Blain’s Morning Porridge Feb 9th 2024: The UK needs more than fiscal discipline – Sir Keir needs a bigger plan.

“The economy does not consist in haste, but in certainty.”

The multiple problems facing the UK will not be solved by Sir Keir Starmer’s Labour Party trying to be better Tories than the Tories. We don’t need better Tories. We need a better UK.  

I don’t think it’s any secret I’m unlikely to be voting for Rishi Sunak at the coming UK election. I am a rational man. All governments become stale – this one particularly so. For at least half its time in the office the Tories internal conflict and dither has dominated our political landscape. Post Brexit, the UK’s slide into irrelevance and decline has accelerated. We are in much worse shape than we should be. The current polling shows the electorate agrees it is time for a change.

But, that does not mean I’m happy with Labour either.

Yesterday’s climb down by Labour on its £28 bln Green Programme might appear a financially sound and diligent decision to please the City of London, but it smacks of straight-line thinking. Balancing the books is important, but conventional, unimaginative, and lacks awareness of the multiple crises facing the UK. I can’t help but wonder if Starmer intends painting the deckchairs on the Titanic.

The problem, which Starmer and his Chancellor in waiting, Rachel Reeves, have identified is the financial markets. If markets lose confidence in a nation’s virtuous sovereign trinity – a stable currency, a sustainable bond market, and government competency, instability follows. Convention dictates radical solutions scare markets. However, markets also accept in time of crisis the need for politically competent solutions becomes paramount – like in Wartime or the New Deal.

The crisis facing the UK is now critical – and the need for something radical is desperate. The trick will be solve the UK’s problem with the market’s support. I know markets – they are not unreasonable, and they are logical.

Let me award myself a No Sh*t Shelock medal for stating the downright obvious that the UK faces multiple challenges. Politicians have choices – they can keep tinkering around the edges (distracting us with targets and irrelevant campaigns like “Stop the Boats”) before reality overwhelms us, or they can innovate radical new solutions and approaches to allow the nation to recover and thrive once more. This is the time for the latter.

We need to acknowledge the crisis that is upon the UK – now:

• The nations finances are broken – convention dictates there is simply not enough tax revenue or borrowing headroom for a new government to fix and repair the entirety of the UK’s neglected, broken infrastructure, unfit utilities, national and local services while making health, education and defence fit for purpose. Convention says the solution is austerity – it is not.
• The economy is rudderless – it has no direction other than vague comments around new tech like AI or whatever bank-wagon Sunak hitches onto next. We need a plan and vision of what the UK economy could become and arrest its decline, based on our industrial strengths, inventive capacity and geography – renewable energy and climate change is something the UK could do rather well, if we had the courage to go for it.
• The UK has repeatedly demonstrated it can’t execute plans – the failure to build necessary new housing, new infrastructure like nuclear power and HS2, or reform bloated state institutional thinking like military procurement, the NHS, planning and local government. “Muddling through” no longer cuts it. A new approach to delivery is needed – professional project management at scale, private participation at scale and an overhaul of the apparatus of state; the Civil Service. Stop talking about deliverables, and actually deliver.
• Trust in politics has evaporated – not just due to the Tories lack of leadership but equally the Labour Party’s failure to be an effective opposition during the Corbyn era. The electorate has little confidence in politicians – hence the swing towards populism.
• The UK’s place in the world continues to deteriorate as geopolitical alignments change. Over the next decade the end of the American and dollar era is a high probability, and will lead to a redefinition of Europe. Pragmatic trade and geopolitical realignment will be needed to ensure the UK’s success and security.

And, lest we forget…

• The latest climate numbers, released yesterday, show global temperatures are now 1.5 degrees higher than pre-industrialisation. While political interest in solving climate change is waning – the climate problem has not gone away.

There are solutions. There are always solutions. Even Liz Truss and Kwasi Kwarteng understood the basic maths: the need to accelerate growth to raise revenues to fund recovery. They just didn’t get the need for a credible plan.

My worry is Labour does not intend a grand, comprehensive plan to sort out the UK. They are too concerned with straight-line thinking and not scaring the markets to see the requirement for a complete economic refit. Labour will therefore miss – massively, unless they start thinking outside the box. Sir Kier Starmer and Rachel Reeves are certainly adults in the room – compared to some of the succession of clowns since 2015 (not all Tories were bad – some were excellent, others less so) – but they need more than just fiscal rules to guide their reconstruction of the UK.

They need a plan that is more than just monetary and fiscal policy, or Rachel Reeves accountant’s determination to balance the books. The plan needs to identify and address the multiple bottlenecks in planning, execution and delivery – and that looks like a challenge to the UK’s entrenched civil service. The plan also needs to prioritise – what will make a difference. And, yes, it needs to be costed and it needs buy in.

It is urgent we address this now – there is something fundamentally broken at the core of the UK economy. Look at London and consider the younger staff in your workplace:

• Do they own their own homes? Will they ever get on the housing ladder? Can they afford their ever-increasing rents? Can they afford the cost of lunch each day? Are they struggling with student debt, council tax, and the bills? Have they given up on plans to raise families because of their housing and financial insecurity? Are they saving anything for their retirement?
• Are they happy?
• And how did they react when the boss told them “that due to the difficult business conditions this year, we have instituted a hiring and pay freeze,” while awarding herself a massive bonus?

Explain what stake that generation has in our economy? We need to give that generation hope and purpose. A first step would be housing. Give them access to affordable and decent housing, and give them hope – and turn around expectations. It can be done, but not when the minister of housing’s average tenure since 2010 was less than 11 months. And then repeat on every single other aspect of the economy.

I can even offer Rachel Reeves a quick win:

One of Rachel Reeves concerns is the quantum of UK national debt to GDP – Gilts. The Bank of England currently holds £740 bln – about 30% of total £2.4 trillion Gilts issuance. They will sell these bonds back into the market – drawing liquidity from the economy as economic conditions continue to deteriorate. That cash is already in the economy – any inflationary effect is already out there.

Think outside the box. Why does The Bank and Treasury need to sell these gilts? Effectively they are a balance sheet item on the national accounts – a liability of the Treasury and an asset of the Bank. Cancel them off. The Treasury can give The Bank a coin representing £736 bln, and Reeves would have a debt level around 70%. Radical? Not really, but it would certainly upset some monetarist dinosaurs.

We need a new government that’s going to sort problems by being imaginative, considered, innovative and competent. Not another “new improved, with gripping hand action” Tories who aren’t Tories. This nation needs a radical rethink – and it will need the support of the financial markets to make it happen. With courage it can be done.

Out of time. Have a great weekend.

Bill Blain

Author – The Morning Porridge