Blain’s Morning Porridge July 10^th 2025: Raise Taxes. Promises come with hefty costs.

“She may not frighten the French, but, by God and Harry, she frightens me.”

The scale of the UK’s funding crisis is becoming increasingly apparent. It can be fixed – but needs political sacrifice. “Changing Policy” and backing off promises has costs and consequences. The UK is not in dire peril – it remains a fine, innovative and strong economy, but we need to get real on spending and how its funded.

The most difficult thing to say in Global Finance is… “I have changed my mind.” This morning Mohamed El-Erian (Mo the Tash) is on the front page of the FT arguing: “The UK should press ahead with the inevitable on tax.” I now agree with him.

Let me try to explain why I’ve changed my mind….

You can argue with politicians – and often win. You can dice with death – and maybe live for another day. You can put it all on black – and possibly walk away rich. But you cannot argue with the bond market or the electorate. They will crush you.

• Electorates are loath to forgive broken promises – no matter what the requirement to do so.
• In bonds there is no forgiveness. There is only cold, brutal logic and the remorseless question: Do I trust you to repay me on time? For Sovereign Borrowers there is the extra dimension: Do I trust you to repay me on time, and that you won’t have destroyed the economy making my investment worthless?

Sovereign Borrowers generally don’t default – but the £100 they will repay you when a 10-year bond matures may be worth very much less because of inflation and currency movements. That volatility depends on how well the economy is governed in terms of stemming inflation, promoting growth and society’s stability, sponsoring new technology, and encouraging productivity gains across the economy. And critically – how courageously the government is prepared to balance the books.

Students of the ultimate handbook of good politics, the 1970s BBC series “Yes Minister” will know “courageous decisions” are the kind that can lose elections.

If you are a bond holder always remember that nations dance with the bond market at your peril. As we have seen, when things go wrong… they go wrong quickly. That’s why political credibility is so incredibly important. Hence my Virtuous Sovereign Trinity theory which very simply states a nation with a stable currency, a sustainable bond market, and political competency will tend to do well. Its why good politics is such a critical ingredient in markets. Invest in the bonds of countries that meet these criteria.

In yesterday’s Porridge I raised my doubts on how sustainable the Gilts market (UK Government Bonds) is in the face of global trade ructions, the Trump effect on investment, recession threats and spending needs. I presented a number of tweaks for stabilising it in terms of liability management and cutting government pensions.

I was up in London yesterday, and had a series of informal chats on the economy and the national finances. They leave me certain I was merely tinkering with solutions yesterday, not addressing the big issues – which includes raising taxes.

As a result I have changed my mind on what the UK must do. That’s easy for me – I’m just a minor market commentator with a penchant for telling politicians what I reckon they should do….

It is going to be much more difficult for the current Labour Government and Chancellor Rachel Reeves to tell markets and the electorate they have changed their minds. Especially when it will mean going back on electoral “promises”. But it has to happen.

Three things are needed:

The first issue is expenditure: The funding issues facing the UK government are multiple – and they urgently need addressed. We know that. The brutal reality is expenditure commitments need rolled back – it’s not just austerity, but a fundamental review of what government can afford that’s needed. It is impossible to deliver all government spending commitments – and the longer we pretend that’s not the case, the worse the problem will get.

That’s the nub of the UK’s potential debt problem – global investors are rightly concerned governments can’t deliver on that stability when electorates are clamouring for ever increasing spending. That means making tough decisions about funding, and tough decisions come with high costs.

The most damaging of these unfundable spending commitments are:

• The Triple Lock – the government’s commitment to increase the state pension every year based on the highest of inflation, earnings growth or a a 2.5% base. When the economy is flatlining and tax revenue are declining – its unsustainable.

As we’ve seen, telling pensioners they aren’t the government’s number 1 concern makes for very, very bad headlines. But it has to be done. After all, the triple lock is just an electoral bribe.

• The NHS – which we all know has become a bottomless money pit that now threatens to consume the whole economy. Junior doctors want massive pay-rises – so does everyone.

Labour does have plans to reform the NHS – but it’s a 10-year programme of restructuring, digitisation, and de-centralisation. It will likely be sucked into the bureaucratic gloop and emerge in even worse shape in terms of costs and delivery. In the 1940s the NHS was conceived and launched under wartime pressures. I understand there were proposals a few years back for a Royal Commission to root and branch review the NHS and determine its future. Apparently, Labour blocked it – happy that a dysfunctional NHS would cost the Tories votes. The reality is – Labour need to own responsibility for making the NHS functional. That’s a fundamental reconstruction.. not a tinkering.

The second issue is taxes. The only way the nation can continue is to pay up – which means raising taxes. Not tinkering with a penny here and there, but a shilling on the basic rate, and even a raise in consumption tax – VAT. Yes, its problematic and will have consequences. Unravelling the NI tax that’s crushing high streets may provide some balance.

A wealth tax is an option. Most folk fear that it will spur capital flight – but there are ways wealth could be directed into UK investment via breaks. Complex and again consequential.

Issues like ending Stamp duty, or setting it above £3mm (who cares about non-doms who’ve fled the country?), could provide a significant confidence boost for the economy.

The third issue is Leadership. This is where it gets tricky. We need a Chancellor with guts and confidence to present the new plan to the electorate and bond markets.

We live in a constantly evolving and rapidly changing economy. A year ago, when the conservative Labour government took office, Reeves made herself a hostage to what she thought we knew then. She promised strict adherence to her fiscal rules – which are crushing her and limiting her options. She promised not to raise taxes – now there is no alternative.

Rachel Reeves is therefore trapped. Does she has the strength to “change her mind” and survive? She is a fine person, and an honest politician – one day, she may well yet be Prime Minister. But… she has to move aside to attone for what will be broken promises. Not because she is bad – she is not. Not because she is wrong – she is not. Nor because she has made mistakes – which she has. It that the tax/spending plans of the economy have to change – and that means someone new to deliver.

Frankly, a new chancellor is going to have to be a “complete bastard” to argue and deliver the hard choices and calls that need to be made. As I look around the Labour Frontbench – only one person looks a contender.

Chancellor Yvette Cooper?

We don’t need a nice Chancellor. We need an effective one. We need someone with a glint of steel in their eye. We need a complete bastard in charge of the UK’s finances. Someone with (litteraly) the “Balls” to make painful, nasty, hard decisions and rip the lungs out of anyone who dares question the programme. Her first move should be to brutally defenestrate any Labour MP who even looks sideways at her and wonders if we need to spend more on welfare we can’t afford.

Out of time, and back to the day job…

Bill Blain

Author, The Morning Porridge

CEO Windshift Capital

Partner Shard Capital