‘We can’t stop borrowing the wonga. Our children will have to pay the bill.’
Matthew Syed, journalist, The Sunday Times
On 11th June UK Chancellor of the Exchequer Rachel Reeves will deliver her Spending Review. With the annual cost of interest on UK public debt now standing at £111 billion — and likely to rise significantly as a result of the parlous state of the U.S. long-dated bond market — and with a series of back-firing tax changes introduced over the past six months, let's hope her focus will be on achievable, structural reductions in public spending.
Both the United Kingdom and the United States are close to the cliff-edge so far as public debt levels are concerned. Matthew Syed’s article in The Sunday Times on 1st June, the headline of which comprises our opening quotation, provides a graphic warning on the scale of debt addiction and its consequences.
As Syed points out, allowing debt to increase is the easy way out for politicians, whose voters call incessantly for more spending and lower taxes. There have been, of course, additional shocks to the system which compound the problem, but then you can never predict the future.
The 2008/9 financial crisis saw the Government stepping in as ‘funder of last resort’ for the banks; it's taken fifteen years to return the Royal Bank of Scotland (now NatWest) to private ownership, and the public finances are still more than £10 billion out of pocket on this bail-out alone. More recently, the pandemic has added an additional £400 billion to national debt as a result of funding the furlough scheme.
Public debt as a raw number probably means little to the average voter, a point that is well-made in this week's 'The Bigger Picture' (following the mid-episode break), but when the annual cost required to service it is so huge, it becomes much more visible. That cost is now about £2,500 per UK adult in just one year.
Rachel Reeves has already had a go at increasing taxes. Alice Thomson, writing in The Times on 28th May, has listed various attempts:
- Raising Employers’ National Insurance, which has restrained employment opportunities and held back economic growth;
- VAT on private school education, which has not only disrupted the education of 13,000 children but also imposed significantly higher burdens on the state school system, particularly so far as special needs are concerned; and
- A variety of wealth taxes, which have resulted in an exodus of 10,800 millionaires leaving the country, taking their tax money with them.
Meanwhile ‘stealth taxes’ applied by freezing the thresholds of income tax have left huge numbers of people feeling worse off, and this tax burden is a significant part of the reasons why so many people have turned to support Nigel Farage’s Reform party.
No wonder Rachel Reeves will not be applying any further tax increases.
I recall a meeting with Treasury tax officials several years ago who appreciated the illogicality of taxing anything that can move overseas: like businesses or people. They therefore spoke of taxing property, which cannot be offshored, and Matthew Syed refers to ‘taxing the value of land’ in his article for the same reason. However, this route has been pretty much exhausted by the imposition of additional Stamp Duty and the application of Inheritance Tax on farming land since my meeting with those Treasury officials.
So she will have to bear down heavily on spending, but that's not as easy as Elon Musk thought when he took over as Head Honcho of DOGE (the U.S. Department of Government Efficiency). Trump's administration is now starting to understand that politicians don't have carte blanche to do anything they want, whether wholesale removal of government departments or trade tariffs: the legislative appeal system can hold back their excesses, as Fraser Nelson explained in The Times on 31st May.
We're also seeing significant new demands for defence spending, which is hardly surprising in today's world. That will add significantly to the cost of debt servicing, thereby comprising a combined scale of ‘indispensable spending’ not far off the annual cost of the NHS.
This brings us full circle back to Autumn 2022, when we first commented on the subject of ‘Health and the Economy’. This was when Jeremy Hunt had just taken over as Chancellor following a prolonged spell as Secretary of State for Health. The solution which we put forward then remains as relevant today: moving away from universal welfare to introduce a mandatory private health insurance for wealthy older people, accessible by the NHS as their services are used. We've updated this proposal to reflect the new political environment.
How else could the Chancellor bear down on spending?
There are many other areas where welfare could be changed from a universal to a targeted application and where, unlike winter fuel payments, the wealthy would not complain at needing to pay their way via a subscription: one such example is the ENCTS free bus pass scheme for old people.
But no doubt we will also hear much about the use of AI systems to reduce the cost of the Civil Service. Whether it works or not may depend on DOGE-like resistance, but we probably won’t find that out until beyond the next General Election: another case of short-termism turning reliable delivery into good intentions.
However, there’s no getting away from the fact that the real ‘Elephant in the Room’ is the sheer scale of public debt. As Matthew Syed concludes in his article, ‘Historians have noted that there are two ways to enslave a nation. One is by the sword. The other is by debt. The irony of 21st-century democracy is that we have enslaved ourselves and, most reprehensibly, our children too’. In both the United Kingdom and the United States, we need a strategy for massively reducing this burden on future generations.
Gavin Oldham OBE
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