This week, Andy Burnham finally faced MPs to set out his economic vision for the country – and got a sharp reality check from the bond market. A 28-year high in borrowing costs isn’t something that can be solved by capping bus fares – or nationalisation. Can Burnham rise to the challenge? Find out more below – my piece of the week is by Mani Basharzad who looks at the Prime Minister’s economic dilemma.
Damian Pudner also addressed the Government’s cost of borrowing, pointing out that the bonds we have been selling are uniquely long-term. He argues that while political risk is part of the reason bond yields are higher than others in the G7, buyers in the gilt market have changed and are now a lot more price-sensitive when buying long-dated debt.
The old captive buyer is fading; the new buyer will simply demand a higher price, shorten duration or walk away.
To cap off the week, our former Deputy Editor, Joseph Dinnage, gave us an inside look into Reform UK’s conference, where Robert Jenrick promised a ‘post-Thatcherite’ economic vision. Despite the recent scandal, the Reform faithful remained optimistic at conference – but it reopened concerns that members of the core team still behave more like a campaign group than a party ready for government.
Elsewhere, we featured Damian Green, the former First Secretary of State, calling for more efforts by the US and UK to invest in and develop open-source AI models to compete with China – a timely intervention just before Nvidia struck a $12.9 billion deal to purchase the open-source AI platform Hugging Face. We also had Vincent Geloso discussing the errors in the Stanford Encyclopedia of Philosophy’s new entry on ‘Capitalism’ – and what it tells us about the echo chamber in which too many critics of capitalism spend their time. Unfortunately, if you repeat a claim often enough, it can pass between scholars as established fact.
On The Capitalist this week, I sat down with Julian Jessop to discuss Burnham’s plans. We also talked about whether nationalisation could reduce the cost of living and why the new Prime Minister seems to think that the UK is an example of a failed experiment in neoliberalism – despite our record high taxes and profligate state spending.
Marc Sidwell
Editor, CapX
Nationalisation is not a growth strategy
Mani Basharzad
Alan Greenspan was always attacked by the Left because of his belief in market forces. John Kenneth Galbraith, at a White House conference, made fun of him, saying that the cure for inflation is always the same for ‘Bolsheviks and the devoted supporters of Ayn Rand’. But each and every government learns the hard way that Greenspan was right about market forces. In 2007, when a Swiss newspaper asked Greenspan who he was going to support in the next US election, he answered: ‘The world is governed by market forces’, and it matters less who the president is in a highly interconnected financial world.
Andy Burnham seems to be learning the power of market forces the hard way. UK long-term borrowing costs have hit a 28-year high, at 5.8%. No wonder bond markets, as a former Clinton adviser once said, ‘can intimidate everybody’. But the Burnham team seems slow to understand the economic situation they have inherited from the Starmer government.
The wisdom of crowds with skin in the game in the stock market is far more rational than politicians whose careers are built around spending other people’s money
A 28-year high in borrowing costs isn’t something that can be solved by capping bus fares. This is the fundamental flaw in Burnham’s economic policy: small solutions for big problems, paired with Labour myths about ‘40 years of neoliberalism’ in the rhetoric. Let’s delve into the policies Burnham has announced. First, single fares are being capped at £2 outside London, cutting affected fares by up to one third from the existing cap. Based on calculations by Policy Engine, this will cost £409 million. Then comes the VAT cut for domestic electricity, which falls from 5% to 0%; the six-month Exchequer cost is expected to be £669 million.
The Government’s policy before the Budget has been small cost-of-living interventions, but is there hope that policymaking will change? There are signs, but for the worse. A Guardian exclusive says that Burnham is convincing MPs that ‘more public control is the way to grow the UK economy’, with more essential services being brought under state control.
Does he forget that this is what Rachel Reeves believed? She said: ‘The only way to drive economic growth is to invest, invest, invest. There are no shortcuts.’ Soon, they will understand that what drives growth isn’t investment itself, but the profit opportunities created by growth, which then drive investment.
With long-term yields at their highest in three decades, can he finance his investment plans through taxes? With manifesto restrictions, he has little room for manoeuvre, especially after two Reeves Budgets. The gains Reeves made from capital gains tax (CGT), for example, acted as a windfall tax. But the problem is that you can only play that card once. Before the Budget, the word went around and people rationally sold their shares to avoid paying the higher CGT. It worked once, but it can’t work again.
The cards Burnham has to play are worse than Starmer’s. Jim O’Neill declined a formal role in the new Government, apparently because he didn’t want to back a potential wealth tax. If Burnham wants to finance increased government spending with less conventional taxes such as a wealth tax or an exit tax, it would be a solution worse than the problem. As the Austrian economist Ludwig von Mises once said:
It may sometimes be expedient for a man to heat the stove with his furniture. But if he does, he should know what the remoter effects will be. He should not delude himself by believing that he has discovered a wonderful new method of heating his premises.
Burnham’s policies seem more like Mises’s analogy of burning furniture to heat the stove. Nationalising industries that were privatised because they were so inefficient and made losses when they were nationalised before. Taxing the wealth and property of millionaires who are leaving the country at record levels. Convincing MPs that the problem of a country which spends 44.3% of its GDP on public spending is that it doesn’t spend enough. Convincing markets that he wants to borrow to spend more on infrastructure, while all the spending promises he has made are populist cost-of-living measures such as cutting VAT or bus fares.
The markets are right, and the wisdom of crowds with skin in the game in the stock market is far more rational than politicians whose careers are built around spending other people’s money. They have already seen the highest levels of inflation and interest rates in the G7, alongside ballooning spending that the Government shows little interest in reducing. Little wonder they are nervous.
While everyone is waiting for Andy Burnham’s 10-year plan, markets have guessed that it is likely to resemble more of what we have had in recent decades. Focusing on TikTok and communications has been one of the strengths of Burnham’s No 10, but it is of little use in economics, where we don’t deal with vibes, but numbers and facts.
The way out is not more small spending increases sold via online videos, but to get serious about where Britain is right now after two decades of a ‘capitalist command economy’.
And if you want more…
– Will the Sturgeon drama ask the right questions? (Philip Patrick)
– Burnham’s statism will lead to more misery (Emma Munday)
– The countryside lobby’s war on batteries (James Ball)
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