UK Politics General Discussion

[Matt N]

Urgh. Matt. I have a lot of time, respect and love for you, but please listen to an episode of Freakonomics or Planet Money at some point.

The government's spending / budget does not work like your household. The only entity in this country which can create money is The Royal Mint. Everything else is by the by. Profit, revenue, etc. The government decides how much money it has. It can either create money from nothing, which could potentially devalue the currency, or it can borrow it at very low rates. Eitherway,, governments are sovereign, hardly go bankrupt, never really default on loans and everyone else is playing a short game.

If you're "borrowing" tens of billions of pounds to invest in programmes and strategies, which are likely to result in economic activity, the markets are fine with that. If you're borrowing tens of billions of pounds to fund tax breaks, a la Truss, the markets are not so ok with that. In such an instance they will sell their reserves in your currency, they will sell your government bonds, they do not believe that they will see a return ok their investment. If you're spending tens of billions of pounds on green energy incentives, investment or even funding the Olympics, the markets are ok with that because there will be some form of return through tax revenue.

I'm short, if a government creates money to invest, or borrows money to invest, the markets will respond positively or neutrally. If a government creates, or borrows, money to fund tax breaks, the markets will respond negatively because no further wealth is being generated.

Love you lots. Not bitter at you trying to pedant me out.

🪿

That makes a lot of sense… thank you for the explanation! I can now see why what Labour is (allegedly) doing should hopefully be a good idea. If I’m interpreting you correctly, you’re saying that because Labour expects their borrowing to result in returns in the form of additional tax revenue, that’s a form of borrowing the markets are OK with, and they only don’t like it when it’s not going to generate them a financial return?

I’ll confess to not being very clued up on finance, particularly in the context of government. If I’m being totally honest, I’ve always just heard the word “borrowing” and automatically conflated it with being bad, because of the likes of Liz Truss. People were also always very negative about borrowing in the context of the likes of Jeremy Corbyn (who I believe planned to do a lot of borrowing to fund his manifesto) as well, so in my mind as someone who’s not terribly clued up about finance/economics, the default connection has always been “borrowing = bad”.

I appreciate the alternative perspective, and your explanation has certainly made me see the more positive side of it!

 

[GooseOnTheLoose]

That makes a lot of sense… thank you for the explanation! I can now see why what Labour is (allegedly) doing should hopefully be a good idea. If I’m interpreting you correctly, you’re saying that because Labour expects their borrowing to result in returns in the form of additional tax revenue, that’s a form of borrowing the markets are OK with, and they only don’t like it when it’s not going to generate them a financial return?

I’ll confess to not being very clued up on finance, particularly in the context of government. If I’m being totally honest, I’ve always just heard the word “borrowing” and automatically conflated it with being bad, because of the likes of Liz Truss. People were also always very negative about borrowing in the context of the likes of Jeremy Corbyn (who I believe planned to do a lot of borrowing to fund his manifesto) as well, so in my mind as someone who’s not terribly clued up about finance/economics, the default connection has always been “borrowing = bad”.

I appreciate the alternative perspective, and your explanation has certainly made me see the more positive side of it!

When Corbyn announced his intention to fund most of his nationalisations through borrowing, loan rates for governments were incredibly low. Governments actually have three ways of generating income, if we include raising taxes or taxing something new too. Creating new, or raising, taxes to fund additional spending though doesn't tend to work very well.

Let's take the 2012 Olympics. The government directly spent £8.2 billion on what's essentially a glorified sports day with a rock concert, in the face of it. Why didn't the markets react negatively to the borrowing for this? It was vastly over the initial budget of £2.4 billion, surely that's bad?

Contracts to deliver the Olympics were given to management companies, to architectural firms, to construction companies, to raw materials providers, to design agencies and consultancies. Spending was directed to overhauling transport infrastructure, regenerating areas in desperate need of attention.

Think of how many people were employed directly in delivering the Olympics; through planning, construction and then the actual event. Then think of all of the businesses which opened and operated near the new developments; restaurants, shops, new transportation routes. They all employed people too and made their own investments in the area, in addition to the government's £8.2 billion.

In 2014 the Department for Media Culture and Sport announced that the 2012 Olympics had generated £14 billion in Gross Value Added to the British economy, which isn't a bad return on the initial investment. This is all just focussing on the sport event too.

The legacy of the 2012 Olympics is still apparent in Stratford. Businesses are still operating, the shopping centre is still chugging along, the sports facilities are still in use.

All of this was delivered by borrowing and the markets were fine with it, because economic activity was being generated and encouraged.

As long as a government can afford to service their borrowing, ie pay back how much they promised to and over the set period, the system works. The system starts to collapse when the markets don't have faith that you will keep servicing your debt.

Here are some podcast episodes for you to listen to, which roughly broadly go a little deeper into what we're discussing here:


From: https://www.npr.org/2021/11/23/1058529788/day-of-the-debt


An analysis on Trussonomics:

From: https://www.npr.org/2022/10/05/1127098609/uk-britain-liz-truss-kwasi-kwarteng-pound-tax-cuts


A fun Radiolab episode about governments just creating money from nothing;

More Money Less Problems

A trillion dollar platinum coin sends us down a wormhole, re-examining a classic question: why can’t we just print more money?

radiolab.org

 

[GooseOnTheLoose]

I'm going to double post, whip me, and try to preempt what your next question might be. If economic theory says that government borrowing for investment is fine, and the markets like it / don't mind it, why are economic conservatives against it?

The answer to this is tricky, but ultimately it's down to how you view individual wealth. If you're economically conservative, traditionally you view your money as yours. You believe that you've worked hard for it (which comes across as those who aren't wealthy don't work hard for their money) and you should be able to keep as much of it as you can.

The problem with government borrowing and economic conservativism, is that the debt needs to be serviced. If the debt needs to be serviced, you can't give tax breaks. You want tax breaks because you want to retain as much as your wealth as you possibly can. It's not that you're greedy, it's that you're an individual. If people want services, like healthcare and education, then they should pay for them at the point of access. The private market can deliver these services perfectly well, and people can pay for the education or healthcare that they want. If you let people keep more of their own money they'll be able to pay for those things.

The problem with that type of thinking, is that some people will never be able to afford education, or healthcare, or the basic services we deem necessary under an entirely private capitalist system. It's a pyramid and you need a lot of people at the bottom for you to keep your lifestyle. So you begrudgingly accept that the government must provide some services, needs to borrow to fund investment, but you want it to be as little as possible. You need it to be as little as possible, because that way you can reduce the tax burden.

You can't reduce the tax burden if you're borrowing more, because the debt needs to be serviced (otherwise you create economic uncertainty, default and the entire system collapses). What you could do, which is what the Conservatives have been doing for the past 14 years, is shift where the tax burden hits hardest.

Income is taxed at a higher level than wealth. What do we mean by that? The money you get paid by your employer is taxed at a higher rate than any additional wealth generated by your savings, assets or investments. Doesn't this go against the conservative economic model? Yes and no. It means that people who aren't wealthy are going to have a harder time becoming wealthy. It does mean that if you're already wealthy, your wealth will continue to grow. If you're already wealthy of course you care about income tax, and you'd like to be paying as little as you can get away with, but it's your pre-existing wealth that you care about more, because of compounding interest. You can afford to take the hit on income tax, which everyone pays, to justify lower tax rates on wealth (which only the wealthy pay).

This is very much an overview, and doesn't go into the intricate detail it probably requires, but I hope it's useful at least!

 

[Matt N]

My apologies for asking something slightly random in here, but I thought it would fit best here rather than derailing a thread elsewhere.

Linking into the discussion in the 2024 general discussion thread about living costs and such, my question is; why is the big hit to disposable income and increase in living costs so unique to the UK? Aren’t the key issues like the Ukraine war affecting all European countries equally?

 

[BarryZola]

Well, apparently our petrol retailers have been ripping us off for the last year or two (not passing on the proper falls in the wholesale prices), our energy and rail companies are foreign owned and actually subsidise the costs for those in other countries. Food manufacturers have apparently been taking the pee with how much they've increased their prices in response to Ukraine etc (whilst making portions smaller at the same time). Some countries have longer term mortgages than us as well, so they're less harmed by relatively short-term interest rate rises. And if you rent your home in some of these countries, you're less likely to get ripped off due to the way their societies are set up.

Basically, our whole system is set-up to rip us off with little breathing room for the average person. As soon as something unexpected like the Ukraine war comes up it tips some people over the edge into not being able to afford anything other than the basics to survive.

 

[GooseOnTheLoose]

My apologies for asking something slightly random in here, but I thought it would fit best here rather than derailing a thread elsewhere.

Linking into the discussion in the 2024 general discussion thread about living costs and such, my question is; why is the big hit to disposable income and increase in living costs so unique to the UK? Aren’t the key issues like the Ukraine war affecting all European countries equally?

It's incredibly complex and nuanced, but here are the highlights.

The UK is highly reliant on natural gas for heating and electricity generation, especially when compared to other European countries, so the surge in gas prices due to the Ukraine war has disproportionately affected us. We also have less gas storage capacity, than other European countries, making our suppliers more vulnerable to price fluctuations and supply disruptions. We're an island, so importing energy is more intensive, difficult and expensive than it is for countries which share borders, or a continent.

Brexit has introduced trade barriers, which didn't exist before. Businesses are paying higher costs for importing goods from the EU, contributing to higher prices for consumers. Although there aren't any tariffs, the actual cost of making sure you have the right paperwork, the new red tape and customs clearances create costs which weren't there before. Considering that we get most of our produce from the EU, this has had a massive impact on food costs.

Brexit has also led to labour shortages in key sectors, like construction, which has driven up wages in some areas and contributes to inflation.

Our economy is heavily reliant on consumer spending, making it more vulnerable to rising prices and reduced disposable income. We've also suffered with low productivity growth, leading to a further squeeze on living standards.

The UK has some of the highest housing costs in Europe, putting further pressure on household budgets. Interest rates are high, which means that mortgage rates are high. The Bank of England's response to inflation, including raising interest rates, has increased borrowing costs for households and businesses. Increased mortgage costs for landlords, get passed on to tenants, who aren't seeing any additional benefit for their increased contribution. My rent literally covers the mortgage payments on two of my landlord's properties, which creates an uneven distribution of wealth.

And finally the government's fiscal policies, including tax increases and spending cuts, have contributed to the squeeze on disposable income. Some taxes may have been cut on the surface (like National Insurance), but the threshold was not increased inline with inflation, creating fiscal drag.

 

[Matt.GC]

My apologies for asking something slightly random in here, but I thought it would fit best here rather than derailing a thread elsewhere.

Linking into the discussion in the 2024 general discussion thread about living costs and such, my question is; why is the big hit to disposable income and increase in living costs so unique to the UK? Aren’t the key issues like the Ukraine war affecting all European countries equally?

Extremely nuanced. But in a nutshell - political priorities. They're not unique to the UK, only who pays the price is.

Plus Brexit, economic stagnation, political instability, and Liz Truss.

I'm a very fortunate person, and I'm in the process of purchasing a dream home. It's more than I ever thought I could afford, and the mortgage is massive.

But I live in a reasonably modest home at the moment. My mortgage was as little as £480 PM at one stage, and is now a little over £600. There's a smaller 3-bed 2 doors down. I met the lady moving out on Friday. A single working mother with 2 children. She left it until the last minute to move out because her rent has been put up to £1500 PM and she can't get anywhere else. So she couldn't move into temporary accommodation until her and her children were technically homeless.

£1500pm! Small 3 bed. The rest in the area similar. Virtually nothing left to live on if she stayed and paid her rent. She's done nothing wrong and neither have her children. She works. She doesn't commit crimes. It's heartbreaking, it's cruel and it's wrong.

Politicians decide who should bear the burden. And they've decided it shouldn't fall on people like me and you, it should fall on people like her.

 

[BarryZola]

I've got to be honest, I'm not sure why the government couldn't have shielded mortgage rates from being effected by interest rate rises, if they felt that rises were absolutely necessary. Credit cards, loans, car payments and everything else, yes, I get it. But why raise prices for people just trying to keep a roof over their heads? Surely it's possible to separate that from the other blanket rises? All it's done is sent more money to the banks who don't need it. Obviously I'm no economist, so am happy to be educated, but I don't think it was absolutely necessary in this case.

I don't even trust the Bank of England to know what they're doing either. They told us during and towards the end of Covid that 'Inflation was only transitory' whilst they carried on with the handouts (same as in the USA). I remember at the time talking to others online about it and everyone agreeing that they were talking absolute rubbish. It was always going to last. My opinion is that they acted way too late, handed out way too many freebies and then have unnecessarily harmed people and the country by being too heavy handed with the interest rate rises. It was obviously the situation in Ukraine suddenly adding to the inflation so why make Sue down the road pay £500 extra in rent every month (due to putting her landlords mortgage up)? This period will be looked back on badly by economic historians I'm sure.

 

[Benzin]

It'll be nothing to do with a number of MPs having a property portfolio though.

 

[Squiggs]

I'm also not sure that the UK is quite as unique as you might think. We have had a concerted "cost of living crisis" media campaign, which brings together a lot of different threads of discussion and naturally therefore gives it more prominence.

But we are not along in that, Australia and New Zealand also have headlines around their own 'cost of living crises', whilst the cost of living is also a major topic in the current US election, and quite possibly in the upcoming Irish elections too, so it's not just a UK issue. I'm not sure about Europe more generally, there might be some significant examples in the EU too, but then it could also be slightly more stable because they are a trading block, which is essentially designed to make extremes less extreme, so economies can correct themselves more easily.

Though whilst we might not be alone in cost of living being a significant societal issue, we definitely have unique challenges in how the cost of living manifests, especially around the disparity between the well off and less well off. After 14 years of Tory rule the system is effectively now set up to make the rich get richer and the poor get poorer. Whichever direction you are heading in, the system makes it very difficult to get out of that spiral

 

[shakey]

So the first budget under the new government. Good or bad ?

Strange that on the one hand they are saying there is a £22 billion black hole in public finances but on the other hand have decided to borrow even more money !!

The increase in employers income tax is a massive gamble and when you add it to the increase in the minimum wage it is going to affect a lot of businesses , especially those who have many low paid workers. So theme parks for example are going to be hit with a double whammy.

 

[BarryZola]

Yeah, so basically the private sector is getting screwed whilst the public sector (which is funded by the private sector) has only had pay rises since the new government came in. Public sector workers will still get generous pension schemes and paid from first day of sickness etc, whilst private businesses get squeezed which means that their pension schemes will get even worse and many workers already don't get paid from first day of sickness etc. Any extra costs put onto busineeses will just lead to a poorer deal for their workers. If they're telling us that we're desperate for money from everywhere then why don't public sector workers share some of the pain? Yes, I understand that many public sector workers have not had real-term pay-rises in recent years, but this is true in the private sector too. Just share the pain is all I'm saying.

The main political parties just need to grow up and agree that whoever wins a general election will put up income taxes a bit, especially for those who can afford it more.

 

[DiogoJ42]

I don't think I can remember a budget that was ever "good".

 

[pluk]

Yeah, so basically the private sector is getting screwed whilst the public sector (which is funded by the private sector) has only had pay rises since the new government came in. Public sector workers will still get generous pension schemes and paid from first day of sickness etc, whilst private businesses get squeezed which means that their pension schemes will get even worse and many workers already don't get paid from first day of sickness etc. Any extra costs put onto busineeses will just lead to a poorer deal for their workers. If they're telling us that we're desperate for money from everywhere then why don't public sector workers share some of the pain? Yes, I understand that many public sector workers have not had real-term pay-rises in recent years, but this is true in the private sector too. Just share the pain is all I'm saying.

The main political parties just need to grow up and agree that whoever wins a general election will put up income taxes a bit, especially for those who can afford it more.

Except that since the pandemic public sector pay has not recovered at anything like the same rate as the private sector, and remains suppressed vs private sector long term even taking into account the very short period where public sector were better protected than private during covid. There will of course be outliers in both 'sides', but as a worker of one of the hardest hit professions (who I'm sure completely coincidentally also happen not to have the power to strike) I have to call BS on this claim. Any gains you've seen since the election don't come close to redressing the balance, and the previous administration had already acknowledged and started upping public sector pay so it can't even be seen as a Labour squandering issue.

Oh, at the same time the pensions have been raided hard and illegally, with many in the public sector now recieving compensation for how we have been treated.

Pressures on public sector pay | Institute for Fiscal Studies

Over a fifth of government spending goes on pay. We examine recruitment and retention challenges which mean that pressures could mount going forward.

ifs.org.uk

 

[Quantum]

Absolutely catastrophic for family farms, hope they can find a way round the inheritance tax issue.

The rest of it was a mixed bag, happy that fuel duty didn't go up. Not so great for small business

 

[Matt.GC]

Our public services are on their knees, the public finances are in a mess, there's very little growth to pay for it all, and the inheritance is a car crash. Something has to give. They were stuck between a rock and a hard place.

It's easy to pick apart the intricacies, but we have to get real and accept the mess that we're in. Like the winter fuel voting bribes being taken away, bold action is required to escape from this corner. And even critics can't argue that we didn't see anything other than a momental change today after many years of politicians sticking their fingers in their ears and doing very little.

As sad as it was to give Churchill the middle finger in favour of Atlee in 1945, and as wicked as Thatcher was following 1979, the country needed balls to the wall change then, and it needs it now. Radical change alway has consequences. We're deluded as a country of we think we can pretend otherwise as if we were living in normal times.

This government was elected, not because the country wanted them, but because we were desperate for someone, anyone, to do something about the grim reality. We've flirted with populism (some ignorant Reform UK Ltd loyalists still are) and it didn't end well. Populism doesn't have the answers. It didn't in Spain, it's not currently providing them in France or Italy. It certainly won't in America if they are stupid enough to elect a fascist dictator for a second time.

I'm concerned about the taxes on businesses, and I'm really concerned about the downgraded growth forecasts. I'm also quite angry at how poor Starmer and co are at messaging in government, as they were in opposition. There's no way they they didn't see the inheritance coming their way beforehand, it could be seen from outer space. I find that aspect of the spin operation incompetent and dishonest.

But they have little choice but to get the sledgehammer out and start smashing up the status quo. They had absolutely zero choice but to raise taxes to record levels thanks to the wreckage left behind by the last government.

I just hope this gamble pays off. I like most of what I've heard (particularly on capital gains, taxes on luxury purchases like Private Schools, second home stamp duty, and inheritance tax on wealthy land owners) and I have no regrets about voting for them. No sour grapes hatchet job Daily Hate Mail headline about Taylor Swift tickets, or misinformation about pensioner winter fuel voting bribes fool me.

They just better make sure that this country is in a better place come 2029.

 

[shakey]

But they have little choice but to get the sledgehammer out and start smashing up the status quo. They had absolutely zero choice but to raise taxes to record levels thanks to the wreckage left behind by the last government.

They increased borrowing, they didn't cut it. They can't complain about a £22 billion black hole while at the same time borrowing even more to make that hole bigger.

 

[Matt.GC]

They increased borrowing, they didn't cut it. They can't complain about a £22 billion black hole while at the same time borrowing even more to make that hole bigger.

They've raised taxes by £40bn to cover the £22bn of unfunded commitments made by the last government, and to fund their other spending plans. They're not making it bigger, they're pledging to fill it and then raise more money for their own commitments.

Separately, they're borrowing specifically to invest. Investment that the country has been starved of since that last rotten lot came into power and destroyed the economy.

Unless you're George Osborne comparing the running of a national economy to balancing a household budget, it's a tried and tested method practiced by governments and businesses around the world every day.

I'm sorry, I don't follow? They've budgeted to fill the hole.

 

[rob666]

Absolutely catastrophic for family farms, hope they can find a way round the inheritance tax issue.

The rest of it was a mixed bag, happy that fuel duty didn't go up. Not so great for small business

Pity the poor farmers?
No, sorry, why should some families have additional rights to avoid tax on property and business that aren't available to others?
Pay your death duties through mortgaging your property, like other rich families do.
You still end up living in the big house.

Dodgy loopholes for the rich being stitched up.
Lets go back to post war tax rates for the rich...99.25% after the second world war wasn't it?
I also recall 90% top tax rates through the fifties and sixties...those were the days.

 

[shakey]

They've raised taxes by £40bn to cover the £22bn of unfunded commitments made by the last government, and to fund their other spending plans. They're not making it bigger, they're pledging to fill it and then raise more money for their own commitments.

Separately, they're borrowing specifically to invest. Investment that the country has been starved of since that last rotten lot came into power and destroyed the economy.

Unless you're George Osborne comparing the running of a national economy to balancing a household budget, it's a tried and tested method practiced by governments and businesses around the world every day.

I'm sorry, I don't follow? They've budgeted to fill the hole.

They have borrowed even more money than the last government.

Yes i get they are investing, but from what i have read the growth predictions are not great despite this extra investment.

We will just have to wait and see if this investment stimulates growth, but if it doesn't then the hole will get bigger.