, if just marginally less cheaply), then it’s tough to see them as all that large.

Meanwhile, the impact on the wealth of British pension-savers of a worse-constructed portfolio could easily be material. Here’s what I wrote on this in a piece for The Economist in March 2024, which also raises some of the same arguments I make here:

“For British investors, patriotism is costly. Sticking money in domestically listed equities over the past decade has meant total shareholder returns two-thirds lower than investing in a global index that strips out Britain. It should be no great surprise, then, that British investors exhibit less “home bias”, an over-allocation to domestic equities, than most rich-world peers (see chart). A decent financial adviser would call this shrewd.”

The benefits of a better-funded pension system are huge. Pressure to constantly raise the state pension goes down. Households are better insulated from shocks. Those, to my mind, almost certainly outweigh even the best-case-scenario for mandation, which might at best reduce the cost of capital slightly for some British firms.

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An unexpected resonance

I didn’t write about the pension issue for The Economist last week, in part since I’d rehearsed a lot of the main arguments in previous articles.

Instead, I wrote about a bizarre and slightly terrifying provision in Donald Trump’s tax bill. That, too, sought to use the power of the state to keep cash from moving freely across borders.

However uncharitable I am about what the British government is up to, though, this is incomparably madder.

“Section 899 would add a 5% tax surcharge in its first year, and another 5% each year after that to a maximum of 20%. That higher rate would target dividend, interest and property income flowing abroad. For now, the language in the bill leaves open a few possible gaps, but punitive rates would almost certainly hit any lending in America by banks from offending countries, dividends on American stocks for those countries’ investors and profits sent home from American subsidiaries. Sovereign wealth funds and public pension funds linked to governments that fall afoul of the Section 899 regime would also lose their existing tax exemptions. Altogether, the move amounts to a radical act of tax protectionism, a near-unprecedented plan to use America’s tax code as a cudgel to knock other countries into line.”

See the full piece here.

I thought it’d be valuable to walk through a few of those conversations here, beginning with Reform UK.

Can Reform UK un-Truss itself?

My last post here, based on an exercise I did for The Economist, was on Reform UK’s fiscally disastrous economic plans. After Reform’s local election wins, I figured an extra dose of scrutiny was due.

You can read that article by following the link below. There, I also walk through Reform’s rather unimpressive first wave of responses to my analysis, which largely involved digging through the archives to complain about previous predictions that The Economist had got wrong. Little of substance.

More recently, the response has been (a little) more promising. Other analysts, notably Simon French at Panmure, landed in a similar place to me on Reform’s numbers. After some loud complaining, Reform’s deputy leader Richard Tice made a meaningful concession to The Telegraph.

“Of course, what we would do is we would make the savings first with a direction of travel to significant tax cuts, right? We’re not going to do the tax cuts before the savings, which is why what he [Simon French] suggested is juvenile claptrap.” (Emphasis mine)

That, in turn, prompted headlines1 like the one below.

Despite Tice’s bravado, admitting that the party would hold off on most of its tax cuts until actual savings2 were made too is an important shift. Liz Truss was undone largely by her refusal to find savings before proposing colossal tax cuts (and, delusionally, hoping that soaring growth would save her). Until this past week, Reform said it would deliver most of its tax cuts within 100 days of taking power.

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So far, so good. But where does that leave the rest of Reform’s governing agenda?

• The central question for Reform is whether they follow the Giorgia Meloni mould (a radical-right party that seeks to govern reasonably effectively, and mostly within existing institutions) or pitch a tear-it-down operation like DOGE or Liz Truss. Sam Freedman has written recently on similar themes, drawing on some of my calculations. Hopefully, this episode has nudged the party into a moderately more constructive place.

• Despite the concession on timing, Reform’s broader economic thinking remains troubling. Around the same time as his climbdown, Tice also wrote up a feisty defence of Reform’s economic policies for The Telegraph. There, he doubled down on even more of the vast unfunded tax cuts from the manifesto. By my reckoning, two-thirds of the tax cuts in the manifesto have now been specifically re-affirmed by senior figures in the party over the past few months.

• And moving beyond the spreadsheet-economics of sizing tax-and-spend plans, Tice falls into trope after trope of unserious economic thinking. I listed a couple of the biggest howlers in a thread on Twitter (forgive my questionable aesthetic choice of clown-emoji bulletpoints).

• Now, the story to watch on Reform is how they govern the councils and mayoralties they won. I’ve written quite a bit about the near-insurmountable constraints that local governments in Britain operate under, largely due to vast and expensive legal obligations on social care, special educational needs, temporary accommodation and more (see chart below). So Reform will quite quickly run into nasty obstacles. Whether the party identifies the actual issues at hand, or simply blames rampant wokery, will be a helpful barometer of their seriousness.

• Winter fuel payments are also a telling litmus test. Reform wants to fully reinstate them. Look behind nearly every line item of British state spending, and you’ll find vast entrenched interests. In a few places, like asylum, Reform is clearly raring for a fight. But cutting tens-to-hundreds of billions inescapably means taking on (a) pensions, (b) health and disability benefits, (c) the NHS. If Reform blanches at taking £1.5bn off mostly well-off pensioners, I struggle to see them breaking the Triple Lock. If even that’s off the table, good luck cutting state spending by any meaningful amount.

Still, the fact that Reform has budged at all speaks to why scrutiny is so important. One happy feature of British politics is that many voters are open-minded. Compare the dug-in trenches of American public opinion, where both parties fight over a few percentage points’ worth of swing voters, to the vast shifts we’ve seen in Britain. Voters can, and do, change their minds.

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Following up on ‘equal value’

A month ago, I published a post here on the legal principle of ‘equal value’ in British equal pay jurisprudence: which allows claims of pay discrimination to be made between groups of workers doing different jobs (e.g. warehouse staff and shopworkers, binmen and cleaners).

That, I argued, was a fairly destructive form of judicial central-planning which has already demolished the finances of the Birmingham and Glasgow City Councils, and is coming for the retail sector next.

If you’re interested and haven’t read the first post, do take a look. But I wanted to follow up on the topic in three extra places, which have come up since.

First, Birmingham’s bin-strikes are still running. (For those unfamiliar, these strikes have been caused by that ‘equal value’ principle: council wants to eliminate a better-paid binman role to stave off more equal pay suits, the binmen’s union Unite is objecting, and neither side has been willing to back down.) The strikes are now nearing the three-month mark.

The longer they drag on, the more they illustrate the central issue with equal value: it breaks the ability to find a market-clearing wage that makes both workers and bosses happy (or at least sufficiently not-unhappy). Clearly, the market-clearing offer for binmen, including wages, bonuses, promotion prospects, etc., is closer to the current arrangement—that’s why the council offered it in the first place, and why the binmen were previously happy to do the work.

So the union has a point: their compensation package is getting worse, even though the need for their labour hasn’t changed. But the council also has a point: the risk that the current setup opens up extra legal jeopardy is very real. After well over a billion pounds in payouts, plus effectively declaring bankruptcy, that isn’t a risk that the council can take. Thus, we get an impasse. And the residents of Birmingham—the ultimate victims in all this—get another month of civic dysfunction and un-collected bins.

Second, Britain’s political conversation has done a pretty awful job explaining these issues. I don’t like picking on individual outfits and outlets, but one recent poll from YouGov captured the problem. Regardless of whether you agree that ‘equal value’ is a problematic legal principle, at least as currently applied in Britain, setting up the strike as exclusively a conflict between the unions and the council misses the point entirely.

Or consider the BBC, which has covered the strikes extensively. By my count3, BBC News has published 66 articles so far in 2025 on Birmingham’s bin strikes. Of those, only 20 referenced the equal pay question at all, and none with much more than glancing detail4.

Take, for instance, the piece “Why are Birmingham bin workers on strike?” from the BBC. That has exactly two references to equal pay:

“The council said it was carrying out a "fair and transparent job evaluation process" agreed with trade unions, to comply with equal pay laws.”

and

“A spokesperson said it was not a role that could be reinstated without opening the authority up to a potential equal pay liability.”

Naturally, I wouldn’t expect the BBC to be opining on the merits of Britain’s current equal pay regime. Still, choosing instead to treat the dispute as an entirely ordinary tug-of-war between a union and employer, without explaining the specific circumstances that make it so intractable, strikes me as utterly surreal.

Nor is the BBC much of an outlier. Sky News’s equivalent article, the first piece that shows up when you Google “why are Birmingham bin workers on strike” doesn’t mention the equal pay issue at all. The moral, of course, is to read (or indeed watch) The Economist5.

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Third, I wanted to highlight an instructive back-and-forth I had on Twitter with the employment barrister David Green, on how far the “material factor” defence mitigates some of the issues I was grumbling about. David argues that lots of the complaints that I and others have made are already handled by fact that employers can argue a “material factor”, like forces in the labour market, explains pay disparities.

I’m not vastly persuaded, but David is right that I only addressed this issue indirectly in my original piece, so wanted to walk through it. Unexpectedly, Jonathan Haskel, until recently at the Bank of England, also made a cameo appearance in the conversation.

In practice, there are a couple issues worth flagging with this.

1. At a fundamental level, courts must still decide whether a deviation from a market benchmark is “reasonable”, which necessarily embeds taking a view on what a job is “worth”. For anyone who takes the epistemic limitations of social planning seriously, that’s a big problem. Haskel puts it well. Even if judges thoughtfully weigh up the framework and are open to the fact that the market may have it right, junk is junk.

The spider diagram of mine that he references is here, capturing just how finger-in-the-air some of these assessments are.

2. My reading of the case law is that a market defence has only worked in fairly specific circumstances—usually highly context-specific market factors applying to a specific individual, versus systemic market forces applying across the labour market.

   The specific precedent that David pulled up in our conversation (Ms A Evans v Pure Recruitment Group Ltd) seemed to have limited cross-over to the big mass-claim cases. There, the “market factor” in question was whether a company needed to pay a man more than a female colleague on the basis he had been poached from a competitor and the company needed to match his prior salary.6

3. There is a good reason for that. The law is specifically intended to accommodate the notion that market outcomes can themselves be discriminatory. So a full-throated market forces defense would undermine the law itself. The judgement against Next in an equal-value case for (mostly male) warehouse workers vs (marginally more-female) shopworkers lays that out explicitly: “for market forces to be a trump card in this way could defeat the objective of the legislation”.

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A few more stories of the triage-ward state

Building on my coverage for The Economist of Britain’s ‘broken windows’, I wrote a piece a few weeks ago reflecting on why so few public services, outside genuine emergencies, seemed to work well in Britain any more.

Gratifyingly, The Spectator put a very similar story on its cover the following week, with the slightly raunchier label “Scuzz Nation”. As Gus Carter, the author, put it:

“[Scuzz Nation is] a place where decay happens faster than repair, where crime largely goes unpunished and where the social fabric has been slashed, graffitied and left by the side of the road.”

There are a few places where I’d quibble with the account—I don’t think Carter’s interpretation of the crime stats is quite right7, and my guess is the situation would look pretty similar even if immigration had been much lower over the past few years—but broadly he lands in a place not far off where I did.

Here on Substack, Iain Mansfield also used some polling I commissioned from Public First as a route into a series of pieces on why British governance isn’t working well. He zooms out a bit further8 than I do, but again reaches a not-dissimilar diagnosis. Well worth reading.

Many of the responses to my piece though, were a form of horrified recognition. One Substack commenter wrote about failing to secure an ambulance for a drunk man with a head injury, who was unresponsive and at risk of choking on his own vomit.

“Called 999 and requested an ambulance only to be asked "does he want to go to the hospital" and I explained that as I had already stated he was not conscious and was not responding to any stimulus.

They told me they didn't want to send an ambulance if he would refuse to go to the hospital and I ended up arguing with the dispatcher and demanding her name because if I left and this man aspirated his own vomit I would not be held liable for his death.”

Other readers also challenged me on some of the ideas in the piece. One great push came from Pieter Garicano:

“Is there a 'grand theory' that explains the cross-sectional variation? At lot of the explanations you identify for the UK apply (to a lesser degree) elsewhere in Europe as well, with similar consequences. Why is state functioning trending downwards everywhere?”

I mostly told a Britain-specific story (and maintain that Britain has it particularly badly), but my sense is that Pieter is right that there’s probably a cross-country issue here too. Of what I wrote about, my guess is the most-generalisable dynamics are:

• Budgets are increasingly eaten up by a small number of ultra-high-need cases, where the state is bad at cost control (in part because of pretty maximalist legal rules, in part because saying no to needy people in awful situations is hard).

• There’s a thicket of principal-agent problems everywhere. Central government dumps responsibilities it doesn't want to deal with on local government, local government has little autonomy over the money it raises so isn't always well-incentivised to spend it well. The sheer complexity of interlocking responsibilities means surprisingly often people in government don't realise the powers they have.

• Talent problem: the gap between top-end private and public sector salaries has growth much higher. The bureaucracy can be oppressive even for good people who do make it in. And, no-one likes to be working for a state that isn't doing well.

My main plea, though, is for better cross-country data on people’s subjective experience of the state. Compared to economic quantities like GDP or inflation, getting a proper sense of whether the sort of anecdotes I wrote about reflect a robust trend is tough. Doing so across countries is harder still.

Another came from Herbie Bradley:

“Great analysis, but somewhat perplexing that fixing the most visible degradations would be so cheap if that's the case, why haven't politicians (notorious for optimising for short-term voter satisfaction) done it already?”

That’s a question I also had, and put to quite a few people when reporting this story. My tentative answer is that the politicians who have the money are different to the politicians who can fix things, and getting cash from the former (MPs, the cabinet) to the latter (local councillors and mayors) is something that Britain is quite poor at. Without reform to statutory duties, there is also the real risk that any cash sent to local governments gets swallowed by social care costs.

To some degree, in governance it does also sometimes take a lot of kicking and screaming before people notice the proverbial £20 notes on the pavement.

Then on Twitter, I was also asked repeatedly why I wasn’t blaming high immigration for these issues. The truthful answer there is that, having looked into this all a fair bit, I simply wasn’t persuaded that this was a story where migration was the central issue, at least at the national level.

Certainly, you can see impacts in either direction. Parts of local council budgets would be even more stretched if lower legal migration pushed the prevailing wage down in social care. Conversely, the asylum hotel crisis has made it more expensive for some councils to find temporary housing for people facing homelessness. On crime, thoughtful people have looked into the immigration-crime question in Britain and not found large impacts, at least in aggregate.

But the core drivers of this story—weakening state capacity, an older and sicker population, struggles with cost control, a tendency to push the most intractable problems to local government—are simply separate ones, at least in my view.

And finally… regular readers will know about my ongoing one-sided feud with the City of London police over their habit of spray-painting mock blue plaques about phone theft on the pavement. (More context here, here and here).

An update there: one plaque (but not the other two I walk past regularly) has been resprayed from “A member of the public had their phone stolen here” to “A phone snatcher was arrested here”. I suppose that’s another small victory to be grateful for.

I want to focus this Substack, though, on policy, not politics1. There, the Westminster chatter around Reform still has serious catching up to do. Commentators are only just starting to leave behind the patterns of thinking they developed when Reform was a protest vote—that could at most shake things up (to admirers) or spew bile (to critics).

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Where to next? The conversation, I’d suggest, should move towards asking: what policies does Reform want to implement, and would they be in the national interest? As I put it in last weekend’s edition of The Economist:

“Success means scrutiny. As a protest party, Reform, like earlier Farage ventures, was distinguished mainly by a penchant for scandal and an uncanny ability to nudge the Tories into unforced errors. Now, the notion that Reform could be a party of government no longer seems fanciful. Its ideas should be taken seriously.”

In that spirit, I spent last week going line-by-line through Reform’s 2024 manifesto and some of Nigel Farage’s recent speeches at local election rallies. I didn’t want to get stuck in the mire of litigating immigration, foreign aid or net zero—readers will have their own views there2. Besides, Reform’s stance on those issues is hardly news.

Rather, I focused on the basics of governance: whether the party has a credible economic plan. What I found was pretty alarming.

Specifically, I pulled out every pledge from both the manifesto and recent campaign speeches that had a clear and direct fiscal impact (i.e. raising or lowering spending or taxes). Then, I put together a generous-but-realistic assessment of how much each would cost or raise3. That produces the eyebrow-raising chart below.4

I’d highlight three things:

1. The numbers are colossal. Look at the tax cuts. The full set that Reform has proposed is something like 3-4x as large as Liz Truss’s mini-budget (though partway-offset with spending cuts).

2. Much of this has been recently re-affirmed as official Reform party policy. Just under half of these tax cuts, by my reckoning, have been specifically backed by Farage over the past few months. That includes raising the income tax personal allowance to £20,0005 and abolishing inheritance tax6. Some spending cuts have been confirmed too, especially on asylum hotels and foreign aid, but they involve far less money. Reform may eventually move on from its fantasyland 2024 manifesto, but it certainly hasn’t yet.

3. The sums rely on turbo-austerity to add up, and even then don’t really. Note the large grey bar on the chart: that covers the £50bn or so in “efficiencies” (excluding cuts to foreign aid, net zero, the asylum system, etc.) that Reform wants to find in the British government. That would be an austerity drive comparable to the 2010s, but imposed on a state that is already struggling to provide basic services competently. All that is baked that into these costings; if you assume that Reform loses its nerve over the scale of the cuts, the fiscal picture gets darker yet.

If anyone from Reform would like to send over their own, detailed, alternative to this costing—please do! I’d (genuinely) be interested to look through it.

Implementing this, or anything close to it, would amount to a colossal fiscal shock—and one that Britain, still stumbling out of the shadow of the Truss debacle, can ill afford.

If we extrapolate from Sushil Wadhwani’s back-of-the-envelope breakdown of the impact of Liz Truss’s unfunded tax cuts on the gilt market, this policy package would mechanically raise borrowing costs for the government by something like 150 basis points (1.5 percentage points). Throw in the possibility of a proper loss of faith in Britain’s macroeconomic stability alongside that, and you can easily get to far scarier numbers still.

To be explicit: that would be an unmitigated disaster. Government borrowing would become more expensive, probably semi-permanently. Brits would pay the cost, in higher taxes and shabbier public services. Britain’s current bleak low-growth, high-rates quandary would shift from being an aberration to a norm. I can think of few faster ways to cement national decline.

Alongside that, plenty of the rest of Reform’s economic agenda doesn’t have an immediate price tag but is still worrying. A crusade against electricity pylons would ensure energy prices stay high. An ultra-restrictive migration policy7 would jam up labour markets. There are a few better-sounding ideas in the manifesto—a nod to planning reform, for instance—but the overall package doesn’t exactly inspire.

A final troubling habit is a seeming desire to sabotage Labour’s efforts to get growth going today. I have plenty of criticisms of the current government (I aired several after the Spring Statement), but Reform seems committed not just to arguing against the government, but actively making their job harder. Temptation for this sort of destructiveness will only grow as the election gets closer.

If today’s polling holds up into 2028 and there’s a decent chance of a Reform majority, the risk premium any right-thinking investor would demand on any infrastructure project in Britain would surely be vast.

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I say that not, or not only, to criticise. Reform has four years to sort this out. They should start soon. There’s nothing inherent in Reform’s core ideas—migration-scepticism, dislike of net zero policies, and so on—that requires them to also drop a fiscal bombshell on Britain. There’s a long transition from protest party to prospective party of government, but Reform also has plenty of time if it gets moving shortly.

An encouraging example, but also a cautionary one, is Giorgia Meloni in Italy. My colleagues wrote a leader on her “not-so-scary” government in January.

“People like labels, and it has always been easy to attach them to Giorgia Meloni, prime minister of Italy since October 2022. She has routinely been dubbed a neo-fascist by her political enemies in Italy and by alarmed liberals across Europe. … But 15 months in, Ms Meloni seems to be conventional rather than a wrecker.”

But one institutional detail may well make a tremendous amount of difference: the Meloni government is a coalition, spanning a range of right-wing parties, including some more moderate outfits, a result of Italy’s proportional-ish electoral system.

Britain, meanwhile, has First Past The Post. The standard argument for FPTP is that parties get few seats unless they hit a ~30% vote share (or are very regionally concentrated). That means they have to appeal to a broad chunk of the country, incentivising coalition-building and moderation. In return, victors get proper majorities and the power to make sweeping changes.

But Britain’s new five-plus party system has broken that logic. The threshold for a majority has fallen, fast, and Reform may well be past it if the latest polls hold8. So far, Reform has made little effort to turn its pile of giveaways into a credible plan for power. That could leave Britain with the worst of all worlds: a FPTP-style unencumbered majority with a PR-style wishlist manifesto. I shudder.

Since my piece for The Economist went out last week, Reform has had the chance to publicly respond. Their efforts haven’t been terribly inspiring either. Zia Yusuf, the Reform chairman, listed a series of past Economist prognostications. Bizarrely, he focuses on a cover about a 2015 market crash in China that very much did happen (and, as anyone invested in Chinese assets over the past decade will be well aware, wasn’t one Chinese markets speedily rebounded from—the CSI 300 is still 25% below its 2015 peak). Needless to say, the Chinese economy also hasn’t grown nine-fold since then.

One Reform candidate tried a similar trick but went back a little further in time to complain about our coverage of the Great Depression.9

Among the historical excavations and ad hominem swipes, glaringly absent was any serious effort to question our analysis or offer a rival set of justifications for why their fiscal numbers did make sense.

The prickly response speaks to the deepest worry I have about Reform: they are treating basic questions about their plans for the country as political volleyballs, not real challenges to be grappled with.

Few responsibilities are more momentous than running the world’s sixth-largest economy, taking decisions each day that will affect tens of millions of lives. The stakes, complexity, and consequence of governing should weigh uncomfortably on anyone seeking high office—doubly so now, when Britain is already in a bad way.

For me, that above all is what makes their shallow glibness so distasteful. Proper patriots would meditate on the enormity of the job ahead, not lash out at those pointing out where they’ve gone astray. The last thing the country needs is more chancers.

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Retrieving him was a six-day saga, but I want to focus here on a specific episode that was equal parts maddening and illuminating. I’ve spent quite a bit of time over the past few months looking at Britain’s frail public services for The Economist, and will discuss some policy-level observations later on. But there’s little substitute for feeling the dysfunction close-up.

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Thanks to an online informant (and the fact that the thief put Oreo on TikTok), we had identified the thief and placed her, with Oreo, at a specific restaurant in Hastings. The thief had gone to Hastings after getting spooked by the “DOG THIEF” posters we’d plastered around London, using CCTV images of her that we’d managed to wangle out of a dog-loving restaurant manager nearby. I’d slipped away from Monday work meetings to help with the search, and was in the passenger seat manning the phones while my father drove from London to Hastings.

The local police in London had been sympathetic but not vastly helpful since Oreo was stolen on the previous Tuesday. Now, though, I was more optimistic. We had confirmation from a waitress at the restaurant, which we’d just rung up, that someone matching the thief’s description, with a small black-and-white dog, was eating there as we spoke.

Next, we figured, it was time to get a hold of the Sussex police, who cover Hastings. Easier said than done. To start, I called 999 and was put through to a helpful operator covering South London, where the car was at the time. After a few minutes’ explaining the context and verifying that I wasn’t a loon, she told me to sit on the line while she dialed up Sussex. Cue a minute of waiting and a repeated faint buzz on her side of the line. Then another minute, then another. Finally, the buzzing stopped. Sheepishly, she told me they hadn’t picked up. My best bet, she said, was to dial 101, the non-emergency number, while she kept trying.

When you’re stressed, panicked, and up against the clock—we didn’t know how long the thief would stay put—working through an automated phone tree with poor voice recognition is a rare form of torture. (“Which police force are you trying to reach?” / “Sussex Police” / “Did you mean … Suffolk Police” / “No, Sussex Police” / “I’m sorry… I didn’t quite get that. Could you try again?”, and so on). Twenty minutes later, after several tries and round upon round of interminable menu options, I reached an actual person at Sussex Police.

She listened politely for a few minutes, wearily apologised, and said she couldn’t help. “We don’t have the resources to look into this.”2 She suggested that I ask the Met to send someone down to Hastings. I pointed out that this would be a two-hour trip each way and, besides, we didn’t have long before the thief left the restaurant. She remained unmoved. I tried stressing that this was a central spot, not far from Hastings’ main thoroughfare. Couldn’t a few officers in the area at least stick their head in for a minute or two? “We have no-one on patrol nearby. Anyway, what would we do then? We’d have to process the dog, and we don’t even know if it’s really yours.”

Rotely, I thanked her for her time, winced and cursed, and hung up. Eventually, the London 999 operator managed to get through to Sussex too. So, ten minutes later, someone else from the Sussex Police called. She said that they wouldn’t be able to do anything until the Met sent over a report. I offered the crime reference number but that was no good: their IT systems weren’t joined up. The Met would need to send the information through themselves and, no, Sussex couldn’t reach them to ask—I’d have to speak to the Met myself. So I did. Thankfully, the Met officer assigned to the case was around. I asked him if he could send the information over. He warned that it would take some time. His only way to reach Sussex would be through the 101 non-emergency line and that awful phone tree. I gave up. By the time the file even reached Sussex, the thief would have been gone anyway.

Later that day, we did manage to get Oreo back, in a hand-over at a petrol station on the outskirts of Hastings. Predictably, the Sussex police were not involved. A few exceptionally kind members of the public made the difference, but that’s a story I’ll save for another article3. Time, shortly, to get to the point.

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One more anecdote, though. A few months after we retrieved Oreo, I stumbled on an article in The Spectator that encapsulated exactly the same feelings of bewilderment and frustration I felt that day—the dispiriting moment when you realise that your latent expectations for how much the British state will help you are wildly out-of-kilter with the bleak reality. This time, the topic was not policing but the ambulance service.

An old lady, Daphne, had fallen on the street, knocked her head, and was bleeding. I’d encourage you to read the whole thing, but I photographed an especially shocking passage in the print copy I was reading at the time. Owen Matthews, the writer, goes through exactly my experience with the Sussex police: a gradual realisation that his standards were set much too high.

Still, it’s always tempting to dismiss an episode like this as an unfortunate one-off that just happened to be highlighted because a journalist was around. So I was especially shocked to open WhatsApp a couple months back and see this text from my father.

An 85-year-old man had taken a tumble on the street just outside my parents’ front door. Along with another passer-by, my dad called for an ambulance and—even though this was in central London, and the nearest hospital was less than ten minutes’ drive away—got nowhere. He eventually drove the 85-year-old to the A&E himself.

I sent the Spectator piece over to him. They matched almost beat-for-beat.

A few weeks later, I dug around the ambulance callout time data for England, which you can see in the chart below, split out by category: C1 is a life-threatening emergency (e.g. serious heart attack), C2 is an emergency (e.g. stroke), C3 is urgent (e.g. most sorts of broken bone) and C4 is less urgent (e.g. minor burns).

Two patterns stood out to me. Both would keep recurring as I started looking into woes facing British public services. First: the “Covid hump”—everything got worse during the pandemic, and then never fully recovered. Second: the triage—thankfully, the data suggest that life-threatening emergencies still mostly get seen to quickly. But everything else, seemingly including pensioners bleeding into the flagstones, now gets deprioritised.

The chart also reminded me of two others that I’d made for earlier articles. One was about Britain’s driving-test backlog, which shows a quintessential Covid hump. When I wrote that piece last September, my back-of-the-envelope estimate was that the backlog would take something like five years to clear at the present rate. In the meantime, hundreds of thousands of young people would be denied the freedom, independence and financial opportunity of being able to drive. Last I checked a few weeks ago, the latest data are pretty much in line with that trend—just four and a half years to go, then!4

The other was a chart I made—or, more accurately, procured from the Resolution Foundation—on Britain’s rising working-age benefits bill. Here, you can see the triage effect in action. Spending is up across the board, but the key driver again is the most acute, expensive stuff: health-related benefits, reflecting (roughly equally) more mental health claims among under-50s and more physical health claims among over-50s.5

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Why nothing works: a few ideas

Each of these anecdotes or data-points seems to be circling around the same point: that the British state seems to have gotten markedly less functional, and that this deterioration has happened surprisingly quickly.

That leads, again and again, to a saddening dynamic. People’s hopeful expectations, formed by recollections of how the state used to work, or maybe just folk-memory from TV detective shows, slowly grates up against what actually exists.

Wounded pensioners or stolen Smooth Fox Terriers are the sharper end of that, but the same thing happens in a smaller way every day too, as people drive down pothole-ridden streets or have to ring the door to enter their local Tesco and buy a pack of chicken breasts with a security-tag. Shoplifting, incidentally, is another chart that looks like those ambulance callout-times. There is one difference, though: since the pandemic, shoplifting has just kept getting worse.

In this weekend’s edition of The Economist, I took this topic on. I opened my leader article on Britain’s fraying social contract with one more anecdote.

“Lodged incongruously on the metal cladding of an office block in the City of London, a blue plaque marks the birthplace of Thomas More. In 1516 he published “Utopia”, sketching out a vision of free hospitals, compulsory schooling and full employment—a forerunner of sorts to the welfare state. Nearby, blue plaques of a different kind are spray-painted on the flagstones of London’s pavement. A cack-handed publicity stunt by the local police, each commemorates a spot where a Londoner’s phone was recently stolen.

The competing plaques capture the gap between aspiration and reality in Britain. Eventually, More’s intellectual descendants brought some of his better ideas to fruition, building modern welfare states across the rich world. But underpinning the ever-higher taxes this arrangement demanded was a deal: the state would provide a safe, orderly public realm and run broad, universal services to a high standard. Increasingly, the British state is reneging on its half of the bargain.”

The good news is that the City of London Police’s awful spray-painted blue plaques are now fading (I took the second photo on Friday). The bad news is that Thomas More’s commemoration continues to be attached to a bleak office-building alcove, a few feet up from a fire exit sign. Surely the man has already been through enough.

Nor am I unusual in feeling this way. Public First kindly ran some polling for me, and shared some other polling they’d already done for the Independent Commission on Neighbourhoods, showing shockingly widespread agreement that something is awry in Britain today.

So what’s caused this mess? After all, the pandemic is now almost five years ago and taxes are set to hit postwar highs. Surely there should be plenty of money to go around?

Answers differ across arms of the state. I’m also certainly not totally satisfied with any of these explanations—and would be interested in what readers think I’m missing6. But there are some themes that did seem to come up repeatedly. I mainly focused on the first two in my Economist articles this week.

1. Acute need has worsened, and the state is awful at cost-control

If I think of the places7 where state spending has grown most over the past decade or so, a common theme seems to be that spending on a narrow group of some of the worst-off seems to have exploded. One example is working-age health-related benefits, which I mentioned earlier. Almost a million extra people are now out of work due to poor health compared to 2019, a major slug of that seems to be young people with mental health issues.

Another is local government spending, which these days is mostly social care for vulnerable children and adults, as the chart below lays out.

Much of the rest is special-needs schooling, now a colossal cost centre, or temporary accommodation for the homeless. Few can fault spending money on helping the neediest (hence money still being spent), but the way that’s been approached is pretty shocking. The the scale of the increase in spending on special-needs schooling and transport over the past few years is pretty remarkable.

Or take the asylum system, where progress at getting people out of extraordinarily expensive hotel accommodation seems to be moving at a glacial pace.

Those are just the areas I’m more familiar with—I expect there are plenty more that are similar.

2. The double-whammy of Covid and austerity has shredded state capacity

There would be something pleasantly reassuring if the problem with public services was just that the state had been cut back too far in the austerity years, and now was working on an unviably slim budget. All it’d take then would be a few well-judged tax rises (VAT broadening, anyone?) and the problem would go away. On parts of the further-out left, my sense is that a version of that view (swapping VAT for wealth taxes) basically holds.

The more troubling reality, though, is that even in the parts of the state that are a little smaller than pre-austerity, the difference isn’t huge. Here’s spending8 on public order, for instance, which covers police, courts and prisons9—among the most dysfunctional parts of the state at the moment.

Clearly, the cuts in the 2010s were part of the problem. But mostly-undoing them doesn’t seem to have helped much. A lot of the problem seems to be staffing churn, and hiring less-experienced officers10.

Something similar, though with Covid as the breaking-point shock, seems to have happened with the NHS. There, spending isn’t even down compared to pre-Covid, but again a public sector bureaucracy that’s had a difficult few years is struggling to mend itself.

3. Bottlenecks are bottlenecking each other

Chaos in one part of the system often compounds itself elsewhere. Courts are blocked and slow-moving, but does that matter if the prisons are full? Hospital beds are full of patients who don’t have any medical reason to be there, but social care is such a problem that there’s nowhere else to put them. Patients are stuck in ambulances because A&Es can’t take them, which then means there are too few ambulances. Police—at least until recently, there have been some efforts to address this—were spending a pretty troubling amount of time dealing with non-crime-related mental health episodes, because no-one else would. Blockages in A&E wards left police officers stuck in queues too, unable to hand patients off to medical staff and get back to stopping crime.

Britain’s public sector seems to be extraordinarily brittle, and the past decade has clearly had a few shocks too many.

4. Low esteem and lower pay have led to talent attrition in government

Compounding all of this is the false-economy of having poorly-paid staff steward vast budgets. The appeal of public service, plus career stability and good pensions, ought to be enough to keep a steady trickle of bright, high-energy people in government.

But I’ve come across enough disillusioned ex-civil-servants recently that I really do worry the pay differentials have got too acute. One ex-Treasury type I met recently, now in finance, just said: “I decided I wanted to be able to afford a house in London one day.”

And the flip-side of low quality frontline services is that working there becomes unappealing too—no-one becomes a police officer only to repeatedly disappoint crime victims by failing to help them.

5. Government has strangled civil society in red tape

If the state steps back, one natural response is for civil society to step up. (Another, less inspiring, vision is that a parallel privatised state emerges for those willing to pay—which is already the case in parts of health, policing and more.)

But one anecdote from a councillor that I spoke to for my most recent piece, Alan Connett, a Devon Lib Dem, stuck with me.

“There’s a residential road, with two small areas of grass: two triangular areas about 8 foot by 4 foot. The council doesn’t cut them because they’re not cutting the grass anymore. The resident opposite says: ‘I’ll cut the grass’. Years ago, he wouldn’t have needed to have asked. Everyone would have been happy, it would have improved the street scene. The council says ‘You need to go on a training course, have you got public liability insurance?’. The chap says ‘I don’t know if I’ll bother’. The grass doesn’t get cut. …

People feel that they are not regarded as able to contribute, actually we should be embracing them.”

The new Martyn’s Law, which imposes hefty security requirements on venues, and already seems to be prompting at least some events to shut down entirely, raises similar issues.

6. Tolerance for social disorder has risen

One rather troubling dynamic in America has been a growing desire—most prevalent in parts of the big-city left—to treat concern about disorder and crime in public spaces as hand-wringing and moralising. (The past year or two seems to have been a real tipping point against that attitude.)

Britain never had it quite so bad, but there’s a certain “grin and bear it” attitude inscribed pretty deep in the national psyche, which tends to mean people don’t complain. The Liberal Democrats’ unexpected proposal of fines for people playing loud music on public transport struck me as encouraging. Perhaps the dam is breaking here too.

7. Politicians were simply too distracted

Another argument that used to come up a lot in the Brexit years was that, abstractly, it seemed worrying that Westminster was monomaniacally focused on Brexit trench-warfare, and not on tackling the country’s many other problems. Covid paused usual government business for more understandable reasons, but had the same effect.

With the benefit of hindsight, we can now see the consequences of some of the slow-boiling domestic issues that were left largely undiscussed (and so also unaddressed) between 2016 and 2022: the housing crisis; a population getting older and sicker; energy scarcity; decaying public infrastructure, and so on.

Many of the challenges Britain faces today might be looking a lot better if the country had paid attention to them from 2016 on11.

There’s certainly a lot more going on that just those seven, and I’ve deliberately steered clear of the most obvious high-level fixes—like improving productivity growth or rolling out AI in the public sector.

The first dynamic I mentioned, rising need and poor cost-control, is something that feels particularly pervasive, and yet near-absent from public commentary on the state of government finances. Given how hard it is to measure, and that the direct implication of nearly any effort to change it would be to take money away from some of society’s neediest, that widespread silence is hardly a surprise. But the problem remains.

The politics of making places nice

There’s a story to be told about how a crumbling public realm and dysfunctional public services breed dissatisfaction and populism. I’m enough of a cold materialist that I have quite a lot of sympathy with that view. I wrote up a soft version of that argument in a recent piece:

“The politics get harder-edged for those unable to pay [for privatised state alternatives]. Reform UK voters are especially angry about the public realm. Meanwhile, promises to fill potholes have become a tired political cliché. The last government’s “levelling up” plans represented a similar impulse on a grand scale, and met a similarly disappointing end. High-minded aspirations struggle to survive contact with cash-strapped realities.

That’s a pity, says Rachel Wolf, a political consultant who co-wrote the Tory manifesto in 2019: politicians need places where they can deliver quick, visible and cheap change. “There aren’t many areas where they can do that; one of the few is the public realm.” Setting the streetscape right could, she says, be “a version of [the] ‘broken windows’ theory for politics”. Mr Giuliani’s unlikely fan club is growing.”

But—as I hope to write more on soon, I’m also wary of ‘false consciousness’-style attitudes that project motivations onto people who are perfectly capable of explaining their voting choices themselves. If Reform UK voters say that they’re unhappy about immigration, there’s value in just believing them: not everything is sublimated economic anxiety.

The good news is that (contra a recent piece in the Times), Britain is still a functional, high-trust society. But the warning-signs are flashing. Politicians that ignore them will struggle.

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That offered ample raw material for me to write a fairly feisty leader article for The Economist (not usually a publication to dwell on how local rats “feasted, and multiplied”)—arguing against ‘equal value’ pay rules, the underlying cause of the strikes and the billion-pound payouts that have bankrupted Birmingham.

“[Equal value laws] penalise employers for disparities between sometimes wildly different roles—binmen and cleaners, warehouse stockers and shopworkers—if judges can be sold on the idea that the work was of “equal value”. Never mind whether the market concurs.”

Still, while there’s nothing wrong with plucking low-hanging writerly fruit every now and then (someone must!), I also thought there’d be value in working through the topic a little more methodically. Much of the public conversation about ‘equal value’ has been a mess1 and—given the ongoing claims against most of Britain’s supermarkets, plus several more local authorities—the issue isn’t going away.2

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That’s what the rest of this post aims to do. People familiar with the issue may want to skip the first section or two. For those skimming, I’d particularly recommend Section 4, on the mechanics of how equal value assessments work in practice, which gets to a level of gory detail I haven’t seen elsewhere in press coverage of the issue.

1. Why care at all?

But to start: a pitch for how this matters, in case any readers are (unfathomably) on the fence over whether to keep reading about equal pay, local government finances and the stealthy comeback of central planning in Britain.

In short: I’m not sure most Brits yet appreciate the sheer scale of these equal value cases and the chaos they’ve unleashed. Start with the claims against local authorities, which are generally further along:

• When all’s said and done, Birmingham will probably end up paying out at least £1.3bn, possibly more. In 2015, the city council flogged two exhibition centres and two arenas to private-equity buyers at fire-sale prices.3 Council taxes have doubled over the past decade and public services have been cut. Another round of assets sales is happening now.

• Two tranches of equal-value claims hit Glasgow, one for ~£500m in 2019 and another for ~£800m in 2023. That’s been paid for by selling (and leasing back) landmark buildings like the main art museum and the city council chambers, as well as a a big lift to council taxes and wider cutbacks.

• A case in Sheffield is ongoing, but could well cost hundreds of millions.

• North Lanarkshire has paid out about £100m

• There have also been claims worth tens of millions or more in Cumbria, Dumfries and Galloway, and Newcastle, plus ongoing cases in Sunderland, Fife, Brighton and Hove, and Dundee4.

And in the private sector, 70% of British grocery chains by market share are in the equal value crosshairs. Each of Asda, Tesco, Morrison’s and Sainsbury’s could be on the hook for a billion or more in back-pay, plus a hefty boost to their future wage bill (which, in a low-margin business like supermarkets, flows straight into prices). There are also smaller cases with Next, Boots, and more.

It’s worth pausing for a second to take in the colossal scale here. The ultimate value of the total liabilities, across the public and private sectors, could easily end up in eleven digits.

Given these claims have hobbled some of Britain’s most important cities for well over a decade5 , you’d hope that they’d be exceptionally well-founded. Virtually all press coverage, at least until the past year or so, has presumed so6.

That strikes me as utterly delinquent: a failure either to explain how unusual Britain’s situation is compared to peers internationally7, or how precarious the economic logic underlying the law is. Whichever side of the issue you ultimately fall on, the sheer scale of the mess means it’s worth seriously interrogating whether the chaos has been worth it.

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2. Defining ‘equal value’

Before we get there, what exactly is ‘equal value’? Usually, when people think of equal pay cases, the situation that comes to mind is when someone is paid less than a coworker despite doing near-identical work, because of gender, race, or another protected characteristic. That sort of unpleasant but clear-cut discrimination still happens (especially when you include subtler instances like unfair denial of promotion and so on), but has thankfully gotten rarer.

Equal value is something else: looking across entire professions, not just person-to-person. Statistically, many jobs skew male (builders, factory workers, binmen) or female (nurses, cleaners, teachers). Under equal value, an employer can be on the hook for pay discrimination if a judge determines that the work done by one female-heavy category of employees is of the same value as that of a male-heavy category, but the former is paid less than the latter. Hence, cleaners get compared with binmen. Since within-sector gender disparities have shrunk (see chart below), these sort of cross-sector gaps now matter more in explaining the overall gender pay gap.

Winning these cases doesn’t require proving sexist intent. Nor is the fact that a particular firm’s payscales track the going market rate for those jobs an adequate defence. Instead, everything hinges on whether judges decide that two roles are of equal value.

This idea has a long history in Britain. Famously the women sewing car seat covers walked out of the Ford plant in Dagenham in 1968 over equal value logic: that they were underpaid compared to the men in the factory, despite doing work that was equally necessary to get the cars on the road,

Equal value was legally enshrined in the 1980s, but the sorts of big class-action cases we see today only got going in the 2000s. I walk through the history in my leader.

“Britain did not originally recognise “equal value”; Barbara Castle, the Labour minister who introduced the Equal Pay Act in 1970, thought it too woolly. But it caught on across the English Channel, and was added to the law books in the 1980s, under pressure from Brussels. Trouble began in the 2000s, after a ruling in the late 1990s by the European Court of Justice, which let victors claim six years of back pay, making a win more lucrative. Alongside Britain’s relaxed rules about no-win-no-fee lawyers and higher levels of pay transparency, that proved a potent lure.”

Doing away with the equal value principle would be a momentous change. One lawyer that I spoke to compared it to “removing a limb” from British equal pay jurisprudence, so established the principle now is. Certainly, it would require primary legislation. After Brexit, Britain can do so without falling afoul of EU rules. But for the moment, that doesn’t look like a path the current government is especially interested in taking.

3. Should the market be the judge?

Now we get to the rub: are today’s equal value cases an admirable reckoning with injustice, or rent-seeking and economic distortion cloaked in the language of equality? That largely comes down to how you answer one question:

• What share of the unexplained pay variation between jobs, after experts have compared the day-to-day work, is down to implicit society-wide sexism, versus differences that the assessments have failed to capture but the market has?

A valid answer—and where I’ve landed—is that ascribing much of the unexplained gap to sexism was sensible in 1960s era of the Dagenham strikes, when overt sexism was rampant and workplaces were often totally gender-segregated, but pretty tough-to-justify today.

That isn’t, as some commentators theorise, because of ‘woke’ judges or a poorly-run process. If you read through the judgements on equal pay cases, the overwhelming impression that comes across is of well-intentioned people trying to do a fundamentally impossible job. And employment lawyers I’ve spoken to don’t see these cases as expansive judicial activism, but instead a pretty clear application of the law as written. Still, no matter how hard the courts try, it’s all-but-impossible to keep these decisions from being wildly subjective.

The best way to see that is by walking through a real-life instance of how these decisions are reached. The process quickly becomes a bizarre sort of judicial central-planning, where an outward rigor masks flim-flam underlying logic. Let’s work through it on its own merits, before getting to why the underlying philosophy of the approach is dubious too.

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4. Litigating equal value claims

Here, I focus on the Asda equal pay judgement, which isn’t quite finished yet but is trundling toward a £1.2bn payout. The core claim was that shopworkers (more often female) were unfairly paid worse than warehouse staff (more often male).

The two sides battled out over how to compare the roles. Eventually, the court settled on an eleven-factor model. For each factor, every job gets banded between A (50 points) and E (10 points). The chart below shows the comparison between the top jobs at the shop (yellow) and warehouse (orange)—the court determined that the physical demands were higher in the warehouse, but that the emotional demands and broader responsibilities were higher in the shop.

At one level, that isn’t totally mad. Directionally, customer-facing shop work probably does demand more emotional nous, while jobs at the warehouse are more physically taxing. But dig deeper, and the implicit assumptions rapidly start to look rather wild.

For one, for this approach to be remotely defensible, the eleven categories would have be be roughly mutually exclusive and collectively exhaustive (MECE, as the consultants say)8. I challenge anyone to argue that there is no overlap between “emotional demand” and “mental demands”, or “physical skills”, “physical demands” and “working conditions”.

And even if that hefty bar gets met, then comes the question of how to weigh the categories. Implicitly, the judgement has chosen to treat them all equally, but there’s no real reason to think that “responsibility for assets” and “physical skills”, for instance, are equally important. The judgement is extraordinarily sensitive to that assumption; fiddle a bit with the weights and it’s not difficult to reach whichever conclusion you want.

But add up the raw scores as they’re laid out and you get a score of 460 for the warehouse team-manager and 440 for the shop section-leader. Then, it gets wackier. During the case, there was a dispute over whether responsibility over “customer goodwill” should have been added as an extra category in the schema. The compromise was to include it as a tiebreaker category. The other tiebreaker category is “marginality”, which adjusts the scores for cases where a role just scraped into a higher category.

Those two adjustments, worth 40 points, knock the shop section-leader into the lead, at 480. But the tolerance band for equal value was set at 20 points, and so the jobs end up being deemed of equal value.9 The table below summarises how the process worked. This was repeated across the judgement for dozens of pairwise comparisons.

5. Bad on paper

Even on its internal logic, this approach looks flimsy to me: its hand-waving pseudo-rigour is sensitive to impossible-to-justify assumptions, and vastly unlikely to pin down the differences between two jobs well enough to make it possible to confidently ascribe the remainder to sexism.

But worse, none of these attributes are static or objective; each person stepping into the job market has their own preferences. For some, physical labour might be a deal-breaker; others might not mind at all. Delightfully, markets are a social technology that’s spectacularly good at finding the right wage to sell just enough people on doing a job, and parcelling out roles and salaries accordingly.

It is worth being cautious: the market-fundamentalist view that any sort of pay discrimination is incompatible with a market economy (a sort of no-arbitrage logic, where if one employer undervalued female workers’ productivity, another would scoop them up) clearly goes too far. But in a context where outright sexism has abated a good bit, and when the jobs in question are gender-integrated, just not perfectly 50-50, an automatic presumption that unexplained salary variation must be down to ambient sexism is difficult to sustain.

One anecdote supporting that: Next, the clothes retailer which lost an equal-value judgement last year, tried in 2021 to get shopworkers to transfer to the warehouse. They made the offer to 25,000 workers. 44 indicated interest, 9 tried a taster week, 7 switched jobs, only 4 lasted beyond a year. If the jobs were indeed interchangeable, this should have been a far more popular choice.

Reading through the Next judgement, another piece that jumped out was the notion that keeping costs down was a legally illegitimate reason for pay differences. In a competitive market economy, this, again, strikes me as utterly wild—keeping costs down as far as possible, and ideally passing those on to consumers in cheaper clothes, is exactly what a business like Next ought to be doing.

“The aim was just a financial one; the respondents could have afforded to pay a higher rate of basic pay to retail staff as some competitors did, but paramountcy was given to keeping costs in the labour budgets to their minimum.”

Digging deeper, though, I also think there’s a real philosophical incoherence to the entire notion of ‘value’ that underpins the equal value framework. A traditional equal-pay dispute comparing two people doing similar work doesn’t rely on determining their value: the issue is purely whether they were performing the same tasks, irrespective of those tasks’ worth.

But once you get to comparing different jobs, you do need that common currency of value. And given the entire substance of these claims is that market wages aren’t correctly reflecting that value, you need a basis that isn’t monetary to compare them. That ends up quite quickly getting you to a fairly dodgy sort of Marxian ‘labour theory of value’ logic. The very idea that wages can or should reflect something deeper and more essential that an employer’s willingness to pay for a particular service (and an employee’s corresponding willingness to sell their time) is, conceptually, rather a messy can of worms to be opening.10

6. Worse in practice

All that gets to the illogic of equal value as an idea, and how shaky it is as a foundation for billion-pound city-paralysing payouts. But actually implementing these rules runs you into yet more trouble. There are four specific issues worth calling out.

1. Persistent distortions. Judicial rulings can’t change the underlying labour market facts of which jobs workers deem more desirable. When an employer loses, they have two choices. Either they raise the pay of the worse-paid job, as the private sector mostly seems to be doing. That becomes a semi-arbitrary pay subsidy for one group, which the rest of society pays for in higher retail prices. Or, as cash-strapped councils often prefer, they pull down the better-paid role. That causes bigger issues: retention can become a problem, and efforts to bridge that gap (as Birmingham did, with one-off bonuses, new jobs and the like) can invite new equal value claims, forcing bigger payouts.

2. Job evaluations (JEs), a shadow payroll tax. The best way to get around equal value claims is to proactively run job evaluations, which regularly audit a firm’s workforce for gender discrepancies. These aren’t a perfect legal shield but do help quite a bit. The most compelling counter-argument I’ve encountered from equal value defenders is that employers just need to get better about running JEs and the issue would mostly go away. There’s some truth to that, but it’s also worth playing it out—doing so means an ongoing, perpetual subsidy by employers to law firms and HR consultants. I’ve had a decent go at digging around to get a sense of the running cost of keeping JEs up-to-date, and there’s vanishingly little public information out there. Even the cheapest software solutions cost £5-10k per year. At a guesstimate, conducting a full, bespoke evaluation for a big employer probably costs around two orders of magnitude more initially (i.e. a one-off cost of low single digit millions), and one order of magnitude more in ongoing costs (hundreds of thousands annually).11 This functions as a de facto payroll tax on employers, only the receipts go to consultants not schools and hospitals.

3. The scale of back-pay. One reason why equal value cases in Britain have been so crippling is the generous six-year back-pay window. Even if you take the view that equal value rules are reasonable, an alternative approach would be to focus on changing forward-looking pay, rather than saddling public bodies with vast liabilities for historic disparities.12

4. Outsourcing. Employers can sidestep equal value rules by outsourcing hiring. That’s why claims mainly hit Labour and SNP councils, who find that sort of thing politically uncomfortable. But having businesses decide whether to outsource entirely on the basis of equal-pay rules isn’t exactly ideal. Now, the government wants to extend equal value to cover outsourced workers. That would entrench the principle at a time when it’d be much better to dial it back. Doing so also raises all sorts of further issues. Might subcontractors then be forced to set separate bespoke payscales for every employer they work with, depending on who else was in that employer’s workforce?

7. A political landmine?

Undoing equal value would be messy, and requires primary legislation. But the toughest issue is even starting the public conversation. For obvious and laudable reasons, pay equality strikes most people as a good thing. But the result is that we’ve kneecapped local government for over a decade in cities across Britain, and not had an open conversation about why.

One line of thinking goes that this is all too much of a landmine. Belatedly (and expensively), employers are learning to deal with the equal value regime with some combination of JEs and outsourcing. And as painful as adding another compliance hoop is, the worst is possibly behind. Frankly, as someone who’s much more worried about the real-world consequences of these rules than any culture-warrior crusades, I can see the merit in that outlook.

On reflection, though, I do also think inaction would be a mistake. Partly that’s because the ongoing costs really aren’t that trivial—as I’ve laid out above. But partly because the very fact that this is a tricky issue makes the case for a proper public conversation more urgent.

The two sides’ incentives to discuss equal value are totally askew: supporters get the adrenaline-rush of pushing for equality and justice and sceptics (at least for those of us unwilling to go down the woke-bashing route) have to settle for bewailing central planning. And, much as I wish the British public shared my visceral discomfort towards overzealous dirigisme, my consistent experience has been that they do not. (Although: if any pollsters are reading this and want to run some questions putting a few equal value scenarios to voters, do get in touch. My sense is the core intuition that cashiers and warehouse workers do vastly different jobs is one that cuts through, and I’d love to test that.)

But in the meantime, equal value remains bad, messy and distortive policy. Worse, the government seems set on expanding its scope, as does the European Commission13. So, as tricky as the issue is, it’s a conversation that needs to be had.

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For a proper refresher on what’s going on, my colleagues at The Economist have a great primer. Here, instead, I wanted to drill a bit into the logic behind why the government is stepping in with a don’t-call-it-a-nationalisation-yet. For once, this won’t be too polemical; I am open-minded to the idea that Britain needs a state-subsidised steelmaking sector, no matter the cost.

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But at first whiff, this smells to me an awful lot like naked protectionism, cloaking the politically-convenient (that overseeing the end of primary steelmaking in the birthplace of the industrial revolution is a bad look) with the misty language of the “strategic”. Certainly, I’ve not seen the pro-steel argument prosecuted anywhere with the rigor that I think the case demands.

So here I want to step through exactly what you’d have to believe to think that piling state cash into rescuing the industry, and subsidising it in perpetuity, is a good idea.

Let’s dismiss the worse arguments first. The government is keen on stressing that lots of Britain’s national priorities, like homebuilding and renewable energy, will need steel. All that is certainly true, but says-little-to-nothing about why that steel needs to be made in Britain—in fact, insisting on using British-made steel for those sorts of peacetime projects is an awful idea.

The entire reason the government is involved in steel at all is because, between energy costs, green rules, broader environmental and labour laws, and so on, Britain is now an almost uniquely ill-suited place to make it. No-one in British politics (yet!) is grousing that the iPhones that they use aren’t made here. Many mocked Donald Trump’s administration for (briefly) arguing that smartphone production should be reshored to America. But for some reason—my guess is the political potency of steel’s industrial aesthetics—credulity gets suspended when the question turns to steel, even though the underlying economic rationale is not much different.

The strongest ground that the pro-nationalisation crowd has is on national security: that losing the ability to make virgin (non-recycled) steel would leave Britain exposed in an ever-more-dangerous world. Counting on free trade in peacetime is all well and good, but what about when Britain is at war and needs steel for ships, submarines, aircraft engines, and so on?

On face, that sounds somewhat compelling. Is it, though? Or, more specifically, what would you have to belive to take that argument seriously on its own merits, not just a slogan. As far as I can see, there are six implicit premises. Let’s draw them out.

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1. That there are appreciable odds of Britain landing in a large-scale, protracted hot war in the near future (i.e. not a counterinsurgency like Iraq/Afghanistan/Northern Ireland, a proxy war like Ukraine, or a horrifying-but-brief nuclear exchange—but a proper, lengthy, and direct conflict with a geopolitical peer).

2. That in such a situation, “friendly” supply chains from Europe, Japan, Korea, etc. would be inaccessible. (Or, more subtly, that Britain would be ‘back-of-the-queue’, since those countries may also be involved and have their own needs.)

3. That the scale of British steel production would be sufficient to make a difference in such circumstances, versus ending up being tokenistic. Bear in mind that Britain currently produces about 0.2% of global steel supply.

4. That in those unfortunate circumstances other dependencies don’t hamstring Britain anyway, if we’re reliant on the rest of the world for either the raw materials for steel production (iron ore, metallurgical coal, scrap steel) or other ultra-necessary inputs like semiconductors.

5. That given steel subsidies under this thinking are de facto defence spending, that there aren’t other bits of Britain’s defence capabilities (personnel, drones, cyber, etc.) where that spending would be better used. Another one for the military boffins, but my guess—reading what I have about the rickety state of much of the British military—is that this cash could do more good elsewhere.

6. That, if this implictly a costly insurance policy for an unlikely-but-serious tail risk, we’re not better off just treating it as one. That would mean focusing on building a national steel stockpile for worst-case military use, or specifically opting for a minimum-viable-product version of steelmaking for now, with blueprints for a rapid scaleup if geopolitical circumstances deteriorate. Now is a particularly good time to be making that choice, given how much of Britain’s existing carbon-intensive steelmaking setup is going to be decommissioned before too long anyway.

All that may well be true, but require a few fairly hefty assumptions that I’ve not seen be especially well justified. If there are good walkthroughs of the case here that readers have seen, please do send them my way.

This isn’t something that I plan on being insufferable about (unlike, say, Britain’s scourge of inaccessible driving tests), but I worry both that the case for this is weaker than has been publicly acknowledged, and that waving it through without proper scrutiny will be a bridgehead for a broader wave of protectionism in Britain. It was not that long ago that the cod-Bidenomics ‘securonomics’ agenda was allegedly Labour’s governing philosophy!

But a principle I’m trying to stick with more on the British economy is to ration my outrage: to focus on the areas where bad reasoning leads to consequential economy-sized failures, not just bits of ill-directed spending here and there. (More on the distinction between aesthetic and substantive policy badness in my last post.)

Probably my strongest reaction to this weekend’s flurry of action is sadness—I wish just a fraction of that sense of emergency was directed toward making energy abundant and cheap full stop (or tackling any other of the long list of supply-side woes Britain faces). Doing that would, incidentally, transform the conversation on steel too.

The national tragedy here is not that Britain—the country that invented industrial modernity—may lose one more bit of manufacturing, even a totemic one. It’s that, several centuries on from the Industrial Revolution, we’re further today from the front-lines of global prosperity than ever. If there’s any emergency to tackle, it’s that.

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One of the joys of running a solo Substack is that I get to valiantly ignore the topic du jour if I don’t think I have much especially novel to add—and so it is with tariffs, with the exception of one chart that I’ll put at the bottom of this post.

So instead, enjoy a Sunday-afternoon screed on British fiscal policy.

Lots is broken in the British economy, and there’s plenty to be breathless about (don’t get me started on VAT exemptions). But today I wanted today to write about the reverse: something which inspires endless anxious hyperventilation, but I’m increasingly convinced is essentially fine and well-functioning—Britain’s fiscal policy process and the role of the Office for Budget Responsibility (OBR).

That doubtlessly sounds like the makings of a dull post: taking an already-dry topic and arguing for plodding incrementalism. So to perk things up, I’ll start with a few examples of publications and writers who disagree with me, and find the status quo somewhere between maddening and untenable.

And I’ll conclude with two problems with the fiscal framework that I do see, and suggest some tweaks that would help fix them.

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Here’s Chris Giles in the FT (who, as I’ll get to later on, is half-right):

Here’s the Labour backbencher Jonathan Hinder MP (speaking, if I had to guess, for quite a few in the party):

Here’s the journalist and podcaster Lewis Goodall on Twitter:

And here’s Stephen Bush, also of the FT, in a back-and-forth with me on BlueSky when I test-drove this take a few days ago.

To an extent, everyone I’ve flagged here has a point. Virtually every budget (or quasi-budget like the Spring Statement last month) is jam-packed with absurdities. I’ve spent plenty of time grousing about them myself.

A quick primer on how Britain now does fiscal policymaking for any readers who don’t follow this stuff but—generously if inexplicably—have still come this deep into the post. If this stuff is all familiar then do scroll on.

• Big tax-and-spend changes get announced at ‘fiscal events’, the tentpole one being the government’s annual Budget. Accompanying those events is a multi-year forecast from the OBR, which takes the government’s current policies, projects how much they’ll cost, projects how much tax revenue to expect and, as a result, projects how much the government will need to borrow.

• Chancellors set themselves ‘fiscal rules’, publicly-stated constraints (mainly directed to keeping the bond market on side) stating how much they’ll allow themselves to borrow, based on OBR forecasts. Rachel Reeves, the current chancellor, has two:

  • The ‘stability rule’, currently the binding one, requires that day-to-day spending should be paid for by taxation by the 2029/30 April-to-April fiscal year (that will shift to three years forward from 2026/7 onwards, and move to allowing a deficit of up to 0.5%).

  • The ‘investment rule’, which doesn’t bind right now, requires that a convoluted cousin of public debt (public sector net financial liabilities—government debt and liquid financial assets or liabilities), be falling in 2029/30, but also shifting to a rolling three-year horizon from 2026/7.

• Those rules bind politically (backing out of them is embarassing, and would prompt an unhelpful bond market reaction) rather than legally, unlike for instance Germany’s debt brake. Bear that in mind whenever reading anything about how a chancellor was “forced” by the OBR into doing something.

• The main quantity that fiscal-watchers obsess over is ‘headroom’, how much space the government has against its binding rule—which, if it widens, gets treated like a piggy-bank for spending rises or tax cuts. Given how volatile many of the inputs into headroom are, especially market variables (gilt yields, gas prices, stock prices etc), headroom can have a slight random-number-generator quality to it.

Ample absurdities

A favourite trick of the last chancellor, Jeremy Hunt, was to pencil in big cuts at the back-end of his spending plans and jam the front-end, including the run-up to the last election, with tax cuts and other goodies.1

This time around, the back-and-forth between the government and the OBR about exactly how much its welfare cuts would save was similarly unedifying, as I narrated in a recent piece.

After weeks of rows Liz Kendall, the welfare secretary, promised Parliament that her cobbled-together reforms would save £5bn ($6.5bn) a year. Unfortunately the Office for Budget Responsibility (OBR), Britain’s fiscal watchdog, reckoned she had over-egged the savings by a billion-plus. Cue a hasty rejig and even deeper cuts.

Richard Hughes, the OBR’s boss, is quietly scathing. “Agreed deadlines were missed,” he says. “It wasn’t accompanied by the usual kind of economic analysis that we would expect.”

Rachel Reeves has also continued some of her predecessors’ worst habits, like forcing the OBR to base its forecasts on a never-to-be-delivered rise in fuel duty. (Governments repeatedly promise the yellow/blue lines, then deliver the black line).

Indeed, the entire pantomime of the Spring Statement, initially billed as a low-drama Spring Forecast, came about because higher interest rates squeezed away the chancellor’s fiscal headroom and forced a round of spending cuts. Or, in other words, because the OBR’s forecast boxed Reeves into delivering a set of cuts that she hadn’t previously seen as necessary.

Altogether, none of that screams stable and functional.

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And yet…

A pretty common disease in British economic commentary—and one I’ve succumbed to fairly frequently myself—is to conflate aesthetic problems with substantive ones2.

Wrangling over an effectively-random margin of headroom looks and feels like an unprofessional way to run fiscal policy. So does building castle-in-the-sky sets of tight fiscal plans which never actually get delivered, blooming the deficit instead. And, from the perspective of someone who writes about this for a living, complaining about this sort of thing also makes for tremendously satisfying copy. (An incentive not to be underrated…)

But, zooming out from the micro-level silliness, does the system as a whole spit out reasonable decisions?3 The key test, for me, is whether the system adequately encourages politicians to belt-tighten if circumstances demand it, for instance if interest rates rise appreciably.

To start, we can see how politicians have responded to changes in OBR forecasts since its founding in 2010. Have worsening, or improving, background conditions prompted sensible shifts in behaviour?

I’ve tweaked a chart that the OBR produces on this below, which I find pretty useful in laying out what’s going on—you can see that when forecasts shift, the politicians’ response is almost always at least in the right direction (i.e. tighening policy when forecasts worsen, the red box, and loosening it when they improve, the green box). Unsurprisingly, particularly with worsening forecasts, the policy response tends not to fully offset the forecast move (nor, given the uncertainty in these forecasts, is it clear that’d be desirable).

That perspective is a pretty charitable one, to be fair. A different presentation of the same data from the IFS reveals some deeper issues. Proportionally, politicians under-respond more to worsening forecasts than improving ones (i.e. they’re happier to bank the gains than feel the losses—that’s the relative size of the black and green bars). And there is a real issue with Hunt-style promises of future restraint that never actually materialise. Even when forecasts deteriorate, the response is often to loosen fiscal policy for at least the first few years.

So clearly, the current system does leave some bias towards running deficits. But eliminating short-termism in fiscal policy altogether is something that’s pretty much impossible to crack. And to a more-realistic standard of keeping that deficit bias partly in check, the current fiscal framework seems to perform decently.

One helpful worked example here is the final budget before the last election. Jeremy Hunt had already delivered a big dose of tax cuts (2 percentage points off national insurance) at the previous fiscal event, the Autumn Statement in 2023. 2024 was clearly set to be an election year, and so the political logic for another round of tax cuts was pretty airtight. Sure enough, that’s what Hunt delivered, cutting another 2 percentage points in the March 2024 budget, delivering a total of £20bn/year or so in tax cuts.

But, his fiscal headroom turned out to matter rather a lot. Because the underlying forecast hadn’t changed very much and he was already running close to the limit of what his fiscal rules would take (gilt yields had been on a long round trip between the two fiscal statements, ending up in a similar-ish place), those cuts ended up being mostly offset by tax rises elsewhere.

The OBR lays that out in the bullet points below. Even when the political logic for tax cuts was overwhelming, the fiscal framework forced a reluctant chancellor to mostly offset them with increases elsewhere.

And, of course, Hunt’s 2023/4 National Insurance cuts were de facto reversed (albeit in an inefficient and distortive way) by Reeves’s post-election increase to employer’s national insurance. In an ideal world, cutting taxes before an election and raising them right afterwards would be verboten full stop. But as a second-best solution, having a framework that rewards backpedalling on that sort of silliness works well, too.

So on the big-deal questions of how much the government borrows and spends, despite a spectacularly ugly mechanism for arriving at its decisions, Britain’s fiscal framework seems to split out plans that are at-least-OK.

One of the biggest outstanding issues in the fiscal setup is also soon to get mostly-fixed by some changes that Labour has already made. The fiscal rules are moving towards binding on a three-year horizon and the government has committed to running spending reviews more regularly, meaning that the implication of those further-out forecasts will actually get spelled out for departmental budgets. That should make it appreciably tougher for chancellors to indulge in the Hunt-style fiscal fiction of cramming spending cuts into forecast years four and five while offering bread-and-circuses in years one, two and three.

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OK rules, bad policies?

There is a second critique that’s also worth spending some time on, though: that even if the aggregate outputs of Britain’s fiscal system are OK, that it incentivises bean-counting policies that are calibrated to keep the OBR on side, not actually deliver the best outcomes. The latest example of this is the welfare cuts that I touched on above, which had to be deepened at the last minute because the OBR was sceptical of how much they would save. (The less-thoughtful version of this claim is just to assert that the “OBR is too powerful”, because government is altering policy in response to its forecasts.)

At some level, even if that is happening, it’s probably fair just to blame the government of the day. Those fine-margin calls only matter if, irresponsibly, they leave too little headroom—as Reeves has at the moment.

On the specific issue of the welfare cuts4, there was also a basic governing competence question: no-one forced Reeves, Liz Kendall, and co to wait until the last minute to hash out their plans5. Britain’s issues with a spiralling working-age health-benefits bill have been apparent for a while, as I ranted about in a leader article for The Economist a few weeks ago.

The noblest traditions of modern British policymaking were followed. First came dithering: worklessness from ill health rose sharply after the pandemic, but it was 18 months before Rishi Sunak’s government took a stab at tightening benefits in response. By then, around 1m people of working age had fallen out of the labour force since 2019, mostly because of supposed poor health. His changes ended up being blocked by the courts—the consultation was deemed insufficiently thorough—though not before a looming election gave an excuse for further delay. Labour won, and chose to procrastinate with a new long-term target: to get the working-age employment rate to 80%, a level Britain has never hit.

Eventually, two things concentrated minds: a genuine need to make room for higher defence spending, and an artificial crisis. Rachel Reeves, the chancellor, had left too little fiscal leeway in her budget in October. What was supposed to be a routine economic-forecast update on March 26th has turned into a scramble for cash. Because Ms Reeves was in danger of breaking her self-imposed fiscal rules, finding money from welfare cuts suddenly became urgent. At last Britain decided to take a proper look at worklessness and the welfare system.

Still, blaming the government entirely is probably one notch too harsh—after all, governments make decisions on headroom in response to the incentives that the current system creates. Right now, those incentives are mostly to squeeze out as much borrowing as possible while staying just on the right side of the fiscal rules.

But criticising policy changes made to “please the OBR” also ignores the counterfactual risks on the other side. I see several. To start, having an OBR analysis insulates the government from wishful thinking. Many Tories probably overestimate the growth benefit from tax cuts, many in Labour likewise overestimate the impact of public investment. Governments can (and probably should more often) lay out their disagreements with the OBR, but without that layer of accountability, the temptation to over-egg how beneficial a policy was likely to be (and thus miscalibrate its scale) would be vast.

Another is to avoid being blind to tradeoffs. Take, again, the health-benefit cuts. Perhaps parts of that reform were intended more to save money than to tackle Britain’s worklessness problem. But the right comparison is not against not making those cuts at all, but—in the context of the government’s fiscal envelope being constrained by largely-reasonable fiscal rules—against whatever would have been cut instead. Having a flinty-eyed OBR that forces the government to crystallise those tradeoffs is a good thing.

And, one final point that’s worth stating explicitly. Britain’s choice is not about whether government borrowing gets hemmed in at all, but whether that happens inside the fiscal-policy process—through something like the OBR—or implicitly through a complaining gilt market. Pretty much everyone who has issues with the current setup would be far more horrified if the bond vigilantes were at the wheel.

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A few fixes

That’s not to say that everything is perfect. I see one big and one medium-sized problem with how Britain does fiscal policymaking.

The big one is the OBR’s macroeconomic forecasts, especially of GDP growth. These are ultra-influential for the government’s overall fiscal position (small tweaks could easily block or open up tens of billions in borrowing), so any moves downward tend to be extraordinarily controversial. The result, unsurprisingly, is that the OBR’s forecasts have consistently been too optimistic.6

That remains the case today—at least compared to other forecasters (who, in fairness, generally tend to look over a shorter horizon than the OBR).

The obvious problem is that this leads to fictitious forecasts, where even if governments stuck to their promised fiscal stringency—which, of course, they never do—slow growth would ensure that debt-to-GDP keeps creeping up.

But the still-bigger issue, which Britain is confronting now, is what happens when the forecasts need adjusting. The political incentives for the OBR will always lean against downgrading, given the risk of an unpleasant backlash. That means that whenever a downgrade is actually mooted, like today or in 2017, it’s already happening much too late and can’t be gradually eased into. That gives the fiscal process an unnecessarily sharp jolt.

Instead, the OBR’s should operate under a strong presumption that its core macro forecasts track market consensus. Financial markets are the best social technology we have for generating predictions about the future, we’d be silly not to use them more. Given the OBR’s goal is to make the government’s fiscal plans credible to the market, operating off the same macro baseline would be a helpful move in that direction. Removing discretion from core growth and inflation assumptions also prevents the sort of counterproductive Westminster guessing-game we’re in at the moment over whether the OBR will pull the trigger on a forecast downgrade.

Practically, what would that look like? I’ll hopefully write more at some point on precise specifics, but on growth for instance that’d mean some combination of: tracking consensus 2-3 year forward GDP growth from a panel of market forecasters (which the BoE already does), issuing GDP-linked bonds or similar securities that would explicitly price out an implied path for growth at different tenors (like the linkers market already does for inflation—that’d be the most compelling approach to me), or proxying out implied long-run growth from the pricing for earnings growth of domestic-facing equities.

There would still be some space for discretion, and the OBR’s models would still be needed to split out a headline GDP growth number into productivity growth, population growth, labour utilisation and so on. The OBR would also still need to evaluate the growth implications of not-yet-announced policies and fold them into the forecast, at least for one fiscal event before the market has time to digest them. But for the most part, the process would be much more mechanical.

You could imagine something similar on inflation, using inflation-linked bonds (which now have 40+ years of data on in Britain), perhaps alongside inflation-expectations surveys. There’d have to be some adjustment for the long-running distortion to UK breakeven inflation numbers from the scale and inelasticity of pension-fund demand, but making and monitoring that tweak should be far easier than generating a full inflation forecast.

Shifting towards that setup right now would be akin to a sharp one-off forecast downgrade (given how far above consensus the OBR now is), but there’s no reason that couldn’t be phased in over five or ten years to smooth over the shock.

(Another option, which the FT pitched a few days ago after rightly flagging the OBR’s macro views as a problem, would be just to hand the macro side of forecasting back to politicians. That strikes me as bonkers—all the same incentives for over-optimism will be even stronger, and any time the forecast needed to be downgraded the chancellor would be accused of ‘doing the country down’. Having politicians own a problem isn’t much consolation if you also make that problem bigger by handing it to them.)

Then, the medium-sized problem: a mismatch between the number of forecasts and fiscal events. Having a system that boxes the chancellor in to delivering a budget purely because of forecast shifts is clearly foolish. That wouldn’t be a problem if Reeves had left more headroom, but the system should be resilient even to chancellors like her who skirt the edges of their rules.

There are two pretty straightforward solutions. The first would be to get rid of the requirement for there to be two forecasts a year at all. If the chancellor wants to commit to only holding one fiscal event a year, accompanying that with a single forecast seems entirely fair—perhaps with an added provision for a forecast re-run in the case of genuine emergencies.

The second would be to simply let the chancellor look through minor fiscal rule misses outside of set-piece Budgets. Could Reeves not, as Tom Pope at the IfG among others has suggested, simply have said that if headroom was still a problem in the autumn that she’d fix it at the Budget then?

Fixing both issues would knock out the most obviously-perverse features of Britain’s fiscal system.

It still wouldn’t be perfect; politicians will always be tempted to over-borrow. But what Britain has right now, for all its visible absurdities, works much better than its many critics admit. Don’t call it ‘world-beating’, but compared to America’s spiralling deficits or ‘superbonus’ mess in Italy, Britain could have it far, far worse.

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And on tariffs…

Grasping the sheer number of strands in the tariff story—crashing global stock-markets, the dollar’s retreat as a safe-haven asset, recession fears, etc.—is tough.

But there was one that I did want to pull out: the human welfare implications in low- and middle- income countries. The most-tariffed countries pretty much all have a GDP per capita of $15,000 or below.

Lots, like Bangladesh or Cambodia, are prototypical manufacturing-development success stories (hence running a goods trade surplus with the US, and hence falling in the crosshairs of the White Houses’ dubious tariff calculation).

Trump II proving a disaster for the US is disappointing, but not hugely surprising. The sheer extent of harm to the world’s poorest has been, though.

Add up the tariffs, all-but-abolishing USAID (and—though Keir Starmer is mainly the one to blame here—leading Britain to similarly gut its bilaterial aid function), and the global health implications of pulling so much scientific research funding, and you end up in a pretty ghastly place for global poverty. Outside wartime, I can’t think of another American presidency that’ll have quite so explicit a death toll attached to it.

3

Of course, during moments where you may want fiscal policy to be activist—for instance in stimulating during an especially-deep recession—the sign flips, and a worsening forecast may actually mean you want government to borrow or spend more. You get a version of this critique from Anatole Kaletsky (from this paywalled piece).

But:

1. During the serious growth scares that have started while the OBR has been around, Covid and the ‘22 energy shock, governments have been demonstrably pretty willing to pull the fiscal lever.

2. This is precisely why fiscal rules tend to be much more flexible about next-year versus steady-state borrowing.

3. This underplays the value in maintaining stable and restrained fiscal policy during normal times (and under those circumstances using the monetary lever to manage the economy cycle), especially for an economy like Britain’s which relies so heavily on borrowing from foreigners.

The analogy isn’t perfect—Massachusetts didn’t do Brexit—but lots of the themes are pretty similar: increased reliance on high-value services, well-meaning but heavy-handed governance, disproportionate influence of a superstar city (that may be a charitable way to describe Boston), and a painful reliance on generations-old housing and infrastructure that’s getting more rickety by the year.

So British readers ought to pay attention to the post-mortems about Democratic governance in America that have started to emerge after November’s election. Plenty of lessons should be able to quite straightforwardly cross the Atlantic.

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A few weeks ago, I reviewed two books in that vein for The Economist, ‘Abundance’ by Ezra Klein and Derek Thompson, and ‘Why Nothing Works’ by Marc Dunkelman. That piece (you can read it here) focused on how the books were intervening in the American policy debate. On that, I landed in a pretty positive place.

On economics as well as politics, therefore, the left must work out what has gone wrong. Two new books—“Why Nothing Works” by Marc Dunkelman of Brown University and “Abundance” by Ezra Klein and Derek Thompson, a pair of journalists—suggest an answer: that excessive regulation has hurt America by blocking housebuilding, infrastructure and innovation.

…

Nowadays “You could have Robert Moses come back from the dead and he wouldn’t be able to do shit”.

The argument that excessive regulation has choked housebuilding, ruined public transport efforts, and jacked up electricity prices is hardly a novel one in Britain either. Britain’s current government (over-generously, I think) argues that tackling such issues is its animating theory of economic growth.

But there are some instructive differences in how Abundance as a political and economic agenda works in Britain compared to America, and I thought it’d be valuable to parse those out.

One note: Here, I focus on ‘Abundance’. But I really would recommend Marc Dunkelman’s ‘Why Nothing Works’, and reckon it’s, if anything, the more interesting of the two books. Much like how the evolutionary pressures of the ocean floor favour crab-like anatomy so powerfully that the crab’s body plan has emerged independently at least five times—the failures in American liberal governance are sufficiently striking that Dunkelman, who starts with quite different intellectual and historical influences to the ‘Abundance’ crowd, alights on a similar-ish diagnosis. But by taking a different route to get to a nearby, though not identical, destination, ‘Why Nothing Works’ carries a refreshing novelty.

Britain’s Politics of Abundance: A National, Not Partisan Failure

A striking feature of ‘Abundance’ (the book) is quite how explicitly party-political Democrat it reads. Partly, that’s a deliberate over-compensation. Proposing an agenda of deregulation to American liberals will inevitably raise hackles; leaning hard into the progressive language helps sweeten the pill. Besides, Klein and Thompson are themselves on the left, as they stress repeatedly, and see their role largely as taking a side in the intra-Democratic debate. The passage below, from early in the book, was pretty forceful in that respect.

We are both liberals in the American tradition. The problems we seek to solve are mostly problems that exist within the zone of liberal concern. We worry over climate change and health inequality. We want more affordable housing and higher median wages. We want children to breathe cleaner air and commuters to move easily on mass transit systems.

…

There are people seeking complementary reforms in that [right-leaning] coalition, such as James Pethokoukis, author of The Conservative Futurist; the economist Tyler Cowen, who has called for a “State Capacity Libertarianism”; and the array of policy experts organized in the Niskanen Center. We wish them well.

But there’s a deeper reason, I think, why the politics of Abundance so often feel left-coded in America: the stakes are different. If blue states get something wrong, they certainly suffer. At the same time, red states can take a different path, and on issues of housing and energy construction they often have. That dampens the nation-wide economic fallout of constraining the supply-side—housing units that couldn’t get built in Manhattan end up in Austin or Atlanta instead.

The political fallout, though, gets accentuated. If red states out-grow blue ones, both in economic and population terms, that makes issues with progressive governance harder-to-avoid. And internal migration literally saps the power of blue states by reducing their representation in Congress and the electoral college. Most likely, the just-about-possible route to 270 electoral votes that Kamala Harris had by winning Pennsylvania, Michigan and Wisconsin will be inaccessible within a few cycles.

The dynamic is reversed in Britain: the economic trumps the political. Local government certainly has some powers over permitting, but is more constrained (especially on infrastucture) than American states. And the incentives for different regions to act differently are narrowed, too—extra tax raised would largely flow back to the Treasury, but local politicians would still have to face off with angry NIMBYs at the next election. So, the political consequences of anti-Abundance governance are less glaringly visible.

Meanwhile, economic activity that is choked off by overregulation in one place isn’t just displaced to elsewhere in the country, but doesn’t happen at all (or is displaced to another country entirely—witness the legions of Brits decamping to Dubai).

Long-term, I’m pretty persuaded that American-style fiscal devolution to something like the metro-area level (and there is plenty of historical precedent for empowered local government in Britain too) would be sensible. Letting mayors levy taxes to get infrastructure built, rather than going with a begging-bowl to the Treasury, and letting them keep more of the tax receipts from densification, would be an unalloyed good.

But in the meantime, Britain is left with a rather different sort of Abundance politics. The forcing mechanism to start facing down the NIMBYs is less political and more economic—the painful reality of slow growth, which has at last started to bite hard enough that the voting public has noticed. The plus side, potentially, is that the overall Abundance/YIMBY agenda manages to get a little less politicised in Britain, though that may be a fornlorn hope.

Britain’s Economics of Abundance: Socialising the Cost of Scarcity

Plenty of the core Abundance alarm-bells of too-high housing and energy costs are going off even more strongly in Britain than America. See, for instance, this great bit of analysis the IFS presented a few days ago (No, wait, come back!). But that’s well-trodden territory, so I wanted to focus on something else.

The core symptoms that Abundance types fret about—high and rising costs of essentials like housing and energy—can have quite painful consequences for government finances in a country like Britain that has a thicker social-safety net than America.

Take the welfare system. Britain is trapped in a particular perversity at the moment where overall spending on benefits (even excluding the state pension) is at record-highs and living standards for the worst-off are still painfully squeezed. (And unemployment is not that far off historic lows). Partly, that’s because of a separate set of issues to do with the over-assignment of health-related benefits.

But another part of the story, I think, is that the high, rising and unavoidable cost of rent and electricity mean that welfare generosity can increase (even in inflation-adjusted terms) without it feeling more generous, since much of the uplift gets eaten up by unavoidable essentials.

That sort of thing sometimes get framed as a broad complaint about the “cost of living”. But those sorts of gripes tend to wind up as ill-directed complaints about inflation in general, or focus on places like food prices, where the issues are different. (On food, competition is doing a good job at keeping prices as low as they can be; the challenge is more about exposure to choppy global commodity markets).

Stepping back, effectively what’s going on is that the higher cost of land and energy is getting socialised across the country by the tax system. And that isn’t just a welfare system story—think of the talented civil servants that the government loses because public-sector salaries can’t match London housing costs; how scarce and expensive prison places now are because of under-building; the scandalous prices that government is paying to house asylum-seekers, and so on.

The effect is a double economic choking. Taxpayers’ own disposable income goes down as a higher share of their spending gets eaten up by essentials, and then their taxes go up too as those same essentials become so expensive that the state ends up subsidising access for a decent chunk of the population.1

All that should, though, make the benefits of housing and energy abundance in Britain even more pronounced, too. Supply-side reform might be the rare policy that not only boosts growth for free, but lowers government transfer spending too.

But scale and ambition matters. And there, I still worry Britain’s current government isn’t being as brave as it could be—as I explained, cribbing a bit from ‘Abundance’ for the Josh Shapiro example, in a leader article this week.

So far, Labour’s best idea for growth has been to build more infrastructure and housing. But flagship projects, like Heathrow’s third runway and a railway between Oxford and Cambridge, will not be finished until the mid-2030s. Contrast Labour’s insouciance with Josh Shapiro, Pennsylvania’s governor, who in 2023 marshalled the full forces of his government to fix a collapsed motorway in 12 days, instead of the expected 12 months or more.

Time for Labour, and indeed British politicians of all stripes, to take the Abundance pill.

Kudos (and thank you!) for getting this far down—I’m playing around with format, and am curious if readers prefer deeper-dive pieces like this one or wider-ranging ones like my last post more. Do send over any thoughts!

Thanks to everyone who read the first post and (better yet) subscribed! Watching the numbers move on Substack’s subscribers chart is surprisingly entertaining, even if the actual figures involved are still pretty humble.

For my second post, I thought it’d be productive to look back. My first article for The Economist came out a year ago last week—a piece on inflation and the Bank of England (some things don’t change…). Then, it seemed newsworthy that any rate-setter wanted to cut. Now, even former ultra-hawk Catherine Mann has flipped.

My previous employer ran a political-economic predictions contest at the end of each year (my performances tended to be middling). So I thought it’d be salutary for me, and an interesting window into what was genuinely unforeseeable in 2024, to look through which predictions in my older articles aged like milk and which, if any, like wine.

Further down, there’s also a bit about Labour’s economic growth plans, which have gotten a little less fuzzy since the start of the year, along with the usual links, thoughts, and charts. And one warning: this post ended up on the chunkier side. I’ll be briefer next time.

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Where I was wrong last year

One of the perks of now having a job where my main output is takes analysis, not buy/sell views on financial assets, is being able to couch guesses with a bit of plausible deniability. But, despite my better instincts, I did make a few concrete predictions over the past year. For this post, I’ll focus on my policy calls and hit my macro/markets predictions in a later edition.

Like any at-all-impartial observer, I noted in June that taxes would have to go up regardless of who won the election. (“Taxes will in fact need to go up—whatever the main parties say and whoever is in power.”) But I took Labour at its word that raising national insurance—including employer’s NI—would be a manifesto breach. Not what the chancellor thought, as it turned out. If there was any fudging, I thought, it’d be with income tax thresholds. (“Labour has ruled out raising the headline rate of all three [income tax, NI, VAT], as well as of corporation tax (though it may have left some room in its manifesto wording to fiddle with income-tax thresholds).”)

Overall, I expected Labour’s first Budget to cobble together various smaller tax rises, inelegantly. That half-happened, but the main event was a bumper rise to employer’s NI. (“It looks likely that a Labour government would try to muddle through with a bit more borrowing, a sprinkling of tax rises and a little trimming to spending, in the hope that growth will eventually change the fiscal picture.”)

Similarly, on fiscal rules, I foolishly largely took Reeves at her word that there wouldn’t be big changes (“In a pre-election interview Ms Reeves said she would retain the current definition but recently she has sounded more open to changes”). So in August, I suggested that a nice easily-defensible tweak would be to exclude the Bank of England’s QE losses from the debt measure used. Instead, the chancellor opted for a much chunkier set of changes, to the slight dismay of gilt markets.

I did a bit better on the broader picture of where the Budget landed. Few would call Labour’s effort a serious bit of tax reform, which the British economy desperately needs—I pointed that risk out in a leader ahead of the Budget. (“Instead of signalling a once-in-a-generation tax reform, Ms Reeves has trailed a slapdash effort, cobbling together revenue-raisers while trying to wriggle free of self-imposed political constraints. … A budget of this sort would be the hallmark of an unambitious government scrambling to make the figures add up, not a radical one doing whatever was needed to pursue growth.”) A nice bellwether here is stamp duty: it’s politically excruciating to open the debate on property taxes, but stamp duty is clearly a major dampener on growth. Rather than eliminating it, the Budget raised it (for second homes).

The other surprise in the Budget was quite how borrowing-heavy it was. That I did partly point out in September (“Practically, higher headroom means more space for the government to borrow.”), though I didn’t quite anticipate the scale and correspondingly—naively, perhaps—underestimated how poorly the gilt market would react to all that extra debt. (“A shift largely within Britain’s existing fiscal rules, without high inflation or a spat with the OBR, is unlikely to raise hackles.”)

Casting ahead to the OBR’s new forecast that’s coming next month, I did sound the alarm in June on how load-bearing the OBR’s optimistic productivity growth assumptions are. A mild downward revision could throw the government’s fiscal plans into disarray. (According to The Economist’s calculations, if Britain grows by the consensus forecast of 1.5%, rather than the 1.8% expected by the OBR, the annual hole in the public finances would deepen by roughly £30bn ($38.4bn, or 1.1% of GDP).1) And, to drop one extra prediction in, I’d be surprised if the OBR goes for a radical downgrade in March, but that could be a real risk at the next Budget if growth doesn’t pick up by the autumn.

All that adds up to an fine-but-not-phenomenal forecasting record, I’d say. Particularly poor marks for Labour Kreminology.

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At last, a growth plan?

About a month ago, during the latest set of gilt market convulsions, I made the tongue-in-cheek point that the bond vigilantes could be Britain’s unwitting saviours—if rising yields shocked the government into a more serious growth policy. That, it now seems, is pretty much what happened.

What have we gotten so far? My best go at a brief summary is: the better of the previously-canned growth ideas from the 2010s (a third runway at Heathrow, a railway connecting Oxford and Cambridge), a few ripped-from-Twitter extras (a new town at Tempsford, early hints at a nuclear push) and a juiced-up AI and datacentre effort.

Quick verdict: all round, a little piecemeal but not a bad few weeks’ effort. The loudest announcements were the new infrastructure megaprojects. It’s worth lingering a little on Heathrow, which I find a particularly excruciating example of how Britain’s gotten this sort of thing wrong in the past. (Anyone already Heathrow-ed out should feel free to skip past the next few paragraphs.)

First: the problem. Britain’s main international hub airport hasn’t gotten bigger in decades, during which time rivals have caught up. I show Schiphol in Amsterdam below as it’s the closest comparator (and partly for the chart pun opportunities), but Dubai or Istanbul would be an even more painful benchmark. Meanwhile, adding a runway has been government policy on-and-off for twenty-plus years2, without a single shovel yet meeting the soil.

I litigate the various arguments for and against expansion in the article, so won’t dwell on that too much here. But briefly: my favourite one-image distillation of the economic arguments in favour of expansion is the map below3. It shows that Heathrow and its surroundings already makes up one of the biggest hubs of economic output in London, aside from the financial centres. When part of the economy has proven it can generate growth and is visibly bottlenecked—this is a theme that recurs in Britain—policymakers would be wise to double down. Bring on the fourth runway!

Hopping through the counterarguments, the trickiest are environmental. Lots of the plans for low-carbon aviation rely on some dubious assumptions about advances in sustainable fuels. Expansion strikes me as a highly sensible place for the government to spend its carbon budget, though, and appears to be net-zero-compatible. More provocatively, if the government’s environmental commitments have genuinely made a third runway impossible, that feels like a good litmus test suggesting those commitments need to be rethought. I’ll do some more writing soon, hopefully, on energy, climate, and growth in Britain. (Bad thinking on the topic abounds!) Air pollution is a simplier one. There, a historical perspective is quite illuminating.

What of the rest? The other eye-catching announcement was a revived plan to substantially expand Cambridge, Milton Keynes and Oxford into a rail-connected tech cluster. Not new, but highly sensible. Like Heathrow, the approach seems to be to find a screaming bottleneck (here, in housing and lab space) and tackle it. Worries about over-focusing on the richer areas of the country seem now to have taken a decisive back seat.

Broadly, the announcements on growth so far seem to be:

• Highly focused on physical investment and building Britain’s capital stock. (Good!)

• Reliant on continued pressure from the top of government. Much softer on self-sustaining reforms that could, for instance, keep a building boom going even with future, less-sympathetic political leadership. (Bad!)

  • But—some more progress there may be coming in the yet-to-be-detailed planning bill.

• Mostly pulling growth levers that won’t make a perceptible difference until after the next election. The urgency to get projects moving swiftly doesn’t, yet, seem colossal. (Politically risky!)

• Largely silent on the trading relationship with the EU, Britain’s other big growth millstone. (Bad!)

• Still too light on improving Britain’s high-skilled migration offer. That should, in principle, be straightforwardly separable from the government’s goal of getting overall migration numbers down. But in practice the two seem to be getting muddied. (Bad!)

More to say on all of that in due course, and despite all those worries I still net out in a cautiously-optimistic place. It would be disheartening if the government stopped here, but the past month has been much more promising on growth than the previous six.

I also wrote a quick piece last week trying to debunk one of the less-persuasive arguments against the government’s growth plan: that Britain will run out of construction workers.

The history of past building booms shows that, when demand is strong enough, work gets done. Construction in Britain surged during the housing bubble of the 2000s, pulling over half a million workers into the industry. Many left after the financial crash of 2007-09, and have stayed out. After the second world war, Britain’s physical landscape was remade on a vast scale. Further back, in the 17th century nearly the entire City of London was rebuilt within a decade of the Great Fire, and to a much higher standard. Labour markets can quite effectively shuffle workers round when a sector has more capacity and can offer higher wages.

That does require politicians to be flexible. London was rebuilt so quickly in the 1660s and 1670s only because occupational licensing rules were loosened and restrictions relaxed on imports like Scandinavian timber. (“The Norwegians warmed themselves comfortably by the fire of London,” went a saying at the time.) Access to European workers speeded construction a great deal in the 2000s; Irish workers were important in the post-war years.

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What else I’m thinking about

First, an open ask to any especially-dedicated readers still reading this far in. I’m compiling data (and anecdote) on the coarsening of day-to-day life in Britain: less-responsive public services, a deteriorating physical environment, an uptick in some petty crime, and so on. Please do shoot over anything worth looking at on those themes, which I hope to write on soon.

And a few more things I’ve been wrestling with:

• AI and knowledge work. I spent a chunk of last week playing around with OpenAI’s new Deep Research tool (having decided that $200 was a price worth paying to see if I was soon to be automated). I came away a bit less wildly impressed than some boosters on Twitter, though that may speak to my poor prompting abilities. Still, it’s a phenomenally good aggregator of data and will get a lot better whenever the licensing issues for paywalled news, scientific papers, and copyrighted books get fixed. Lots of compilation work (think tank primers, literature reviews, etc.) will pretty clearly get swiftly commoditised. What I find most immediately interesting is how it shifts the evaluation of knowledge work—lots of shorthands for effort and erudition, like an aposite-but-obscure historical reference, just got a lot cheaper.

• How to distinguish between policies that genuinely block growth, and those that mainly just aesthetically offend. One of the more bizarre recent bits of economic news in Britain (well-covered by my colleague Millie Wood) has been a proliferation of equal-pay cases between classes of workers doing manifestly different jobs—the latest involves shop versus warehouse workers at Asda. The substance is a pretty bizarre denial of markets (see below). Certainly, this stuff isn’t doing Britain any good and merits proper reform. But I also wonder if its sheer visible absurdity outweighs its economic impact and can distract finite attention from what matters most. Some—but not all—of Britain’s tax idiosyncrasies (wonky income tax schedule, perverse VAT exceptions) might also fall into this category.

The court left no aisle unscrutinised. Judges weighed up the relative pitfalls of dealing with muttering customers or impatient lorry drivers. Ms Ashton regularly mopped up spills. Mr Opelt had to learn how to operate a hand-held scanner. Both Ms Hutcheson and Mr Ballard used a forklift for some of their work. Rival experts were hired. Precise timings were calculated (Mr Devenney spent 3% of his time tidying). Points for knowledge, communication and “emotional demands” were awarded. Detailed job descriptions submitted for the judges’ consideration spanned over three times the length of the complete works of Shakespeare.

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The best things I’ve read recently

The Post-Neoliberal Delusion—Jason Furman

Hard to not enjoy someone thoughtful saying things you agree with. But this was a particularly interesting salvo in the intra-liberal fight over what the Biden era’s turn to economic heterodoxy got wrong.

I was especially glad to see Furman slaying the all-too-prevalent view that supply chain strains during Covid were mainly indicative of impaired supply, rather than overheating demand (for goods): a superficially-appealing but misleading take with astonishing staying power.

Supply chains, meanwhile, were less a source of strain than an underappreciated success. Real consumer spending on durable goods in the United States rose nearly 30 percent above pre-COVID levels in 2021, with no equivalent bump in countries that did not provide continued stimulus checks. Global supply chains were mostly able to accommodate the U.S. increase in spending, in part through large increases in imports. U.S. ports processed 19 percent more cargo by volume in 2021 than they did before COVID, an unusually large uptick that was responsible for the lineup of ships at U.S. ports that many apologists incorrectly attributed to supply chain slowdowns. Ports simply could not keep up with American consumers’ increased appetites for spending. These were not supply dislocations but a huge demand shock stemming in part from the Biden administration’s decision to provide another round of stimulus checks.

On DeepSeek and Export Controls—Dario Amodei

DeepSeek feels a little like old news now, but I thought this—admittedly from a highly partial actor—was one of the more level-headed treatments of how America should process and respond to Chinese AI advances that I’ve seen. I do still struggle to see how any non-frontier AI model maker can justify a decent valuation, though, in a world where open-weights models are only months behind.

All of this is to say that DeepSeek-V3 is not a unique breakthrough or something that fundamentally changes the economics of LLM’s; it’s an expected point on an ongoing cost reduction curve. What’s different this time is that the company that was first to demonstrate the expected cost reductions was Chinese. This has never happened before and is geopolitically significant. However, US companies will soon follow suit — and they won’t do this by copying DeepSeek, but because they too are achieving the usual trend in cost reduction.

And a few of my favourite charts

So far, it looks like the only people seriously using LLMs for work are coders, tutors and copywriters. (via Anthropic)

The British government’s price shock to low-wage employment looks even more striking if you fold in the impact of the coming minimum wage rise—shown here in purple. (Via the BoE)

And the crash in British housing starts doesn’t bode vastly well for the government’s plans to sharply ramp up housebuilding over the course of this parliament. (Chart mine)

Finally, it was gratifying to see Happy Days’ The Fonz and/or Arrested Development’s Barry Zuckerkorn taking an appropriately robust stance on Heathrow back in 2013.

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Thanks for coming by. Since this is my first post here, I’m starting with a brief bit of navel-gazing about what this Substack will be before I get to anything substantive. Feel free to scroll past the next few paragraphs if that sounds dull.

I’ve been looking for a midpoint between Twitter/X and full Economist articles to share some of what I’ve been working on and thinking about. I’m hoping this Substack will help fill that niche. Largely, I’m running it for pretty selfish reasons—putting rough thoughts on paper tends to clear them up, and doing so in public lets others (ideally productively) respond.

But, hopefully there’s also some value for others in a stream of somewhat-thought-through takes on the British economy and governance, monetary policy, the bond market, growth, and other miscellany. Ideally, at a minimum, there should be a steady supply of interesting provocations (and charts).

If any of that sounds of interest, then do hit the red button down here:

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And I’m very much still playing around with the format, so let me know what does and doesn’t add value for you.

Between Davos and Denali, there’s been something of an inadvertent alpine theme to my writing over the past week. On Wednesday, I helped dissect our Editor’s chat at Davos with Britain’s seemingly-no-longer-press-shy chancellor: The Rachel Reeves theory of growth.

Britain, she says, faces “a long-standing supply-side issue”. Demand is not the problem, but “there are too many things holding back investment”. What is needed is “an active supply-side approach, to improve the productive capacity of our country”. By that logic, the government’s job is to remove barriers to investment, making space for the private sector to direct capital to productive uses. That emphasis on deregulation marks a shift for Ms Reeves, who in opposition took inspiration from Bidenomics—a more heavy-handed approach where private investment is guided, and sometimes subsidised, by the state.

Having spent more time than I care to admit reading Reeves-related economics takes, three main things struck me from the conversation.

1. As the quote above gets to, the chancellor was sounding awfully deregulatory. The central fact of her growth thesis is that Britain under-invests. The 2022/3-era Reeves answer to that problem, I think, would have been to talk about ‘crowding-in’, state-directed investment, taking inspiration from Biden, and so on. Now, she seems mostly to be saying that her job is to help the state get out of its own way (good!). As to whether that reflects a genuine shift in belief, Britain’s lack of fiscal space to splash cash on market-shaping, Bidenomics’ political failure in the US, or something else, your guess is as good as mine.

2. We pushed Reeves on what, to me, was the most curious part of her budget: the choice to push a disproportionate share of the employer’s national insurance rise onto lower-paid jobs. The chart below from the piece illustrates that. She denied that anything was afoot here, and said she just needed the money.

   

   Up to you whether to believe that denial (I have my doubts…)—but the conversation points, potentially, to a more interesting arm of her pro-investment agenda than the standard YIMBY fare: actively penalising employers and sectors that use lots of low-wage workers, rather than investing more in human or physical capital. “The e-checkout chancellor”, perhaps?

3. And there was a striking gulf between the boldness and ambition of the chancellor’s tone, versus the policies that she’s actually delivered so far: not much boldness in the October Budget, a bit in the pro-housebuilding and pro-infrastructure agenda—but partly because recent governments have set the bar so low there. But, she insists, she is genuinely totally single-minded in her pursuit of growth. The ‘bull case’ is that this presages more ambition going forward (there’s still 90% of this parliament to go, and that Labour majority is large); the ‘bear case’ is that there’s a mismatch between what the chancellor thinks will be enough to move the dial on British growth and what Britain’s bleak reality actually demands. Best hope it’s the former.

And earlier in the week, I wrote our Free Exchange column, working through the murky political-economic debate on Trump’s tariff plans: Do tariffs raise inflation?

Mountain-naming turned out to be a curiously high priority for Donald Trump. Mere hours after his inauguration, the president signed an executive order to change the name of America’s highest peak from Denali, of indigenous Alaskan origin, back to Mount McKinley, as it was officially known until Barack Obama intervened in 2015. The rechristening reflects more than just the usual culture-war ping-pong. Like Mr Trump, William McKinley was a “tariff man”. As a congressman and later president, he swung America toward protectionism in the late 19th century. “President McKinley made our country very rich through tariffs and through talent,” said Mr Trump in his inaugural address.

Pro-free-trade arguments would not, I suspected, be vastly new to Economist readers, but the current tariff debate in the US has a few interesting wrinkles that I wanted to pull out. For one, it’s heavily shaped by the dominance of inflation as voters’ main economic worry. So most of the anti-tariff messaging from the Democrats has involved arguing that tariffs are inflationary. I suspect that sort of argument polls excellently, and there’s certainly a germ of truth to it (tariffs do very much raise the prices of the goods affected).

But, as John Cochrane wrote about at great length, it’s also a little frustrating given the reason to object to tariffs really isn’t that they’ll kick off sustained broad-based inflation—they should just be a one-off shift to the price level, and only for imported goods (they may well be offsettingly disinflationary to home-produced goods if households’ spending power is soaked up in higher prices).

The bigger issue, as I get to towards the end of the column, is how tariffs misallocate resources, and, over time, reduce productivity by hindering competition and access to international markets. Harder, perhaps, to get all that on a bumper sticker though.

Separately, it’s really notable how much the best pro-tariff arguments hinge substantially on other countries not retaliating. That’s certainly true vis-a-vis the argument that dollar appreciation will offset the impact of tariffs, as I work through in the column— but applies more generally as well.

More to say on all this, I’m sure, whenever any actual new tariffs start flowing through.

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What I’m thinking about

What are some AI ‘canaries in the coalmine’ for knowledge work? Hard to argue, I think, that large swathes of white-collar ‘email jobs’ won’t be done pretty effectively by AI in the fairly near future—though Claude/o1’s poor pun game gives me some hope for my own future employment prospects. But for the moment, my London lawyer friends assure me there’s still a pretty tight labour market for junior corporate lawyers, which is a job that has seemed plausibly-automatable since even before LLMs took off. I’m very interested in ideas on where to look for barometers to assess how fast and far-reaching the automation cycle will be.

Is Britain too exposed to the global financial/liquidity cycle? The way that US political-economic conditions yanked up bond yields around the world in over the past few months, and particularly in Britain, is exactly the sort of thing that a regime of floating exchange rates ought in theory to prevent. Clearly, that’s not happened. Is it possible or desirable for policy to blunt a country’s exposure to shifts in global liquidity? (I’ve been enjoying reading some of Hélène Rey’s work on the global financial cycle over the past day or two.)

What are the best arguments against nuclear power in Britain today? One thing I’m planning to spend more time thinking about over the next few months is Britain’s energy market. The case that Britain will pretty desperately need a lot more baseload power if there’s any chance of phasing out gas (there is only so far demand variability and energy imports can get you in terms of dealing with intermittency) feels hard to argue with. Ditto, I struggle to see many viable alternatives beyond nuclear. But before I become a total bore on this topic, I do want to make sure I’m getting the best version of the case for the other side—since, demonstrably, the political enthusiasm to kick off new nuclear projects in Britain at the moment doesn’t feel vast.

The best things I’ve read recently

A User's Guide To Structuring The Global Trading System — Stephen Miran

An valiant attempt to reconcile Trumpist intuitions with mainstream economics from Trump’s new top economics adviser. Put out in November, but something worth referring back to as we see what Trump II policies look like in practice. (I don’t agree with most of it, but the push for coherence is admirable.)

Broadly, there were two interesting ideas in Miran’s report. First: dollar appreciation blunts the impact of tariffs, which I spent a while working through in this week’s Free Exchange. (Most important point there: that logic doesn’t hold if, as looks overwhelmingly likely, tariffs spawn retaliation).

Second and much wider-reaching: an inversion of the conventional logic of exorbitant privilege—the benefits to the US of the dollar’s status as a global reserve currency. That status, Miran argues, is not a perk but a burden: the costs, in terms of an overvalued dollar, outweigh the benefits (typically: the ability for the government to borrow more cheaply because of strong foreign demand for Treasuries). And, he says, the situation is worsening.

As the United States shrinks relative to global GDP, the current account or fiscal deficit it must run to fund global trade and savings pools grows larger as a share of the domestic economy. Therefore, as the rest of the world grows, the consequences for our own export sectors—an overvalued dollar incentivizing imports—become more difficult to bear, and the pain inflicted on that portion of the economy increases.

Eventually (in theory), a Triffin “tipping point” is reached at which such deficits grow large enough to induce credit risk in the reserve asset. The reserve country may lose reserve status, ushering in a wave of global instability, and this is referred to as the Triffin “dilemma.” Indeed, the paradox of being a reserve currency is that it leads to permanent twin deficits, which in turn lead over time to an unsustainable accumulation of public and foreign debt that eventually undermines the safety and reserve currency status of such large debtor economy.

My own view is that complaining about too many foreigners wanting to buy US government debt at a time when deficits are already 6-8% is—to put it politely—cheeky, and that America should shut up and enjoy the lower borrowing costs. But the driving force behind US economic policy over the next four years is going to be taking a rather different attitude…

Grasping For Growth — Ben Ansell

A walkthrough of the political-economic “theories of growth” different British governments have followed. Ansell worries, as I do to an extent, that this government’s not quite figured its own out yet.

Which leads us to the crux of the matter. Labour’s current plans on their own will not get them re-elected because there are minimal gains for most and tax rises, which even if disguised, are still likely to have contractionary effects. For the plans to work politically, they have to work economically, which means they need to create a framework for sustained economic growth by 2029.

But Labour does not seem to have a coherent theory of how that growth might emerge. Worse, the current agenda is a mishmash of different theories of growth that potentially offset one another.

Where I’d part from Ansell’s analysis, potentially, is that I think I can see a rough synthesis that Labour is (inelegantly) grasping towards: a bolting together of left-YIMBYism and classic Labour tax-and-spend.

Lots of unknowns, still, and the coherence is perhaps more in the rhetoric yet than the policy programme, but it doesn’t feel totally absent either. Unhelpfully for the economics pundit, all the ‘securonomics’ talk from opposition that supposedly defined Reeves’s growth philosophy seems to have turned out to be a total distraction.

Inside the Houthis’ moneymaking machine — The Economist (Corbin Duncan)

Great piece by one of my colleagues on how the Houthi control of a Red Sea chokepoint has turned into a stunningly sophisticated marine highwayman operation. Stationary bandits, but at sea.

IT’S A REALLY, surprisingly user-friendly experience,” says Stephen Askins, a shipping lawyer, of his interactions with the Houthis, the militia that has been attacking commercial ships in the Red Sea for more than a year. “You write to them, respectfully. They write back, respectfully, and wish you a happy passage.”

Not everyone is greeted cordially. In 2024 the Houthis took aim at almost 200 vessels, damaging more than 40, and attacks have continued into 2025. With Iranian weapons and Russian intelligence, the Yemeni rebels partly control what enters Bab al-Mandab, at the mouth of the Red Sea, and thus the Suez Canal through which 12% of world trade normally flows. Not since the second world war have merchant ships faced such peril.

Heathrow Expansion: Britain’s Runway to Growth — UK Day One

An exhaustive walkthrough of the case for expanding Heathrow that goes point-by-point through pretty much every objection. I particularly enjoyed the thinking on the economics of hub airports.

The economic case for a hub airport is distinct from that of other airports. Specifically, hub airports demonstrate increasing returns to scale. For every additional Heathrow connection, the value of other connections rises, as more potential passengers can be captured. Suppose Heathrow adds a direct flight to Chongqing, a city of 30 million in central China. This benefits anyone in or around Chongqing who wishes to fly to London, for work, tourism or study, but also benefits anyone who wants to connect to a European, North American or North African airport which is served by Heathrow. Furthermore, anyone living in the UK or Europe now has an additional way to get to Chongqing. The route becomes more valuable for each additional available route. Note that this logic applies not just by adding more long haul routes to places like Chongqing, but also by adding smaller short-haul destinations in the UK and Europe.

Why UK gilt yields have risen since the US election and what the government might do — Sushil Wadhwani

A thoughtful column from an ex-MPC member on why gilt yields went up, and what the government can do to lessen the intensity of spillovers to the UK from global economic volatility. As a card-carrying inflation-linked bond fan, I especially liked this one:

Take measures to reduce the debt interest bill directly – for example, I have previously proposed allowing the Bank of England to set its own inflation target (Wadhwani 2024). A key point to make here is that the markets confront Knightian uncertainty with regards to what future UK governments will look like in, say, 15 years. Anything that makes it more difficult to amend the inflation target would be perceived as a good thing by markets. I also suggested that the proportion of issuance taking the form of index-linked debt be increased – this would be seen as a signal that the UK government believes that the inflation target will be hit. Note that these measures would reduce the ‘inflation risk premium’ that the UK government currently pays unnecessarily, and, as I showed above, would make the fiscal arithmetic look less forbidding.

And, to close out, a few of my favourite charts at the moment

The last round of Trump tariffs very visibly raised domestic prices for the goods they affected (via Goldman Sachs)

Even when you look past the impact of a strong dollar, sterling has fallen noticeably in 2025. A less-than-ideal backdrop to the British government’s current attempt at an international charm offensive. White line: GBP Real Exchange Rate vs Trade-Weighted Basket, Blue line: GBP vs EUR (my chart, data from Bloomberg).

And, lastly, a moment of silence for Britain’s Q1 2024 growth spurt. We won’t forget you… (via Resolution Foundation)

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