The United Kingdom announced vast increases in taxes and borrowing in a major budget announcement Wednesday. The budget shows Prime Minister Keir Starmer’s abandonment of the political center ground in favor of an overtly left-wing economic policy.
Since entering office in July, Starmer has encouraged Britons and the U.K.’s trading partners to believe that his Labour Party will adopt centrist governance. That effort no longer passes the smell test. After all, what Chancellor of the Exchequer Rachel Reeves (the U.K.’s all-powerful treasury secretary equivalent) has announced is nothing short of a return to the tax, borrow, and spend approach that nearly bankrupted Britain in the 1970s. Reeves and Starmer have set a course for long-term decline.
The centerpiece of this budget are changes that allow far greater government borrowing and major increases to the employer side of the U.K.’s social security tax. The impact will be very significant.
As the independent government Office of Budget Responsibility noted, the “Budget policies increase spending by almost $91 billion (a little over 2% of GDP) a year over the next five years, of which two-thirds goes on current and one-third on capital spending. As a result, the size of the state is forecast to settle at 44% of GDP by the end of the decade, almost 5 percentage points higher than before the pandemic. Half of the increase in spending is funded through an increase in taxes … [these will] push the tax take to a historic high of 38% of GDP by 2029-30. The other half of the increase in spending is funded by a $42 billion (1 per cent of GDP) a year increase in borrowing, one of the largest fiscal loosenings of any fiscal event in recent decades.”
The OBR added that “the employer [social security tax] rise is estimated to reduce labor supply by 50,000 average-hours equivalents, while the net fiscal loosening would crowd out some private investment in an economy with little spare capacity … The economic outlook depends on uncertain judgements on the paths for productivity, inactivity, and net migration.”
The problem for the U.K. is its productivity, inactivity, and net migration figures are all on a highly negative trajectory. The BBC‘s political editor summed up the budget well, “The tax rises visible from near earth orbit, self imposed borrowing rules shredded and re-written — yes, to allow more borrowing; big wads of spending for the [the public health service] for starters.”
This admittedly bold economic plan is highly unlikely to succeed. The budget pulls from the private sector to give to an already vastly bloated public sector. It blatantly disincentivizes the hiring and retention of workers. It uses debt to put a short-term band-aid over structural unproductivity and welfare policies that heavily encourage slothfulness. Of concern to the United States is it makes the U.K. more vulnerable to China’s political coercion. Beijing is offering major new investment in return for London’s foreign policy distancing from Washington, and Starmer’s government has shown itself open to that deal with the dragon.
What Starmer and Reeves have done here is pursue the economic model of Europe when they should be pursuing that of the U.S. The statistics prove as much.
The U.K.’s per capita GDP (constant basis) has been stagnant since the 2008 financial crisis, rising from $44,000 in 2008 to only $47,000 in 2023. In contrast, U.S. per capita GDP rose from $53,700 in 2008 to $65,000 in 2023. Similarly, in 2008, U.S. GDP stood at $14.4 trillion but had nearly doubled to $28.3 trillion by the end of 2023. U.K. GDP grew far slower in the same period, from $2.9 trillion to just $3.3 trillion. These discrepancies are explained by the far greater private sector dynamism and economic innovation in the U.S. economy.
What happens now?
The grave risk is that as the debt markets see the state continue to absorb those remaining and most dynamic elements of the economy, they will demand an unaffordable premium on future lending. Then Britain will be forced to choose between bankruptcy and an economic revolution in the vein of former Prime Minister Margaret Thatcher.
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Speaking of which, the Conservative Party will elect its new leader Saturday. However, whether Kemi Badendoch or Robert Jenrick becomes Leader of the Opposition, the new leader will at least have the opportunity to present a far different policy direction for Britain.
There’s no question that Labour has gone back to the failed policies of the past.