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And we're one of the richest countries in the world... Makes you proud to be British. Not.

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And we're one of the richest countries in the world... Makes you proud to be British. Not.

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More than one in three children in poverty as UK deprivation hits record high

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Exclusive: Study finds almost quarter of UK population living in poverty, reaching the highest level this century

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Larry Elliott's final column as the Guardian's economics correspondent is worth a read

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Larry Elliott's final column as the Guardian's economics correspondent is worth a read

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From Thatcher to Trump and Brexit: my seven lessons learned after 28 years as Guardian economics editor

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The free market experiment has failed, free trade is out, and populism is rife but it can be defeated if the left can galvanise ideas into a credible plan

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Reeves to announce major change to fiscal rules releasing £50bn for spending

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After weeks of speculation, chancellor will tell IMF in Washington that UK’s debt measure will be redefined to permit borrowing for investment

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14 years of Tory austerity got the UK into this economic mess. Labour's solution? More austerity. You really couldn't make it up.

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14 years of Tory austerity got the UK into this economic mess. Labour's solution? More austerity. You really couldn't make it up.

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Treasury asking ministers to draw up billions of pounds of infrastructure cuts

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Exclusive: departments asked to model cuts of up to 10% despite Rachel Reeves’ vow to invest in growth

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Clear explanation of just how unlike any other country the UK is due to its profoundly divided and unequal economy.

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Clear explanation of just how unlike any other country the UK is due to its profoundly divided and unequal economy.

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Why is the UK the Richest and Poorest of Europe?

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High quality video that explains (1) Britain is in long term significant decline, and (2) why this is the case. One problem: don't listen to the nonsense at the end about national debt...

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High quality video that explains (1) Britain is in long term significant decline, and (2) why this is the case. One problem: don't listen to the nonsense at the end about national debt...

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UK’s 100 Year Economic Decline - No 1 to Failed State

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Danny Blanchflower is as credible as you get. Starmer is attempting to solve our broken economy by using the policies that broke it. This is the definition of madness.

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Danny Blanchflower is as credible as you get. Starmer is attempting to solve our broken economy by using the policies that broke it. This is the definition of madness.

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I believed Starmer and Reeves were too smart to repeat austerity. It appears I was wrong | David Blanchflower

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New governments usually come into power offering hope and a break with the past. This one is squandering the opportunity for a fresh start, says David Blanchflower

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A fabulous article that covers many different economic ideas and concepts

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A fabulous article that covers many different economic ideas and concepts

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The German problem? It’s an analogue country in a digital world | Larry Elliott

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Germany was once an economic model to emulate but its reliance on industries past their sell-by date is costing it dear

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Labour will not fix anything until they jettison the Tories' crazy fiscal rules 

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Labour will not fix anything until they jettison the Tories' crazy fiscal rules 

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‘A big ask’: can Labour fix Britain using modern supply-side economics?

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Turning to a theory championed by the US Treasury secretary, Reeves aims to upskill the workforce while boosting productivity

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If you play by Tory rules don't be surprised if people don't see any difference between you and them

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If you play by Tory rules don't be surprised if people don't see any difference between you and them

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A spectre is haunting Rachel Reeves. It has the tonsure of an abbot and a jawline kept taut by intermittent fasting, but any trace of asceticism is dispelled by its perma-smirk: a half-smile, half-jeer that taunts "I've got one over you!" It is the spectre of George Osborne.

I am not the only one to see his shade. Other commentators have observed this week how the new chancellor has copied her predecessor's trick of beaming over the threshold of No 11, before scowling like Captain Renault and claiming to be Shocked! Shocked! at the debauchery inside.

Osborne decried " thirteen years of fiscal irresponsibility" when he became chancellor in 2010; Reeves fulminates against " fourteen years of ... economic irresponsibility". Just weeks after taking office, Osborne unveiled an " emergency budget"; moving even faster, Reeves has just launched a "public spending audit". He vowed to "fix the roof"; Reeves pledges to " fix the foundations ".

Westminster may applaud this as excellent sport; for the rest of us, the problem is the rules by which it is played. Reeves is doing more than lifting tactics from a master tactician. Mr Austerity is also providing her framing and logic.

Mimicking Osborne, she attacks her opponents for " maxing out the credit card". She likens one of the richest economies in the world to families scrabbling around for grocery money: "When household budgets are stretched, families have to make difficult choices. And government needs to do the same." And where he railed against Gordon Brown's "broken Britain", she accuses Rishi Sunak of leaving a Britain that is "broke and broken".

Even when these phrases were first used in 2010, they struck me as being among the most cynical in our political lexicon: some of the wealthiest men in Britain feigning knowledge of what it's like to live on modest means to justify taking money from the poorest households.

Then a new backbencher, Reeves caught her opponents deploying these falsehoods day after day at the dispatch box. An economist, she needed no tutoring in their lies - that, unlike individuals, nation states don't retire or die; that no household hides a government's printing press or tax department in its loft conversion; that most families do borrow to invest (for what else is a mortgage?) and will spend cash to keep kids from going hungry. She saw how such analogies were flung about as paper-thin excuses for making fellow Britons poorer, for closing Sure Starts and libraries and starving hospitals and schools of funds. Perhaps the biggest growth Britain saw in the 2010s was in food banks, from 35 provided by the Trussell Trust at the start of the decade to nearly 2,900 in total today.

As Reeves argued in her Mais lecture this March, austerity did " severe damage to our social fabric and to our public services" and the Tories' failure to borrow to invest "was an act of historic negligence". Yet 14 years later, we get the same language. This week it was in aid of cutting more than £5bn from this year's public spending, in winter-fuel payments, cancelled hospitals and railway work. That won't be the last of it. In three months' time, the chancellor will be back for another £16bn, largely in tax rises.

None of this is to argue that Labour is simply offering the same old reverse-Robin Hood economics. The Tories wouldn't have agreed decent pay rises for junior doctors, nurses and teachers (although teachers are still paid 9% less than they were in 2010, so they deserve more). Here's another big, but almost unnoticed difference: in his emergency budget of 2010, Osborne made £3 of spending cuts for every £1 he clawed in tax rises. Reeves looks to be doing the inverse: a quid of spending cuts for £3 in extra taxes.

But by using the analogies and arguments of their opponents, Reeves and Keir Starmer are strapping themselves into a political straitjacket. How can they argue for more billions for public services after arguing that tax is merely a burden on hardworking families? How will they claim that public servants know best about funding schools and hospitals, after Reeves has implicitly accused Whitehall of helping Jeremy Hunt spend like a sailor on shore leave? Billions have gone down the drain on asylum seekers' accommodation and the Rwanda botch-job, and said drain was located in the Home Office, while Treasury mandarins would also have had oversight of the misspending. This is boggy terrain for a progressive politician arguing for the value of the public sector.

Osborne and David Cameron knew the value of crafting an argument and repeating it over and over. Take the two-child benefit cap: Cameron began floating the notion in speeches as far back as 2012; Osborne drafted the policy in 2015; Theresa May launched it in 2017. In 2024 what experts call " the worst social security policy ever " is still with us.

Compare this with the early signals from Labour. Britain has suffered chronic underinvestment for decades, yet first in the bin go investment projects. Public services are failing, and there remains a £20bn shortfall every year in funding them - and yet the government has foresworn raising serious money by promising no rise in any of the big taxes. The public demands change, but mainly gets a change in tone.

Continue down this road and the likely outcome is that public services continue to fail, even while taxes remain high. Labour will do some good things, but by stealth - when it thinks it can get away with it. Come the next election, Nigel Farage will be rubbing his chubby pink hands together.

There was another spectre at Reeves's shoulder this week: John Maynard Keynes. It was he who argued on the BBC in 1942 for a wholesale reimagining of Britain's bombed-out public realm. Your nearest city, he said, deserved "a local centre of refreshment and entertainment with an ample theatre, a concert hall, a dance hall, a gallery, a British restaurant, canteens, cafes and so forth. Assuredly we can afford this and much more. Anything we can actually do we can afford ... We are immeasurably richer than our predecessors," he pointed out, adding: "Is it not evident that some sophistry, some fallacy, governs our collective action if we are forced to be so much meaner than they in the embellishments of life?"

Reeves clearly knows this passage because in parliament this week she inverted his line. "If we cannot afford it, we cannot do it," she repeated, as if the future was a project to be cancelled. But Keynes's question remains the most pertinent one. After over a decade of spending cuts, of lacklustre growth, of betting the house on finance boffs and tech bros in overpriced gilets - after the failure of Osbornomics, in other words - how do we still not have enough? It's time for change - and that surely begins by putting this cynical language where it belongs - in the bin.

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The cynical spectre of Osbornomics is haunting the Labour party | Aditya Chakrabortty

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Emergency cuts, empty pockets, a 'maxed-out credit card': why is Rachel Reeves using the language and logic of austerity, asks Guardian columnist Aditya Chakrabortty

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Rachel Reeves is preparing to throw the kitchen sink at the Conservatives. To howls of predictable outrage from the opposition benches, the chancellor will tell the Commons on Monday that Labour's inheritance is far worse than anyone could have imagined, backed up by a Treasury audit showing £20bn in spending commitments left unaccounted for by the previous government.

Despite the old Tory promise to "fix the roof when the sun is shining", made way back in 2010, it has been clear for years that nothing of the sort happened. Reeves can hardly feign shock that the national debt is at the highest level since the 1960s, public services are crumbling and living standards have gone backwards.

For several years it has been clear the Tories were engaged in one of the most elaborate works of fiscal fiction ever penned, by glossing over mounting spending challenges - from a failing NHS to collapsing school buildings - in favour of promoting fantasy tax cuts. Time was always going to catch up with the cowboy builders, cutting corners with their botched roof mending, leaving Britain wringing wet.

Since the general election, Jeremy Hunt has admitted he wouldn't have had scope to cut taxes this autumn, sharply contrasting with Rishi Sunak's promises of a low-tax nirvana made only weeks earlier. Most people knew the pledges were pure bunkum anyway, desperately peddled to voters who cared more about seeing a doctor than proving the Laffer curve.

Instead, Reeves' spending audit this week is widely viewed as the chancellor paving the way for a tax-raising autumn budget. "Nothing in our manifesto is going to require us to raise taxes," Keir Starmer had told voters. But what about in the inheritance left by the Tories?

The opposition will cry duplicity. But the case for action is clear given the mess public services have been left in. Most voters were resigned to higher taxes whoever won the election, and many would welcome increases to speed the repair job.

The chancellor will also make the case that most people will be protected by manifesto promises not to raise income tax, national insurance or VAT, which bring in the majority of revenue for the exchequer. Another big earner - corporation tax - is also off limits.

Money could be found from raising taxes on capital gains, inheritances and closing pensions loopholes - measures Labour quietly explored before 4 July. On Sunday, the Resolution Foundation thinktank suggested putting up these levies could plug up to half of the £20bn fiscal hole. Reeves could also say such rises wouldn't break a promise not to increase taxes on "working people" because it would primarily target passive income.

The former Bank of England rate setter Michael Saunders reckons such a move could raise up to £25bn, with the bulk from aligning capital gains tax rates with the higher rates of income tax. However, full equalisation is something the chancellor has previously ruled out, fearing it could undermine investment in Britain.

Over the weekend it was widely reported that Reeves would instead look to cancel or delay big infrastructure projects such as the building of new roads and hospitals, arguing she has inherited "unfunded" and unrealistic schemes.

Yet after securing such a thumping majority, Labour could be far bolder to ensure tangible economic progress before 2029.

Part of Reeves' caution is rooted in a desire to maintain her "iron chancellor" image, drawing contrast with Liz Truss's reckless approach. This was politically astute before the election, helping to assuage voters' concerns about Labour that have lingered since the 2008 financial crisis.

But the time has come to move on from the fiscal rule imposed by the previous Conservative government, which Reeves has stuck to so far, requiring the national debt to be falling as a share of GDP in the fifth year of forecasts.

It isn't as though this would be without precedent. The Tories changed the fiscal rules seven times since 2010 - the shortest lifespan out of 35 advanced economies - to suit political needs, and were only meeting the current ones with fantasy spending assumptions.

Growing numbers of top economists see the current rule as an albatross holding Britain back, including the former Bank of England chief economist Andy Haldane and the director of the National Institute of Economic and Social Research, Jagjit Chadha.

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Some are concerned that borrowing with abandon would anger the City gods, risking a repeat of the mini financial crisis triggered by Truss's not-so-mini budget. But much also depends on circumstances.

Britain still confronts an awkward reality of high levels of national debt and lacklustre economic growth. But Starmer's administration has significantly more goodwill with the money-changers than Truss's wrecking mob, having returned a sense of grownup government to Britain.

The City not only hated Truss's disregard for the Bank of England, Treasury, Office for Budget Responsibility and the International Monetary Fund. Its top economists knew her £45bn of tax cuts for the rich would have no meaningful impact on growth, seeing it instead as costly inequality-stoking ideology.

Should Labour wish to borrow to fix public services and boost investment in productivity-enhancing infrastructure, it is more than likely the City would take a different view. Most economists know the UK's biggest problems are with its diminished supply capacity. Borrowing today to support growth tomorrow would therefore be welcomed.

For starters, Reeves could change the fiscal rules to exclude losses on the Bank's quantitative easing programme, which Barclays estimates could add £20bn to the government's headroom.

However, the Niesr thinktank proposes a more comprehensive rethink, including reforms to discount public investment from the current targets - helping to pave the way for more spending on transport, housing and the transition to net zero.

Earlier this year, the chancellor showed some acknowledgment that change was required, using her Mais lecture to say she would get the OBR to report on the long-term benefits of capital spending decisions, helping to make the case for borrowing to invest.

But the chancellor should go further. Sticking to an arbitrary straitjacket is unnecessary and could throttle the kind of investment on which stronger economic growth and higher living standards depend.

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Fear of a Truss repeat should not deter Reeves from rewriting spending rules | Richard Partington

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Labour has enough goodwill with City to increase debt if the money is used for key infrastructure

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Krugman is probably the most influential economist in the world. I don't always agree with him, but you really need to read and fully understand this article.

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Krugman is probably the most influential economist in the world. I don't always agree with him, but you really need to read and fully understand this article.

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Composite: Guardian Design Team/Getty

Unless the polls are wildly inaccurate, the Conservative party is heading towards a catastrophic defeat in the coming election.

All across the rich world, voters are angry at their governments - they blame politicians for a burst of inflation that happened almost everywhere and is now subsiding almost everywhere, including in the UK. But the Conservatives deserve defeat more than most: they took power 14 years ago promising to deliver responsible policies and economic success. Instead they have presided over economic stagnation and a collapse in public services.

Why has Conservative governance gone so badly? It is natural to blame Brexit, which did indeed increase trade frictions and therefore surely had a negative effect on British real income. However, Brexit has not had the disastrous effects some predicted, and has somewhat perversely led to a rise rather than a fall in immigration, especially of the highly skilled.

In fact, the roots of Britain's poor economic performance are older and deeper than Brexit. Though many bad decisions undoubtedly contributed, one central cause was the way David Cameron and George Osborne gratuitously embraced fiscal austerity when they came to power after the global financial crisis.

At the time, this looked like an obvious macroeconomic error; more than a decade later, it has become a social and political catastrophe.

Let us recall the circumstances when the Conservatives took power. The financial crisis had produced a severe global recession; by 2010 the world economy was growing again, but all major economies, Britain included, were still operating far below capacity and had high unemployment.

Textbook economics tells us that when unemployment is high and inflation is low, governments should try to stimulate demand with reduced interest rates and fiscal deficits. Interest cuts were not an option because rates were already close to zero, so the indicated policy was fiscal stimulus.

Yet the Cameron government chose to do the opposite, pulling back fiscal support from an economy that still needed it badly. Britain was not the only nation turning to fiscal austerity in the face of high unemployment - Greece engaged in savage austerity, while Portugal, Spain, Italy and Ireland made large cuts, and fiscal policy in the US also turned contractionary.

What made the British case unique was that it was almost entirely an unforced error. Southern European austerity was a response to pressure from the bond markets: Greece was in effect cut off from private markets, while other nations faced sharply increased borrowing costs, becoming dependent on official lenders who insisted on budget cuts as a condition for loans. Bond buyers never lost faith in the US, but after 2010 Barack Obama faced a deeply hostile Congress, which in effect blackmailed him into spending cuts by threatening to provoke a government default.

While Britain had low borrowing costs like the US, its government was not divided. The Cameron executive could have chosen to maintain spending. Why did it turn to austerity?

Part of the answer is that policymakers were genuinely spooked by the sudden emergence of the crisis in Greece. Until Greece hit the wall, debt crises were generally thought of as a problem that happened only in poorer nations. It is understandable that many observers, at least initially, wondered if the Greek crisis was the leading edge of a broader attack by bond vigilantes.

But UK debt was clearly far smaller relative to the economy than Greece's - and it became obvious early on that contagion from the Greek debt crisis was restricted to eurozone nations. So there was no reason to continue believing that the UK risked "becoming Greece", as many politicians recklessly claimed at the time.

In fact, it soon became clear that even the eurozone crisis was more a matter of market panic than one of fundamentally unsustainable levels of debt. As the economist Paul De Grauwe has said, nations with debts in another country's currency can suffer something similar to a bank run: panicked investors seeking to pull out their funds can cause a government to run out of cash, forcing it into default. Nations that borrow in their own currency are not vulnerable to such a self-fulfilling crisis, because they can in effect print money in a crunch.

This analysis was validated in 2012 when Mario Draghi, the president of the European Central Bank (ECB), said three words: "Whatever it takes." This was taken to mean that the ECB would, if necessary, supply cash to governments facing a market panic. And suddenly the euro "debt" crisis faded away, with investors demanding much lower interest rates on the debt of Italy, Spain and so on.

Since Britain has not adopted the euro and had debts in its own currency, it was not vulnerable to this kind of cash crisis.

The bottom line is that there was no pressing economic need to slash spending in the face of high unemployment. I would argue that the best way to explain Britain's austerity is not economic but sociological.

Sociology? I used to talk about the push for austerity being led by Very Serious People (a term I borrowed from the blogger Duncan Black). This was not really a joke: if you spend any time consorting with members of the global policy elite, you realise that many of them are driven primarily by the desire to appear "serious". In economic terms, this usually means pushing policies that will cause significant hardship - to other people, of course.

The obsession with perceived seriousness reflects peer pressure, but in some ways also reflects personal careerism. Officials in democratic nations cannot expect to remain in office for more than a few years. What do they do next? If they have lobbied for "serious" policies, they can have a bright future giving speeches at Davos about the importance of making "tough choices". Or they might even end up employed by the financial industry to lobby their former colleagues - where a reputation for "seriousness" is a prerequisite, no matter how much damage those policies have caused. (Indeed, Osborne has done both.)

Sociology partly explains the Conservative embrace of austerity. But there was also political calculation. Denunciations of debt and deficits often go hand in hand with demands for smaller government, in particular a shrunken welfare state. In effect, politicians whose real goal is to move policy to the right exploit fear of deficits to push an agenda that would be deeply unpopular if stated openly. The Oxford economist Simon Wren-Lewis calls this the "deficit deceit" hypothesis. The deceit aspect is especially obvious in the US, where Republican leaders routinely denounce deficits while pushing for budget-busting tax cuts. But there is every reason to believe that the same kind of cynicism played an important role in UK austerity.

It turns out, however, that exploiting debt fears to engineer cuts in public spending tends not to work out quite the way that small-government advocates hope.

What serious conservatives - they do exist - want is a less generous social safety net, with fewer income transfers to households, while governments concentrate on those functions that only government can perform. I do not share that desire, but never mind. What is important is that voters do not share that desire: cutting direct financial aid is deeply unpopular.

What does this have to do with deficit deceit? Even when a government manages to build support for spending cuts by scaring the public about debt and deficits, it generally finds itself shying away from spending cuts that will directly affect families' incomes. Instead, it tries to save money by shortchanging public investment and public services, a strategy that seems preferable because the consequences of these spending cuts may not be all that visible in the short run.

But the effects of inadequate public investment cumulate over time, so that a fiscal strategy advertised as an exercise in responsibility ends up being deeply irresponsible, leading to crumbling infrastructure and deteriorating public services. This is how Cameron and Osborne's error has compounded over the past decade.

Consider the NHS. I am clearly not an expert on the system, and I am sure that the NHS's problems have multiple causes. But it is obvious to an outsider that direct public provision of healthcare, while it has major advantages, creates a special form of political vulnerability.

Compare the NHS with single-payer systems - including Medicare, which serves older Americans - in which the government pays the bills but does not employ the doctors or operate the hospitals. An attempt to save money by underfunding Medicare would provoke an immediate public outcry - in fact, false rumours of such a move created an outcry in 2010. But a government can underfund the NHS for years before the consequences become obvious to voters, and by that time the crisis can be very hard to fix.

To sum up: a decade ago, the main critique of austerity was macroeconomic - it was holding back recovery from the severe recession that followed the global financial crisis. And it did. But that was not the end of the story. Austerity also gradually undermined public services, including healthcare.

What will a Labour government do to reverse this damage? There are two reasons to worry it will fall short.

First, the era of Conservative austerity coincided with an era of low interest rates and substantial excess capacity, exactly the conditions under which Britain should have been investing in its future. The current environment is much less favourable.

Second, Labour's stated plans lack any ambition to reverse austerity. In the US, the Biden administration came in with bold plans and managed to accomplish a significant fraction of them despite having only a razor-thin congressional majority. I am not hearing anything comparable from Labour, even though Keir Starmer seems on course to have political capital beyond the wildest dreams of US progressives.

I hope to be proved wrong. But right now it looks as though the shadow of austerity policies adopted in error 14 years ago will continue to darken Britain's prospects for many years to come.

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How the 'unforced error' of austerity wrecked Britain

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The Tories' cuts were an obvious economic blunder, but their disastrous consequences are still piling up - and there is little hope Labour will reverse the damage

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GDP really isn't fit for purpose. We need a better way of judging a successful economy 

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GDP really isn't fit for purpose. We need a better way of judging a successful economy 

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"Great news this morning!" beamed Rishi Sunak on Wednesday. Not every release from the Office for National Statistics gets its own prime ministerial post on Instagram, but inflation falling to 2% was, the Tory leader claimed, a personal victory. When he moved into No 10, it was 11%, he reminded voters. "But we took bold action, we stuck to a clear plan and that's why the economy has turned a corner."

Not so fast, Mr Sunak. The prices of food and petrol remain about 25% higher than two years ago. More than one in five households say that they are struggling to pay their bills or to make ends meet. The cost of living crisis was always much bigger than a number on the consumer price index: it was a catch-all term, taking in everything from a punitive welfare system and poorly paid and insecure work to rising expenses. Millions of households were in a cost of living crisis long before it made the front pages; long after the term falls out of fashion, they will still be in one.

Much of modern politics runs like this: taking a big and complex issue and squeezing it down to fit into a single number that serves as a target. Perhaps the most glaring example is the fixation on GDP growth. Last month, just hours after the ONS announced that the UK's national income had grown 0.6% in the first quarter of the year, Mr Sunak proclaimed that " things are starting to feel better ". Over this election campaign, Labour's Sir Keir Starmer and Rachel Reeves have made much of how they will boost GDP growth.

This is an odd strategy, politically and economically. For one thing, surveys show that GDP means very little to most of the British public. In one study from 2020, respondents confused GDP with "the exchange rate (due to the similarity to GBP) and even general data protection regulation (due to the similarity to GDPR)". Rather than GDP, previous generations of politicians measured economic success by living standards or even industrial production. As the economic historian Jim Tomlinson observed in a recent essay, Liz Truss stands out for her focus on GDP growth. However great the disaster of Trussonomics, he writes, "both Conservatives and Labour accepted her view that growth should now be central to the political agenda".

Second, most of the benefits from economic growth have not been shared out. In their book When Nothing Works, the Foundational Economy collective of researchers show that of all the growth in take-home pay between 1999 and 2020, the 10% highest earners scooped 25%, while the bottom 10% got only 3%. This kind of disparity led to the Brexit heckle of " that's your bloody GDP, not ours". Finally, history shows that over the past 50 years, almost every government has overseen lower economic growth than its predecessor.

So GDP growth is something that the public doesn't understand, and enjoys little of. Far better would be for politicians and the media to look at a range of measures of economic health and social benefit. The UN publishes a human development index that looks at life expectancy and schooling as well as income. In Britain, such an index could take in healthy life expectancy and security of housing, as well as decent jobs. Living standards are more than one measure and more than one number. Our discussion should reflect that breadth.

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The Guardian view on GDP: a poor measure of what matters in Britain's economy | Editorial

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Editorial: The public doesn't understand how economic growth is measured, let alone enjoy much of it. So why is it central to this election?

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Investment in the UK the lowest of comparable countries in 24 of the past 30 years. Dire.

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Investment in the UK the lowest of comparable countries in 24 of the past 30 years. Dire.

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Investment in the UK has trailed other G7 countries including the US and Germany since the mid-1990s, according to a report that urges Labour and the Conservatives to reverse planned cuts to investment or risk long-term damage to economic growth.

The Institute for Public Policy Research (IPPR) thinktank found the UK was bottom of the G7 league for investment in 24 out of the last 30 years, using figures from the Organisation for Economic Co-operation and Development (OECD).

A lack of spending by UK companies on technology and innovation over the last three decades was mostly to blame for the underperformance, the OECD figures show, while public sector investment has also ranked below the G7 average.

The IPPR said latest comparable data for 2022 showed investment by private companies was lower in the UK than any other G7 country for the third year in a row. The analysis also showed the UK ranked 28th for business investment out of 31 OECD countries with Slovenia, Latvia and Hungary attracting higher levels in relation to the size of their economies.

Private investment includes spending in factories, plant and equipment, and technology. The G7 comprises the UK, US, France, Germany, Italy, Japan and Canada, while the OECD has 38 member countries.

A lack of investment is widely blamed for the UK's poor productivity record and low levels of economic growth.

A report last year by the National Infrastructure Commission said investments of about £30bn a year from UK taxpayers, and £40bn to £50bn a year from the private sector, would result in savings to the average household of at least £1,000 a year, higher economic productivity, and a better quality of life in the future.

The IPPR report said: "The different trajectories of France, with the second-highest level of private investment in the G7, and the UK show that the UK's poor performance was far from inevitable.

"In 2005, the two countries had the same level of business investment - about 11.35% of GDP. In the most recent data (2022), France increased its level by 3.4 percentage points, while the UK's now stands almost 1 percentage point lower."

Among OECD countries, only Greece, Luxembourg and Poland were ranked lower for business investment than the UK over the last three years.

The thinktank said it was concerned cuts to public investment were forecast whichever of the two main parties wins the general election, though Labour plans to reduce budgets by less than the Conservatives.

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"Current Conservative policies imply significant cuts to public investment after the election. Even though Labour promises to invest £4.7bn more per year than the current government through its green prosperity plan, this still implies an overall fall in investment."

The figures show the turning point was the period after the early 1990s recession, which was followed by a severe property crash and Black Wednesday, when Britain was forced to hurriedly exit from the EU's exchange rate mechanism. Ever since, growth in private sector investment has tracked below all the G7 countries except in three of the 24 years.

The IPPR said the next UK government should "lead from the front by designing and delivering high-quality public investments to crowd in private sector funds, especially into industries of the future like electric vehicles and renewable energy".

It added: "Likewise public sector investments in education, infrastructure and healthcare are needed to create the right conditions for growth."

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Investment in UK has trailed other G7 countries since mid-1990s, IPPR says

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Institute for Public Policy Research urges Labour and Conservatives to reverse planned cuts

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International economics: World Bank says protectionism is slowing growth & driving global poverty 

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International economics: World Bank says protectionism is slowing growth & driving global poverty 

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A new era of protectionism is leading to slower global growth and hindering attempts to eradicate poverty, the World Bank has warned.

The Washington-based institution said 80% of the world's population - more than 6 billion people - were living in countries where growth would be slower in the next three years than in the pre-Covid decade.

In its half-yearly global economic prospects, the World Bank said the model of international cooperation that had allowed the poorest countries to close the gap with the wealthiest had fractured.

Even though the global economy had avoided recession, it had stabilised at a lower level than in the years leading up to the start of the pandemic.

Indermit Gill, the World Bank's chief economist, said policymakers had cause to celebrate a "soft landing" despite the steepest rise in global interest rates since the 1980s.

"But they would be wise to keep their eye on the ball: growth rates remain too slow for progress. Without stronger international cooperation and a concerted push for policies that advance shared prosperity, the world could become stuck in the slow lane."

The bank's forecasts show global growth holding steady at 2.6% in 2024 before edging up to an average of 2.7% in 2025-26. In the pre-Covid decade, growth averaged 3.1%.

Gill said progress towards prosperity occurred when governments put in place policies that fostered productivity, entrepreneurship and innovation - and when they did so while cooperating.

"That was the model that flourished after the fall of the Berlin Wall. By encouraging the flow of goods, capital, and ideas across borders, it ushered in an extraordinary era of global prosperity: a span of roughly 25 years when the incomes of the poorest nations, on average, were catching up with those of the wealthiest, and when the world came within striking distance of ending extreme poverty," he said.

But Gill added its global economic prospects provided a "sobering assessment" of how the model of international cooperation had been fracturing, pointing to how trade measures designed to restrain cross-border commercial flows were growing at a historic pace.

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"Four years after the upheavals caused by the pandemic, conflicts, inflation, and monetary tightening, it appears that global economic growth is steadying," Gill said.

"However, growth is at lower levels than before 2020. Prospects for the world's poorest economies are even more worrisome. They face punishing levels of debt service, constricting trade possibilities, and costly climate events. Developing economies will have to find ways to encourage private investment, reduce public debt, and improve education, health, and basic infrastructure."

Gill said the world's 75 poorest countries, eligible for grants or cheap loans from the bank, would not be able to make the necessary progress without international support.

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Protectionism is slowing growth and entrenching poverty, says World Bank

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International cooperation that allowed poorest countries to close gap with wealthiest has fractured, says report

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Adrian Ramsay: GDP focus not way to fairer society, says Greens co-leader

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This is one of many reasons I'll be voting for the Green Party in the general election

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This is one of many reasons I'll be voting for the Green Party in the general election

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The co-leader of the Green Party has told the BBC that finding different ways to measure economic success would help build a fairer society.
The party has long argued that economic growth drives over-exploitation of resources and should not be the default aim for governments.

Adrian Ramsay said relying on gross domestic product (GDP) to judge the state of the economy was a "blunt instrument".

He added that a "wider range of economic measures" should be reflected when deciding what policies to pursue.

It marks a contrast with other political parties, which usually put their plans to boost economic growth front and centre in election campaigns.

Speaking on the BBC's Sunday with Laura Kuenssberg, Mr Ramsay defended his party's approach, adding they had a "strong message about the sort of economy we want to see".

"The principle for Greens is that just using GDP as a measure of economic success is a blunt instrument," he added.

He added that the statistic "doesn't tell us about how unequal our society is," or whether public services are working, or measure impacts on the environment.

"We need to have a wider range of economic measures which are about health and happiness, prosperity, jobs, public services," he added.

He added that policies such as its proposed tax on the wealthiest 1% would help fund improvements to the NHS.

'Consumerism'

The UK's main GDP measure is produced by the Office of National Statistics (ONS) and tries to measure the overall size of the economy.

It plays an important role in deciding tax and spending decisions, because the government relies on official forecasts for GDP to work out which policies are affordable.

It is also expected to play a major role in the UK's general election campaign.

Rishi Sunak cited economic growth figures in his speech announcing the poll, whilst Labour has made achieving the "highest sustained growth" in the G7 club of wealthy nations one of its five missions for power.

In recent years, a number of alternative measures have been developed that try to capture other aspects of the economy.

Since 2010, the ONS has also measured well-being, external alongside economic growth. This assesses health, relationships, education and skills, as well as people's personal finances and the environment.

However, critics say GDP still occupies too important a role in debates about the economy.

In documents setting out their philosophy, the Greens say it promotes a focus on "consumerism" and other indicators would better capture the extent to which economic policies protect nature and improve well-being.

The Green Party of England and Wales is separate to the Scottish Greens, which stands candidates in Scotland.

It is aiming to run in every English and Welsh seat for the first time, requiring it to pick 103 more candidates than at the last election in 2019.

However, it is expected to focus on a small number of target seats, including the new seat of Waveney Valley, where Mr Ramsay is the party's candidate.

Other targets include the new seat of Bristol Central, North Herefordshire, and Brighton Pavilion, where the Greens only current MP, Caroline Lucas, is standing down.

A full list of candidates will be available on the BBC website after nominations close on Friday 7 June.

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Adrian Ramsay: GDP focus not way to fairer society, says Greens co-leader

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Adrian Ramsay says economic growth statistics do not capture how well the economy works for people.

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Inflation in the UK is about to tumble. But how far - and for how long?

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Inflation is going to plummet down this month. As I said it would. Entirely inevitable. No shit, Sherlock.

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Inflation is going to plummet down this month. As I said it would. Entirely inevitable. No shit, Sherlock.

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Jeremy Hunt knows it. Rachel Reeves knows it too. The Office for National Statistics will come bearing good news on Wednesday when it releases the latest inflation figures. The only real question is just how good the news will be.

In the year to March, annual inflation as measured by the consumer prices index stood at 3.2%. The figure for April will be a lot lower and if Hunt gets lucky it might even fall as low as the government's 2% target.

The sharp decline is mainly due to movements in electricity and gas prices. Domestic energy bills rose in April 2023 but have fallen by 12% this year for most households. The energy price cap was set at £1,690 last month compared with £2,500 a year earlier.

Base effects - in other words, what happened a year ago - coupled with cheaper heating and lighting this year means it is inevitable the inflation rate will tumble.

Hunt is a seasoned enough politician to avoid claiming total victory when the figures come out. The chancellor is aware that voters have seen prices rise by 20% in less than three years and may be unwilling to accept that the cost of living crisis is over.

And this is not "game over" by any means. The Bank of England expects less favourable base effects later this year to push the annual inflation rate back up to about 2.5% in the second half of 2024 - the period when the prime minister seems likely to call a general election.

But even with the additional caveat that prices are not actually falling but simply rising at a slower rate, the position is a lot more comfortable than it was for Hunt when he was appointed by Liz Truss to succeed Kwasi Kwarteng as chancellor in October 2022. In that month, inflation hit 11.1% - its highest level in four decades.

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The focus is not the headline rate - which is influenced by global prices - but on inflation generated by the domestic economy

Double-digit inflation conjured up unhappy memories of the mid-1970s, when inflation soared to a postwar high of more than 25% and eventually led to the need for a bailout from the International Monetary Fund - assistance that came with strings attached.

By coincidence, an IMF team has been in the UK for the past two weeks conducting its annual health check on the economy. Unlike in 1976, the fund will not be demanding unpopular spending cuts, and the findings of this so-called article IV consultation will prove helpful to Hunt if it finds that the UK is through the worst of the cost of living crisis. But the study may contain a sting in the tail if it also concludes that any further pre-election tax cuts will be followed by post-election tax increases or fresh austerity measures.

In the short term, though, the focus will be on what lower inflation means for interest rates. Having raised the official cost of borrowing at 14 successive meetings of its monetary policy committee between December 2021 and August 2023, Threadneedle Street has left rates unchanged since. The reason for that is that a majority of MPC members want to be sure that inflation has truly been beaten.

The focus is not the headline rate of inflation - which is influenced by the global prices of energy and food - but on inflation generated by the domestic economy. As a proxy for that, the MPC watches services-sector inflation, which is currently running at 6%. While the headline inflation number will be good on Wednesday, it will be the small print that really counts.

Susannah Streeter, head of money and markets at Hargreaves Lansdown, said: "If inflation hits the sweet spot, hopes will shoot higher that a rate cut will come in June. But it would be wise not to reach for the bunting and go splashing the celebratory cash even if the longed-for 2% target is reached.

"Bank of England policymakers have stressed that it will need confidence that inflation will consistently stay at or near the target before they start reducing borrowing costs."

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Inflation in the UK is about to tumble. But how far - and for how long?

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The chancellor will have good news to pass on this week. But he knows the cost of living crisis may not be over yet

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A really interesting thought experiment: if we taxed the rich significantly and burnt the money, what effect, if any would this have for "normal" people?

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A really interesting thought experiment: if we taxed the rich significantly and burnt the money, what effect, if any would this have for "normal" people?

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The Guardian view on rethinking economics: a discipline in disarray holds too much sway in the UK | Editorial

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The Guardian view on rethinking economics: a discipline in disarray holds too much sway in the UK | Editorial

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Editorial: Gordon Brown challenged Conservative ideas to fix the economy. His successors unfortunately will not

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World's billionaires should pay minimum 2% wealth tax, say G20 ministers

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A much needed fiscal policy that will help reduce inequality 

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A much needed fiscal policy that will help reduce inequality 

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The world's 3,000 billionaires should pay a minimum 2% tax on their fast-growing wealth to raise £250bn a year for the global fight against poverty, inequality and global heating, ministers from four leading economies have suggested.

In a sign of growing international support for a levy on the super-rich, Brazil, Germany, South Africa and Spain say a 2% tax would reduce inequality and raise much-needed public funds after the economic shocks of the pandemic, the climate crisis and military conflicts in Europe and the Middle East.

They are calling for more countries to join their campaign, saying the annual sum raised would be enough to cover the estimated cost of damage caused by all of last year's extreme weather events.

"It is time that the international community gets serious about tackling inequality and financing global public goods," the ministers say in a Guardian comment piece.

"One of the key instruments that governments have for promoting more equality is tax policy. Not only does it have the potential to increase the fiscal space governments have to invest in social protection, education and climate protection. Designed in a progressive way, it also ensures that everyone in society contributes to the common good in line with their ability to pay. A fair share contribution enhances social welfare."

Brazil chairs the G20 group of leading developed and developing countries and put a billionaire tax on the agenda at a meeting of finance ministers earlier this year.

The French economist Daniel Zucman is now fleshing out the technical details of a plan that will again be discussed by the G20 in June. France has indicated support for a wealth tax and Brazil has been encouraged that the US, while not backing a global wealth tax, did not oppose it.

Zucman said: "Billionaires have the lowest effective tax rate of any social group. Having people with the highest ability to pay tax paying the least - I don't think anybody supports that."

Research from Oxfam published this year found that the boom in asset prices during and after the Covid pandemic meant billionaires were $3.3tn - or 34% - wealthier at the end of 2023 than they were in 2020. Meanwhile, a study from the World Bank showed that the pandemic had brought poverty reduction to a halt.

The opinion piece, signed by ministers from two of the largest European economies - Germany and Spain - and two of the largest emerging economies - Brazil and South Africa - claims a levy on the super rich is a necessary third pillar to complement the negotiations on the taxation of the digital economy and the introduction earlier this year of a minimum corporate tax of 15% for multinationals.

"The tax could be designed as a minimum levy equivalent to 2% of the wealth of the super-rich. It would not apply to billionaires who already contribute a fair share in income taxes. Those, however, who manage to avoid paying income tax would be obliged to contribute more towards the common good," the ministers say.

"Persisting loopholes in the system imply that high-net-worth individuals can minimise their income taxes. Global billionaires pay only the equivalent of up to 0.5% of their wealth in personal income tax. It is crucial to ensure that our tax systems provide certainty, sufficient revenues, and treat all of our citizens fairly."

The ministers say there would need to be steps to counter the use of tax havens. The levy would be designed to prevent billionaires who choose to live in Monaco or Jersey, for example, but make their money in larger economies such as the UK or France, from reducing their tax bills below a global agreed minimum. If one country did not impose the minimum tax, another country could claim the income.

"Of course, the argument that billionaires can easily shift their fortunes to low-tax jurisdictions and thus avoid the levy is a strong one. And this is why such a tax reform belongs on the agenda of the G20. International cooperation and global agreements are key to making such tax effective. What the international community managed to do with the global minimum tax on multinational companies, it can do with billionaires," the ministers say.

Zucman said there was overwhelming public support for this proposal, with opinion polls showing up to 80% of voters in favour. Even so, the economist said he was prepared for stiff resistance.

"I don't want to be naive. I know the super-rich will fight," he said. "They have a hatred of taxes on wealth. They will lobby governments. They will use the media they own."

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World's billionaires should pay minimum 2% wealth tax, say G20 ministers

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Brazil, Germany, Spain and South Africa sign motion for fairer tax system to deliver £250bn a year extra to fight poverty and climate crisis

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A look at MMT and the question: can sovereign governments ever run out of money?

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A look at MMT and the question: can sovereign governments ever run out of money?

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In the UK and US, political parties are promising spending splurges to appease voters after a decade of squeezes.

Whether it's more nurses, frozen tax promises, free broadband internet or more social housing in the UK; or tax cuts and green energy investments in America, public spending is set to surge.

This sudden abandonment of fiscal rectitude comes amid the rise in prominence of a way of thinking about money, spending and the economy - Modern Monetary Theory (MMT).

According to its key architect, US businessman Warren Mosler, it is based on a simple idea - that countries that issue their own currencies can never run out of money in the same way a business or person can.

This is important to understand because it means when someone says the government can't do something for want of money, that's simply not applicable, says Mr Mosler. A government can no more run out of money than a football stadium can run out of goals scored.

The theory has become popular among economists and political thinkers, particularly on the left - such as rising star of the US Democrats Alexandria Ocasio-Cortez.

Using MMT as a basis, they argue that countries should be able to borrow and spend more freely, and not be as concerned by things like the national debt or the deficit - the difference between a government's income and outgoings.

The idea is fiercely contested.

"I'm not a fan of MMT - not at all," billionaire investor Warren Buffett told Bloomberg News in March.

MMT is "wrong" Federal Reserve chairman Jerome Powell said a month before that.

But MMTers say they do believe in being fiscally responsible, and that critics misunderstand.

'Spend and tax'

The story starts with any government's desire to fund public services, which it does through taxation. Citizens need money to pay that tax, and they work to get it, Mr Mosler says.

However, rather than this money appearing from thin air, he says, "all the funds to pay taxes come only from government or its agents" because they will have printed or minted it.

The government will also have had to spend that newly issued cash in the first place, so it can find its way into the economy and the public can get their hands on it.

"Every member of parliament will tell you we have to get money first by taxing to be able to spend. And what we don't get by taxing we have to borrow in the market and pay interest," Mr Mosler says. "It's not true."

As such, he says the tax-and-spend orthodoxy embraced by most governments should be rethought. What's actually going on is tax liabilities come first, then spending, and then payment of taxes, which paints guiding economic principles such as the debt and deficit in entirely different lights.

MMT also challenges the long held assumption that governments need to borrow money from international markets to get what they need. Mr Mosler calls the idea "an anachronism".

Critics see such ideas as far too radical, saying they would be damaging and lead to sky-high inflation. But similar principles have actually played a huge role in stabilising the global economy since the financial crisis of 2008.

Who is Warren Mosler?

Mr Mosler started off his financial career in banking in 1973 collecting loans at the Savings Bank of Manchester in Connecticut. As well as managing money, he has also built supercars and a ferry. He sold his car businesses and a bank he owned in 2013.

He operates from his base in the US Virgin islands.

Central banks have pumped some $11tn into the world's financial system by buying up government bonds and corporate debt through what is known as quantitative easing (QE).

During that time inflation has remained subdued. Among the G7 group of large economies, Canada currently has the largest annual price increases at a manageable 1.9%.

And while MMTers argue QE has driven up asset prices, worsening inequality, they believe this could have been remedied by more generous government spending - something they believe is necessary to help economies in crisis recover.

This has led some to liken MMT to the work of late British economist John Maynard Keynes, who also argued that economies in crisis should spend more in order to revive growth.

Now, after a decade of cuts and austerity, politicians of all stripes seem content to spend, and discussions about MMT have entered the spotlight.

In the UK, Conservative and Labour politicians have promised hundreds of billions of pounds of extra spending ahead of the 12 December general election. In the US, public debt hit a record $22trn in February following hefty tax cuts brought in by the Trump administration.

But Jo Michell, associate professor in economics at the University of the West of England, Bristol says fans of the theory - many of whom share their views online - can be quite uncompromising.

"There's a very vocal online movement to really push MMT and any criticism is very strongly acted against," he says. "It does become quite unpleasant."

There are more technical criticisms of the theory too. Some argue that if governments simply print money to fulfil their needs, then interest rates will languish around zero - something that has been a by-product of QE.

As a result, anyone trying to save will find it extremely difficult to grow their money.

"What does that do to your pension fund system, insurance, banking, the entire basis of the financial system?" asks Prof Michell.

Economist Frances Coppola also argues that by focusing on fiscal - spending - policy and ignoring interest rates, MMTers are making a mistake.

"My view is you need both monetary and fiscal policy and you should not hobble either," she says.

Despite the reservations, MMT is winning some grudging respect in the financial services sector.

"Conventional thinkers are wrong to dismiss MMT out of hand. But we must consider long and hard the institutional framework we need if the central bank is going to provide the financing for a big increase in government spending," said Jamie Dannhauser, economist at UK money manager Ruffer.

He worries that by going down a path of high government spending - backed up by printed money - we may not have the ability to "press the brake again" if there is a crisis.

He also believes having politicians in charge of printing money to finance government spending is a foolish idea. A body independent of government, whose sole focus is the national interest, has to have the power to reverse the economic thrusters, he says.

Politicians, focused on the short-term electoral cycle, cannot be counted on to do this, he adds.

The debates over MMT look set to rage on as more prominent people come out to back it.

Ms Ocasio-Cortez told Business Insider in January, MMT "absolutely" needs to be "a larger part of our conversation".

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In the UK and US, political parties are promising spending splurges. Is more borrowing sensible?

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Macroeconomists, meet Hank: how new models are changing the discipline

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This is A*/A complex, but is a great "question the assumptions" form of macro evaluation. Ask me if you need it explaining 

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This is A*/A complex, but is a great "question the assumptions" form of macro evaluation. Ask me if you need it explaining 

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Macroeconomists, meet Hank: how new models are changing the discipline

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Incorporating inequality into the field is an uphill battle

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Margaret Thatcher set Britain's decline in motion - so why can't politics exorcise her ghost? | Andy Beckett

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An old spectre is haunting Britain yet again - the spectre of Thatcherism. Although she became Tory leader almost half a century ago and was sacked by her party in 1990, since when this country has changed hugely, Margaret Thatcher still obsesses the Tories. Rishi Sunak says he is a Thatcherite, and so do almost all those jostling to replace him: Kemi Badenoch, Penny Mordaunt, Priti Patel, James Cleverly, Grant Shapps and Suella Braverman.

Most other Conservative MPs remain Thatcherite in their basic assumptions: about the need to deregulate markets, regulate the lives of the poor, pursue aggressively nationalistic policies abroad and fight domestic culture wars. This outlook is shared by many Tory members and voters, most rightwing thinktanks and almost the entire rightwing media. Meanwhile the party's strengthening rival, Reform UK, sounds increasingly Thatcherite, campaigning against "record taxes, wasteful government spending and nanny state regulations". Arguably, her hegemony is more complete now in conservative parts of Britain than it ever was during her contentious leadership, about which the right was often divided.

Even more strikingly, her iconic status is also being sustained by Labour's most senior figures. Last November, the shadow chancellor, Rachel Reeves, said: "My generation of women, of course we have been influenced by her." In December, Keir Starmer said that she "sought to drag Britain out of its stupor by setting loose our natural entrepreneurialism". Last month, the shadow foreign secretary, David Lammy, said she "was a visionary leader for the UK - no doubt about it".

These homages from the party she tried so hard to destroy are often justified by the need to appeal to Tory voters and journalists in the run-up to the election. It's a familiar, if humiliating, Labour ritual. Whether this also drives leftwing voters away from the party is a question that neither its current leadership nor the media show much interest in asking.

Even when Labour has a leader with less time for pro-Tory political conventions - as it did with Jeremy Corbyn and to a lesser extent Ed Miliband - a respect for Thatcher among some on the left remains. "She was a conviction politician, and I think conviction really matters," Miliband said in 2012. In 2019, the radical economist Christine Berry wrote an article headlined: "Thatcher had a battle plan for her economic revolution ... the left needs one, too."

Whatever your politics, it's perfectly rational to see Thatcher as a key figure: one of few modern prime ministers to profoundly change the country. What's much less rational, however, is to revere her with few reservations, when the wreckage left by her government is still piling up all around us.

From the crisis at Thames Water, a company created by her naively pro-monopoly privatisation programme, to the precarity and spiralling cost of renting a home - both products of her curtailment of tenants' rights and council housing - her policies' flaws, limits and unforeseen consequences are ever more apparent. Less directly but just as damagingly, her hostility to the EU, to taxing the rich properly, and to most state services except the military, set this country on a path towards today's European isolation and public and private poverty. Thatcher was elected prime minister largely because she promised to reverse national decline, an approach Starmer is trying to emulate. But along with the Tory successors she so influenced, she can now be seen as having caused such a decline instead.

Why is this so rarely said? The passage of time has certainly helped her reputation. The diminishing amount that is widely remembered about her reign - her victories over the miners and the Argentinians, her electoral landslides, economic boom and commanding manner - has fixed her in the public mind as a divisive but essentially successful prime minister. Her government's failures and ineffective periods, for instance, the terrible recession that her policies created in the early 80s, or her vain attempts to reverse progress towards racial and sexual equality through reactionary legislation, are largely forgotten. Instead, she has become a free-floating signifier of strong leadership, untethered from much of her actual record.

If this country were not so influenced by rightwing myths, the romanticisation of her premiership would matter less. It might just be something for academics to argue about. Yet instead we have a national narrative, shaped by films, documentaries and popular histories, as well as by parliament and the press, that treats Labour premiers with long lists of achievements, such as Harold Wilson and Tony Blair, as at best, deeply flawed, while seeing Thatcher - The Iron Lady, the 2011 biopic called her - as a unique, if not very likable, modern Downing Street success. The idea that the Tories are more natural rulers than Labour is thus further entrenched.

One of many challenges Starmer is likely to face if he becomes prime minister is how to create what he calls "an economy that works for working people", which sounds very different from the one Thatcher helped establish, and which worked primarily for bankers, property developers and business executives. For a politician who sheds policies like a sweaty football kit after one of his five-a-side games, Starmer seems unusually committed to making the economy more equal, as does the shadow chancellor. New Labour never talked about the economy in such class-conscious, egalitarian language.

Yet by also emphasising their respect for Thatcher and suggesting that 1970s Britain needed rescuing by "setting loose" its "natural entrepreneurialism", Starmer and Reeves also reinforce the right's worldview. They ignore veteran activists and revisionist historians who point out that the 1970s, while economically troubled, were also a time of vibrant new social movements and unparalleled equality.

Until the next election, and even during the first year or two of any Starmer government, his contradictory approach to Thatcherism and conservative ideas generally - simultaneously positioning his party both to the right and the left of where New Labour stood - may not be a problem. Public relief at having a more competent, less extreme and corrupt government than the Tories may keep Labour popular enough.

But in the end, Starmer will probably have to choose whether to completely break with Thatcherism. Unlike during Blair's lucky government, the condition of the economy and state finances is likely to mean that questions about how best to distribute resources will be unavoidable. Thatcher faced these questions during her difficult first few years in power, and we're still living with the consequences of her answers. The one useful thing Starmer can still learn from her is to have the confidence to look at the other side's ideas, and conclude that their time is up.

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Margaret Thatcher set Britain's decline in motion - so why can't politics exorcise her ghost? | Andy Beckett

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MPs on all sides pay homage, while her failures are forgotten, says Guardian columnist Andy Beckett

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Children living near Sure Start centres did better at GCSEs, study suggests

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Brilliant example of just what massive time-lags supply-side policies can have.

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Brilliant example of just what massive time-lags supply-side policies can have.

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Children from low-income families who grew up near a Sure Start centre did better than their peers at GCSEs, says the Institute for Fiscal Studies (IFS).

Its research says those living near a centre performed up to three grades better than those further away.

Sure Start centres started in 1998 to give parents of toddlers extra support, especially in disadvantaged areas, but many have closed.

The Department for Education has been approached for comment.

The IFS study, funded by the Nuffield Foundation, used postcodes from when children were five years old to determine roughly how close the nearest centre was.

It then looked at the GCSE results of those children 11 years later and found "big improvements" in the performance of those living near a centre, especially those from low-income backgrounds.

The study found a child on free school meals who got DDD in their GCSE grades would be more likely to get three Cs - or three 3s would become three 4s under the current boundaries - if they lived close to a centre in their early years.

Among all children in the study, those who lived near to a Sure Start centre performed better at GCSEs than those who lived further away, but the trend was more pronounced among those eligible for free school meals, and those from minority ethnic backgrounds.

The effects were more pronounced at centres which started earlier in the programme, the IFS said, as they tended to have bigger budgets and better outreach to help bring in families who could benefit from using them.

The scheme improved early support for children with special educational needs, and reduced the need for expensive education, health and care plans in their teenage years, the IFS said.

Sure Start was introduced by Tony Blair's Labour government in 1998 as "one-stop shops" providing parents of children under five with integrated support around health, education, childcare and employment, particularly in disadvantaged areas.

At its peak in 2010, the IFS says spending on the scheme topped out at £2.5bn in today's prices, with more than 3,000 centres around the country.

An IFS report from 2019 found Sure Start reduced the number of children being admitted to hospital, but said funding for the scheme had been cut and 500 sites had closed.

Sarah Cattan, an IFS research fellow who co-authored the report, said government spending on early years had "significantly increased" since 2010, but had shifted away from integrated services and towards funding free childcare.

The government still provides support in the form of family hubs, provided by 75 councils in England, which are designed to improve health and education outcomes for young children and their families.

But Ms Cattan said the hubs currently receive a fraction of what was spent on Sure Start at its peak, so are "unlikely to go as far in realising the potential" of integrated early years services.

Niamh Sweeney, deputy general secretary of the National Education Union, said Sure Start had been "decimated, leaving families in desperate need of support".

Neil Leitch, chief executive of the Early Years Alliance, said the IFS study showed that children's centres provide "vital" opportunities to "support children's long-term development and improve their life chances".

He added: "While the government's new programme of family hubs is undoubtedly welcome, with the current rollout limited to 75 local authorities, it's very difficult to see how the plans will compensate for the sheer scale of children's centre closures that have taken place over recent years."

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Children living near Sure Start centres did better at GCSEs, study suggests

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Children who grew up close to a centre achieved better GCSE grades than their peers, research suggests.

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'Outdated and misleading': is it time to reassess the very concept of money?

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Financial Economics: How money is created and destroyed on a daily basis.

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Financial Economics: How money is created and destroyed on a daily basis.

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In the classic 1946 film It's a Wonderful Life, depositors demand their money from a small-town building society. Its manager, George Bailey (in an unforgettable performance by James Stewart), explains that the money is not in the building society's vault; it has been lent to other people in the town. "The money's not there," Bailey pleads. "Your money's in Joe's house ... And in the Kennedy house, and Mrs Macklin's house, and a hundred others."

Bailey's explanation reflects a widespread idea of how banks work.

According to this idea, banks gather funds, such as through retail deposits and wholesale borrowing, then lend out those funds - or a proportion of them. This picture of banking permeates popular culture and popular notions of finance.

In 2008, during the crisis that rocked the foundations of western capitalism, the author and Harvard professor Niall Ferguson published The Ascent of Money. His goal was to explain the underpinnings of the global financial crisis and put it in its historical context.

Ferguson's book repeated uncritically the It's a Wonderful Life explanation of how banking works. Seventeenth-century banks, he explained, had pioneered what would become the foundation of modern finance: "fractional reserve banking". That mode of banking exploited the fact that "money left on deposit could profitably be lent out to borrowers. Since depositors were highly unlikely to ask en masse for their money, only a fraction of their money needed to be kept in the [bank's] reserve at any given time."

The George Bailey-Niall Ferguson explanation of banking is widely held, and, long ago, it was a valid explanation of how banks worked.

Just as banks lend money into existence in the form of IOUs, governments spend it into existence

But as a descriptor of banking today, it is incorrect. Banks don't lend out money from reserves or deposits or other sources of pre-existing funds. Counterintuitively, the loans come first.

When you borrow money and your bank credits your loan account, the account balance is created anew, "from thin air", not from or in relation to existing deposits or other existing money. And as you repay the loan principal, the money created at the time of the loan gradually disappears, reverting to its previous form of airy nothingness.

The Bailey-Ferguson picture of bank lending is back to front, and the nature of bank deposits is also widely misunderstood. The unnerving reality: a positive balance in your bank account does not correspond to a stock of "money" held somewhere for you, over and above the account balance. The account balance is all there is. It is the record of a promise from the bank, effectively an IOU.

Your deposit account is a liability for your bank and, as a depositor, you are no more than one among many of the bank's unsecured creditors.

In normal times a promise from a private bank is nearly as good as a promise from a government or a central bank. But in a crisis the promise is worth much less, and can be worth as little as nothing at all.

These differences in understanding are the tip of an iceberg of confusion that also extends to public finance and fiscal policy.

According to the standard picture of public expenditure and revenue raising, governments can only spend if they first gather money through taxes or asset sales or borrowing. The reality, however, is again the reverse. Just as banks lend money into existence in the form of IOUs, governments spend it into existence.

(From time to time, governments and central banks also make loans, such as for monetary policy and economic development purposes. In those instances, governments and central banks lend money into existence just as private banks do.)

As with money created through bank lending, money created through government spending does not persist and circulate indefinitely through the economy. The slightly shocking and dispiriting reality is that, when you pay your taxes, the money doesn't go into an account or a vault. It is vaporised. The tax payments cancel out the money that was created at the time of the original government spending.

These differences in understanding are not peripheral or inconsequential. Their implications extend far beyond the practical administration of banks and governments.

The standard view dominates the politics of taxation and fiscal responsibility. It also prevails in sections of the academy, where some economists are wedded to the idea of money continually circulating through the economy as a persistent element in a closed system. In reality, money is regularly being created and destroyed, and economic models that don't reflect that fact are not even slightly useful.

(The New Zealand economist Alban William Housego "Bill" Phillips became famous for the Phillips curve, postulating a relationship between rising inflation and unemployment. In 1949 he invented the monetary national income analogue computer, or Moniac. Also known as the financephalograph, this heroically clunky contraption used real liquid, hydraulics and pipes to illustrate how Phillips thought a sealed, circular, money-fuelled economy worked.)

Misunderstandings about money and banking affect the incentives and tactics of the largest private banks, and how well citizens and taxpayers hold governments and financial regulators to account. They prevent us all from having an adult, evidence-based conversation about debt, taxes and monetary policy. Without such a conversation (knowledgeably adjudicated by finance writers and journalists) citizens will forever be bit-part players in capitalism - the irresistible targets of participants with better information.

Protecting customers, taxpayers and the community as a whole from the excesses of modern banking requires a new understanding of the roles of banks and governments in finance; a new understanding of loans, deposits and derivatives as one family of financial contracts; and a new awareness of the privileged position of private corporations in the global financial system.

Crucially, society as a whole needs to think differently about the nature of money -possibly by first discarding the term itself. "Money" encompasses a range of phenomena that have intrinsically different purposes and risks. Commercial bank deposits are materially different to banknotes, for example, which are different to reserve funds. Money as a concept is increasingly outdated and misleading.

A better understanding of money would open up the possibility of important innovations such as lending-only and deposit-only institutions; new mechanisms of financial prudence and oversight; and an integrated monetary and fiscal policy that uses monetary and fiscal levers in concert.

A new financial conversation would make the causes of inter-generational inequities more explicit, and it would allow the community to rethink allowing "too big to fail" banks to earn, year in year out, enormous risk-free profits.

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'Outdated and misleading': is it time to reassess the very concept of money?

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It's regularly being created and destroyed - and economic models that don't reflect that fact are not even slightly useful

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Some great macro commentary including the fact that real GDP per capita has been declining for 8 consecutive quarters (2 years)!

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Some great macro commentary including the fact that real GDP per capita has been declining for 8 consecutive quarters (2 years)!

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Rachel Reeves is staking it all on economic growth. So where’s her plan to achieve it? | Larry Elliott

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An interesting article whether Labour's plan for economic growth is desirable or achievable

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An interesting article whether Labour's plan for economic growth is desirable or achievable

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Rachel Reeves is staking it all on economic growth. So where’s her plan to achieve it? | Larry Elliott

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Promising to reform the planning system, boost investment and improve skills is all very well, but the detail is missing, says Guardian economics editor Larry Elliott

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Why everything you've been told about debt and deficits could be wrong

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We may be on the cusp of a revolution.

What if everything we thought we knew about public finance over the past 40 years has been wrong?

A new economic theory has emerged that could rewrite our understanding of how governments create and spend money and what type of society we can afford to build.

And if it is correct, people may be furious.

Because it could show that Australia's political elite can afford to spend far more than they are on public health and education, social housing, scientific research and green energy schemes, while eliminating unemployment.

And yet they're not - either from a misunderstanding of government finances or because they don't want to.

However, to embrace this radical economic theory you will have to forget what you've learned about budget deficits (that they're bad) and government debt (that it burdens future generations).

Why?

Because proponents of the theory say that far from being a problem, budget deficits are often a good thing - they can be the source of healthy economic growth.

They argue a country like Australia that controls its own currency doesn't need to tax or borrow before its national government can spend money - the government can create all the money it needs to fund itself ... within limits.

It all sounds too good to be true, which is why critics warn the theory is naive, simplistic and potentially dangerous.

But supporters of the theory - who are growing in number - say many of the world's problems today (extreme wealth inequality, poorly funded public hospitals and schools, chronic underemployment, stagnant wages) are a consequence of misunderstanding government financing.

They say macroeconomic theory - which looks at the bigger picture of how the national economy works - has got too many major questions wrong.

So what are we talking about? Let's take a closer look.

MMT is challenging the orthodoxy

The theory is called Modern Monetary Theory (MMT).

It is challenging the neoliberal economic orthodoxy that has dominated policymaking in Australia, the United States, the United Kingdom and many other countries since the mid-1970s.

The reigning orthodoxy assumes a couple of things.

Firstly, it assumes every country has a "natural rate" of unemployment and it's unwise to try to force the jobless rate below the natural level because inflation (and wages) will rise too quickly. Therefore, it assumes it's better to accept a certain amount of unemployment to keep prices stable (and to keep wage demands weak).

At the moment, Australia's natural rate of unemployment is assumed to be somewhere between 4 and 5 per cent.

Secondly, the economic orthodoxy holds that the national government needs to collect taxes, or borrow from savers, before it can spend money.

Politicians repeat this point incessantly.

When you hear a politician saying the government must "live within its means," what they're really saying is the government mustn't spend more than it collects in taxes or borrowings.

However, MMT economists want to turn these orthodoxies on their head, among others.

What is MMT?

MMT is a school of economic thought and a political project (more on this later).

Its proponents are not shy about their intentions to shake up the establishment.

The people who developed it have been working on the body of theory for decades, quietly, in countries such as Australia and the United States, but their ideas have recently burst out into the open as global leaders search for fresh ideas to deal with the unprecedented economic crisis of 2020, and the lingering effects of the global financial crisis in 2008-09.

MMT economists make several claims:

Firstly, they say we've been thinking about budget deficits incorrectly.

They say budget deficits are not always bad. In fact, deficits are often necessary and beneficial. A budget deficit is merely evidence of extra government spending, and government spending boosts the wealth of private sector businesses and households.

They say it depends what deficit spending is used for. Increasing the deficit to finance a war is not the same thing as increasing the deficit to build more hospitals and schools.

They argue investments that will enhance productivity through better health, greater knowledge and skills, improved transport and the like are worth funding, even if it results in a budget deficit.

Secondly, MMT economists say we've been thinking about government spending incorrectly.

They say the argument (promoted famously by British prime minister Margaret Thatcher) that national governments must tax or borrow before they can spend is wrong.

MMT argues it's the other way around - national governments have to spend money into the economy before they can tax or borrow. Government spending actually precedes taxation.

Accepting this proposition is key to embracing MMT.

Thirdly, they say taxes are necessary, but not for the reasons you may think.

They say government taxes can be used to keep inflation under control, to control our behaviour (via fees and levies and rates), and to get us to produce things the government needs.

MMT economists draw on the ideas of chartalism to make this last point. They say governments use taxes to create demand for their own currency - that is, if a citizen has to pay tax then they're going to have to work to earn the currency to pay the tax in that currency.

Essentially, governments use taxes to put everyone to work.

"At the end of the day, a currency-issuing government wants something real, not something monetary," writes Professor Stephanie Kelton, one of the highest-profile MMT economists and a senior adviser to Bernie Sanders in both his 2016 and 2020 Democratic presidential primary campaigns.

"It's not our tax money the government wants. It's our time.

"To get us to produce things for the state, the government invents taxes or other kinds of payment obligations."

Fourthly, MMT economists say countries that issue their own fiat currency can afford to buy anything that's available for sale in their own currency, and they can never go bankrupt in their own currency.

"Fiat" money is government-issued currency that isn't backed by any commodity, such as gold. It's paper or digital money that has no intrinsic value. We'll return to this point later too.

Fifthly, MMT economists say "full employment" is not only possible, it's a moral imperative. Anyone who wants a job should have one.

They say we must prioritise genuine full employment and governments should spend whatever is necessary to achieve it - no matter the debt or deficit.

Sixthly, MMT economists say the national government should run a permanent "Job Guarantee" (JG) program to provide a job to everyone who wants one.

They say it could be linked to other economic and social programs, such as a "Green New Deal" - a policy advocated by MMT proponents linked to the US Democratic senator Bernie Sanders, to create jobs by shifting to zero-emissions technologies.

Which countries could MMT apply to?

MMT's principles couldn't be applied everywhere immediately.

MMT economists say they're specifically talking about countries with floating exchange rates that issue their own fiat currencies - countries like Australia, Japan, the UK, Canada and the United States.

The theory couldn't be applied as easily in European Union nations, for example, because those countries have ceded currency sovereignty by all agreeing to use the same currency, the euro.

There would be many hurdles to jump for MMT principles to work in the EU.

What's so special about fiat currencies?

MMT's theorists say world leaders still haven't come to terms with the demise of the Bretton Woods monetary system in 1971.

During that era (1945 to 1971), certain currencies were pegged at agreed fixed rates against the US dollar, and the US dollar was supposed to be backed by gold reserves so it could be exchanged on demand for a fixed amount of gold held by the US government.

But that system was abolished by US president Richard Nixon in 1971 when the US admitted it did not have enough gold to back its currency.

After that, the US and other major sovereign currency issuers (including Australia) adopted "fiat" currencies - currencies with no intrinsic value, that aren't backed by gold - with floating exchange rates.

MMT economists say this is significant because it means those countries (such as Australia, the US, Canada, the UK, Japan) no longer have to fear a shortage of gold, and that leaves them free to print as much money as they need to fully employ their "real" resources - workers, factories, machines, raw materials - within limits.

That insight is not new, nor particularly radical.

In a speech in 1997, then-US federal reserve chairman Alan Greenspan said central banks in the modern era could issue currency without limit.

"When there is confidence in the integrity of government, monetary authorities - the central bank and the finance ministry - can issue unlimited claims denominated in their own currencies and can guarantee, or stand ready to guarantee, the obligations of private issuers as they see fit," Greenspan said.

"Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit."

MMT economists say the reality of this situation seems to have been forgotten, but policymakers should remember it.

Does MMT apply to all levels of government?

No.

MMT only applies to the national government level, because that's the level of government with the power to issue the sovereign currency.

Local governments must behave like households when making spending decisions because they're currency users, not currency issuers like the national government.

What exactly is the Job Guarantee?

The Job Guarantee is a central component of MMT.

MMT economists say the national government should ensure that everyone who wants a job has a job.

Why? Because unemployment is socially destructive and wasteful.

They say "full employment" should be a national priority, like it used to be in Australia: between 1945 and 1975, full employment was an official part of Australia's national economic program, and the Federal Government felt obliged to ensure it.

However, full employment was abandoned in the mid-1970s. It was replaced by an acceptance of the so-called "natural rate" of unemployment, which is assumed to be around 4 or 5 per cent unemployment.

MMT economists say the idea of a job guarantee is not radical. The basic human right to a job is outlined in Article 23 of the UN Declaration of Human Rights and in former US president Franklin D Roosevelt's call for an economic bill of rights.

Australian economics professor Bill Mitchell is one of the founders of MMT and one of the originators of the Job Guarantee idea.

Mitchell says it would work like the "Wool Floor Price Scheme" introduced by Australia's government in 1970.

The Wool Floor Price Scheme was used to stabilise the incomes of farmers by ensuring a steady price for wool each year, irrespective of the volume of wool farmers could deliver to the market after each clip.

Under the system, the Australian Wool Corporation would purchase stocks of wool from auction markets when demand was low and sell them when demand was high - helping to keep wool prices stable.

"By being prepared to hold 'buffer wool stocks' in times of low demand and release them again in times of high demand, the government was able to guarantee incomes for the farmers around the stable price," Mitchell has explained.

Have you noticed those old red-brick woolsheds near the wharves in Australia's cities and towns?

Many have been turned into apartments or offices. But that's where surplus wool stocks used to be kept under the wool floor price scheme.

A job guarantee program would work similarly to the woolsheds.

It would play the role of an "automatic stabiliser" in the economy by employing more people during downturns and fewer people during boom times.

In downturns, it would provide jobs for whoever wanted one - soaking up surplus workers who had lost their jobs - helping to prevent incomes falling below a living wage.

Mitchell says in an economy that adopted the MMT policy framework, the Job Guarantee would give rise to a "Buffer Employment Ratio (BER)," which is the ratio of Job Guarantee employment to total employment, which economists could use to track inflationary pressures and keep their eye on the capacity of the economy.

How would the Job Guarantee work?

Advocates say the job guarantee program should be federally funded, but administered at the local level by municipal governments, non-profits and social enterprises.

Professor Kelton, who has written a best-seller on MMT called The Deficit Myth, sees it working this way:

"Because the job guarantee allows workers to transition into alternative employment rather than joining the ranks of the unemployed, the program helps to cushion the overall economy by supporting wages and preserving (or enhancing) skills until the economy recovers and workers begin to transition back into private sector jobs," she writes.

"The federal government guarantees the financing, establishes the broad parameters that define the types of jobs the program aims to support, and provides oversight to ensure compliance and accountability.

"Virtually everything else is handled in a decentralised way, bringing decision-making as close as possible to the people and communities who will benefit most directly from the tasks that will be performed."

Kelton says the job guarantee isn't about creating any old job.

"This isn't a make-work scheme, aimed simply at giving the unemployed a shovel in order to justify paying them a wage," she writes.

"The idea is to task people with useful work that is valued by the community and to provide compensation for that work in the form of a decent wage and benefit package."

MMT economists argue there is no financial constraint on the amount a government should spend to achieve full employment, so the deficit should be set at whatever level is necessary.

What does MMT think of universal basic income?

Unlike a Job Guarantee, where only those who work get paid, a universal basic income would see the government pay everybody a modest amount with no strings attached.

Advocates of the UBI say it would reduce or eliminate the bureaucracy around welfare and government work programs and, if set high enough, would provide everyone with a basic income safety net to avoid poverty.

People could then choose to top up that very modest lifestyle through paid work, or live off the UBI while doing volunteer work, social and community activities, artistic pursuits or other unpaid work such as caring responsibilities.

However, MMT advocates don't like the idea of a UBI.

They say the Job Guarantee idea is superior to universal basic income because of the economic and social function it provides - a JG would supply everyone with a job, which is socially beneficial, and JG workers could be used as a "buffer stock" against inflationary pressures (while still providing everyone with a job).

MMT's view of budget deficits

This area of MMT attracts much criticism (and misunderstanding).

According to MMT economists, we've been thinking about government spending and budget deficits the wrong way.

They say Margaret Thatcher's dictum that federal governments must tax or borrow before they can spend is fundamentally wrong, and it's the other way around - federal governments have to spend money into the economy before they can tax or borrow.

It's a crucial point.

They say when Thatcher argued that government finances were constrained in the same way as household budgets, she committed the "household fallacy" - and that fallacy has had a deleterious impact on politics and society.

They say national governments are not the same as households - national governments have the power to print money and impose taxes, households don't.

Thatcher wasn't comparing apples with apples.

They argue another former British Conservative prime minister, Theresa May, made the same mistake when she told a nurse that wages for British nurses hadn't increased for years because the UK government didn't have a "magic money tree."

MMT economists say the "household fallacy" leads to socially destructive outcomes.

Why? Because it makes politicians think they can't afford to spend more on socially important programs until they "find the money" to pay for them.

According to MMT adherents, that view is misguided - because a sovereign government that issues its own currency can print as much money as it needs to pay for all the goods and services it needs in its own currency - within limits.

Mr Greenspan, again, made a similar point in 2005 when he admitted that the US Social Security system couldn't run out of cash.

"There's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody," he said.

The fundamental question was whether the US economy had the ability to soak up any extra cash the government printed, he said.

What about inflation?

This is an important topic.

For many people, the thought of governments printing unlimited amounts of money conjures images of shoppers pushing wheelbarrows of cash in Weimar Germany, or the hyper-inflation of more recent times in Zimbabwe or Venezuela.

Some of MMT's critics like to draw that comparison deliberately.

But MMT economists say that's a caricature.

Why did hyperinflation occur in Zimbabwe? Because when you damage the productive capacity of an economy, as Robert Mugabe did, it can't produce the same volume of goods and services. When you have households fighting over a shrinking amount of goods, prices soar. If you start feverishly printing money in that situation, you'll make things even worse.

MMT economists say inflation would only be a problem (in a country like Australia) if the federal government spent too much money into an economy that was already running at, or close to, full capacity.

If your economy's "real resources" are underutilised - its workers, factories, machines, land and raw materials - government spending won't create concerning inflationary pressures, they argue.

They say if inflationary pressures start building, the federal government could raise taxes or reduce government spending to take money out of the economy.

Essentially, MMT asks people to look around to see how government spending works in reality.

"You've probably already seen MMT's central insights in action," Kelton writes.

"I saw them up close when I worked in the US Senate.

"Whenever the topic of social security comes up, or when someone in Congress wants to put more money into education or health care, there's a lot of talk about how everything must be 'paid for' to avoid adding to the federal deficit.

"But have you noticed this never seems to be a problem when it comes to expanding the defence budget, bailing out banks, or giving tax breaks to the wealthiest Americans, even when these measures significantly raise the deficit?

"As long as the votes are there, the federal government can always fund its priorities. That's how it works."

Criticisms of MMT

There are many criticisms of Modern Monetary Theory.

But at this point, it's difficult to tell how many mainstream economists are making criticisms in good faith.

MMT has ruffled lots of feathers. It's clear some orthodox economists don't want to cede territory to the upstarts. Others won't have wrapped their heads around the MMT logic yet. And there'd be some professional jealousy and rivalry behind the scenes.

However, some economists have scrutinised MMT seriously. Stephen Grenville, a former deputy governor of the RBA, being one of them.

While open to some of its ideas, he, like many other mainstream economists, argues it has fundamental flaws.

There's no free lunch: Grenville says the chief vulnerability of the MMT narrative, and where MMT economists "are a little vague, even slippery," is the MMT assumption, sometimes implicit, that budget deficits can be funded without adding to official debt.

"The government might get the cash to spend in its deficit by giving the central bank a bond in return for the cash," Grenville wrote in the Eureka Report.

"But the bond is just a government debt which it owes itself, so in the view of many MMT supporters, the bond could be deleted from the central bank balance sheet by offsetting book entries in the accounts of the government and the central bank.

"In spending the cash to implement its deficit, the government shifts the economy to full-employment ... GDP has increased without either debt or interest rates rising. This seems to be 'free money'," he said.

"It's hardly surprising that this is an attractive narrative [...] [but] this is clearly wrong."

Human Behaviour: A major criticism of MMT has to do with the assumptions it makes about human behaviour, particularly about the way politicians "should" behave.

Professor Kelton, in her book The Deficit Myth, says unelected central bankers shouldn't have so much control over the economy, and the responsibility for economic management should rest with elected representatives.

"We must end the cruel and inefficient practice of relying on democratically unaccountable central bankers to target the 'right mix' of inflation and unemployment," Kelton wrote.

"To build an economy for the people, responsibility for maintaining full employment and income security must become the responsibility of elected representatives of the people.

"Congress, with its great power over the federal budget, must play an active and permanent role in stabilising output and employment through time."

Cynics say handing that type of responsibility to politicians could be a recipe for disaster.

Would politicians have the ability to know when the economy has reached full capacity?

Would they have the backbone to raise taxes, perhaps during an election year, to keep inflationary pressures down? Would they have the discipline to stop spending?

Recent Australian history demonstrates this point, when the Howard government pressed ahead with tax cuts ahead of the 2007 election (promises matched by the Rudd opposition) even as the Reserve Bank was hiking interest rates to temper rising inflation during the mining boom.

A few years ago, the economist Thomas Palley said one problem with MMT was that it "assumes away the problem of fiscal-monetary conflict."

By that he meant MMT assumes that fiscal and monetary authorities behave as a single entity for the good of the country. Is that politically practical?

Interestingly, a former vice-chairman of the US Federal Reserve, Stanley Fisher, has suggested that responsibility for overseeing massive deficit-financing could be handed over to a central-bank-like independent committee. That type of institution could prevent uncontrolled spending by politicians (Fisher was not arguing for MMT, however).

Grenville says in an MMT context, "perhaps this all-wise committee could just set the budget deficit size, and leave it to parliament to make the hard decisions on distribution and on the size of the public sector by setting taxation rates."

Bond market vigilantes: Another concern about MMT regards how participants in bond markets, credit markets and foreign currency markets might react if a country adopted its principles.

What's to stop traders from deciding that your currency will become nearly worthless if your leaders start printing money and expanding the budget deficit, and trying to punish you accordingly? Financial market participants may take a lot of convincing.

Tax policy: According to MMT, the government could use changes in the level of taxation to control inflation. However, would the uncertainty surrounding the shifting level of taxation make it harder for businesses and households to make investment decisions?

What do MMT economists say about themselves?

They can appear to say contradictory things.

On one hand, they say MMT is not a political project, it's simply a way of looking at the world.

According to Mitchell, anyone - left or right - can view the world through an MMT framework and you can use MMT principles to pursue a leftist or rightist agenda.

On the other hand, MMT's supporters advocate for a framework that would overhaul politics. It would take the responsibility for price and employment stability away from the central bank and put it back into the hands of politicians.

The Job Guarantee idea is also a central component of MMT, and it would be the government's responsibility to run it.

What schools of economic thought does MMT draw on?

MMT has several moving parts.

The MMT project is a synthesis of economic theories, some of them decades old - so some opponents mock MMT for offering nothing new at all.

Theoretically, it draws heavily on Abba Lerner's functional finance, Wynne Godley's sectoral balances and Hyman Minsky's financial instability hypothesis (Minsky also theorised about a job guarantee).

It provides a neo-chartalist analysis of the relationships between the private banking system, the central bank and treasury. That's also where it's uncommon view of taxation comes from.

It also has a strong overlay of Keynesianism, by advocating for central governments to actively use their budget balances to manipulate macroeconomic outcomes, the key tenet of John Maynard Keynes' Depression-era policy prescriptions.

Who are the main figures in MMT?

Some of the main personalities include:

Bill Mitchell, emeritus professor of economics at the University of Newcastle and Director of the Centre of Full Employment and Equity

L Randall Wray, professor of economics at Bard College, United States, and senior scholar at the Levy Economics Institute

Warren Mosler, economist and co-founder of the Centre for Full Employment and Price Stability at the University of Missouri-Kansas City

Martin Watts, emeritus professor of economics at the University of Newcastle and a Research Associate at the Centre of Full Employment and Equity

Stephanie Kelton, professor of economics at Stony Brook University and a former economics adviser to US Democratic senator Bernie Sanders

Steven Hail, professor of economics at the University of Adelaide

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Why everything you've been told about debt and deficits could be wrong

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A new economic theory emerges that could rewrite our understanding of how governments create and spend money and what type of society we can afford to build.

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The UK’s Self-Inflicted Economic DECLINE

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More superb analysis of UK macro from economicshelp

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More superb analysis of UK macro from economicshelp

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The UK’s Self-Inflicted Economic DECLINE

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Jeremy Hunt's Budget was more radical than it looked

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Some good stats relating to fiscal policy and fiscal drag

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Some good stats relating to fiscal policy and fiscal drag

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Rishi Sunak started the week giving a speech on a construction site in Swindon, with diggers and cranes in the background.

So far, so typical for a prime minister in Budget week - all that was missing was for Mr Sunak to pop on a hard hat.

The diggers were knocking down the town's Honda factory, 35 years after Margaret Thatcher lured the Japanese car giant to the UK. There are hopes that the redevelopment of the site will lead to thousands of new jobs, but it is still unclear what they might be.

There are parallels with this week's Budget. Is this the start of a period of more economic growth and confident renewal? Or have several years of acute uncertainty left the economic picture permanently diminished?

The chancellor is relying on voters seeing their glasses as half-full, rather than half-empty.

Will workers celebrate paying less tax than they thought they were going to six months ago? Or decry the fact they are paying more than they were told five years ago?

Quietly radical

While the Budget lacked pre-election fireworks, there was a quietly radical thread that could have long-term consequences.

By 2027, because of cuts to National Insurance (NI) and the decision to freeze income tax thresholds, for every £1 NI cut, £1.90 will be raised in taxes.

This "fiscal drag" will mean over three million more higher-rate taxpayers, and nearly four million more low earners paying tax. On current trends, a recipient of the full basic state pension alone is also on course to have to pay tax, and perhaps fill out a tax return in 2026/27.

The government is shifting the tax burden away from workers towards all forms of income including savings and pensions.

Chancellor Jeremy Hunt has cast this as a strategy that could lead to the abolition of National Insurance. Mr Sunak is selling this as a simplification of the tax system, and the end of the "double taxation" of work.

Presumably, this forms the cornerstone of a manifesto promise to "end the jobs tax", and would be paid for from further extensions of the freeze on income tax thresholds.

The thinking is that these incentivise work. The Office for Budget Responsibility (OBR), which monitors the government's spending plans and performance, said levels of inactivity were back at post-pandemic levels and were holding back growth.

This is another example of the government appearing to prioritise policies that "score" with the OBR. Its chair Richard Hughes protested this week when I asked him whether he was in fact running the country. "Our only power is to forecast," he said.

Not a tax cut

According to the OBR's calculations this week's 2% NI cut and last November's 2% cut in the Autumn Statement do not offset the extra income tax being paid as a result of the tax thresholds being frozen.

But the fact that taxes on income overall are being raised means pensioners will see higher tax bills as their income increases. There is a backlash against this, but it is due to their income rising, with the state pension set to increase by 8.5% from April.

Overall this is not a tax cut, with fiscal drag equating to the biggest single tax rise in 45 years and since Mrs Thatcher's Chancellor Geoffrey Howe nearly doubled the rate of VAT in 1979.

Here is what is very curious. The Conservative strategy on tax has completely turned on its head.

Not far from the old Honda factory in Swindon, David Cameron launched his 2015 election manifesto with a commitment to raise income tax thresholds above inflation to take people out of the income tax system, and to prevent many upper-middle earners paying higher-rate tax.

It was the absolute cornerstone of Conservative tax strategy in 2017, too.

What we see now is pretty much the entire reversal of that. "U-turn" does not really capture the galactic extent of this change in direction. In 2010, there were three million higher taxpayers, by 2029 there will be 7.3 million.

Then there is another reversal - on how to fund rising public service costs. It was only three years ago that Mr Sunak was making the argument for raising spending on the NHS and social care by increasing National Insurance to 13.25%. The policy now is to decrease National Insurance to 8% and the adult social care plan is officially on ice.

Clearly, this is after a pandemic and energy crisis, and probably partly reflects the wild political ride - including four chancellors and three prime ministers in the same period of time.

'Conspiracy of silence'

Details are sparse on the precise trade-offs for unprotected areas such as councils, courts, prisons and social care. The chancellor said this was because plans are undecided and reliant on a government spending review which he has now said will not be done until after the general election.

Labour are also as yet unwilling to go into much detail, but leader Keir Starmer was in a hard hat meeting apprentices on a different building site in London this week, vowing to "build more houses".

An influential think tank, the Institute for Fiscal Studies, points to what it calls a "conspiracy of silence" about the tough decisions required after the election.

At the moment, Labour's promise is to fund services from higher growth, but the central plank of its growth plan, spending an extra £28bn per year on green investment, has been parked.

So the Budget may or may not herald a turnaround in the economy. But it was the confirmation of a considerable turn in economic policy, especially on who pays taxes in times of need.

From now until the election there will not be a building site in a swing seat not visited by the main party leaders dressed up in hard hats and protective goggles, as they seek to persuade the public they can rebuild the economy out of recession. But both are yet to finish construction of their long term plans to return Britain's economy to sustained growth.

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Jeremy Hunt's Budget was more radical than it looked

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It lacked pre-election fireworks, but there was a radical thread that could have long-term consequences.

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The Conservatives’ economic record since 2010 in 10 charts

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Recent UK macro history in 10 charts. Great article.

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Recent UK macro history in 10 charts. Great article.

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The Conservatives’ economic record since 2010 in 10 charts

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From a huge budget deficit to weak GDP and a record rise in tax, we look at the background to the Tory budget

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The Real Reason Britain is Broke – A Doom Loop of Debt

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Watch this. Understand this. Take notes on this. Use this in your summer exams!

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Watch this. Understand this. Take notes on this. Use this in your summer exams!

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The Real Reason Britain is Broke – A Doom Loop of Debt

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Call for new taxes on super-rich after 1% pocket two-thirds of all new wealth

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Tax the rich because profoundly unequal societies are profoundly unhappy societies. It helps everyone (rich included).

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Tax the rich because profoundly unequal societies are profoundly unhappy societies. It helps everyone (rich included).

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Oxfam has called for immediate action to tackle a post-Covid widening in global inequality after revealing that almost two-thirds of the new wealth amassed since the start of the pandemic has gone to the richest 1%.

In report to coincide with the annual gathering of the global elite at the World Economic Forum in Davos, the charity said the best-off had pocketed $26tn (£21tn) in new wealth up to the end of 2021. That represented 63% of the total new wealth, with the rest going to the remaining 99% of people.

Oxfam said for the first time in a quarter of a century the rise in extreme wealth was being accompanied by an increase in extreme poverty, and called for new taxes to be levied on the super-rich.

Policies introduced to combat the economic impact of Covid 19 - such as cuts in interest rates and the money creation process known as quantitative easing - boosted the value of property and shares, which tend to be owned by richer people.

The report said that for every $1 of new global wealth earned by a person in the bottom 90%in the past two years, each billionaire gained roughly $1.7m. Despite small falls in 2022, the combined fortune of billionaires had increased by $2.7bn a day. Pandemic gains came after a decade when both the number and wealth of billionaires had doubled.

Danny Sriskandarajah, the chief executive of Oxfam GB: "The current economic reality is an affront to basic human values. Extreme poverty is increasing for the first time in 25 years and close to a billion people are going hungry but for billionaires, every day is a bonanza.

"Multiple crises have pushed millions to the brink while our leaders fail to grasp the nettle - governments must stop acting for the vested interests of the few.

"How can we accept a system where the poorest people in many countries pay much higher tax rates than the super-rich? Governments must introduce higher taxes on the super-rich now."

Oxfam said extreme concentrations of wealth led to weaker growth, corrupted politics and the media, corroded democracy and led to political polarisation. The super-rich were key contributors to the climate crisis, the charity added, with a billionaire emitting a million times more carbon than the average person. They were also twice as likely to invest in polluting industries, compared with the average investor.

The report called on governments to introduce immediate one-off wealth levies on the richest 1%, together with windfall taxes to clamp down on profiteering during the global cost of living crisis. Subsequently, there should be a permanent increase in taxes on rich, with higher rates for multimillionaires and billionaires.

In support of its call for redistribution of wealth, Oxfam said:

Food and energy companies had more than doubled their profits in 2022, paying out $257bn to wealthy shareholders at a time when more than 800 million people were going hungry.

Only 4 cents in every dollar of tax revenue came from wealth taxes, and half the world's billionaires lived in countries with no inheritance tax on money they give to their children.

A tax of up to 5% on the world's multimillionaires and billionaires could raise $1.7tn a year, enough to lift 2 billion people out of poverty, and fund a global plan to end hunger.

In a foreword to the report, Colombia's finance minister, José Antonio Ocampo, said: "Taxing the wealthiest is no longer an option - it's a must. Global inequality has exploded, and there is no better way to tackle inequality than by redistributing wealth."

He added: "Fairness is at the heart of Colombia's tax reforms. Concretely, this means a new wealth tax, higher taxes for high-income earners and large corporations reaping extraordinary profits in international markets, and ending tax incentives that exist without clear social or environmental justification.

"We are also implementing digital services taxes and adopting a corporate minimum tax rate, building on the international tax deal,."

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Call for new taxes on super-rich after 1% pocket two-thirds of all new wealth

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Oxfam has called for immediate action to tackle a post-Covid widening in global inequality after revealing that almost two-thirds of the new wealth amassed since the start of the pandemic has gone to the richest 1%.

# data[].attributes.attachment_link.readable_text
Oxfam has called for immediate action to tackle a post-Covid widening in global inequality after revealing that almost two-thirds of the new wealth amassed since the start of the pandemic has gone to the richest 1%.

In report to coincide with the annual gathering of the global elite at the World Economic Forum in Davos, the charity said the best-off had pocketed $26tn (£21tn) in new wealth up to the end of 2021. That represented 63% of the total new wealth, with the rest going to the remaining 99% of people.

Oxfam said for the first time in a quarter of a century the rise in extreme wealth was being accompanied by an increase in extreme poverty, and called for new taxes to be levied on the super-rich.

Policies introduced to combat the economic impact of Covid 19 - such as cuts in interest rates and the money creation process known as quantitative easing - boosted the value of property and shares, which tend to be owned by richer people.

The report said that for every $1 of new global wealth earned by a person in the bottom 90%in the past two years, each billionaire gained roughly $1.7m. Despite small falls in 2022, the combined fortune of billionaires had increased by $2.7bn a day. Pandemic gains came after a decade when both the number and wealth of billionaires had doubled.

Danny Sriskandarajah, the chief executive of Oxfam GB: "The current economic reality is an affront to basic human values. Extreme poverty is increasing for the first time in 25 years and close to a billion people are going hungry but for billionaires, every day is a bonanza.

"Multiple crises have pushed millions to the brink while our leaders fail to grasp the nettle - governments must stop acting for the vested interests of the few.

"How can we accept a system where the poorest people in many countries pay much higher tax rates than the super-rich? Governments must introduce higher taxes on the super-rich now."

Oxfam said extreme concentrations of wealth led to weaker growth, corrupted politics and the media, corroded democracy and led to political polarisation. The super-rich were key contributors to the climate crisis, the charity added, with a billionaire emitting a million times more carbon than the average person. They were also twice as likely to invest in polluting industries, compared with the average investor.

The report called on governments to introduce immediate one-off wealth levies on the richest 1%, together with windfall taxes to clamp down on profiteering during the global cost of living crisis. Subsequently, there should be a permanent increase in taxes on rich, with higher rates for multimillionaires and billionaires.

In support of its call for redistribution of wealth, Oxfam said:

Food and energy companies had more than doubled their profits in 2022, paying out $257bn to wealthy shareholders at a time when more than 800 million people were going hungry.

Only 4 cents in every dollar of tax revenue came from wealth taxes, and half the world's billionaires lived in countries with no inheritance tax on money they give to their children.

A tax of up to 5% on the world's multimillionaires and billionaires could raise $1.7tn a year, enough to lift 2 billion people out of poverty, and fund a global plan to end hunger.

In a foreword to the report, Colombia's finance minister, José Antonio Ocampo, said: "Taxing the wealthiest is no longer an option - it's a must. Global inequality has exploded, and there is no better way to tackle inequality than by redistributing wealth."

He added: "Fairness is at the heart of Colombia's tax reforms. Concretely, this means a new wealth tax, higher taxes for high-income earners and large corporations reaping extraordinary profits in international markets, and ending tax incentives that exist without clear social or environmental justification.

"We are also implementing digital services taxes and adopting a corporate minimum tax rate, building on the international tax deal,."

# data[].attributes.attachment_link.title
Call for new taxes on super-rich after 1% pocket two-thirds of all new wealth

# data[].attributes.attachment_link.description
Oxfam has called for immediate action to tackle a post-Covid widening in global inequality after revealing that almost two-thirds of the new wealth amassed since the start of the pandemic has gone to the richest 1%.

# data[].attributes.attachment_link.readable_text
Oxfam has called for immediate action to tackle a post-Covid widening in global inequality after revealing that almost two-thirds of the new wealth amassed since the start of the pandemic has gone to the richest 1%.

In report to coincide with the annual gathering of the global elite at the World Economic Forum in Davos, the charity said the best-off had pocketed $26tn (£21tn) in new wealth up to the end of 2021. That represented 63% of the total new wealth, with the rest going to the remaining 99% of people.

Oxfam said for the first time in a quarter of a century the rise in extreme wealth was being accompanied by an increase in extreme poverty, and called for new taxes to be levied on the super-rich.

Policies introduced to combat the economic impact of Covid 19 - such as cuts in interest rates and the money creation process known as quantitative easing - boosted the value of property and shares, which tend to be owned by richer people.

The report said that for every $1 of new global wealth earned by a person in the bottom 90%in the past two years, each billionaire gained roughly $1.7m. Despite small falls in 2022, the combined fortune of billionaires had increased by $2.7bn a day. Pandemic gains came after a decade when both the number and wealth of billionaires had doubled.

Danny Sriskandarajah, the chief executive of Oxfam GB: "The current economic reality is an affront to basic human values. Extreme poverty is increasing for the first time in 25 years and close to a billion people are going hungry but for billionaires, every day is a bonanza.

"Multiple crises have pushed millions to the brink while our leaders fail to grasp the nettle - governments must stop acting for the vested interests of the few.

"How can we accept a system where the poorest people in many countries pay much higher tax rates than the super-rich? Governments must introduce higher taxes on the super-rich now."

Oxfam said extreme concentrations of wealth led to weaker growth, corrupted politics and the media, corroded democracy and led to political polarisation. The super-rich were key contributors to the climate crisis, the charity added, with a billionaire emitting a million times more carbon than the average person. They were also twice as likely to invest in polluting industries, compared with the average investor.

The report called on governments to introduce immediate one-off wealth levies on the richest 1%, together with windfall taxes to clamp down on profiteering during the global cost of living crisis. Subsequently, there should be a permanent increase in taxes on rich, with higher rates for multimillionaires and billionaires.

In support of its call for redistribution of wealth, Oxfam said:

Food and energy companies had more than doubled their profits in 2022, paying out $257bn to wealthy shareholders at a time when more than 800 million people were going hungry.

Only 4 cents in every dollar of tax revenue came from wealth taxes, and half the world's billionaires lived in countries with no inheritance tax on money they give to their children.

A tax of up to 5% on the world's multimillionaires and billionaires could raise $1.7tn a year, enough to lift 2 billion people out of poverty, and fund a global plan to end hunger.

In a foreword to the report, Colombia's finance minister, José Antonio Ocampo, said: "Taxing the wealthiest is no longer an option - it's a must. Global inequality has exploded, and there is no better way to tackle inequality than by redistributing wealth."

He added: "Fairness is at the heart of Colombia's tax reforms. Concretely, this means a new wealth tax, higher taxes for high-income earners and large corporations reaping extraordinary profits in international markets, and ending tax incentives that exist without clear social or environmental justification.

"We are also implementing digital services taxes and adopting a corporate minimum tax rate, building on the international tax deal,."

# data[].attributes.attachment_link.title
Call for new taxes on super-rich after 1% pocket two-thirds of all new wealth

# data[].attributes.attachment_link.description
Oxfam has called for immediate action to tackle a post-Covid widening in global inequality after revealing that almost two-thirds of the new wealth amassed since the start of the pandemic has gone to the richest 1%.

# data[].attributes.attachment_link.readable_text
Labour is heading for power as an incoming party for the first time in 26 years. What will it do with it? Its leader, Keir Starmer, and its shadow chancellor, Rachel Reeves, are reluctant to say. Reeves has, however, taken one adamantine position: Labour will not introduce new taxes on wealth, as she first told the New Statesman in June and recently reiterated to the Telegraph. This is less tenable than it appears.

Labour will soon face an inescapable choice. In order to spend money in government the party will need to raise it. There is a very good way to do that. It is to shift the tax burden away from labour and on to capital, away from work and on to wealth. An agenda is coalescing in policy circles around a set of major tax changes that could spur growth, cut taxes for most people, and raise the money Labour will need. The party, haunted by ghosts, is unwilling to embrace it.

By raising taxes on wealth, Labour could, crucially, cut taxes on income. The reforms available to Labour, detailed here, would raise £28bn a year. That could fund the £28bn a year Labour once wanted to commit to green energy, or it could allow Reeves to cut the basic rate of income tax by up to 4p - a tax cut every employee would notice, and one that would silence Conservative claims that Labour is a high-tax party. By taxing capital, Labour, the party of labour, could actually reward work.

Listen to Harry Lambert discuss the great tax con on the New Statesman podcast.

Starmer and Reeves are following an electoral script written for a different era. Britain has been transformed since Labour won in 1997. One part of the country has lived through an asset boom. The other is living on wages that have not risen in real terms for 15 years, since before the 2008 financial crash. For those with assets, the crash is a distant memory. London house prices have risen inexorably since 2010, by 31 per cent after inflation. The FTSE 100 is 58 per cent higher after dividends. Real average weekly pay is, meanwhile, no higher today than in July 2006. Those who live in Asset Britain have no idea what Austerity Britain is like.

Labour is ignoring wealth at its peril. Reeves is rejecting the most consequential tax reforms open to her, despite polling that suggests each reform she has ruled out would be highly popular. They are also vital. Britain's growth rate is in a multi-decade decline, while wealth inequality has become entrenched. It hasn't fallen in the 17 years the Office for National Statistics has recorded it. Every year you can expect £4 in every £10 of new wealth to go to the wealthiest 10 per cent, while £1 in £10 is shared by the bottom half. In stagnant societies, capital reigns.

The Tories have lost credibility, gifting Labour a generational opportunity to be heard. There is no better story Starmer could tell than the story of tax: who it serves, who it exploits, and how it could be fixed.

The most important fact about the British tax system is that almost no one knows anything about it. If they did, it would not last for long. It not only punishes work at the expense of wealth but poorer homeowners at the expense of richer ones, the tenant in favour of the landlord, and anyone who does not inherit capital, almost all of which is passed on untaxed. (Only 3-4 per cent of the £120bn in gifts and inheritances passed on in the UK each year is taxed.) The very richest, who sit on vast estates, pay lower rates of tax than the staff they invariably employ. There is no equal starting line in life. But in Britain the rules of the game have been fixed.
[See also: Labour's fiscal paradox]
To grasp the secrets of British wealth, you need to go to the 11th floor of an unassuming 12-storey office block in Stratford, east London. Book an appointment, request your files, show an ID at the door, and the staff of His Majesty's Revenue & Customs will escort you to a secure room filled with ten offline computers.

In July 2021 Arun Advani - an assistant professor of economics at the University of Warwick who has spent the past six years investigating who does and does not pay tax in Britain - took a seat and punched in his code. Forty million anonymised tax records filled his screen. He had come to Stratford with a question to answer. If you increase taxes on the rich, do they in fact leave the country?

In 2017, "non-doms" - who live in Britain but do not pay tax on money they make overseas - threatened to do just that after a new reform abolished such status for long-term residents. Any who remained faced a significant tax bill. Advani knew that non-doms were inherently mobile: in any given year about 10 per cent of them migrate. But what he found that day surprised even him. The reform had resulted in hardly any additional emigration.

Those who left had paid derisory amounts of UK tax in the first place. The non-doms who paid meaningful tax in Britain did not leave at all. They worked in jobs that were more lucrative here than anywhere else. Abolishing non-dom status in full, Advani calculated, could raise at least £3bn, maybe more. Critics who claimed abolition would cost the UK were lost in ideological abstractions. But Advani had the data. He was looking at the receipts.

"Tax advisers will say that people are going to leave," Advani says, "but I have the data for everyone in the country for more than 20 years. And we can look at the reforms. And they didn't leave. We can just show you: they're in the country. I can count them."

In February 2010, the Bank of England released an online video that was less innocuous than it seemed. In four minutes it sought to explain a new financial concept: quantitative easing (QE). The Bank, a soothing female narrator said in the manner of an answering machine, had begun buying government bonds from insurers, pension funds and banks with newly created money, in order to encourage economic growth in the aftermath of the 2008 financial crisis.

By buying government bonds from these firms, the Bank was doing two things: it was providing them with fresh cash, and it was making it less attractive for them to hold government bonds. To make a return on this new money, firms would buy other assets: shares, company bonds, property. "As purchases of these other assets start to increase, their prices rise," the narrator explained, switching into an oddly passive, hypothetical tense as she described a very present reality. The Bank had committed to £200bn in QE in November 2009, three months earlier.
[See also: Tax wealth and reward work]
"Of course, higher asset prices also make some people better off," the narrator conceded in an aside, adding only that this would provide "an extra boost to spending" as the newly enriched felt more secure. When the economy improved, the Bank would, the video concluded, later "sell assets to remove the extra money it has put into the economy".

I remember watching this video at the time. I did not fully absorb its implications. Neither did the Bank. Far from being unwound, QE became the Bank's primary policy tool throughout the 2010s, fuelling an ever-greater asset boom. It was deployed in the name of stimulating the economy again in 2012, when £175bn in new money was created to offset the impact of austerity. It was deployed to ensure financial stability after the Brexit vote in 2016 (£70bn). And it was deployed to help government finance borrowing and cover the cost of the Covid pandemic (£450bn).

"Everything's been done to make the wealthy stay wealthy," an asset manager at Ruffer, which manages £25bn in client money, conceded to me recently. "Whole investment strategies have been based on the belief that the Bank would blink as soon as there has been any risk in the markets. And they've been right."

The fact that QE would inevitably "make some people better off" was irrelevant to the Bank; it was not part of its mandate to manage inflation and ensure market stability. Responsibility for alleviating the effects of QE lay with the Treasury. It was for the chancellors of the day, from George Osborne to Rishi Sunak, to tax the boom being fuelled by the central bank. They did the opposite. In 2016 Osborne reduced the tax rate paid on profits from capital (capital gains tax) to 20 per cent - less than half the top rate of income tax. It was a tax cut for the 1 per cent, paid for by six years of austerity imposed on everyone else.

Few people in the 1 per cent understood what austerity meant in the 2010s. But Gary Stevenson did, and that knowledge made him millions. He had grown up beside a railway track in Ilford, east London, the son of a Post Office worker on £20,000 year. In 2011, in his early twenties and working at Citibank, Stevenson made a contrarian bet: interest rates would not rise.

He agreed to lend money in a year's time to other banks at rates of around 2 per cent. They thought they were locking in a cheap rate ahead of a rapid recovery and a return to higher rates. Stevenson thought recovery was years away, and they were agreeing to pay many times what it cost him to borrow. (Rates were at 0.5 per cent; they did not reach 1 per cent until 2022.)

Rates wouldn't rise until confidence had recovered - and no one he had known growing up was spending. They were struggling. The well-heeled bankers he was trading with had no idea what the Great Recession felt like. It hadn't hit them. The UK stock market, buoyed by QE, was two years into a fresh bull market.

Stevenson won the bet. He repeated the trade throughout the 2010s: once more at Citibank, where he became one of its most profitable traders, and then on his own after he quit in 2014. He earned more before he was 30 than his father earned throughout his life.

As a boy, Stevenson had thought of the rich as those on big salaries. In the public's mind, taxing the rich meant taxing well-paid work. But as Stevenson became rich himself a reality dawned on him: among the wealthy, income was secondary, a sop to the taxman. The ownership of assets was the real game, and assets were taxed far more favourably than labour.

"It doesn't matter what you do for a job," he says today. "You can't compete with wealth. It confers its own income, it compounds, and you don't need to work for it." At Citibank Stevenson paid more than half of his income in tax. The Duke of Westminster, he notes, inherited £9bn in 2016 through a trust and reportedly paid only a fraction of that in tax. "It's hard not to see the tax code as a class-based system." Stevenson says: "We are living in a new aristocracy."

We think of aristocracy as a relic of Britain's feudal past. But what if it's the norm? In 2013 the French economist Thomas Piketty argued in his seminal book Capital in the Twenty-First Century that we are returning to a world where wealth and power is concentrated in ever-fewer hands.

Piketty claimed to have assembled a greater range of historical data than any previous economist. This data, he argued, revealed a fundamental fact of capitalism. The rate of return on capital, which he called "r", has almost always been greater than an economy's growth rate, which he called "g". Piketty saw profound implications in this fact. If "r > g", then wealth accumulated long ago will grow more quickly than wages earned in the present. Inherited inequalities will be ingrained. "The past," as he puts it, "will devour the future."

This rule, Piketty showed, had been an underlying principle of society until the First World War, as returns on capital (of 4-5 per cent a year) have been consistent throughout history but economic growth is only a modern phenomenon. In the century between 1913 and 2012, growth was, for the first time in history, high enough to exceed the return on capital and reduce inequality.

The mistake, Piketty believed, was to treat this as the natural order. He thought the 20th century was unique. Two world wars depleted wealth, dragging down the return on capital, while the global postwar recovery led to growth rates that may now be beyond developed countries, whose populations are ageing and shrinking.

Piketty, born in 1971, saw evidence for this in his own lifetime. Growth has slowed in the West since he was a boy. The UK, for instance, despite growing strongly under Tony Blair after the recession of the 1990s, grew at only 2.1 per cent a year between 1980 and the publication of Piketty's book in 2013. It had grown at 3.1 per cent a year between 1961 and 1979. Privatisation, the supposed saviour of the British economy, did not fuel growth, which has since fallen even further, to 1.6 per cent a year since 2014, and is not expected to rise above 0.5 per cent until 2025.

It is the return on capital that has shot up in Britain since 1980. Inequality has risen with it, and inherited wealth is once again taking on the social importance it held in the Victorian era.

"Money pads the edges of things. God help those who have none," EM Forster has Margaret Schlegel, a child of wealth, say in Howards End (1910). "I stand each year upon £600 [£60,000 in today's money]... and as fast as our pounds crumble away into the sea they are renewed."

Forster understood that wealth was much more than merely another form of income. So did James Meade, a British economist who in 1978 published a seminal review into the UK tax system for the Institute for Fiscal Studies. "Wealth gives opportunity, security, social power, influence and independence," Meade wrote, arguing that "equity requires that wealth itself should be included in the base for progressive taxation."

It was not enough to tax income progressively only to tax wealth more favourably. Those who held capital stood on islands above the sea. The point of the tax system was to redress that, not perpetuate it.

Meade, assisted by a young Mervyn King (the future governor of the Bank of England), called for an annual wealth tax in his 1978 review. But the moment had already passed. Labour had failed to implement such a tax after winning the 1974 election, having committed to doing so in its manifesto. Denis Healey, Labour's chancellor at the time, later reflected that he had "found it impossible to draft" a wealth tax "which would yield enough revenue to be worth the administrative cost and political hassle".
[See also: If Jeremy Hunt won't cut taxes, what are the Tories for?]
By the time of the 1992 election - the first Labour expected to win since losing power in 1979 - the energy in the party had shifted entirely away from taxing capital. John Smith, Labour's then shadow chancellor, instead promised a new 50p income tax rate, focusing debate where it has remained ever since: on taxing labour, not wealth.

Smith's plans were initially well received. But when Labour failed to win power, they were considered to have doomed the party. The 1992 loss set the tenor of Labour's approach to tax for a generation. Today the party remains in the grip of an ideology advanced most fanatically by Philip Gould, the New Labour strategist, that Labour can only win by operating within the prism of Tory tax plans.

"Commentators never understood," Gould wrote in The Unfinished Revolution in 2011. "They saw a big Labour lead, thought Labour was certain to win and therefore accused us of being too cautious." But Conservative defectors, he argued, pointing to polling data, feared Labour would "betray them on tax". It was "only Labour's strategy of relentless reassurance that turned opinion poll leads into a real majority" in 1997.

These articles of faith are now three decades old. But are they right? John Major, an incumbent prime minister, was much more popular than the Labour leader, Neil Kinnock, in 1992. John Smith, whose tax plans had supposedly sunk his party, was on course for Downing Street when he died in 1994. Gould glided past these facts. Starmer's strategists still invoke Gould when they are pressed on tax but Gould's theories, if they applied at all, date from a different political world - before QE, before Capital, before the great British asset boom.

We have come a long way from 1978. When Healey failed to implement a wealth tax he consoled himself that inequality was falling anyway. That is no longer true. Inequality, Piketty argued in Capital, is U-shaped. Having fallen during the 20th century, it would rise in the 21st. In Britain, and across the developed world, inequality has risen dramatically over 40 years.

The UK is splitting apart, fuelled by a tax system that entrenches inequality. The consensus behind change is broad. A former senior Treasury official I spoke with supported all of the ideas that follow here. He had raised similar ideas with successive chancellors of both parties. With the exception of Nigel Lawson, he said that none were interested. It was all considered too difficult. Taxing property was seen as political death. But, he added, a great deal has changed since the financial crisis.

By making the case for tax reforms on wealth whose time has come, Labour could acquire the definition it has lacked under Starmer. The agenda open to Labour's leaders should not be confused with the party's Corbyn-era policies, which focused on taxing highly paid employees, or with the tenets of Tony Blair, who never sought to even the inequalities of wealth and now thinks taxes should fall. Blair is a poor guide to the present. The value of privately held wealth in Britain has doubled as a share of GDP since he entered No 10 and the tax code has only become more weighted in capital's favour.

There is no greater front on which Labour could fight than council tax, the least defensible tax in Britain. If you live in Burnley, where homes are cheaper than many other parts of the UK, you will on average pay 1.1 per cent of the value of your home in council tax every year. If you live in a typical property in Kensington and Chelsea, where council tax has scarcely risen but homes have rocketed in value since QE - leaping from 24 times earnings in 2010 to 38 times earnings in 2022 - you will pay 0.1 per cent. The burden of council tax is ten times as great in Britain's poorest areas. No party that wants to level up Britain can uphold it.

It is regressive by design and labyrinthine in complexity. Labour could abolish council tax and stamp duty, a tax that only serves to freeze the property market. Every property owner in the UK would instead pay 0.5 per cent on the value of their home. That would raise as much revenue while cutting taxes for three in four people, according to the Institute for Public Policy Research. Proportional property taxes such as these are commonplace in US cities. Britain is the aberration.

Council tax has been a 30-year tax break for wealth - for nominally left-wing Guardian readers in Camden and Islington and propertied Tories across the south-east of England. Their tax would rise, but the property-rich would retain the greatest privilege our tax code affords them: the right to avoid capital gains tax on the home they live in. House prices in London have tripled in real terms since 1991. London homeowners are sitting on colossal gains or have already realised them entirely untaxed. The city can absorb a small annual property charge. The public strongly supports this. Three times as many voters back this idea as oppose it, according to polling for the New Statesman by Redfield & Wilton, including a majority of Londoners.

A proportional property tax would not raise revenue, but it would even the burden between poor and rich households. That would galvanise the economy, as the rich save and the poor spend. But Labour will also need to raise fresh revenues in order to cut taxes for those in work. There is a compelling way to do so: by applying National Insurance, a tax paid by workers, to landlords and speculators, the primary beneficiaries of QE, who profit without working.

Arun Advani, the economist who turned up in Stratford to study non-doms in 2021, has shown that this could raise £10bn. The former senior Treasury official with whom I spoke thinks such parity is long overdue. (Parity is arguably generous to the asset-rich; until 1984 "unearned income" was taxed at a higher rate than work.) Rentiers, the official said, should pay their fair share. Voters agree. This is terrain on which to win. Yet Labour is running from these ideas. Supporting them, its leaders think, would be tantamount to throwing the election, as one senior shadow minister has put it. The only major tax reform they back is the full abolition of non-dom status, even though these more impactful ideas are just as popular, if not more so.

There is a third reform Labour could evidently embrace: reversing George Osborne's 2016 capital gains tax cut. Treasury analysis at the time had shown that 28 per cent was the revenue-maximising rate: a higher rate would deter entrepreneurs; a lower rate would cost Britain money. Osborne duly cut the rate to 20 per cent. Reversing that cut could raise £7bn. In 2018, before she disavowed change, Reeves went further, proposing to equalise capital gains rates with those on income tax, which could raise twice as much.

There are more radical options available to Labour, but the moderate reforms outlined here would give those affected little basis to object. And few would be affected: most people already pay National Insurance on their earnings and don't have any investment income, while 99 per cent of taxpayers do not pay capital gains tax. The reform with the broadest consequences - council tax - would still only increase tax for one in four households, many of them in London constituencies that Labour win in landslides.

Every era has its climate of ideas. It is for parties to recognise them. "Everyone knows tax has to shift from income to wealth," says an academic who has worked closely with Reeves. The trick, he says, is to make changes in tax seem normal. That is what is striking about Reeves' current insistence on ruling out these reforms: the public want them.

Labour doesn't think it needs to do any of this. Instead it expects to emulate Blair and simply grow the economy. But Blair was lucky. He was elected just as the economy began to improve, which allowed him to skirt the "trilemma" every prime minister faces: that in order to invest in anything new you have to cut, borrow or tax.

Margaret Thatcher was even more fortunate. She was gifted the North Sea oil boon, which (along with privatisation) furnished her with today's equivalent of £60bn in tax for every year she was in power. Such is the pot luck of inheritance. Labour's plan to grow is, in the short run, no plan at all. You cannot speak growth into existence, as Liz Truss can attest. Labour's best hope for growth is to fix the flawed incentives of Britain's tax code.

There is one more major reform Labour is refusing to adopt: a tax on the very richest. Britain's inheritance tax system is riddled with asset reliefs and trust exceptions. Those with the greatest estates pay the lowest rates. Estates worth at least £10m pay an average of 10 per cent (the nominal rate is 40). Fixing capital gains tax, as Advani puts it, "is not going to get money from somebody who has £100m. They don't need to sell their assets. They borrow against them, and when they die they'll pass on those assets free of tax."

The only way to raise money from the very richest is to charge a wealth tax, as Labour once won an election promising to do. A tax of 1 per cent on wealth over £10m would fall on around 20,000 people - the 0.1 per cent. In the 1970s Healey thought the revenues on offer didn't justify the cost. Advani's research has, however, shown that a one-off version of the tax could today raise £11bn. He estimates capital flight would be rare, as it was for non-doms. And evasion is less possible than people think. The wealth of the very richest is boundless yet bound in by Britain. Land may be leased out but it cannot be moved. Estates can always be taxed. It is a political choice.

Labour has never fought against capitalism. It once sought to alleviate its inequities through control of the commanding heights of industry. Now it risks governing without a creed. Yet one is on offer. In Britain the rules of the tax game have been stacked against working people. The question for Labour is simple and deafening: are you going to fix that or not?
[See also: Can Labour afford to be ambitious?]
Content from our partners

This article appears in the 30 Aug 2023 issue of the New Statesman, The Great Tax Con

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The UK's tax system entrenches inequality, stymies growth, and rewards a few at the expense of the many.

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Why is Labour still using the self-defeating, discredited ‘maxed out credit card’ analogy? | Yanis Varoufakis

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Using discredited language like "the country has maxed out it's credit card" is wrong and will damage Labour, like I said yesterday in class. Here's a full explanation why...

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Using discredited language like "the country has maxed out it's credit card" is wrong and will damage Labour, like I said yesterday in class. Here's a full explanation why...

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Why is Labour still using the self-defeating, discredited ‘maxed out credit card’ analogy? | Yanis Varoufakis

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It is one thing to U-turn on a modest green transition programme. It is another to do so using mendacious Tory economic paradigms, says the economist Yanis Varoufakis

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Does Germany's economy need more than a cup of coffee?

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Is Europe's powerhouse economy in long term decline?

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Is Europe's powerhouse economy in long term decline?

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"I'm afraid that we will actually miss out on the future, because we're taking too little risks."

Verena Pausder is a successful German entrepreneur who is clear about where she thinks the economy is going wrong.

This week, it was confirmed that Europe's biggest economy shrank by 0.3% last year.

Whilst the country avoided recession - thanks to a statistical quirk - most economists think Germany will be in that position when the numbers for the first part of this year are published.

Germany's growth is being held back by the twin shocks of the energy crisis, caused by the war in Ukraine, and higher interest rates.

There are also long-term structural issues such as ageing infrastructure, a labour shortage and the cost of tackling climate change.

At January's World Economic Forum in Davos, Germany's finance minister Christian Lindner denied these problems made Germany the "sick man" of Europe.

"After very successful periods since 2012 and these years of crisis, Germany is a tired man after a short night, and the low growth expectations are probably a wake up call," he said.

"And now, we have a good cup of coffee, which means structural reforms, and then we will be continuing to succeed economically."

For Mrs Pausder, who is chair of the German Start-up Association and founder of the kids app developer Fox & Sheep a "change in mindset" is what's needed.

"I think we're really good at kind of listing all the negative stuff and what we're not good at. And I think what we're forgetting is what we actually get done."

She points out that despite the downturn there were still 2,489 start-ups founded last year and the country is making good progress in the switch to green energy.

Younger generations are more willing to take risks, she says. But as things stand, Germany's pension funds - which are worth more than $700bn - "are not allowed to invest into asset classes like venture capital and private equity".

"We're used to these big brands of the past, and we want to do everything to have them in the future. And sometimes we put too much energy into conserving what we have [rather] then to investing in the new things."

Those big brands have traditionally sold huge amounts of cars, machinery and pharmaceuticals abroad, driving economic growth and influencing government policy.

However, foreign demand "has been declining for many, many months", says Dr Klaus Deutsch, the chief economist at the German Federation of Industries (BDI).

Exports to non-EU countries were down 9.2% in December compared to the same time a year earlier.

Dr Deutsch explains that Germany's recovery depends on the world's two biggest economies, as well as domestic concerns.

For exports, he says, "The question of greatest importance is whether the US economy can avoid a recession" as well as if China can overcome the many challenges its economy faces.

Around 7.5m people, or 16% of the workforce, are employed in manufacturing, and nearly half of what they make is sold abroad.

That gloom in the manufacturing sector is, he says, driving the pessimism amongst German consumers which "is a bit worse than in most parts of the world".

December's figures showed an uptick inflation to 3.7%, which is still lower than many other major European economies. The rate at which prices are rising means people are holding back their spending on everything from cars to furniture.

It's a sentiment that's not hard to find amid the hustle and bustle of office workers and tourists on Berlin's shopping hub of Friedrichstrasse.

On a cold, but sunny winter's day one man tells us that he notices higher prices everywhere from his rent to his energy bills, as well as when he goes to restaurants. "Berlin used to be a cheap city. That's not the case anymore."

A woman tells us that for her family of five the weekly supermarket shop used to come in well under 100 euros. "Now I spend well over that," she says.

A lady who says she has a "good job and a good wage" is doing "ok". However, she adds: "I think in general things are going to get worse."

Despite the shrinking economy, the number of people in work has increased steadily over the last two years. That points to lower productivity.

According to Moritz Schularick, President of the Kiel Institute for the World Economy, "Unhappiness isn't mainly driven by the current economic situation. It is driven by a deeper cultural unease as well as uncertainty and fear. There's a lot of angst."

That sense of negativity about the outlook is reflected in the latest GfK survey of consumer sentiment, which says crises, war and inflation are all leading Germans to save rather than spend.

Mr Schularick thinks the move away from cheap Russian energy is less of a challenge that the long term issues and December's court ruling which has forced Olaf Scholz's government into budget cuts.

"One of the lessons we've learned from the UK and the 1930s, is that in these situations you don't want to antagonise parts of the population even further by making painful budget cuts because that feeds the extremes and populists."

Economic discontent has helped the political rise of the far-right AfD who are seen as against immigration. Amid a labour shortage that is something which is worrying business leaders such as the CEO of software giant SAP, Christian Klein.

"We are completely against any kind of extremism now, because we need to have those talents coming to us to innovate, to boost the economy. And that's why it was time indeed, to speak up not only for myself, but for the German economy."

The AfD's deputy leader Peter Boehringer denies his party is bad for business and says companies biggest problem is high energy costs which have been caused by bad government policy.

If Germany's economy is to return to growth innovation will be crucial, says SAP's Christian Klein. Germany's most valuable company saw the amount of money it took in grow 6% last year to $33.7bn.

"Many companies actually turn to SAP, especially in macroeconomic challenging times."

He explains his company is helping its customers tackle challenges ranging from supply chains to climate change and productivity challenges caused by high inflation.

"In Germany, I don't see a decline in IT budgets. What I actually see is that business leaders want to invest because they see tech as an opportunity to overcome those challenges."

Additional reporting by Damien McGuinness in Berlin

You can watch more about Germany's struggle for economic growth on Talking Business with Aaron Heslehurst on BBC News. Viewers in the UK can watch on BBC iPlayer from 23:30 GMT on Saturday. In other countries it will be on at 23:30 GMT on Saturday, 05:30 GMT and 16:30 GMT on Sunday and 08:30 GMT on Monday.

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Does Germany's economy need more than a cup of coffee?

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Germany's growth is being held back by the twin shocks of expensive energy and higher interest rates.

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The damning truth about the UK's 2% inflation target: it's completely made up | Louis-Philippe Rochon

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The most widely used macro target in the world was made up with zero empirical evidence to back it up.

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The most widely used macro target in the world was made up with zero empirical evidence to back it up.

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Across the world, central banks have been vowing for almost two years to return inflation to the target rate of 2%. In practice, this has meant increasing interest rates - the cost of borrowing - in order to slow down economic activity. Today, the Bank of England decided to leave interest rates in the UK at 5.25%, their highest level since 2008.

There are almost 60 countries that officially have a 2% inflation target, including the US, UK, Japan and the eurozone, but where does this actually come from? It is perhaps the most important policy objective being pursued today; you would think there must be a slew of empirical support that justifies this chosen target. After all, the target matters a great deal. If it were, say 3% or 4%, we would probably no longer be so concerned with rising prices, as many countries' inflation has fallen to those levels.

I have spent hundreds of hours over the last few years poring over papers and documents at various central banks, going back decades, looking for some sort of document that would justify, or at least explain, the choice of a 2% target. I have not been able to find anything.

Now, I am not a fan of the 2% inflation target to begin with, as I am not convinced that inflation is "always and everywhere" a monetary phenomenon, to quote Milton Friedman - by which he meant that inflation is always about too much money in the economy. As such, I don't think interest rates help much. I also believe that focusing on an inflation target detracts from the importance of fighting unemployment (or under-employment and low pay), which is, in my opinion, a greater problem than inflation.

But let's focus on the choice of a 2% target. After the high inflation of the late 1970s and early 1980s, when it reached over 20% in the UK, central banks were left scrambling to find some new theoretical model to deal with rising prices. The first central bank to propose an inflation target of 2% was in New Zealand. But where did they get it from? Apparently, from thin air.

Recently, I came across this one story that suggested the choice of 2% was the result of an off the cuff remark by then New Zealand finance minister, during a TV interview, who told reporters he would be happy with an inflation between 0% and 1%. This led the governor of the central bank at the time, Don Brash, to factor in an inflation bias of roughly 1% to arrive at the magical number of 2%. Michael Reddell, a colleague of Brash's at the time at the Reserve Bank, admitted: "It wasn't ruthlessly scientific." Brash himself admitted as much: "It was almost a chance remark. The figure was plucked out of the air to influence the public's expectations."

A similar version of the events was proposed, in June 2023, by the Council on Foreign Relations, which concluded that "surprisingly [a 2% target] came not from any academic study", and that it came about "somewhat accidentally". Recently, Nobel prizewinning economist Joe Stiglitz arrived at the same conclusion: "Moreover, one must remember that the 2% target was pulled out of thin air."

But perhaps the most damning comment was made by Harvard professor Benjamin M Friedman (no relation to Milton). In 2018, Friedman wrote, in a book honouring Vítor Constâncio, the former vice-president of the European Central Bank: "There is the arbitrariness surrounding the current 2 percent target. In retrospect, the paucity of serious empirical research underlying the identification of the 2 percent norm, now quite some time back, is a professional embarrassment."

It's worth repeating those words - "a professional embarrassment". One of the most important economic policies in place today, across the world, is based on an impromptu remark and very little, if any, empirical support.

And central banks don't seem to be listening. There is now considerable discussion out there about raising the inflation target to 3%. For instance, Constâncio himself has recently said that "after overcoming the current wave of inflation, central banks should seriously consider raising their inflation target to 3%". Nobel prizewinner Paul Krugman and former chief economist at the IMF, Olivier Blanchard, were officially in favour of this change. As recently as October 2023, this publication reported on such a proposal by the UK's Resolution Foundation.

Yet this proposal suffers from the same criticism as above: where is the empirical justification? These comments are seemingly just as off the cuff as the original proposal.

We give central banks too much power over our lives and livelihoods, when fiscal policy, which concerns government spending and taxes, is where the battle should be fought. Using interest rates to tackle inflation can lead to serious problems, as anyone with a mortgage knows full well. John Maynard Keynes once said that the use of interest rates "belongs to the species of remedy which cures the disease by killing the patient". Surely we can think of better ways to do this. The only solution, in my view, is to scrap inflation targeting altogether, and start anew with a deep, systematic examination of what monetary policy is, and what it actually does.

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The damning truth about the UK's 2% inflation target: it's completely made up | Louis-Philippe Rochon

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So much pain is inflicted in the name of this figure. But was it ever more than an arbitrary choice, asks Canadian academic Louis-Philippe Rochon

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How will the UK economy compare to other countries in 2024?

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Interesting look at UK economic forecasts for 2024 compared to other developed countries 

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Interesting look at UK economic forecasts for 2024 compared to other developed countries 

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Rising prices, stagnant incomes, and flatlining growth raising fears of recession: 2023 was tough.

But with a pre-Christmas surprise drop in inflation, will the dawning of 2024 - likely to be an all-important election year - ring in a brighter, less pressured phase?

And how does the UK experience compare to elsewhere?

Inflation

The worst of the cost-of-living crisis appears behind us - but prices were still 3.9% higher in the UK than a year ago in November.

Inflation's the same in France but above the EU's 3.1% inflation rate, looking at the most comparable figures. It's even lower in the US.

Britain had particularly stubborn inflation due to experiencing the worst of both sources of price shocks affecting rich countries - 2022's spike in energy and food costs prompted by the war in Ukraine, and a post-pandemic shortage of workers.

But as those pressures retreat, the inflation gap is narrowing.

Core inflation, which strips out food and energy, has also been more stubborn in the UK, suggesting a greater willingness and ability by consumers to spend. That might have been funded by pay rises or pandemic-era savings - but that's easing too.

Interest rates

Barring a new inflation shock, the Bank of England's rate-raising spree - 14 hikes over the last two years - may be over. But the pain lingers.

That's been true of many countries. Central bank rates - and the rates on new mortgage deals have generally shot up over the last couple of years.

However, the impact differs. In the US and some of Europe, fixed-rate mortgage deals tend to typically run for 25 or 30 years and homeowners may be able to switch deals with minimal penalty. The French government also effectively caps rates, so a new 30-year mortgage deal may cost 3.5% while in America those rates peaked at over 7%.

So, borrowers in those countries may be more shielded from rate hikes than in the UK, where the majority are on two- or five-year fixed rate deals. Millions have seen a jump in repayments as they renewed deals, hundreds of thousands more will follow in 2024.

But the blow for the latter may be softened somewhat. If the latest fall in UK inflation is sustained, some economists reckon the Bank of England may cut rates as soon as the spring, around the same time as those other central banks. Fixed rate mortgage deals are already falling as financial markets grow more hopeful of cuts.

Growth

The previous couple of years turned out to be a bit better than originally thought - but in recent months, activity has stalled.

Revised official statistics in September showed that the UK economy wasn't, contrary to earlier estimates, still smaller than prior to the pandemic.

While the UK still lags behind the US on that score, and did slightly worse than France - it fared better than Germany. The latter has struggled, the manufacturing prowess it has been renowned for making it vulnerable to weaker demand from other countries and supply chain issues, in particular as it tried to wean itself off energy imported from Russia.

Economists remain downbeat about Germany's near-term prospects. But those may not be much brighter in the UK.

The latest official figures suggest the UK's economy stalled and then slipped into reverse over the summer, raising the risk that it edged into recession at the end of 2023. Many parts of the service sector that cater to households remain smaller than prior to the pandemic.

As the impact of the recent rate rises continue to filter through to incomes, profits and spending, the Bank of England is expecting virtually no growth over the next couple of years. The IMF is only a bit more optimistic.

UK growth over the past 15 years has typically been a fraction of what it averaged before the 2008 financial crisis. Add in rising inequality and researchers at the Resolution Foundation say the typical British household is more than £8,000 worse off than it would have been had it echoed competitors' track records.

That's why politicians of all parties have put higher growth on the priority list.

Unemployment

Despite Covid and higher rates, our jobs market has been resilient so far. The latest comparable unemployment rate shows the UK at 4.2%. That's in line with the G7 average. It's higher than in Germany and the US but below France's rate of 7%.

But the widespread skills shortages of 2022 have gone. As those interest rates bite, employers are curbing hiring. Unemployment too could rise - by less than one percentage point according to official estimates - but that could see over a hundred thousand jobs to go.

But there's more. To count as unemployed, people have to be available for work and seeking a job - or they count as inactive. The UK is one of few rich countries in which there are more inactive people than prior to the pandemic. Hundreds of thousands more. The number of long-term sick has soared.

Helping more people back to work is seen by some policymakers as crucial to boosting growth and incomes. The Autumn Statement contained many measures - from occupational health support to benefit sanctions, both carrot and stick - towards that.

Tax

It's not just jobs, inflation and rates affecting fortunes.

Millions of workers will benefit from a New Year National Insurance cut - but they've also seen tax bills via their pay packets rise as the thresholds at which higher rates of taxes on incomes become applicable fail to rise with inflation.

So the UK's tax burden, the proportion of the nation's income, GDP, paid to the tax man, is still set to reach a post-war record.

But our tax burden was actually lower than the EU average, although above that in the US on the latest comparable numbers. The taxman in France already receives 46 cents for every euro generated in the economy there.

However most nations will face increased pressures on their public purse, thanks to an ageing population and existing debts.

2023 has had its challenges but going into 2024, there are some areas to feeling cheery about - and others that will mean some households continuing to struggle.

There'll be plenty to keep politicians busy as they draft manifesto pledges and debate on doorsteps.

The economy is one of the most crucial election battlegrounds, a sign of these challenging times.

Everyone wants to turbo-boost prosperity - the question for politicians and policymakers is how to do so.

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How will the UK economy compare to other countries in 2024?

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After a tough 2023, will things improve for the UK and other economies in the new year?

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IMF warns UK government against further tax cuts

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IMF warns chancellor that tax cuts he's planning should not be carried through 

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IMF warns chancellor that tax cuts he's planning should not be carried through 

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On Tuesday, Mr Hunt receives the first draft of the numbers on the public finances from the Office for Budget Responsibility (OBR) - the government's independent forecaster - including an indication of the room for manoeuvre that might be used for tax cuts or spending increase.

OBR head Richard Hughes recently said a description of the government's pencilled-in post-election spending plans as a "work of fiction" was "generous" because the "government hasn't even bothered to write down" its plans for individual departments.

If the government sticks to its spending plans, then lower interest rates, and a stronger economy could increase the chancellor's room for manoeuvre against his self-imposed borrowing targets by as much as £20bn per year.

The Institute for Fiscal Studies (IFS) said last week that promises of tax cuts during general election campaigns may have to be rolled back as the UK economy faces some of its worst problems since the 1950s.

Politicians need to be honest about tough economic trade-offs, it said.

Following the IMF's forecast, Carl Emmerson, deputy director of the IFS, told the BBC the chancellor was "only barely on track to meet his own central objective of having government debt on a downward trajectory in five years' time".

"[Tax cuts should] at least wait until we have debt more securely on a downward trajectory, and much more clarity about where planned spending cuts will bite," he said.

Commenting on the IMF's advice, Mr Hunt said: "The IMF expect growth to strengthen over the next few years, supported by our introduction of the biggest capital investment tax reliefs anywhere in the world, alongside National Insurance cuts to improve work incentives.

"It is too early to know whether further reductions in tax will be affordable in the Budget, but we continue to believe that smart tax reductions can make a big difference in boosting growth."

But Labour's Darren Jones, shadow chief secretary, said the IMF's forecast was "yet more evidence of 14 years of Conservative economic failure".

"The Tories have left Britain with high debt, flatlining growth, high taxes and working people worse off," he said.

The IMF and UK government have disagreed over previous forecasts. In October last year, the IMF rejected government suggestions that its assessment of the UK back then was too gloomy.

But economic forecasters are not always right when it comes to predicting the future. The IMF has previously stated its forecasts for most advanced economies, such as the UK's, have more often than not been within about 1.5 percentage points of what actually happens.

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IMF warns UK government against further tax cuts

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The International Monetary Fund suggests pencilled-in spending cuts from this year are unrealistic.

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BBC News - IMF warns UK government against further tax cuts
https://www.bbc.co.uk/news/business-68140634

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UK halts trade negotiations with Canada over hormones in beef ban

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Contextual example for tariffs, trade disputes, regulation etc. 245% tariff on cheese exports to Canada!

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Contextual example for tariffs, trade disputes, regulation etc. 245% tariff on cheese exports to Canada!

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By Paul Seddon & Kate Whannel

Negotiations between the UK and Canada on a post-Brexit trade deal have broken down after nearly two years, following a row over beef and cheese.

Canada has been pushing for the UK to relax a ban on hormone-treated beef, which its producers say in effect shuts them out of the British market.

The UK have concerns about 245% import taxes Canada put at the start of the year on British cheese.

The pause in talks mean British car firms could also face higher tariffs.

It will also mean the UK's trading terms with Canada will now be worse than when it was part of the EU's deal with the country.

Minette Batters, president of the National Farmers' Union of England and Wales, said she was glad the UK government had not "given way" on hormone-treated beef.

But the British Chambers of Commerce (BCC) and the Society of Motor Manufacturers and Traders (SMMT) described the news as unwelcome.

Downing Street said the government would "only negotiate deals that deliver for the British people", and reserved the right to "pause negotiations where progress is not being made".

But a spokesperson added: "We're open to restarting talks with Canada in the future."

No 10 dismissed a suggestion that Brexit had left the UK worse off in terms of international trade, saying it was a "benefit of our independent trading status that we are able to insist on the detail of each and every deal to ensure that it works specifically in the UK's interests".

Trade between the two countries currently takes place under the terms of a deal the UK rolled over from its time as an EU member.

A time-limited agreement allowed the UK to continue to sell cars and cheese without high import taxes. But talks about extending these as part of a new deal have now broken down.

The arrangements for cheese ended on 31st December 2023 leading to taxes of up to 245% on British imports, while the car deal is due to expire in April.

This is the first time the UK has formally suspended talks with a trade partner since formally leaving the EU trading regime in 2021.

Talks between the two countries on reaching a bespoke agreement had been taking place since March 2022.

'Relief' for UK farmers

A spokeswoman for Canada's trade minister Mary Ng said she was "disappointed" at the pause in talks, and had communicated this to UK Business Secretary Kemi Badenoch.

"Their decision to continue to maintain market access barriers for our agriculture industry and unwillingness to reach a mutual agreement has only stalled negotiations," the spokeswoman added.

"The UK is a long-standing trading partner and I am confident that we can negotiate an agreement that is win-win for Canada and for the UK.

"But let me be clear - we will not negotiate an agreement that is not good for Canadians - and not good for our Canadian businesses, farmers and workers".

Total goods trade between the two countries was worth £19.2bn in 2020, according to the UK government, with UK imports from Canada worth £7.3bn and UK exports to Canada worth £11.8bn.

Ms Batters said the UK's decision would be a "relief for farmers".

She told BBC Radio 4's Today programme she was pleased the "government has stuck to its line and not given way".

"We have already damaged our economy and agricultural sector by fully liberalising on trade deals with Australia and New Zealand. We had to take a strong line on this."

However, William Bain, trade policy head at the BCC, said: "For our dairy exporters and parts of our manufacturing industry the loss of key trade preferences puts them in a worse position than before 2020.

"Government must help these sectors through difficult times and open up new markets for our goods and services."

Mike Hawes, the chief executive of the SMMT, said the breakdown in talks sent "a signal that the UK's world-class automotive products are not welcome in Canada".

"If UK car exports can't use EU parts and components to avoid additional duties it creates a risk that tariffs, potentially charged on top of luxury goods taxes, could be reintroduced," he added.

'Weaker'

The Canadian Cattle Association said it backed its government's "hard-line approach" on beef rules, adding that the UK had "shown no indication that it is prepared to fully accept Canada's food safety system which is widely recognized as one of the finest in the world".

Labour's shadow business secretary Jonathan Reynolds said: "This is very concerning news and another significant failure from the Conservatives to honour their promises.

"Rather than strengthening our trading position post-Brexit these failures have left us in a weaker position, particularly for the automotive sector."

SNP international trade spokesperson Richard Thomson said: "Westminster's Brexit has damaged the UK's potential for global trade and has dragged Scotland's economy down with it."

Former Environment Secretary George Eustice told the BBC the UK was "absolutely right to suspend negotiations", and that Canada should "accept the need to comply with British food standards".

Mr Eustice, who was fiercely critical of the UK-Australia trade deal, said the government had to ensure that "any access granted for hormone free beef from Canada is matched with access for UK dairy into the Canadian market".

Commons Speaker Sir Lindsay Hoyle expressed frustration that the halting of the talks was announced to the media before MPs.

"I will say it is amazing how quickly the government come to give good news... I always believe this House should hear it first," he said.

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UK halts trade negotiations with Canada over hormones in beef ban

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Talks aimed at extending an EU-era deal broke down over Britain's ban on hormone-treated meat.

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Predictions about the death of globalization may be premature...

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Predictions about the death of globalization may be premature...

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Gillian Tett: Look back to judge chances of a global future

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Interesting article on the history and future of globalization by Gillian Tett at the FT

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Interesting article on the history and future of globalization by Gillian Tett at the FT

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Gillian Tett: Look back to judge chances of a global future

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Maybe it's time to dust off John Maynard Keynes's warning about taking borderless prosperity for granted

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UK economy will enter 'grey gloom' until polling day, economists say

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Predictions for UK macro performance in 2024. Worth a read.

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Predictions for UK macro performance in 2024. Worth a read.

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UK economy will enter 'grey gloom' until polling day, economists say

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Lower inflation will result in little perceptible improvement to living standards as growth stagnates in 2024, the FT's annual survey predicts

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Central banks rethink forecasting after failures on inflation

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It really is about time that central banks admit that they have no idea what causes inflation or what can reduce it.

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It really is about time that central banks admit that they have no idea what causes inflation or what can reduce it.

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Central banks rethink forecasting after failures on inflation

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ECB, Fed and BOE overlooked potential for global price spikes after end of pandemic and Russian assault on Ukraine

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Five charts explaining the UK's economic prospects in 2024

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What are the UK's macro prospects in 2024? Y13 need to read this before February mocks.

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What are the UK's macro prospects in 2024? Y13 need to read this before February mocks.

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The UK is entering an election year with the economy struggling to grow as households and businesses come under pressure from rising borrowing costs, higher taxes and elevated living expenses.

Rishi Sunak is expected to send voters to the polls in 2024 having declared victory on his primary economic target to halve inflation in 2023. However, the Bank of England has warned the UK is facing a 50-50 chance of a recession, while living standards are on track to be lower at the end of the parliament than they were at the start of it for the first time on record.

Here are five charts underpinning the UK's economic prospects in 2024.

Falling but stubbornly above-target inflation

Inflation has fallen from more than 10% in January 2023 to 3.9% in November, driven mainly by cooling energy prices. However, the annual rate has stuck at persistently higher levels than anticipated, as the UK grapples with the highest rate in the G7.

While inflation is expected to continue to fall in 2024, the Bank is forecasting it to remain above its government-set target until the end of 2025, maintaining pressure on households. Lower inflation does not mean prices are coming down, only that they are rising less quickly.

Financial markets are predicting that cooling inflation and weak economic growth will force the Bank to start cutting interest rates from the current level of 5.25% from as early as the summer, as central banks across advanced economies begin to dial back the toughest increase in borrowing costs for decades.

However, there are risks inflation could remain persistently high amid geopolitical tensions and a tight UK labour market. The Bank has said it is watching closely for signs of inflation persistence from pay growth and prices in the services sector.

Weak GDP growth

Economic activity has slowed to a crawl in recent months, with gross domestic product (GDP) unexpectedly shrinking in October, according to the latest official figures, as households come under sustained pressure from higher living costs.

The Bank of England has warned there is a 50-50 chance of a recession, beginning around the time a spring general election could be held, amid the impact from higher borrowing costs. It expects zero growth for 2024 as a whole.

Sunak has placed growing the economy among his top priorities after years of lacklustre performance. While growth proved more resilient to the shocks of the Covid pandemic and energy crisis than anticipated in 2023, the Office for Budget Responsibility (OBR) said in November that it expected the UK economy to grow more slowly over the coming years. It is slightly more upbeat than the Bank, pencilling in growth of 0.7% for 2024 - still less than half the annual average growth rate between 1998 and the 2008 financial crisis.

Rising unemployment

Weak activity and higher borrowing costs are expected to weigh heavily on employers' hiring intentions in 2024, with forecasters anticipating a rise in unemployment over the course of the year.

The UK's jobless rate has remained at historically low levels over recent months despite pressure on the economy, as employers struggle to fill near-record numbers of job vacancies. However, the number of job openings has fallen in recent months as hiring demand fades.

The OBR forecasts unemployment will rise to a peak of 1.6 million people (4.6% of the labour force) by the second quarter of 2025, up from the current level of about 1.5 million (4.2%).

With weaker hiring demand and cooling inflation, average annual pay growth is expected to fall to about 3.7% in 2024 and 2.2% in 2025, down from a peak of about 8% in 2023.

Tax cuts?

Taxes as a share of the economy are on track to reach the highest sustained levels since Clement Attlee's postwar Labour government 1945 to 1951 - even after the chancellor, Jeremy Hunt, cut national insurance and offered tax relief on business investment at the autumn statement.

Fuelled by a six-year "stealth" freeze on income tax thresholds, revenues for the exchequer are on course to reach almost 38% of GDP by 2028-29, significantly above the pre-pandemic level of about 33%.

Hunt is expected to use his spring budget on 6 March to announce electioneering tax cuts before the general election. However, he is constrained by a commitment to reduce the UK's national debt as a share of the economy within five years.

The OBR forecast at the autumn statement that Hunt would meet his target with about £13bn to spare. But this was predicated on plans that included a sharp £6bn rise in fuel duty this spring, which the chancellor is unlikely to apply, and a new austerity drive after the general election.

Soaring housing costs

The Bank of England's most aggressive cycle of interest rate rises in decades has fuelled an explosion in housing costs, triggering a timebomb in the mortgage market. Most home loans have a fixed rate - meaning higher costs come with a lag.

About half of all mortgages have repriced since December 2021. A further 5m are expected to be hit by 2026. For the typical owner-occupier rolling off a fixed rate between the summer of this year and the end of 2026, the Bank expects monthly repayments to increase by about £240, a jump of about 39%.

Many landlords have increased the rent they charge or sold properties to offset their own increasing borrowing costs, contributing to the sharpest increase in private sector rents on record.

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Five charts explaining the UK's economic prospects in 2024

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As we enter an election year, how will the effects of inflation, weak GDP growth, unemployment, tax cuts and rising housing costs sway voters' intentions?

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More than 500,000 under-35s in UK out of work due to long-term illness

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Further results of austerity. Welcome to Britain 2023.

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Further results of austerity. Welcome to Britain 2023.

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More than half a million young people in the UK say they are out of work due to long-term illness, a 44% increase in just four years.

Data from the Office for National Statistics shows that more than 560,000 people aged between 16 and 34 were economically inactive - meaning they were not in work or seeking work - in the first three months of 2023 due to long-term sickness.

The findings, which experts connect to a growing mental health crisis and an underinvestment in health services, are also reflected in other studies.

One report, by the Health Foundation, found that 16- to 34-year-olds were now "as likely to report a work-limiting condition as someone aged 45-54 years 10 years ago".

The chief secretary to the Treasury,Laura Trott, recently caused controversy when she said people with mobility and mental health problems should do "their duty" and work from home or face having their benefits cut.

Chart showing the proportion of people in different age groups who are out of work and affected by mental health problems

Mental health problems - including depression, bad nerves and anxiety - were most prevalent in the youngest age group, affecting more than a third of the 16- to 34-year-olds (36%) who were out of work due to long-term illness, according to the ONS labour force survey.

The equivalent figure was 31% among those aged 35 to 49 and 20% in the 50-64 cohort.

David Strain, a professor at the University of Exeter and chair of the British Medical Association's board of science, said difficulties in accessing mental health services and "12 years of underinvestment in the public health sector" had contributed to poorer population health.

"We have a national disease service these days, not national health service. We are focused on treating sick people rather than keeping people healthy. And people haven't had access to essential mental health services," he said, adding that while long Covid had probably played a part in the increase, this was difficult to tease out from the available statistics.

The number of people stating they were out of work because of long-term illness also grew in the older age categories, although these increases were not as stark, affecting 1.4 million people aged between 50 and 64, a 26.7% rise on the 2019 figure, and 578,000 of 35- to 49-year-olds, up 16%.

Researchers point to a post-pandemic effect in the number of people out of work because of mental health problems, but they also say these problems are not new and that they are part of a wider trend that goes back to 2012.

The Health Foundation report shows that the rise in work-limiting conditions among young people has been mainly driven by mental health problems, with the proportion of people not working because of mental health issues almost doubling in 11 years, from 6.7% in 2012 to 12.7% in 2023.

Dave Finch, an assistant director of the healthy lives team at the Health Foundation, said its research showed there were now more than four times as many younger workers reporting mental health conditions that affect their working lives compared with a decade ago.

"Good mental health is built on having a stable income, social interaction and a good place to live. But we know that younger people face greater pay insecurity, are more likely to suffer financial strain due to high rents, and are likelier to feel lonely than other working-age people," he said.

"Many of these trends were exacerbated first by a pandemic that disrupted the education of millions of students and now a cost of living crisis that has hit the health of younger people."

The study also found that 3.7 million people are in work but have a health condition that limits the type or amount of work they do. This is 1.6 times higher than the number before the pandemic, and more than half a million additional people are projected to be suffering from work-limiting conditions by 2030.

More working-age people than ever - 2.6 million across all groups - were out of work because of long-term health conditions in July, according to ONS data.

The labour force survey does not provide figures on the proportion of participants out of work due to long Covid. The most recent figures, from a separate ONS analysis, estimated that 93,000 people aged between 16 and 34 were economically inactive with self-reported long Covid in July 2022.

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More than 500,000 under-35s in UK out of work due to long-term illness

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Experts link 44% increase in four years to a growing mental health crisis and underinvestment in health services

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How much money is the UK government borrowing, and does it matter?

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How much money is the UK government borrowing, and does it matter?

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How much money is the UK government borrowing, and does it matter?

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The government is spending more on public services than it raises in tax.

To bridge this gap it borrows money, but this has to be paid back - with interest - and that can influence wider tax and spending plans.

Why does the government borrow money?

The government gets most of its income from taxes. For example, workers pay income tax, everyone pays VAT on certain goods and companies pay tax on their profits.

It could, in theory, cover all of its spending from taxes, and in some years that happens.

But if it can't, it will cover the gap by raising taxes, cutting spending or borrowing.

Higher taxes mean people have less money to spend, so businesses make less profit, which can be bad for jobs and wages. Lower profits also mean companies pay less tax.

So, governments often borrow to boost the economy. They also borrow to pay for big projects - such as new railways and roads - which they hope will help the economy.

How does the government borrow money?

The government borrows money by selling financial products called bonds.

A bond is a promise to pay money in the future. Most require the borrower to make regular interest payments over the bond's lifetime.

UK government bonds - known as "gilts" - are normally considered very safe, with little risk the money will not be repaid.

Gilts are mainly bought by financial institutions in the UK and abroad, such as pension funds, investment funds, banks and insurance companies.

How much is the UK government borrowing?

The amount the government borrows varies from month to month.

For instance, when people submit tax returns in January, they often pay a large chunk of their annual tax bill in one go, so the government sees a jump in the amount of money it takes in.

So it is more helpful to look at the whole year, or the year-to-date.

In the 2022-23 financial year, the government borrowed £127.8bn. That was £5bn higher than in the previous year.

The total amount the government owes is called the national debt. It is currently about £2.6 trillion.

That current level is more than double what was seen from the 1980s through to the financial crisis of 2008.

The combination of the financial crash and the Covid pandemic pushed the UK's debt up from those historic lows to its current level.

But in relation to the size of the economy, today's debt figures are still low compared with much of the last century, as shown above, and also compared with some other leading economies.

How much money does the government pay in interest?

The larger the national debt gets, the more interest the government has to pay.

That extra cost was not as big when the interest rates due were low through the 2010s, but it is more noticeable now that interest rates have been rising.

If the government has to set aside more cash for paying its debts, it may mean it has less to spend on the public services which it borrowed to fund in the first place.

The most significant figures tracking the cost of debt are published monthly by the Office for National Statistics (ONS).

According to this data, two months in 2022 saw record levels of money set aside for debt interest: £20bn in June and £18bn in December.

June 2023 saw the third largest monthly amount - £12.8bn.

The most recent October figure revealed interest on government debt was £7.5bn.

During the 2022-23 financial year, the government spent £108bn on debt interest - more than it spent on education.

Why does it matter if governments borrow more?

Some economists fear the government is borrowing too much, at too great a cost.

Others argue extra borrowing helps the economy grow faster - generating more tax revenue in the long run.

In an ageing population, the proportion of people of working age drops, meaning the government takes less in tax while paying out more in pensions.

The OBR says debt could rise to more than 300% of GDP by 2070.

What is the government's plan for debt?

Responding to the OBR report, Chancellor Jeremy Hunt said the government would take "difficult but responsible" decisions on the public finances.

He previously blamed the "twin global emergencies of a pandemic and Putin's war in Ukraine" for driving up government costs.

The chancellor has set a target of getting underlying debt to fall in five years' time.

What is the difference between the government deficit and debt?

The deficit is the gap between the government's income and the amount it spends.

When a government spends less than its income, it has what is known as a surplus.

Debt is the total amount of money owed by the government that has built up over years.

It rises when there is a deficit, and falls in those years when there is a surplus.

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How much money is the UK government borrowing, and does it matter?

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How does government borrowing work, and how and when is the money paid back?

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Costly credit and a mortgage timebomb: five ways rising interest rates have hit the UK

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Fantastic article for explaining the monetary policy transmission mechanisms (including relevant evaluative stats)

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Fantastic article for explaining the monetary policy transmission mechanisms (including relevant evaluative stats)

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Two years ago, Britain's economy was entering an uncertain winter. The Omicron variant of Covid-19 was hitting businesses hard. Furlough had ended. Inflation was at a 10-year high of 5.1%.

Against this backdrop - two years ago this week - the Bank of England took its first tentative step to raise interest rates from 0.1% to 0.25%. A month earlier, the Bank had ducked a decision to raise rates given concerns over the end of the government's furlough scheme, wrong-footing financial markets. Few predicted how far Threadneedle Street would go next.

Among independent forecasters, the average inflation reading expected for the end of 2022 was just 3.1% - nowhere near the 11.1% peak in October 2022 that resulted after Russia's invasion of Ukraine.

After 13 more increases after its first move in December 2021 - lifting the base rate to 5.25% by August 2023, the highest level since the 2008 financial crisis - the Bank is expected to leave borrowing costs unchanged for a third consecutive time at its next meeting on Thursday. While inflation remains above the Bank's 2% target, having fallen back to 4.6%, concern is growing over the strength of the economy after the toughest round of rate increases in decades.

Here are five ways that households and businesses are feeling the pinch:

Mortgages

The driving-up of interest rates at the sharpest rate in the 26-year history of the Bank's monetary policy committee has primed a ticking timebomb in the UK's mortgage market.

Most home loans taken out in recent years have a fixed rate - meaning higher borrowing costs tend to come with a lag. About 55% of mortgages have repriced since rates started to rise in December 2021. Another 5m are expected to be hit by 2026.

For the typical owner-occupier rolling off a fixed rate between the summer of this year and the end of 2026, the Bank expects their monthly repayments to increase by about £240, a jump of about 39%.

Many landlords have raised rents or sold properties to offset their own higher borrowing costs. Given limited supply, renters have faced a surge of more than 10% in annual rental inflation on new lets.

Credit cards

High street banks are passing on the rise in interest rates to borrowers who use credit cards and personal loans - adding to the pressure on households struggling to make ends meet amid the cost of living crisis.

Annual growth in all consumer credit was 8.1% in October, the fastest pace since 2018. Average quoted rates on credit cards have risen by about 5 percentage points to 25% in the past three years.

Overall household debt levels are at the lowest point since 2002, but this reflects a falling number of households with mortgages. With soaring living costs, more than 24 million UK adults - 40% of the population - plan to use credit to pay for Christmas gifts this year.

Savings

High street banks have been slower to pass on higher interest rates to savers - exposing them to accusations of profiteering from trade unions and MPs from across the political spectrum. Meanwhile, many households are raiding their savings to pay for the higher price of basic essentials.

Recent figures from the Bank show average quoted rates have belatedly started to catch up, with an increase of about 0.9 percentage points for instant access deposits between June and October after the Financial Conduct Authority set out an "action plan" to ensure higher rates are passed on.

However, significant differences remain. While some accounts offer above the Bank's base rate of 5.25%, the average rate on easy access deposits was 1.99% in October, according to the latest figures from the FCA, or 3.52% for fixed-term accounts.

Business lending

The interest rate on new bank loans for businesses has leaped from about 2% at the start of the tightening cycle to almost 7% today, while many firms have reported a decline in credit availability.

Under pressure from weaker consumer demand and rising borrowing costs, the number of company insolvencies has jumped in recent months - hitting 2,315 in October, 18% higher than in the same month a year earlier. Companies in the construction sector are faring the worst.

The Bank expects rising interest rates are likely to contribute to a reduction in business investment growth. A key priority of the government is to raise investment in Britain, but higher interest rates are serving as a headwind.

Market interest rates

Increases in UK interest rates relative to other countries' rates would normally cause the pound to appreciate on global currency markets. However, the Bank's tightening cycle has been matched by other leading central banks. That said, if Threadneedle Street had not acted, sterling could have fallen significantly, adding to inflation by driving up the cost of imported goods.

Reflecting the actions of central banks, stubbornly high inflation and weaker economic growth, government bond yields have increased sharply across advanced economies. The cost of issuing bonds for large corporates has also risen.

City investors are betting the central banks' next move will be to reduce interest rates. With inflation fading and a growing risk of recession, financial markets expect the Bank to launch its first rate cut from as early as summer 2024.

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Costly credit and a mortgage timebomb: five ways rising interest rates have hit the UK

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Two years on from the first in the Bank's run of rate hikes, how have they changed the shape of Britons' finances?

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I’ve got news for those who say Brexit is a disaster: it isn’t. That’s why rejoining is just a pipe dream | Larry Elliott

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An interesting mix of economic and political analysis from Larry Elliott.

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An interesting mix of economic and political analysis from Larry Elliott.

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I’ve got news for those who say Brexit is a disaster: it isn’t. That’s why rejoining is just a pipe dream | Larry Elliott

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Many still hanker for how things were: but looking across the Channel, it’s completely illogical to do that, says Guardian columnist Larry Elliott

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Britain is broken. What will fix it? Lots and lots of money | George Monbiot

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If this analysis doesn't make you angry you need to call an ambulance. You may be brain dead.

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If this analysis doesn't make you angry you need to call an ambulance. You may be brain dead.

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Britain is broken. What will fix it? Lots and lots of money | George Monbiot

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If the money were for bank bailouts, we wouldn't hesitate - and £100bn is much better than state failure, says Guardian columnist George Monbiot

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Austerity warning for public services after tax cuts

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Austerity 2.0 will be just as bad as it was under Osborne. The chancellor is an absolute Jeremy Hunt.

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Austerity 2.0 will be just as bad as it was under Osborne. The chancellor is an absolute Jeremy Hunt.

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Tom Espiner & Daniel ThomasBusiness reporters, BBC News

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Austerity warning for public services after tax cuts

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The tax cuts in the Autumn Statement will come at the expense of public services, think tanks say.

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The extent of groupthink amongst mainstream economists never fails to stagger me. This article is a discussion of the UK's current economic problems & they just can't see that mainstream thinking IS the problem NOT the solution

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The extent of groupthink amongst mainstream economists never fails to stagger me. This article is a discussion of the UK's current economic problems & they just can't see that mainstream thinking IS the problem NOT the solution

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The chancellor’s Autumn Statement comes as the country appears consigned to high taxes and poor public services, regardless of the election result next year

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Analysis - How can we grow the UK economy? - BBC Sounds

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Listen to this podcast of the lack of growth in the UK economy since GFC. Leave a comment once you've listened to it.

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Listen to this podcast of the lack of growth in the UK economy since GFC. Leave a comment once you've listened to it.

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Analysis - How can we grow the UK economy? - BBC Sounds

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Catch up on your favourite BBC radio show from your favourite DJ right here, whenever you like. Listen without limits with BBC Sounds.

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Treasury should use price controls in cost of living crisis, say Fabians

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Interesting proposals for joined up monetary and fiscal policy in a world of multiple macro objectives 

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Interesting proposals for joined up monetary and fiscal policy in a world of multiple macro objectives 

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The Treasury should use price controls and cuts in VAT during the cost of living crisis to prevent the Bank of England from driving the economy into recession through over-aggressive use of interest rates, a thinktank has said.

Warning of the need for the two institutions to stop operating from separate silos, the left-leaning Fabian Society said poor policymaking in the past quarter of a century had often been the result of the Treasury and the Bank pulling in opposite directions.

The thinktank said in a new pamphlet that a joined-up approach was essential to solve the economic challenges faced by the UK: weak growth, flatlining productivity and wages, high inflation, poor business and public investment, regional inequality and the urgent transition to net zero. "These problems are interconnected - but economic policymaking is not," the Fabians said.

The Fabians said there was a need for an explicit role for the chancellor when cost of living pressures were acute and that there should also be new rules for running the economy when interest rates were close to zero.

In times when official borrowing costs could not be reduced further, the Bank of England governor would write to the chancellor saying that the limits of monetary policy had been reached and it was up to the Treasury to stimulate activity through tax cuts and public spending increases.

The last big shake-up of the UK's economic framework came in 1997 when the then chancellor, Gordon Brown, made the Bank of England independent and handed it the role of setting interest rates. When George Osborne became chancellor in 2010, the Treasury relied on the Bank to deliver growth while it was imposing austerity measures.

Interest rates were cut to a then record low of 0.5% in early 2009 and remained at rock-bottom levels until the Bank began a series of moves that took official borrowing costs from 0.1% in December 2021 to their current 5.25%.

Michael Jacobs, a professor of political economy at the University of Sheffield and one of the report's authors, said the idea of the Bank of England having sole responsibility for managing demand worked in benign times but had been found wanting during the multiple crises of recent years. "In more extreme circumstances we need monetary and fiscal policy to be working together," he said.

The Fabian pamphlet - In Tandem - said a new economic policy coordinating committee should be set up to bring together the Treasury, the business department and the Bank of England, alongside the devolved governments and arms-length bodies responsible for climate change, public finance, infrastructure and low pay.

It said the sharing of analysis and policy planning would enable economic policy to be better coordinated, and thereby better able to meet a range of economic, environmental and social goals. The committee would be jointly chaired by the chancellor and business secretary and would feed into the Treasury's two set-piece events: the budget and the autumn statement.

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"Economic policy is more difficult than it used to be," Jacobs said. "The government has multiple goals: not just growth and employment, but lower carbon emissions, higher wages and reduced regional inequalities. That requires much better coordination of policymaking. Relatively modest reforms, including the creation of an overarching economic policy coordinating committee, could greatly help the next government succeed where the current one has failed."

Jo Michell, a co-author of the pamphlet and a professor of economics at UWE Bristol, said: "The need for better coordination between fiscal and monetary policy is increasingly clear. Current challenges require a more flexible approach. Getting the Treasury and Bank of England to work together will enable economic policy to add up to more than the sum of its parts."

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Treasury should use price controls in cost of living crisis, say Fabians

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Thinktank says government and Bank of England need to take more joined-up approach to solving economic problems

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UK economy stagnates as high borrowing costs hit activity

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FT: UK stagnates as high interest rates begin to bite

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FT: UK stagnates as high interest rates begin to bite

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UK economy stagnates as high borrowing costs hit activity

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Flat GDP in third quarter poses challenge for chancellor as he aims to revive growth in Autumn Statement

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Hunt urged to invest £30bn a year in infrastructure or risk 'decade in doldrums'

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U2468: Brilliant macro article advising chancellor of the right thing to do to grow the economy. Unfortunately, he will almost certainly not do the right thing...

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U2468: Brilliant macro article advising chancellor of the right thing to do to grow the economy. Unfortunately, he will almost certainly not do the right thing...

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Jeremy Hunt risks condemning Britain to a decade in the doldrums unless he uses this month's autumn statement to announce a £30bn-a-year investment plan to upgrade public infrastructure, a leading thinktank has warned.

The National Institute for Economic and Social Research (NIESR) said the chancellor should ignore calls by Tory MPs for pre-election tax cuts and instead focus on measures to boost growth through improvements to transport, digital networks, skills and housing.

In their quarterly update on the state of the economy, researchers at the thinktank said Hunt had more scope for a bold package than generally believed, because the freezing of income tax allowances and thresholds at a time of high inflation had resulted in stronger-than-expected growth in government revenues.

They said the chancellor should set out immediate plans to raise the level of annual public investment from 2% to 3% of gross domestic product and that there was scope to do so in the autumn statement. "In its absence, the UK is set for a decade in the doldrums and poor prospects for regional regeneration," the thinktank said.

NIESR said it was more optimistic about the state of the public finances than the government's own watchdog, the Office for Budget Responsibility, and said if current tax and spending plans were kept to there would be scope to raise spending or cut taxes by up to £90bn in five years' time.

Prof Stephen Millard, NIESR's deputy director for macroeconomic modelling and forecasting, said the UK would avoid slipping into recession and predicted that the Bank of England would not need to increase interest rates further from their current level of 5.25%.

"Although the good news is that the monetary policy committee have done enough to bring inflation down to target, the bad news is that the UK's sluggish growth performance continues," Millard said. "It is up to the government to increase public investment and encourage private investment so that UK productivity growth may return, and standards of living improve."

The thinktank said the inflation-adjusted incomes of the poorer half of working families - those earning less than £32,000 a year - would be 5% lower in 2023-4 than they had been five years earlier, and not return to pre-pandemic levels until the end of 2026.

The squeezed living standards for those in the bottom half of the income distribution was likely despite the boost for the lowest-paid workers from an expected increase in the national minimum wage of about 10% next year.

Prof Adrian Pabst, NIESR's deputy director for public policy, said: "Higher real wages this year are a welcome boost, especially for low-income working families, who have been hit hardest by the Covid and inflation shocks. But a return to pre-pandemic living standards will require sustained real wage growth, including further increases in the 'national living wage'. All this should be aided by targeted investment in physical and digital infrastructure, skills and housing."

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Hunt has strongly hinted that the poor state of the public finances and the need to avoid further increases in interest rates from the Bank of England rule out a big stimulus package on 22 November. The chancellor will instead focus on measures to boost investment, improve public sector productivity and increase participation in the labour force by people who are long-term sick or disabled.

NIESR also called on Hunt to increase investment incentives for businesses, and to revise the government's fiscal rules so that tax and spending decisions can respond to economic shocks.

Pabst said: "Only a rethink of economic and social policy can avoid another period of protracted stagnation where the UK falls further behind other advanced economies and regional disparities continue to widen."

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Hunt urged to invest £30bn a year in infrastructure or risk 'decade in doldrums'

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Thinktank says stronger than expected tax revenues have given chancellor scope for bold package in autumn statement

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Remember the austerity of 2010s? Early 2020s are expected to be far worse | Richard Partington

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Einstein said the definition of insanity was to keep doing the same thing, but to expect a different result. If so, we have lots of insane politicians in the UK.

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Einstein said the definition of insanity was to keep doing the same thing, but to expect a different result. If so, we have lots of insane politicians in the UK.

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The prospects are bleak. For more than 70 years the British economy has grown steadily, if not always spectacularly. There have been setbacks - not least the 1970s energy shock, 1990s property crash, and 2008 financial crisis - before eventual recoveries took hold. This time is different.

Should last week's forecasts from the Bank of England come to pass, Britain is heading for the weakest sustained period of economic growth of the postwar age, and quite possibly of the past century or more.

If the austerity-ridden 2010s were considered a lost decade, the early 2020s are expected to be far worse, with flatlining progress and heightened inequality. It could not come at a worse moment, as the country tries to recover from the Covid pandemic, meet the existential challenge of global heating, and ensure that the proceeds of growth are spread more evenly.

On the Bank's reckoning, gross domestic product will post zero growth in 2024, with a 50-50 chance of a recession as Rishi Sunak prepares for the next general election. Growth thereafter will average less than 1% in each of the next two years, which is less than half the annual average rate between 1998 and 2007.

If the Bank is right, another of the prime minister's five priorities - to grow the economy - is in serious jeopardy. Steering Britain to prosperity, without veering into a ditch in a reckless dash for growth like his predecessor, was the entire point of Sunak's premiership. Instead we're on a road to nowhere.

This week Sunak will attempt to change course with the King's speech on Tuesday. Last week he hinted that his legislative focus for the next parliamentary session will be to "grow the economy, strengthen society and keep people safe".

Yet it's a difficult sell. No parliamentary term has been worse for living standards since the last King's speech, seven decades ago, when George VI was on the throne.

Ahead of the state opening of parliament, business leaders are pushing for legislation to promote investment in the economy. The British Chambers of Commerce list of wants includes a "skills bill" to boost workforce training, a planning bill to ease new developments, trade policy reform to overcome Brexit headaches, and a legal framework to enable the transformation of the National Grid.

The last thing bosses want, however, is policymaking to score political goals rather than economic ones. Yet most of the ideas the government is reportedly considering seem designed to appeal to Tory voters and save the prime minister from rebellious rightwing MPs who might otherwise depose him.

Sunak is expected to promote expansion of North Sea oil and gas exploration, as well as pro-car policies, to create a dividing line with Labour. It's a gamble, given the failure of his Tory party conference speech to revitalise his performance in opinion polls. It is also exactly the wrong kind of change required to kickstart the economy.

The prime minister will get a reality check just days after the pomp and ceremony in Westminster, with the Office for National Statistics due to issue its first growth estimate for the third quarter on Friday. After a near flatlining performance this year, the Bank thinks growth will have, at best, stagnated. City economists aren't much more upbeat.

There are several reasons why Britain is trapped in a low-growth bind.

In a consumption-led economy, the worst hit to household finances in modern history - caused by a combination of the inflation shock that followed the pandemic and the war in Ukraine - was always bound to affect growth. Today the spending power of households is depressed by not only stubborn inflation and higher interest rates but sharply rising taxes.

Over the next three years, these headwinds are expected to remain as the central bank aims to squeeze inflation out of the system by keeping borrowing costs high for an extended period of time. Much of the pain is still to come, as households prepare to refinance cheaper mortgage deals on to higher rates. Half of the impact of the Bank's 14 rate increase has yet to be felt.

There are offsetting factors. Nominal pay growth has been stronger than expected, supporting households' spending power, while it is hoped that inflation will cool further next year. The Bank could be wrong in its assumptions. It has been before. Yet even then, pay growth has remained significantly below inflation, and not everyone has benefited equally.

An underfunded public sector is holding the economy back, seen most visibly in record NHS waiting lists contributing to record long-term sickness among working-age adults, limiting workforce participation. Taken together with other overwhelmed services, crumbling schools and infrastructure, austerity is coming home to roost.

Following on from the King's speech, Jeremy Hunt is expected to use the autumn statement on 22 November to bang the drum for growth by unlocking private investment, getting more people back to work, and delivering a more productive British state.

However, the chancellor is expected to steer clear of announcing transformative changes for two reasons: concerns the health of the public finances and a desire to hold back giveaways until the spring budget, which will be closer to the election. Time for the government, though, is rapidly running out.

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Remember the austerity of 2010s? Early 2020s are expected to be far worse | Richard Partington

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Britain is in a low-growth bind and too many policies have political goals rather than economic ones

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Why inflation is falling but prices are still rising

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Solid BBC article exploring UK inflation 

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Solid BBC article exploring UK inflation 

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The Office for National Statistics (ONS) which calculates inflation, bases its numbers on a basket of goods that reflects what most people across the UK are buying. But it doesn't include everything. So if you are buying a lot of unusual or niche items, or you have atypical tastes, you might find the cost of your own bag of shopping is going up more quickly - or more slowly - than the headlines suggest.

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Why inflation is falling but prices are still rising

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We report this percentage every month but here are three things you may not know.

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So George Osborne has a new podcast. What do the victims of his austerity policies get? | Aditya Chakrabortty

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A heartbreaking story of how austerity ruins lives combined with the story about how Osborne seems to have completely got away with it. #angry #furious

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A heartbreaking story of how austerity ruins lives combined with the story about how Osborne seems to have completely got away with it. #angry #furious

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ew things became Alan Clark less than retirement. "My mind races," the Thatcher-era Tory junior minister raged into his diaries. "I am hungry for news and gossip, resentful at John Major ... how could they? Although, of course, the cruelty of politics is its attraction."

If only he'd hung on for the arrival of podcasts. Today, Clark would be a cert to host his own politics one, sweeping the crumbs from Westminster tablecloths into a regular 50 minutes of audio content: reminiscence, gossip and crisp, chilled cruelty - Who's down? Who's out? - all generously sponsored by a manufacturer of probiotic yoghurt.

It has become SW1's premier cottage industry, providing gainful employment for disused ministers and ersatz advisers. Another diarist, Alastair Campbell, fronts The Rest is Politics with Rory Stewart, a show so popular it tours theatres. Soon their competitors will number George Osborne and Ed Balls, who are about to launch an economics show.

A format is fast emerging: two big names (all the better for advertisers to see you with), almost always men, season current events with some inside-the-room recollections of Vladimir's body language or Tony's office management. It is informed yet accessible and, as a report this month from the Reuters Institute shows, it draws an audience very different from the wider public: younger, more educated and, crucially, richer.

Central to the format is that the silverbacks come from either side of a political divide spanning no more than two inches. They cannot be too left or too right. They must disagree, but agreeably. Osborne last week described Balls as a former "bitter foe" turned "firm friend".

Reading those words, a memory came back to me from seven years ago. In the spring of 2016, I sat in a small front room in a cramped terrace house. Opposite were Paul and Lisa Chapman - and the story they had to tell, in all its routine awfulness, explained the brokenness of British politics.

They had lived and worked in the Northamptonshire town of Irthlingborough for decades, until Paul started to suffer tremors, shakes, sudden falls. He'd got Parkinson's. Once the fastest postie in town, he found that his body would no longer do what his brain wanted. Lisa gave up her cleaning job to care for him, and now the couple had to rely on social security. But there was no security, not six years into Osborne's spending cuts, which research showed hurt people with severe disabilities 19 times worse than the average.

For the Chapmans, this meant undergoing an assessment that claimed he was far healthier than the reality - and being robbed of benefits that were rightfully theirs. In front of me, Paul recalled what he'd told Lisa: "You go round your mum's. I'll clear off and I won't take my tablets or my insulin. And it'll be over then. I won't be here."

What rings in my ears even now is the confusion in his voice: he'd never expected this illness, this foreclosed life or this official sadism.

Whenever he is wheeled into another studio as an elder statesman, Osborne is never asked about people such as the Chapmans, or scientists' research that shows 300,000 extra deaths were caused by his austerity programme. Nor do I expect it to be a major feature of his podcast - not when Balls himself went along with so much of the austerity agenda. Perhaps there'll be some light ribbing about the former chancellor's career after Westminster. How many jobs are we up to now?

In 2003, Campbell was a salesman for an illegal war prosecuted on dodgy evidence that killed between 280,000 and 315,000 Iraqis, according to the estimates of Brown University in the US. On the 20th anniversary of the start of the Iraq war, he was interrogated on his podcast not by a relative of one of those killed, or by a maimed soldier or by one of the million Britons who marched in opposition - but by Stewart, who after the invasion became a latter-day colonial administrator in the shattered country. It is fair to say their conversation on the matter was less heated than it gets on the iniquities of Brexit.

Light entertainment is the great launderer of political reputations. A few years ago, TV quiz shows turned Boris Johnson into the serial liar you could have a pint with. Cookery and bad dancing transformed Balls from an economist into a household name. The pretence is that they've shed the Westminster carapace and are now on civvy street. Yet long after he left Blair's court, Campbell continued to help run election campaigns, while as editor of the London Evening Standard Osborne would run front pages to help Matt Hancock, his former chief of staff-turned-health secretary.

This time round, the great redeemer is the podcast boom, fuelled by venture capital. It is a giant speech bubble, which middle-aged politicos will use to rehabilitate their tarnished names. Perhaps the public will learn to love Osborne, who has always struck me as far more personable than that deluded Sloane David Cameron.

A few months after I wrote about the Chapmans came the vote for Brexit - and with it a newfound desire by the political classes to listen to voters and to arguments they had long ago tuned out. Post-Brexit, post-Corbyn, post-Johnson, that era is now over. In vogue today is a room-temperature liberalism, defined by cosy agreement and willing blindness to those unpleasant facts and those unfortunate people who don't fit. But they haven't gone away.

I spoke to the Chapmans this week. Paul's Parkinson's has got much worse and their benefits aren't enough for the rising costs of food and fuel. Last winter, they didn't put on the central heating and Lisa went over to her mum's for a few hours of warmth a day. Paul broke his little finger in December but was so numb with cold that he only felt the pain in February. As well as borrowing from relatives, they've started selling off things: his model cars and fish tank, her CDs and DVDs. Now they plan to sell that terrace house.

Lisa said: "We done it right; we both worked, we bought our own place." Who did she blame? "All of them in Westminster: liars." What did Paul make of Osborne's latest gig? "All those jobs are like awards for him. He's top of the pile." What did that make him and Lisa? "Oh, we're bottom of the heap."

These two need no lessons in the cruelty of politics. Someone should give them a podcast.

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So George Osborne has a new podcast. What do the victims of his austerity policies get? | Aditya Chakrabortty

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Entertainment launders reputations. No wonder washed-up politicians are so keen to invest in this great speech bubble, says Guardian columnist Aditya Chakrabortty

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The Guardian view on declining public services: Labour should level with the public | Editorial

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I thought 330,000 excess deaths was the worst thing you could hear about Tory austerity. But this is equally depressing - Britain is fundamentally broken, and no one is willing to fix it...

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I thought 330,000 excess deaths was the worst thing you could hear about Tory austerity. But this is equally depressing - Britain is fundamentally broken, and no one is willing to fix it...

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The Guardian view on declining public services: Labour should level with the public | Editorial

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Editorial: Huge backlogs and staff shortages mean that health, justice and other vital systems are incapable of functioning properly

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EU-funded report calls for wealth of super-rich to be taxed, not income

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EU report calls for global 2% annual wealth tax

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EU report calls for global 2% annual wealth tax

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Billionaires have been operating on the "border of legality" in using shell companies to avoid tax and the world's 3,000 wealthiest individuals should be charged a 2% levy on their wealth, a research group created to inform EU tax policy has claimed.

In its inaugural global tax evasion report, the Paris-based EU Tax Observatory said billionaires have been pushing the limits of the law by moving certain types of income, including dividends from company shares, through dedicated holding companies that usually serve no other purpose.

"These holding companies are in a grey zone between avoidance and evasion," the report said. "To the extent that they are created with the purpose of avoiding the income tax, they can legitimately be seen as closer to evasion."

The EU Tax Observatory, led by the economist Gabriel Zucman, was founded three years ago and is funded by the EU as part of its efforts to combat tax abuse.

These types of loopholes allow the super-rich to avoid certain forms of income tax, resulting in effective tax rates worth just 0%-0.6% of their total wealth, the report found. Meanwhile, income taxes levied on most wealthy citizens who do not employ these loopholes, end up paying between 20% and 50%.

Shell companies can also stand in as nominal owners for luxury properties in expensive cities such as London. "Real estate continues to provide ample opportunities for the rich to avoid and evade taxes," the report said.

The shell companies also fall outside the most effective tools that have so far been used to combat tax avoidance, including the automatic exchange of banking information, which is followed by more than 100 countries.

"To date no serious attempt has been made to address this situation, which risks undermining the social acceptability of existing tax systems," the report said.

The Observatory, which deployed more than 100 researchers to gather the report's data, is now calling on global leaders to use the next G20 summit in Brazil in November 2024 to launch talks over a global minimum 2% annual tax to be levied on the wealth - rather than the income - of the world's richest people.

It says the measure could raise £250bn (£205bn) a year from the world's 2,756 known billionaires, who together are believed to be worth $13tn.

The idea is based on the 2021 agreement between 140 countries and territories to impose a global minimum tax rate of 15% on the biggest multinational companies.

Zucman said: "This is the logical next step after the global minimum tax on multinational companies - which demonstrates that it is possible for countries to agree on minimum tax rates."

He said minimum rates were the most powerful tools to address loopholes in existing tax systems because they ensure that no matter what the avoidance measures used, the tax collected cannot fall below a set amount.

Commenting on the report, Nobel prize-winning economist Joseph Stiglitz said: "Tax evasion, and, more broadly, tax avoidance, is not inevitable; it is the result of policy choices - or the failure to make policy choices that act to stop it."

He explained that a billionaire's tax would help governments fund important services such as education, infrastructure and technology, and soften the blow of oncoming crises, including future pandemics, and those linked to extreme weather events as a result of the climate crisis.

"So many people struggle to make ends meet yet pay the taxes their governments ask of them," Stiglitz said. "We need to make sure those at the top of the income ladder who certainly have the financial means don't wriggle out of them."

The Observatory also warned about other looming risks for tax revenues, including in the area of green energy subsidies. The report explained that a race for green energy producers was resulting in much larger tax exemptions that could more than offset the gains made by the newly enforced 15% minimum corporate tax rate. While it has the potential to accelerate a country's transition to zero-carbon emissions, the Observatory said it raises some of the same issues as standard tax competition.

"It depletes government revenues, and if not accompanied by egalitarian measures, it risks increasing inequality by boosting the after-tax profits of shareholders, who tend to be towards the top of the income distribution."

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EU-funded report calls for wealth of super-rich to be taxed, not income

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Wealthiest 3,000 work on 'edge of legality' with shell companies to funnel dividends and own property, says EU Tax Observatory

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UK fiscal watchdog admits 'genuine errors' in inflation forecasting

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The government's economic watchdog admits it's economic models are completely wrong (without actually saying so)

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The government's economic watchdog admits it's economic models are completely wrong (without actually saying so)

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The Treasury's independent economic forecaster has admitted it underestimated the scale of the inflation shock sparked by the Covid pandemic and Russia's invasion of Ukraine.

Blaming the rapid succession of shocks hitting the economy, the Office for Budget Responsibility said it "significantly underestimated the strength and persistence of inflation".

It also found corporate profits had been significantly stronger than expected in the past two years, including a 50% increase in finance industry profits fuelled by a boom in the banking industry, rather than the 13% rise it had anticipated.

In its annual forecasting evaluation report, the OBR said it had made some "genuine errors", but that many of the differences between its predictions and the outcomes for the economy had been difficult to anticipate.

"To a significant extent these differences between outturns and previous forecasts are inevitable given the inherent difficulty in forecasting the path of the economy and the consequent effect on the public finances, which has been amplified recently by unforecastable shocks that hit the economy."

The OBR has faced a barrage of criticism for its forecasting track record from MPs, particularly from rightwing Conservatives who had sought to curb the watchdog's influence under Liz Truss's short-lived premiership.

Evaluating its March 2021 and March 2022 forecasts for the 2022-23 financial year, the OBR defended its record by saying its judgments were made before the invasion of Ukraine, while last year's estimates came before the full impact of the conflict could be quantified.

It also said it had underestimated how damaging rocketing energy prices could be for the UK economy, while arguing Bank of England interest rate increases had taken longer than expected to counter the inflationary fallout.

The indirect effect of the energy shock feeding through to other prices - including food and other goods - had been almost twice as large as its initial estimate, the OBR said, after it made incorrect assumptions about changes in the UK economy since the 1970s that could have helped limit the impact.

Although there had been a decline in the overall energy intensity of the economy in the past 50 years and the structure of the Labour market had changed, the impact was compounded by the gas price surge coming on top of disruption from Covid supply bottlenecks in global trade. A shortfall in workforce participation after the pandemic had also helped workers to negotiate higher wage settlements than anticipated.

The OBR said it would revisit its assessments in its upcoming forecasts, which will be published alongside next month's autumn statement and used by the chancellor, Jeremy Hunt, to inform the government's tax and spending plans.

Inflation peaked at 11.1% in October 2022, the highest level for more than 40 years, with an annual average of more than 8 percentage points higher than the OBR had anticipated two years ago.

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While its March 2022 forecast factored in some of the pressure on energy prices from the Russian invasion of Ukraine, it still expected a significantly lower inflation peak of 8.7%.

Alongside higher inflation, the OBR said it had underestimated government borrowing, as higher government spending on cost of living support outweighed a rise in tax receipts from more resilient household spending, wage growth, and company profits.

Highlighting the unexpected strength of corporate profits, it said non-oil and non-financial company profits had risen by 7.3% in 2022, against predictions for a fall of 1.4% assumed in its March 2022 forecast.

Banks in particular benefited from a rise in their net interest margins, the OBR said, reflecting gains from rising Bank of England interest rates on the difference between the interest lenders charge on loans and deposits.

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UK fiscal watchdog admits 'genuine errors' in inflation forecasting

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OBR says it underestimated strength and persistence of inflation as well as impact of high energy prices

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Raise Bank of England inflation target to 3%, says leading thinktank

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Should the target inflation rate be changed to 3%?

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Should the target inflation rate be changed to 3%?

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The Bank of England should be set a 3% inflation target and given powers to crash borrowing costs below zero in response to future economic shocks, a leading thinktank has said.

The Resolution Foundation said Britain required a big overhaul of its economic toolkit to avoid decades of rising debt or austerity, and called for reforms at the Bank and the Treasury to get a "bigger bang for each buck".

The report said the Bank's inflation target set by the government should be increased from 2% to 3%, although only once the existing remit had been met to ensure inflation was brought under control.

Suggesting that Threadneedle Street lacked capacity to respond to future economic downturns, it also called on ministers to sanction the use of negative interest rates of up to -1%. This would mean charging commercial banks to deposit money with the central bank, instead of paying interest, in a policy designed to encourage lending and discourage saving.

In changes that would mark the most radical shakeup since Gordon Brown handed the Bank independence for managing inflation in 1997, the thinktank said Threadneedle Street had found itself boxed in for much of the past 15 years during a period of ultra-low interest rates.

Although inflation has soared to the highest level in decades after the Covid pandemic and Russian invasion of Ukraine, Resolution said there was a danger that future economic shocks would require a sharp cut in borrowing costs. Should inflation have a starting point closer to 3%, and with the ability to use negative rates, the Bank would have more capacity to respond.

The report also said a steady ratcheting up for government debt could limit options to respond to future downturns. If the UK stayed in a new higher interest rate environment over the long-term, with only debt reduced gently between recessions, the thinktank said the country's ratio of debt to gross domestic product could rise to about 140% over the next half century.

It called for the Treasury to target a primary budget surplus - excluding debt interest costs - of about 1% of GDP to prevent the UK debt ratio from rising over time in the face of inevitable shocks.

The report said governments should also use "smarter" tax and spending policies in downturns to avoid driving up the national debt, suggesting that targeted, rather than blanket support schemes, could have saved £35bn during the response to the pandemic and cost of living crisis.

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James Smith, the research director at the Resolution Foundation, said a "reset" for policymaking was required. "This reset would ensure we can support the economy in bad times and fix the fiscal roof when the sun eventually arrives."

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Raise Bank of England inflation target to 3%, says leading thinktank

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Resolution Foundation also calls for Bank to have power to set below-zero interest rates in response to future downturns

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UK regular pay rises faster than inflation, easing pressure on living costs

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Pay rising above inflation (on average) for the first time in 2 years, but the key stat in this article is that average pay is £30 less in real terms than 2008. Unprecedented pay stagnation. An utter indictment of failed economic policy and neoclassical economics in general.

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Pay rising above inflation (on average) for the first time in 2 years, but the key stat in this article is that average pay is £30 less in real terms than 2008. Unprecedented pay stagnation. An utter indictment of failed economic policy and neoclassical economics in general.

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Average wage growth in the UK rose above inflation in August for the first time in almost two years, according to official figures, easing some of the pressure on workers amid the cost of living crisis.

The Office for National Statistics said annual growth in regular pay, excluding bonuses, was 7.8% in the three months to August, among the fastest growth rates on records dating back to 2001.

After a cooling in the annual inflation rate over recent months, the ONS said this meant regular pay was 0.7% higher on the year - the first real-terms increase since October 2021.

Economists expect the ONS to say that annual inflation fell slightly to 6.5% in September, from 6.7% in August, when figures are released on Wednesday - still well above the Bank of England's 2% target.

Much of the rise in pay was driven by soaring wage growth in the City of London, where regular pay packets rose by 9.6% for workers in finance and business services. While public sector pay rose by 6.8% on average - the fastest rate since comparable records began in 2001 - it jumped by a much sharper 8% in the private sector.

Workers have also suffered among the worst periods for average wage growth on record over the past decade, after years of sluggish pay rises before the inflation shock triggered after the Covid pandemic and Russia's invasion of Ukraine.

Total pay growth, including bonuses, rose by 8.1% in the three months to August, with the figure affected by one-off payments made to NHS staff and civil servants to reflect cost of living pressures. After inflation total pay rose by 0.8%.

However, the real-terms value of an average worker's total weekly pay packet remained almost £30 below the peak recorded in February 2008 before the financial crisis struck.

Jeremy Hunt, the chancellor, said it was good news that inflation was falling and real wages were growing. "To keep this progress, we must stick to our plan to halve inflation."

But Rachel Reeves, the shadow chancellor, said 13 years of Conservative "economic failure" had left working people worse off, with low growth, low pay and high taxes. "Working people saw pay rise faster under the last Labour government. But with the Conservatives we have seen a decade of stagnant wage growth."

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UK regular pay rises faster than inflation, easing pressure on living costs

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Wages outpace inflation for first time in almost two years, driven by growth in City of London

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Tories have no room for tax cuts despite £52bn a year stealth rise, says IFS

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Fiscal policy: The extent of the stealth tax increase resulting from fiscal drag is huge. £52bn p.a. and the % of adults who will be 40% tax payers will go from 9% to 15% or 16%.

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Fiscal policy: The extent of the stealth tax increase resulting from fiscal drag is huge. £52bn p.a. and the % of adults who will be 40% tax payers will go from 9% to 15% or 16%.

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Tories have no room for tax cuts despite £52bn a year stealth rise, says IFS

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UK stuck between weak economic growth and risk of persistently high inflation, says thinktank

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The Guardian view on Tory austerity: an unpopular policy returns | Editorial

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Arbitrary fiscal rules and austerity. When will we get past this madness?

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Arbitrary fiscal rules and austerity. When will we get past this madness?

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ir Rod Stewart is a Tory who backed Boris Johnson in 2019. So it was a surprise to hear the 78-year-old singer, when asked about recent strikes by NHS workers over pay, telling Sky News this week that he was on the nurses' side not the Conservatives'. "I personally have been a Tory for a long time, but I think this government should stand down now and give the Labour party a go at it. Because this is heartbreaking for the nurses. In all my years of living in this country, I've never seen it so bad."

Polling suggests this is a widely held sentiment. The country is in a mess and everyone but ministers can see it. It is not " declinist" to say so. The government bears the bulk of the responsibility for failing to keep the trains running, the classrooms open or the emergency wards working. Public sector workers are fed up seeing their wages fall behind the cost of living. They have every right to feel aggrieved. Private sector industrial disputes are being sensibly settled - with pay awards outstripping those in the public sector. Yet the government doesn't seem bothered about resolving industrial disputes.

The running down of the public sector was a policy choice. In the decade before Covid struck, and in the name of sound money, Conservative chancellors cut annual public spending, as a proportion of GDP, from 46% to 39%. Austerity left the country underprepared when the pandemic hit. The effects of this are still being felt. Weekly deaths have reached the highest level for two years, with doctors warning that "dangerous" waits for emergency treatment are killing hundreds of people.

Jeremy Hunt, the chancellor, didn't want to talk about the past on Friday. A cabinet minister for a decade, he wanted to focus on the distant future, not present-day failures. Instead of explaining how ministers would work to avoid falls in real incomes and rising unemployment, Mr Hunt offered himself up as a "tech bro" ready to turn the "UK into the world's next Silicon Valley", with a plan "made possible by Brexit ". This is old wine in new bottles. The idea that the British economy is an entrepreneurial success story compared with sclerotic European ones has been a founding Brexiter myth that Mr Hunt's speech married to a notion of a British genius for innovation.

Mr Hunt's plan for growth won't work because it relies on a "restraint on spending". For evidence just look at the warning this week from Dame Kate Bingham, the former vaccines tsar, that the UK's hopes of becoming a science superpower are being dashed by Treasury penny-pinching over research subsidies. Yet the UK public debt ratio is lower than in many G7 countries. The government won't spend despite the US, the EU and China using the state to build up green technology leads. Labour's Ed Miliband is right to argue that Britain needs a proper industrial policy and a determination to put workers' rights at the heart of it.

In the next two years, £100bn is being cut from government spending - money that should be used to repair public services, and save lives and livelihoods. Britain needs a balanced economy - one that manages both unemployment and inflation - not a balanced budget. Mr Hunt, however, wants one of the key issues at the next election to be about how to close the deficit. The choice he wants Labour to face is either to slash spending like the Tories; or to raise taxes and risk Conservative attacks over redistribution; or to slow the pace of cuts, which can be framed as profligacy. But in tough times, Labour can dictate the terms of political debate - as the support from Sir Rod shows. The opposition should shape the argument to remain on the right side of it.

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The Guardian view on Tory austerity: an unpopular policy returns | Editorial

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Editorial: Public spending is needed to green the economy and repair public services. But the chancellor plans £100bn in cuts

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The Guardian view on the austerity delusion: economies cannot cut their way to growth | Editorial

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The austerity delusion... Unfortunately, the chancellor, despite the evidence of 13 years, is still utterly deluded.

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The austerity delusion... Unfortunately, the chancellor, despite the evidence of 13 years, is still utterly deluded.

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aul Krugman, the Nobel prize-winning economist, warned a decade ago against thinking about budget deficits in terms of " bond vigilantes" and " confidence fairies". He said politicians - mostly, though not exclusively, on the right - argued that unless governments cut their deficits, bond vigilantes would pressurise them by forcing up interest rates. But if they did cut them, the story went, then the "confidence fairy" would magically stimulate so much private spending that this would compensate for the loss caused by budget cuts. This fiction was heard across the EU, Britain and the US.

Prof Krugman was right. Austerity didn't produce economic growth. The confidence fairy is as unreal as the one looking for children's teeth. But the political rhetoric has not gone away. Every major UK political party wants more economic growth, and the message is that to grow the economy means bearing down on the deficit. The Office for Budget Responsibility forecast in March that the UK economy would grow by about 2%. This looks wildly optimistic. The International Monetary Fund sees two years of about 0.5% growth. It is a dangerous delusion to think that economies can cut their way to growth.

Higher interest rates have also resurrected old fears about western nations' public debt, and the idea that they are determined solely by "market forces". But bond vigilantes don't exist. What is being exposed are financial institutions' speculative bets. The crisis for Liz Truss began when pension funds started dumping UK bonds, sending the long-term interest rates on gilts soaring and forcing the Bank of England to step in. Last month came a warning that hedge funds pose a similar threat to the US bond market.

On Friday Jeremy Hunt, the chancellor, said " difficult decisions" lie ahead on the public finances. He was looking at the recent sell-off in government bonds, and the rise in their yields, pointing to higher debt interest bills. Central banks won't let governments default in their own currency. But they are happy to go along with the idea that fiscal extravagance makes a bond-market attack on heavily indebted governments likely. Mr Hunt is signalling that it is spending on the poor, not the rich, that needs to be cut.

The economist Bill Mitchell blogged this week that under Mr Hunt's self-imposed debt rule "significant cuts in recurrent spending" would be needed unless, under the fluttering wings of confidence fairies, businesses invested at unprecedented levels. Even if the money were there, wrote Prof Mitchell, the workers - barring massive migration or a rapid decrease in unemployment - are not. The Labour party ought to take note.

Until 1984 the postwar consensus was that economic growth was secured through the fiscal stimulus of an enlarged budget deficit and quiescent rate policy, while regulation and price controls kept inflation in check. Mr Hunt's predecessor, Nigel Lawson, argued that the reverse should be the case: growth would be obtained by doing away with government regulations, and inflation brought down by cutting the budget deficit and aggressive rate hikes. Economics is a religion where rhetoric persuades voters to believe bad policies can have good results. All this came tumbling down in 2008 with governments pumping trillions into the world economy to save it. It is another crisis - around inflation - that has seen a public who had abandoned the old faith find comfort in it once again. If history is any guide, their conversions won't last long.

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The Guardian view on the austerity delusion: economies cannot cut their way to growth | Editorial

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Editorial: Economics is a religion where rhetoric persuades voters to believe bad policies can have good results

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Bernie Ecclestone pleads guilty to fraud

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This is inequality and privilege in the UK today. A billionaire commits £ multi-million fraud but gets away with a fine. You have no idea how angry this makes me.

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This is inequality and privilege in the UK today. A billionaire commits £ multi-million fraud but gets away with a fine. You have no idea how angry this makes me.

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Bernie Ecclestone pleads guilty to fraud

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The former F1 boss admits failing to declare more than £400m of overseas assets.

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To grow the economy in a way that benefits people and the planet, politicians must think outside the box | Mariana Mazzucato

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Economic growth Mariana Mazzucato style. This could be very useful in the summer exams.

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Economic growth Mariana Mazzucato style. This could be very useful in the summer exams.

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oliticians from across the UK's political spectrum seem to agree on one thing: growth. But for all the talk of resuscitating the UK's flagging economy, there is little evidence (yet) to suggest that any party will succeed in charting a new course. Political leaders of all persuasions are - to echo the words of John Maynard Keynes - captive to defunct economic theory.

Rishi Sunak is advancing a piecemeal industrial strategy while painstakingly avoiding this label, focusing on wooing companies such as Jaguar Land Rover to base operations in the UK and on building the competitive strength of certain sectors. On the other side of the aisle, Keir Starmer is framing Labour as " economically responsible", with a focus on growth rather than " big spending ", and is scaling back or delaying previous commitments, including a green prosperity fund. While Sunak's plans show a lack of confidence in the state's role in the economy, Starmer's are falling victim to a false dichotomy between spending and growth.

By taking a forward-looking, ambitious approach to how they spend and invest, governments have significant power to foster and direct growth to be innovation-driven, inclusive and sustainable. Setting bold objectives that require public-private collaboration can work to expand private sector investment, stimulating jobs, training and productivity growth. These benefits are a byproduct of this mission-oriented investment; they are not the core objective. Done well, this approach can bring economic, social and environmental priorities into alignment.

For example, in addition to contributing to better health, education and economic outcomes for young people, well-structured investments in healthy and sustainable school meals for all primary schoolchildren in the UK can create a massive market opportunity for agriculture and food industries. This potential to leverage school meal procurement to transform food supply chains has already been recognised in Sweden. Starmer has so far avoided committing to free school meals for all primary schoolchildren in England, citing spending constraints and a focus on fixing a broken economy. Not only has Sunak ignored calls for free school meals, he is also battling claims that underinvestment in infrastructure has led to schools that are crumbling. Parts of the UK - including Scotland and London - are also further ahead in providing access to free school meals, with Scotland recently announcing plans to expand free school meals to additional primary schoolchildren and the mayor of London, Sadiq Khan, announcing free school meals for primary schoolchildren in London for the 2023-24 school year as an emergency measure.

Instead of seeing spending on education, school meals and other priorities - such as tackling the climate emergency, health crises or the digital divide - as an expense, it should be recognised as an investment. And one that can drive innovation.

In my 2013 book, The Entrepreneurial State: Debunking Public Vs Private Sector Myths, I made the case for governments to invest (rather than cut) their way to growth - and to do so in an entrepreneurial way that embraces the collective risk-taking needed. But, as I warned, it is vital to ensure that both risks and rewards are socialised.What was the point of government investing in the technologies that make our smartphones smart (yes, the internet, GPS, touchscreen and Siri are all fruits of government investment) if we don't ensure that the resulting wealth is distributed rather than absorbed into massive excess profits in the private sector? A decade later, governments around the world are advancing industrial strategies, notably in the US, where the government has compared the scale of its ambitions to that of the Apollo space programme and is investing $2tn into its economy through the Bipartisan Infrastructure Law, Chips and Science Act and Inflation Reduction Act. But most still shy away from maximising the potential of these investments by bringing social and environmental objectives into alignment with industrial strategy goals. Realising this potential requires four shifts in thinking.

First, it requires setting a clear direction. Governments can orient industrial strategy investments around bold goals - such as healthy, sustainable and tasty school meals for all children - to shape economies that not only grow, but grow in ways that are designed to benefit people and the planet.

Second, governments should approach the relationship between government, business and labour in such a way that risks and rewards are equitably shared. This is about establishing a new social contract. While public-private partnerships can and should create private value, the government's role is to maximise public value. This requires setting conditions on any benefit granted to the private sector - through grants, loans, procurement deals, tax incentives or other means - to, for example, ensure affordable prices (as with the Oxford-AstraZeneca Covid-19 vaccine during the pandemic), share profits or IP rights, require fair labour practices and carbon emissions reductions, or limit shareholder buybacks (as was done with the US Chips and Science Act) and require reinvestment in research and development or worker training.

Third, it requires citizen engagement. At a time when public disenchantment with government leadership is rife, it is all the more vital for economic strategies to benefit and resonate with the people they are ultimately for. As politicians closely watch the polls and refine their policy agendas, they should be looking for ways to meaningfully engage in a ground-up conversation with the people of Britain and really listen to them.

Finally, directing and shaping growth requires investments in dynamic public sector capabilities, tools and institutions - to build back the state's entrepreneurial capacity. Conversely, it means avoiding the pitfalls of over-reliance on consulting firms, a tendency that the UK has repeatedly fallen victim to and is the subject of my new book, The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies. The language of cost-saving and fiscal responsibility can lead to downsizing and gutting the capacity of governments to advance ambitious strategies. This becomes a self-fulfilling prophecy: when governments outsource critical functions, they do not develop the internal skills and knowledge to manage these functions.

The importance of taking an active hand in the UK economy is not about big v small government; rather, it is about advocating for smart, capablegovernments that understand their role in directing growth. Unless this direction is aligned with sustainability, health and inclusion goals, a thriving, resilient economy will remain elusive.

This article was amended on 22 September 2023. An earlier version said that Keir Starmer had avoided committing to free school meals in the UK. As school meals are devolved, this should have said England. Further information has been added to make this clear and to reflect the situation in the devolved nations.

Mariana Mazzucato is author of The Entrepreneurial State: Debunking Public vs Private Sector Myths. The 10th anniversary edition, updated with a new preface, is out now

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To grow the economy in a way that benefits people and the planet, politicians must think outside the box | Mariana Mazzucato

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We rely on too many old ideas. Governments must foster growth that is innovative and sustainable, says economist Mariana Mazzucato

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The deep rooted problem holding back the UK economy

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Great short BBC article about the fundamental things holding back the UK economy 

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Great short BBC article about the fundamental things holding back the UK economy 

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The economic shockwaves of the pandemic, and the Ukraine war appear, finally, to be calming.

Inflation has fallen for three months in a row and pay is now almost matching the pace of price rises.

Interest rates, which had been rising since late 2021 and making life tough for struggling households and families alike, were finally put on pause earlier this month, with Bank of England boss Andrew Bailey saying there were increasing signs higher rates were beginning to to rein in UK inflation.

And even in the toughest of environments - three prime ministers in one year and a worldwide pandemic - the UK economy has shown more resilience than had been expected, managing to avoid a recession.

While the economy is not quite free of these three years of relentless rolling crises, the path out of this could now be clearing, if the jobs market and oil prices calm.

But when the storm subsides, it will reveal more deep-rooted challenges. The future of the economy and prosperity depends on investment spending. The UK has an underinvestment crisis, and it affects both the private and the public sector.

No flying cars yet

A recent trip to Milton Keynes in the south of England is one of the best places to see all the challenges and opportunities in Britain's faltering record on long-term investment.

This 1960s city is where long-term economic growth will happen. The city, the original "new town" created to house baby boomer Londoners, is now plugged into the future of high tech, high investment growth.

Two hundred shopping trolley sized robots trundle down the leafy cycle paths delivering groceries, parcels and fast food. Hire cars can be summoned to drive themselves to your location.

There are no flying cars just yet, but the council and the local hospital are trialling delivery of medicines via drone. It might sound like an episode of the Jetsons, the futuristic 1960s American cartoon, yet some parts of the city feel dated.

Locals bristle at the city being called a "concrete jungle". There is a lot of greenery as well as 1960s and 70s concrete. But some of what was new and gleaming back then, now needs the funding to be renewed and rebuilt, half a century on, both in this city, and across the country.

ABB a Swedish-Swiss manufacturing company are training advanced industrial robots here to work with people, on picking, packing, sorting, welding. Its managing director, Dermot Lynch, says investment has been poor.

When it comes to deployment of robot technologies, the latest figures show the UK is at the bottom of the G7 advanced economies which include Canada, France, Germany, Italy, Japan and the US.

Mr Lynch says the key is to get these technologies, already widely used in car factories, into small and medium sized businesses (SMEs). "The robots code themselves by recording the actions of a human operator. We see that being particularly important in SMEs where there may not be a lot of technical skill."

Productivity puzzle

British business does not now invest as much as other major economies either. The UK was in second place in the G7 for private investment, as a share of the economy in the mid 1990s, but has now fallen behind them all.

The long-term impact of this is low productivity - we take more time to produce less than our rivals -which results in low growth, low real wages, and then problems raising money for public services.

There is a hope that robotics and artificial intelligence could be the technologies that solve the productivity puzzle.

For Chancellor Jeremy Hunt, correcting poor business investment is the main aim of next month's Autumn Statement. Various tax changes have been tried, including the "superdeduction" tax break, which gave businesses investing in certain types of equipment, like machinery, a much higher tax reduction than usual.

This spring, Mr Hunt announced a new scheme to allow every pound invested by businesses in IT equipment, plants or machinery to be deducted in full from taxable profits. The "full capital expensing" policy allows companies for three years to deduct spending on investment from profits, meaning they have to pay lower amounts of corporation tax.

But the productivity problem remains stubborn.

The other aim of the chancellor with his Autumn Statement is his pledge to balance the borrowing numbers.

'Declining public realm'

This is putting pressure on public spending reflected in the recent discussion over the future of the HS2 rail link due to the soaring cost of the project. Capital investment in transport is due to go up sharply, because of HS2, even as it has hardly gone up for schools.

A Milton Keynes secondary school head showed me what she called one of the worst examples of the schools concrete crisis: a sports hall, built in the early 1990s, with a bowing RAAC concrete roof.

This has sparked criticism of a "declining public realm", and whether the fabric of public services in general are up to scratch.

Public investment has been low in recent years, and was cut after the financial crisis as part of the coalition's austerity drive. Ahead of the last general election, former Prime Minister Boris Johnson made a push to increase this to 3% of the size of the national economy - the long term average.

But the plans now are to cut that back after next year with a cash freeze brought in to help calm markets after last year's mini budget which sparked turmoil on financial markets. Net public investment will fall from 2.9% of our national income to 2.1% over the next four years.

Lower investment also puts the UK's pledge to meet net zero and stop adding to the total amount of greenhouse gases in the atmosphere by 2050 in jeopardy.

This city is benefiting from a new £760m East West rail link connecting it to Oxford. The plan is to spend billions more on a further connection to Cambridge. This would be a huge boost to growth, connecting two world-beating research centres directly to a city with the space and housing to grow. But with capital spending squeezed, all major transport projects are now being carefully scrutinised.

The government's plan appears to be to get the private sector to do the heavy lifting of investing in our economic future. There are exciting opportunities for this in Milton Keynes and beyond that could help crack our poor productivity record. Turning this round is essential for long term growth. But doing so while public investment is being squeezed, is quite the challenge.

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The deep rooted problem holding back the UK economy

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The UK has an underinvestment crisis - our future prosperity depends on this changing.

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As Britain’s town hall services crumble, the case for reform is overwhelming

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The impact of 13 years of austerity on local council finances and services is a terrible story only now unfolding 

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The impact of 13 years of austerity on local council finances and services is a terrible story only now unfolding 

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As Britain’s town hall services crumble, the case for reform is overwhelming

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Local government has been steadily squeezed by austerity, inflation and centralisation. Greater devolution is needed

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A year after Truss's demolition job, the UK is still in a hole

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Some great background on splits in Conservative party economic thinking. Also, some good economic theory and UK economy stats.

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Some great background on splits in Conservative party economic thinking. Also, some good economic theory and UK economy stats.

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Imagine an alternative world. Liz Truss has just completed her first year in office this weekend, having miraculously survived when her mini-budget triggered the worst political and economic meltdown since Black Wednesday.

Andrew Bailey has been fired as Bank of England governor, the Office for Budget Responsibility has been abolished and the Treasury has been reformed: it's no longer a bastion of orthodoxy but a ward of No 10's pro-growth coalition. The International Monetary Fund has been ignored - despite the pound hitting a record low against the dollar - while high inflation and borrowing costs have fuelled a soaraway government deficit.

A year on from promising more tax cuts and less regulation, chancellor Kwasi Kwarteng has followed the mini-budget with an " autumn of action" aimed at business red tape. A full budget launches a flat tax on incomes, company profits and capital gains. Set at just 20%, and costing £40bn, it brings the tax rates paid by millionaire bankers into line with minimum-wage workers - fuelling extreme inequality.

Funding for the NHS, schools and defence is £35bn lower than it would be under a Rishi Sunak government, and despite a cost of living crisis, welfare benefits are lower, too.

In reality, Truss became the shortest-serving prime minister in British history as political and economic turmoil brought about her downfall. But despite her policies failing to survive contact with reality for any longer than the shelf-life of a lettuce, her ideas continue to loom large in Conservative circles.

Last week, Truss praised Sunak's decision to water down net zero policies and called on her successor to cut taxes to kickstart Britain's faltering economy. It was a gift to Labour, given Truss's status as the least popular prime minister in polling history.

Even with a change of course, inflation remains uncomfortably high, and interest rates on some UK government debt are back above mini-budget levels

But could a Truss government have resulted in an economic landscape similar to the one now overseen by Sunak? The most radical elements of Truss's mini-budget were jettisoned in a series of screeching U-turns as reality overruled ideology. But Britain's inflationary burst was always driven primarily by global forces, Truss's energy price guarantee was retained, and Brexit still ties businesses in knots. Meanwhile, Jeremy Hunt - who thought Truss's text message asking him to take over from Kwarteng was a hoax - was her pick as chancellor, not Sunak's.

Even with a change of course, inflation remains uncomfortably high, and interest rates on some UK government debt are now back above mini-budget levels.

Unlike in Truss's retelling of history, it was the pace at which long-term interest rates soared - not the level they hit - that triggered the crisis for pensions funds invested in liability-driven investments (LDI), and meant the Bank of England had to intervene to counter the "doom loop" in financial markets.

"If I'd know about LDIs, we'd have done things differently," Truss said last week. She may not have known about this obscure corner of the pensions market, but she had been amply warned against testing the markets with reckless fiscal policies - including by her own economists.

At the anniversary of the mini-budget, debate continues about how best to revive growth. Wages after inflation are no higher today than in 2007, and recent weak growth figures are hardly news after more than a decade of lacklustre gains in output.

This time, however, the chancellor is warning that tax cuts are "virtually impossible" because of tight constraints on government finances, the high cost of servicing the national debt - and because not making them could help Sunak to fulfil his promise to halve inflation this year.

Still, Sunak and Hunt will face demands to use November's autumn statement to bring in growth-enhancing policies. These will come not just from disgruntled Truss supporters, but also from businesses and households struggling with high borrowing costs and a deteriorating economy.

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A year after Truss's demolition job, the UK is still in a hole

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Her worst ideas were reversed, but today's economy is similarly floundering, as Sunak prepares for his own autumn budget

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UK's political short-termism is killing hopes of business investment | Richard Partington

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Does "investment" lead economic growth or follow it? Whatever you think we need it, but the UK's blind adherence to it's "arbitrary" fiscal rules stink of short-termism. Even the US is following a Keynesian stimulus policy. Will we ever learn?

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Does "investment" lead economic growth or follow it? Whatever you think we need it, but the UK's blind adherence to it's "arbitrary" fiscal rules stink of short-termism. Even the US is following a Keynesian stimulus policy. Will we ever learn?

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ehman Brothers was still in business, Gordon Brown was the prime minister and George Bush was US president. The last time the Bank of England held interest rates above 5%, the world economy was very different. There were warning signs, but few could have predicted the severity of what happened next.

Fifteen years later, the Bank again used its September meeting to keep interest rates on hold, bringing to a halt its most aggressive round of rate increases in decades, with rates set at 5.25%, the highest level since 2008. For many, the end of ever-higher rates could not have come soon enough.

Once again there are growing signs of recession. The force of previous rate increases, combined with stubborn inflationary pressures, are running the economies of Britain, the US and the EU into a brick wall. Talk of a "hard landing" after the biggest inflationary shock in 40 years cannot be dismissed lightly.

With inflation still uncomfortably high, the Bank is expected to keep rates at elevated levels for a prolonged period to ensure inflation falls back sustainably to the 2% target set by the government. It is, as Huw Pill, the Bank's chief economist, put it in a speech in Cape Town last month, a "Table Mountain" strategy.

Life on the plateau is likely to prove tough. There are still millions of mortgage holders yet to refinance to higher rates, in a ticking timebomb for consumer spending over the months to come. Figures from the private sector already show activity collapsing at the fastest rate, outside the Covid pandemic, since 2009.

Little of this backdrop is good news for businesses. Faced with ongoing cost pressures, higher borrowing costs and rapidly fading consumer demand, companies have few reasons to push ahead with ambitious investment plans. What's more, the government is adding to the instability.

Determined to make a bad situation worse, Rishi Sunak's decision last week to move the goalposts on the government's net zero commitments angered business leaders desperate for greater stability. Pulling the plug on HS2 to Manchester - just as the Tories prepare to hold their annual conference in the city - adds yet more instability into the mix.

Elsewhere, Brexit remains a serious headwind for companies, while offshore wind projects are stalled after the government's botched subsidy auction received no new bids from energy firms.

Juergen Maier, the former chief executive of Siemens UK, is worried. "We've experienced the chopping and changing of policies in this country for decades. But this is no longer chop and change. This is chaos," he told me last week.

"Everybody [in industry] is now sitting and wobbling and wondering. And I tell you what, they won't be investing in the UK. It's a disaster for productivity. It's a disaster for jobs, well-paid jobs. And it's a disaster for business confidence and investment - and we need exactly the opposite."

Unlike the crash 15 years ago, most forecasters do not expect a deep or prolonged recession. But without a rapid turnaround in business investment, the likelihood is Britain will be left without solid foundations for recovery. As a consequence, growth is likely to remain anaemic at best for years to come, turning a lacklustre decade after the 2008 financial crash into two decades of limited progress.

Considered key to raising the long-term growth rate of the economy, business investment involves companies spending on plant, machinery, and information and communication technology.

So far this year, investment has held up better than expected, in part because of Sunak's super-deduction tax break, which expired at the end of March. The government replaced the scheme with "full expensing" for qualifying capital investments, aiming to soften the impact of a rise in corporation tax from 19% to 25% from April. However, despite arguing that it would like to make the policy permanent, the chancellor, Jeremy Hunt, has so far refused to do so because it would break the Conservatives' arbitrary fiscal rules.

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This is short-termism on steroids, placing narrow political priorities over the long-term needs of the economy. Sadly, it is par for the course in Britain's recent history of robbing from the future to avoid short-term difficulties. And there are no worse culprits than the Conservatives.

For decades, British business has tended to underinvest relative to firms in other leading nations. From 1971 to 2008, capital accumulation contributed one percentage point to output growth a year on average, according to a Goldman Sachs report. From 2009 to 2021, the contribution averaged just 0.2 percentage points.

Brexit unleashing deep political and economic uncertainty added to the reasons for companies not to invest in Britain. With interest rates at the highest levels since 2008, there are renewed headwinds. According to the Goldman report, for every 100 basis point rise in Bank rate, business investment typically falls by 3% over the following 10 quarters. Rates have risen by five times that level, priming Britain for a marked slowdown in spending.

The position contrasts sharply with the US, where Joe Biden is backing companies by ploughing billions of dollars into infrastructure and green technologies through the Inflation Reduction Act, offsetting some of the pressure on business investment after rate rises from the US Federal Reserve. The EU and China are taking similar steps, spending billions of dollars of public money in a subsidy war to pull ahead in the green industries of the future.

Companies rely on political and economic stability to make their investment plans. With high interest rates for a long time to come, looming recession and Sunak pulling the rug from major government commitments, the business investment required to kickstart the British economy is in serious jeopardy.

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UK's political short-termism is killing hopes of business investment | Richard Partington

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Without economic stability the country is likely to be left without solid foundations for recovery

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UK recession risk grows as higher interest rates weigh on firms

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Evidence is mounting that the UK may slip into recession very soon 

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Evidence is mounting that the UK may slip into recession very soon 

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Britain's economy is at growing risk of recession, with industry figures showing the sharpest monthly fall in private sector activity, outside of the Covid pandemic, since the financial crisis.

In a sign that higher interest rates and the cost of living crisis are combining to depress consumer demand, the latest snapshot from S&P Global and the Chartered Institute of Procurement and Supply (Cips) showed a steep drop in the UK's dominant service sector and manufacturing output in September.

Aside from pandemic disruptions to the economy, the latest decrease in the purchasing managers' index (PMI) was the steepest since March 2009.

On Thursday, the Bank of England halted its most aggressive round of interest rate increases in decades on Thursday amid growing concerns over the economy, holding borrowing costs at 5.25% after 14 previous rises. It said it was given early sight of the S&P Global/Cips data before its decision.

On Friday, Mike Bell of the US investment firm JP Morgan Asset Management said: "This morning's weak UK PMI business survey explains why the Bank didn't raise rates yesterday.

"It's clear from the weak survey data that the effect of the prior interest rate hikes is starting to bite. The weakness in the key service sector, along with the ongoing weakness in manufacturing, was probably what sealed the deal for the Bank."

Total new work in the private sector fell for the third month in a row, with firms warning that cost of living pressures and higher borrowing costs, alongside cutbacks in the real estate and construction sectors, were weighing on activity.

The S&P Global/Cips UK PMI composite output index fell from 48.6 in August to 46.8 in September. A reading above 50 separates growth from contraction.

Chris Williamson, the chief business economist at S&P Global market intelligence, said the reading was consistent with the economy shrinking at a quarterly rate of about 0.4%. Two consecutive quarters of decline are regarded as the technical definition of a recession.

Williamson said: "The disappointing PMI survey results for September mean a recession is looking increasingly likely in the UK. Underscoring the severity of the UK's deteriorating situation, September's downturn is the steepest since the height of the global financial crisis in early 2009, barring only the pandemic lockdown months."

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Separate figures for retail sales in Great Britain showed some recovery in consumer spending in August, after a washout for retailers in one of the wettest Julys on record.

Sales volumes rose by 0.4% on the month after a sharp 1.1% fall in July, the Office for National Statistics said. Economists polled by Reuters had forecast a slightly stronger rebound to 0.5%.

Sales in food stores drove the recovery, with growth in the volume of sales of 1.2% after a fall of 2.6% in July, when supermarkets reported that wet weather had reduced clothing sales. Sales volumes at non-food stores grew by 0.6%in August, after a fall of 1.2% in July when poor weather reduced footfall.

Sandra Horsfield of the investment bank Investec said: "The trend in total retail spending volumes has been broadly sideways. The economy is entering more troubled waters and a [relatively mild and short-lived] recession is likely to ensue this winter."

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UK recession risk grows as higher interest rates weigh on firms

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Service sector and manufacturing output falls, with cost of living crisis also hitting businesses

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UK economy makes stronger recovery from pandemic than first thought

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GDP revisions suggest UK has performed better since COVID than first thought. However, it's still not great...

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GDP revisions suggest UK has performed better since COVID than first thought. However, it's still not great...

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The UK economy made a faster recovery from the Covid pandemic than previously estimated, according to revisions to official figures revealing a stronger performance than Germany and France.

In a boost for Rishi Sunak before the Conservative party conference in Manchester beginning this weekend, revised figures from the Office for National Statistics (ONS) showed gross domestic product was 1.8% above pre-pandemic levels at the end of the second quarter this year.

In August, the ONS had estimated the economy was still 0.2% below the level at the end of 2019 before the global health emergency triggered one of the deepest recessions on record.

The changes mean the UK economy is no longer the worst performer in the G7. The chancellor, Jeremy Hunt, said: "We know that the British economy recovered faster from the pandemic than anyone previously thought, and data out today once again proves the doubters wrong."

The ONS said growth in the first quarter of 2023 was revised up to 0.3% from an earlier estimate of 0.1%, while its estimate for growth in the second quarter was unchanged at 0.2%. Growth was also faster than expected last year. GDP is now estimated to have increased by 4.3% in 2022, revised from a first estimate of 4.1%.

Momentum is, however, beginning to stall as the UK economy grapples with higher interest rates from the Bank of England and stubbornly high inflation weighing on businesses and households amid growing fears of a recession.

Sandra Horsfield, of the investment bank Investec, said: "We see little in today's numbers to derail our expectation of a more challenging growth picture ahead: we continue to forecast that the UK economy will enter a recession over the winter months."

Ruth Gregory, the deputy chief UK economist at Capital Economics, said: "We still think that higher interest rates will trigger a mild recession involving a 0.5% fall in GDP in the coming quarters."

Business surveys show private sector activity collapsed in September at the fastest rate, outside the Covid pandemic, since the financial crisis.

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Millions of households are braced for a sharp jump in mortgage payments, while inflation remains at the highest level in the G7, and taxes have risen by the most in any parliament since the 1950s - hitting consumer spending power.

Darren Jones, the shadow chief secretary to the Treasury, said: "Britain's economy remains trapped in a low-growth, high-tax cycle after 13 years of economic mismanagement under the Conservatives."

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UK economy makes stronger recovery from pandemic than first thought

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Revisions to figures show stronger performance than Germany and France but momentum starts to stall

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UK Treasury minister defends tax plans in face of biggest rise on record

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Some great stats about the government's fiscal policy in this short article

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Some great stats about the government's fiscal policy in this short article

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A senior Treasury minister has defended the government's tax plans after a report said British households were facing the biggest rise on record.

Andrew Griffith said on Friday the government would stick to its spending plans even as pressure grew from Conservative backbenchers to cut taxes in the next budget.

His comments came after the Institute for Fiscal Studies published a report saying UK households faced an average tax rise of £3,500 a year by the next election, pushing up tax revenue from 33% of national income four years ago to 37% by next year.

Ben Zaranko, a senior research economist at IFS, said: "This is not, for the most part, a direct consequence of the pandemic. Rather, it reflects decisions to increase government spending, in part driven by demographic change, pressures on the health service and some unwinding of austerity.

"It is likely that this parliament will mark a decisive and permanent shift to a higher-tax economy."

Griffith told Sky News: "I think that the economy runs best when it has stability, which is our focus right now, bringing down inflation, which is a tax rise by another name."

He added: "Right now, because of the constraints that the economy is facing, our priority is inflation. I'm pleased that the plan for reducing inflation is on track, but there's no margin to change that at the moment. We've got to stick with it and deliver that."

Labour has refused to commit to tax cuts if it wins the next election. Darren Jones, the shadow Treasury chief secretary, told Sky News: "The IFS data shows that the population is generally getting older, and when you get a bit older, you need more help from the health and social care system."

Jeremy Hunt, the chancellor, has come under increasing pressure in recent months from Conservative colleagues to cut taxes. Priti Patel, the former home secretary, told GB News on Friday: "The tax burden is now [at a] 70-year-high. That is unsustainable. And the people that pay the taxes are hard-pressed Brits around the country."

Hunt has argued that cutting tax would further fuel inflation. However, Rishi Sunak is reported to be considering a pledge to abolish inheritance tax altogether, a proposal that the IFS said earlier this week would cost the government £7bn.

Griffith said on Friday the government wanted to cut taxes once inflation had fallen further. "This is still a government that believes in taking people out of tax and reducing the tax burden."

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Tory tax-cutters have been given ammunition by falling inflation levels; while prices rose by 6.7% in August this was lower than economists had expected.

Ministers were given a boost on Friday by official figures showing economic growth has been higher than previously thought. According to quarterly statistics from the Office for National Statistics, the economy grew 0.3% in the first quarter of this year, rather than 0.1% as previously thought.

Hunt said: "The best way to continue this growth is to stick to our plan to halve inflation this year, with the IMF forecasting that we will grow more than Germany, France, and Italy in the longer term."

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UK Treasury minister defends tax plans in face of biggest rise on record

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Andrew Griffith says government will stick to spending proposals despite growing pressure to cut taxes

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The deep rooted problem holding back the UK economy

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After 15 terrible austerity years, how can the UK achieve economic growth?

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After 15 terrible austerity years, how can the UK achieve economic growth?

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The economic shockwaves of the pandemic, and the Ukraine war appear, finally, to be calming.

Inflation has fallen for three months in a row and pay is now almost matching the pace of price rises.

Interest rates, which had been rising since late 2021 and making life tough for struggling households and families alike, were finally put on pause earlier this month, with Bank of England boss Andrew Bailey saying there were increasing signs higher rates were beginning to to rein in UK inflation.

And even in the toughest of environments - three prime ministers in one year and a worldwide pandemic - the UK economy has shown more resilience than had been expected, managing to avoid a recession.

While the economy is not quite free of these three years of relentless rolling crises, the path out of this could now be clearing, if the jobs market and oil prices calm.

But when the storm subsides, it will reveal more deep-rooted challenges. The future of the economy and prosperity depends on investment spending. The UK has an underinvestment crisis, and it affects both the private and the public sector.

No flying cars yet

A recent trip to Milton Keynes in the south of England is one of the best places to see all the challenges and opportunities in Britain's faltering record on long-term investment.

This 1960s city is where long-term economic growth will happen. The city, the original "new town" created to house baby boomer Londoners, is now plugged into the future of high tech, high investment growth.

Two hundred shopping trolley sized robots trundle down the leafy cycle paths delivering groceries, parcels and fast food. Hire cars can be summoned to drive themselves to your location.

There are no flying cars just yet, but the council and the local hospital are trialling delivery of medicines via drone. It might sound like an episode of the Jetsons, the futuristic 1960s American cartoon, yet some parts of the city feel dated.

Locals bristle at the city being called a "concrete jungle". There is a lot of greenery as well as 1960s and 70s concrete. But some of what was new and gleaming back then, now needs the funding to be renewed and rebuilt, half a century on, both in this city, and across the country.

ABB a Swedish-Swiss manufacturing company are training advanced industrial robots here to work with people, on picking, packing, sorting, welding. Its managing director, Dermot Lynch, says investment has been poor.

When it comes to deployment of robot technologies, the latest figures show the UK is at the bottom of the G7 advanced economies which include Canada, France, Germany, Italy, Japan and the US.

Mr Lynch says the key is to get these technologies, already widely used in car factories, into small and medium sized businesses (SMEs). "The robots code themselves by recording the actions of a human operator. We see that being particularly important in SMEs where there may not be a lot of technical skill."

Productivity puzzle

British business does not now invest as much as other major economies either. The UK was in second place in the G7 for private investment, as a share of the economy in the mid 1990s, but has now fallen behind them all.

The long-term impact of this is low productivity - we take more time to produce less than our rivals -which results in low growth, low real wages, and then problems raising money for public services.

There is a hope that robotics and artificial intelligence could be the technologies that solve the productivity puzzle.

For Chancellor Jeremy Hunt, correcting poor business investment is the main aim of next month's Autumn Statement. Various tax changes have been tried, including the "superdeduction" tax break, which gave businesses investing in certain types of equipment, like machinery, a much higher tax reduction than usual.

This spring, Mr Hunt announced a new scheme to allow every pound invested by businesses in IT equipment, plants or machinery to be deducted in full from taxable profits. The "full capital expensing" policy allows companies for three years to deduct spending on investment from profits, meaning they have to pay lower amounts of corporation tax.

But the productivity problem remains stubborn.

The other aim of the chancellor with his Autumn Statement is his pledge to balance the borrowing numbers.

'Declining public realm'

This is putting pressure on public spending reflected in the recent discussion over the future of the HS2 rail link due to the soaring cost of the project. Capital investment in transport is due to go up sharply, because of HS2, even as it has hardly gone up for schools.

A Milton Keynes secondary school head showed me what she called one of the worst examples of the schools concrete crisis: a sports hall, built in the early 1990s, with a bowing RAAC concrete roof.

This has sparked criticism of a "declining public realm", and whether the fabric of public services in general are up to scratch.

Public investment has been low in recent years, and was cut after the financial crisis as part of the coalition's austerity drive. Ahead of the last general election, former Prime Minister Boris Johnson made a push to increase this to 3% of the size of the national economy - the long term average.

But the plans now are to cut that back after next year with a cash freeze brought in to help calm markets after last year's mini budget which sparked turmoil on financial markets. Net public investment will fall from 2.9% of our national income to 2.1% over the next four years.

Lower investment also puts the UK's pledge to meet net zero and stop adding to the total amount of greenhouse gases in the atmosphere by 2050 in jeopardy.

This city is benefiting from a new £760m East West rail link connecting it to Oxford. The plan is to spend billions more on a further connection to Cambridge. This would be a huge boost to growth, connecting two world-beating research centres directly to a city with the space and housing to grow. But with capital spending squeezed, all major transport projects are now being carefully scrutinised.

The government's plan appears to be to get the private sector to do the heavy lifting of investing in our economic future. There are exciting opportunities for this in Milton Keynes and beyond that could help crack our poor productivity record. Turning this round is essential for long term growth. But doing so while public investment is being squeezed, is quite the challenge.

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The deep rooted problem holding back the UK economy

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The UK has an underinvestment crisis - our future prosperity depends on this changing.

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To grow the economy in a way that benefits people and the planet, politicians must think outside the box | Mariana Mazzucato

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Mazzucato is an economist with big, non-mainstream ideas. Politicians looking for a fresh start should listen to her.

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Mazzucato is an economist with big, non-mainstream ideas. Politicians looking for a fresh start should listen to her.

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oliticians from across the UK's political spectrum seem to agree on one thing: growth. But for all the talk of resuscitating the UK's flagging economy, there is little evidence (yet) to suggest that any party will succeed in charting a new course. Political leaders of all persuasions are - to echo the words of John Maynard Keynes - captive to defunct economic theory.

Rishi Sunak is advancing a piecemeal industrial strategy while painstakingly avoiding this label, focusing on wooing companies such as Jaguar Land Rover to base operations in the UK and on building the competitive strength of certain sectors. On the other side of the aisle, Keir Starmer is framing Labour as " economically responsible", with a focus on growth rather than " big spending ", and is scaling back or delaying previous commitments, including a green prosperity fund. While Sunak's plans show a lack of confidence in the state's role in the economy, Starmer's are falling victim to a false dichotomy between spending and growth.

By taking a forward-looking, ambitious approach to how they spend and invest, governments have significant power to foster and direct growth to be innovation-driven, inclusive and sustainable. Setting bold objectives that require public-private collaboration can work to expand private sector investment, stimulating jobs, training and productivity growth. These benefits are a byproduct of this mission-oriented investment; they are not the core objective. Done well, this approach can bring economic, social and environmental priorities into alignment.

For example, in addition to contributing to better health, education and economic outcomes for young people, well-structured investments in healthy and sustainable school meals can create a massive market opportunity for UK agriculture and food industries. This potential to leverage school meal procurement to transform food supply chains has already been recognised in Sweden. In the UK, Starmer has so far avoided committing to free school meals for all primary schoolchildren, citing spending constraints and a focus on fixing a broken economy. Not only has Sunak ignored calls for free school meals, he is also battling claims that underinvestment in infrastructure has led to schools that are crumbling.

Instead of seeing spending on education, school meals and other priorities - such as tackling the climate emergency, health crises or the digital divide - as an expense, it should be recognised as an investment. And one that can drive innovation.

In my 2013 book, The Entrepreneurial State: Debunking Public Vs Private Sector Myths, I made the case for governments to invest (rather than cut) their way to growth - and to do so in an entrepreneurial way that embraces the collective risk-taking needed. But, as I warned, it is vital to ensure that both risks and rewards are socialised.What was the point of government investing in the technologies that make our smartphones smart (yes, the internet, GPS, touchscreen and Siri are all fruits of government investment) if we don't ensure that the resulting wealth is distributed rather than absorbed into massive excess profits in the private sector? A decade later, governments around the world are advancing industrial strategies, notably in the US, where the government has compared the scale of its ambitions to that of the Apollo space programme and is investing $2tn into its economy through the Bipartisan Infrastructure Law, Chips and Science Act and Inflation Reduction Act. But most still shy away from maximising the potential of these investments by bringing social and environmental objectives into alignment with industrial strategy goals. Realising this potential requires four shifts in thinking.

First, it requires setting a clear direction. Governments can orient industrial strategy investments around bold goals - such as healthy, sustainable and tasty school meals for all children - to shape economies that not only grow, but grow in ways that are designed to benefit people and the planet.

Second, governments should approach the relationship between government, business and labour in such a way that risks and rewards are equitably shared. This is about establishing a new social contract. While public-private partnerships can and should create private value, the government's role is to maximise public value. This requires setting conditions on any benefit granted to the private sector - through grants, loans, procurement deals, tax incentives or other means - to, for example, ensure affordable prices (as with the Oxford-AstraZeneca Covid-19 vaccine during the pandemic), share profits or IP rights, require fair labour practices and carbon emissions reductions, or limit shareholder buybacks (as was done with the US Chips and Science Act) and require reinvestment in research and development or worker training.

Third, it requires citizen engagement. At a time when public disenchantment with government leadership is rife, it is all the more vital for economic strategies to benefit and resonate with the people they are ultimately for. As politicians closely watch the polls and refine their policy agendas, they should be looking for ways to meaningfully engage in a ground-up conversation with the people of Britain and really listen to them.

Finally, directing and shaping growth requires investments in dynamic public sector capabilities, tools and institutions - to build back the state's entrepreneurial capacity. Conversely, it means avoiding the pitfalls of over-reliance on consulting firms, a tendency that the UK has repeatedly fallen victim to and is the subject of my new book, The Big Con: How the Consulting Industry Weakens our Businesses, Infantilizes our Governments and Warps our Economies. The language of cost-saving and fiscal responsibility can lead to downsizing and gutting the capacity of governments to advance ambitious strategies. This becomes a self-fulfilling prophecy: when governments outsource critical functions, they do not develop the internal skills and knowledge to manage these functions.

The importance of taking an active hand in the UK economy is not about big v small government; rather, it is about advocating for smart, capablegovernments that understand their role in directing growth. Unless this direction is aligned with sustainability, health and inclusion goals, a thriving, resilient economy will remain elusive.

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To grow the economy in a way that benefits people and the planet, politicians must think outside the box | Mariana Mazzucato

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We rely on too many old ideas. Governments must foster growth that is innovative and sustainable, says economist Mariana Mazzucato

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What is the UK inflation rate and why is it so high?

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What is inflation and why is it so high?

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What is inflation and why is it so high?

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The rate at which prices rising remained unchanged at 6.7% in the year to September compared with August.
Slowing food inflation on items such as milk, cheese and eggs were offset by fuel prices rising sharply, hitting drivers at the pumps.

In a bid to slow inflation, the Bank of England has increased interest rates to 5.25%, but held rates at its last meeting.

What does inflation mean?

Inflation is the increase in the price of something over time.

If a bottle of milk costs £1 but £1.05 12 months later, then annual milk inflation is 5%.

Each month's inflation figure shows how much these prices have risen since the same date last year.

You can calculate inflation in various ways, but the main "headline" measure is the Consumer Prices Index (CPI).

Food prices saw their first monthly fall in two years in September, but fuel prices rose sharply.

"Core inflation" excludes the price of energy, food, alcohol and tobacco.

This measure was 6.1% in September, marginally down from 6.2% in August.

The Bank of England considers this number, as well as CPI, when deciding whether to change interest rates.

Soaring food and energy bills helped drive inflation up.

Alcohol prices in restaurants and pubs also rose.

The Bank of England has a target to keep inflation at 2%, but the current rate remains well above that.

This makes borrowing more expensive, and means some people with mortgages see their monthly payments go up. Some saving rates also increase.

When people have less money to spend, they buy fewer things, reducing the demand for goods and slowing price rises.

Businesses also borrow less, making them less likely to create jobs; some may cut staff.

This is higher than the rate of inflation was in the same period (7.1%), which means real wages grew for the first time in nearly two years.

However, unions point out that many workers have received smaller pay increases, and there have been widespread strikes over pay.

The government has previously argued that big pay rises could push inflation higher because companies might increase prices as a result.

When will inflation go down?

Lower inflation doesn't mean prices fall. It just means they rise less quickly.

The Bank of England has predicted inflation will drop to 5% by the end of 2023, rather than the 4% it had been anticipating.

But he admitted that inflation had been "more sticky than previously expected".

Other countries have also been experiencing a cost-of-living squeeze.

Many of the reasons are the same - increased energy costs, shortages of goods and materials, and the fallout from Covid.

The European Central Bank had been increasing interest rates to try to bring eurozone inflation under control.

August had seen the 11th increase since early 2022, with rates at their highest for almost two decades.

It warned further raises would follow "if appropriate".

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What is the UK inflation rate and why is it so high?

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The rate at which prices are rising has fallen but remains well above the 2% inflation target.

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GDP or Gross Domestic Product is one of the most important tools for looking at how well, or badly, an economy is doing.

GDP helps businesses judge when to expand and hire more people, and it lets government work out how much to tax and spend.

What is GDP?

GDP is a measure - or an attempt to measure - all the activity of companies, governments and individuals in a country.

In the UK, new GDP figures are produced every month, but the quarterly figures - covering three months at a time - are the most widely watched.

In a growing economy, each quarterly GDP will be slightly bigger than the quarter before, a sign that people are doing more work and getting (on average) a little bit richer.

Most economists, politicians and businesses like to see GDP rising steadily because rising GDP usually means people spend more, more jobs are created, more tax is paid and workers get better pay rises.

If GDP is falling, then the economy is shrinking - bad news for businesses and workers. If GDP falls for two quarters in a row, that is known as a recession, which can mean pay freezes and lost jobs.

The Covid pandemic caused the most severe recession seen in over 300 years, hurting business and employment, and forcing government to borrow hundreds of billions of pounds to support the economy.

Although higher prices have squeezed consumers' budgets in more recent months, the UK has avoided going into recession.

According to the most recent official statistics, the economy grew by 0.2% between April and June - slightly higher than expected.

How does GDP affect me?

If GDP is growing, the government will use that as evidence to say that it is doing a good job of managing the economy. Likewise, if GDP falls, opposition politicians will say the government is running it badly.

But it's not just a report card on how the government is doing. If GDP is going up steadily, people will pay more in tax simply because they're earning and spending more. This means more money for the government to spend on public services, such as schools, police and hospitals.

Governments also like to keep an eye on how much they are borrowing in relation to the size of the economy.

For example borrowing was equivalent to about 14% of GDP in the first year of the Covid pandemic, the highest proportion since World War Two.

How is it measured?

GDP can be measured in three ways:

Output: The total value of the goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and government

Expenditure: The value of goods and services bought by households and by government, investment in machinery and buildings - this also includes the value of exports, minus imports

Income: The value of the income generated, mostly in terms of profits and wages.

In the UK, the Office for National Statistics (ONS) publishes one single measure of GDP, which is calculated using all three measurements. But early estimates mainly use the output measure, using data collected from thousands of companies.

The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.

At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.

The ONS publishes more information on how this is done on its website.

What are its limitations?

GDP growth doesn't tell the whole story.

There are lots of things the statistics might not take into account:

Hidden economy: Unpaid work isn't captured in official figures, such as caring for an elderly relative

Inequality: GDP growth doesn't tell us how income is split across a population - rising GDP could result from the richest getting richer, rather than everyone becoming better off

Just because GDP is increasing, it doesn't mean that an individual person's standard of living is improving.

If a country's population increases, that will push GDP up, because with more people, more money will be spent. But individuals within that country might not be getting richer. They may be getting poorer on average, even while GDP goes up.

So the ONS publishes a figure for GDP per head (of population), which can often tell a different story to the main GDP number.

Critics have argued that GDP doesn't take into account whether the economic growth it measures is sustainable, or the damage it might do to the natural world. Alternative measures have been developed.

In 2010, the ONS started measuring well-being alongside economic growth. This measures health, relationships, education and skills, as well as personal finances and the environment.

In 2019, New Zealand's Prime Minister, Jacinda Ardern, released the country's first "well-being budget", prioritising health and life-satisfaction rather than economic growth.

Despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.

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A basic guide to how the economy is measured and what that calculation is used for.

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10 ways we could make the tax system more progressive

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10 specific, practical ways to make UK tax policy more progressive. Fantastic contextual examples of practical fiscal policies.

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10 specific, practical ways to make UK tax policy more progressive. Fantastic contextual examples of practical fiscal policies.

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Left Foot Forward: Leading the UK's progressive debate

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We need to improve tax policy to reduce inequalities and increase social investment
The economic and social crisis engulfing the UK is all too visible and needs government intervention. Homes and public buildings built with reinforced autoclaved aerated concrete (RAAC) are crumbling. Some 7.6m people in England are waiting for hospital appointments.
Due to government imposed austerity, the UK is the only economy among G7 countries which is still smaller than what it was in 2019. The cumulative economic growth in the period quarter 4 of 2019 to quarter 2 of 2023 is -0.2%.

Inequalities have depleted spending power of the masses and ability to rebuild the economy. The wealthiest 10% of households hold 43% of all the wealth, in comparison the bottom 50% holds only 9%. In 2021/22, 37% of total disposable household income went to the richest fifth of individuals, while 8% went to the bottom fifth. Real average wages are lower than in 2005 and a further decline is expected. 14.4m people are living in poverty.

The 'leaving it to the markets' policy has failed and wealth has not trickled-down. A different approach is needed. Governments can create money as supporters of modern monetary theory advocate, but that has no traction in political circles. It can create money through quantitative easing to fund investment, but the policy lacks support. Government can borrow money to rejuvenate the economy, but all major political parties want to reduce public borrowing. They are also opposed to increases in general taxation. In effect, major political parties are proposing more austerity and misery, which is untenable.

The current and next government will have to use tax policies to reduce inequalities and increase social investment. Progressive taxation and elimination of tax perks for the rich is the way forward. Here are some suggestions:

1. Currently wages are taxed at the marginal rates of 20%-45%. Wage earners also pay national insurance contributions (NIC) at the rate of 12% on annual earnings between £12,570 and £50,270, and 2% on income above £50,271. In contrast, capital gains are taxed at rates ranging from 10% to 28%. Dividend income is taxed at the rates ranging from 8.75% to 39.35%. Recipients of capital gains and dividends do not pay NIC even though they use the National Health Service and social care. Indeed, no NIC is levied on investment income, which includes bank interest and rental income. All income provides identical access to goods and services and therefore needs to be taxed at the same rate. By taxing capital gains at the same rates as wages and charging national insurance, up to £25bn of additional revenues a year can be raised. Applying the same logic to dividends can raise another £6bn-£10bn. Equalising the tax rates also eliminates opportunities for tax avoidance.

2. National insurance is a regressive tax. It is charged at the rate of 12% on earned income between £12,570 and £50,270, and a 2% rate is applied above that. This means that the rich pay a lower proportion of their income in NIC. By extending the 12% rate of NIC to all earned income, more than £14bn can be raised each year.

3. Tax needs to be simplified. The rate of income tax and national insurance needs to be combined. All income and windfall gains, regardless of the source, must be aggregated and taxed at the appropriate marginal rates.

4. The net cost of pension income tax and NICs relief is estimated to be £48.2 billion in 2020 to 2021. About two-thirds of this goes to wealthy individuals paying income tax at the marginal rate of 40% (on income between £50,271 and £125,140) and 45% (on income over £125,140). People with annual incomes below £12,570 get no pension tax relief. By restricting tax relief/credit to everyone at the rate of 20%, the government can generate £14.5bn a year.

5. The purchaser of shares pays a tax or duty of 0.5% on the transaction. This ought to be extended to all marketable securities, including derivatives. Even at very modest rates it could raise nearly £4.7bn a year.

6. Britain's 50 richest families hold more wealth than the entire bottom 50% of the nation's population, and must make additional contributions. A wealth tax of 1.7% on people with more than £3m in assets could yield £2.7bn. On assets above £5m the tax rate could rise to 2.1%, raising another £3.2bn. Above the £10m threshold the rate could rise to 3.5 % and raise £4.6bn. That is a total of over £10bn from 140,000 rich individuals.

7. A higher rate of VAT (30%) on luxury goods could raise £1.6bn a year.

8. More than 93% of the UK estates have zero inheritance tax liability. In 2022-23, 41,000 estates paid inheritance tax amounting to £7.1bn. Too many are able to avoid it by using trusts. A clampdown on that is long overdue.

9. The government hands 1,180 tax reliefs costing billions to the public purse. Too many, such as those relating to research and development, are abused. A former head of HMRC has urged the government to abolish the "entrepreneurs' relief", one of the many tax reliefs, because it is just a tax perk and has provided "no incentive for real entrepreneurship". All reliefs are not costed and the government has little idea of the economic benefits. A revision is long overdue and will save billions.

10. HMRC has been starved of resources and has been unable to chase the rich and big corporations. Since 2010, between £450bn and £1,500bn of tax revenue has been lost due to avoidance, evasion and error. For every £1 of investment into large business investigation HMRC has yielded £69 in extra tax revenue. So, greater investment in enforcement is needed. This would also enable HMRC to challenge offshore tax dodges which are costing the world, including the UK, $4.8 trillion over the next decade.

A conversation about using progressive taxation to rescue and rebuild the UK economy is long overdue. The above is a small sample of the ways in which additional tax revenues can be raised without increasing the rates of income tax, corporation tax and basic national insurance contributions. A large proportion of the population will see no increase in their taxes. One estimate is that people in the bottom decile pay 56.81% their income in direct and indirect national and local taxes, and their burden must be reduced.

The additional tax revenues can be used to reduce poverty. For example, by abolishing VAT on domestic fuel, increasing tax free personal allowance and social security benefit rates, all of which will boost spending and stimulate the economy. The revenues can also be used to increase public investment in infrastructure and new industries, which the private sector is always calling for.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.
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10 ways we could make the tax system more progressive

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We need to improve tax policy to reduce inequalities and increase social investment

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Councils going bust, schools crumbling, the NHS in crisis: the answer is more tax | Larry Elliott

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Labour will need to raise tax revenues, but who to target is very contentious. By ruling out a wealth tax, are Labour being smart or stupid?

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Labour will need to raise tax revenues, but who to target is very contentious. By ruling out a wealth tax, are Labour being smart or stupid?

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Schools at risk of falling down. Councils going bust. If ever there were any doubts that the Tories are on course to be booted out at the next election, then the events of the past few days have surely dispelled them. The government is a shambles and needs to be put out of its misery.

As with any party that has been in power a long time, past policy errors have started to become glaringly apparent. There are specific reasons why Birmingham council has run into problems, but it is far from alone. Councils are in financial difficulties - and have been forced into risky money-making schemes - because they have been starved of cash since 2010. In the years of austerity that have followed, repairing schools has not been a priority.

The Conservatives have also run out of luck. Even when there has been good news recently, such as the hefty upward revision to post-lockdown growth announced last week by the Office for National Statistics, it has been outweighed by the fallout from the latest policy screw-up. Rishi Sunak is heading for defeat, and the only real issue is whether he can keep that defeat to respectable proportions.

Labour's approach is to play things ultra-safe and leave no flanks exposed. The latest example of this was the categorical announcement by Rachel Reeves that she has no plans to introduce a wealth tax. "We won't be doing that. It's a denial," the shadow chancellor told the Sunday Telegraph last month.

As an election-winning strategy, this approach has its merits. At all costs, Labour wants to avoid a rerun of 1992, when the campaign was dominated by the proposal by the then shadow chancellor, John Smith, to introduce a new top rate of income tax. As today, the Tories were defending a rotten economic record, but managed to switch the focus to Labour's alleged "tax bombshell". It was classic project fear stuff, and it worked.

That's not to say the Reeves approach is politically risk-free, because it isn't. When the next election arrives, voters will want to hear more from Labour than how the Tories have mismanaged the economy for the past decade and more; they will want to know what the opposition plans to do to put things right. And, if the answer is that nothing much will change, Labour's apparently commanding opinion poll lead could shrink.

But the drawbacks of Labour's safety-first approach will really be exposed only if and when it wins power. That's when the problems will start in earnest. In 1997, the last time Labour won an election as a party of opposition, the economy had been growing strongly for five years. Today it is flatlining. As in 1997, years of public sector neglect will need to be addressed. Pressures to spend more on an ageing population are bound to increase.

Reeves says Labour will speed up the economy's growth rate and so generate the revenues for higher public spending without the need for higher taxes, but this is a triumph of hope over experience. Raising the pace at which the economy can sustainably expand will be a gruelling process that will take years to bear fruit, and it is fantasy to assume otherwise.

Sooner or later, Reeves will need to accept the inevitable. Taxes will need to be raised in order to do the things that Labour desires: repair schools, reduce NHS waiting lists and stop councils from going bust. As the Institute for Fiscal Studies put it in a recent report: "Without tax rises, UK public service and benefits provision will not simply tread water, it will deteriorate. Unless levels of tax increase substantially, a reduction in the scope of the public services that the British state provides is likely inevitable."

That's a sobering but realistic assessment. Although taxes as a share of national income are at their highest in 70 years, they will need to be even higher. The only real question is who is going to pay them - and taxing wealth more stringently is the obvious choice.

Incomes adjusted for inflation have barely risen since 2010, while asset values - house and share prices most notably - have soared. In large part that's down to the impact of low interest rates and the money creation scheme known as quantitative easing, both of which have encouraged speculation. The richest 10% of households own almost half of the UK's wealth, the bottom 50% just 9%. Britain's tax system encourages investment in bricks and mortar rather than innovation, symbolised by the fact that there is no capital gains tax on the sale of main residences. Reforming the tax system so that it better serves employees rather than rentiers would help to boost the UK's growth potential.

By ruling out a new wealth tax, Reeves appears to be denying herself a lucrative source of revenue, but things are not necessarily that bleak, according to Prof Richard Murphy, a tax expert. He says Labour is right to rule out a bespoke levy - something that he says would be difficult to collect, owing to the ability of the super-rich to employ the best financial advisers and lawyers - but it can more easily tax the wealthy through the current system. To take one example, the better-off get higher rates of tax relief on their pension contributions than those earning less. Restricting pension tax relief to 20% would raise up to £14.5bn a year, according to Murphy's calculations.

There are other options, too. For example, national insurance is currently paid by workers, but not by landlords. Capital gains tax could also be raised. Financial services could lose their exemption from VAT. In total, Murphy has a list of 30 reforms that he says would raise £50bn a year for Reeves, enough to pay for both better public services and tax cuts for the less well-off.

Politically, a one-off wealth tax on plutocrats is an easier sell than telling someone earning £60,000 a year that the tax relief on their pension contributions is going to be cut. But while it is human nature to want somebody else to foot the bill for better public services, a degree of honesty is needed here. Taxes in the UK are high by historic standards, but not when compared to most other western European countries. If it is a fantasy to think that all will be well if the economy can grow a bit faster, then it is also a fantasy to assume that all will be well if the super-rich are stiffed for a one-off tax.

Labour needs to start telling it as it is. Significantly, perhaps, Reeves has ruled out a new wealth tax but has not said what her plans are for the taxes that already exist. That is wriggle room she will need to exploit.

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Councils going bust, schools crumbling, the NHS in crisis: the answer is more tax | Larry Elliott

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Labour can raise £50bn from the wealthy to pay for public services without introducing a new one-off wealth tax, says the Guardian's economics editor, Larry Elliott

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Beware September: five cautionary tales from economic history

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September is a very dangerous month according to economic history. 5 cautionary tales of economic disasters in September.

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September is a very dangerous month according to economic history. 5 cautionary tales of economic disasters in September.

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Be afraid. That's the message from history to policymakers returning from holiday this week as they contemplate negotiating the trickiest few weeks of them all.

For while TS Eliot called April the cruellest month in The Waste Land, in economics and finance that unwanted label would better be attached to September, the time of the year - from the 18th century to the modern day - when problems that have been quietly developing over the summer come to a head.

As these five examples demonstrate, September can be the month when share prices crumble, banks wobble and currencies are devalued.

1. September 1720 and the collapse of the South Sea Bubble

Even three centuries on, the rise and fall of the South Sea Company is the yardstick against which all subsequent speculative manias are judged. That's because this crisis had everything: a dodgy business prospectus; a company that was unable to generate the returns it was promising; the first example of what became known as a Ponzi scheme under which the company was buying its own stock to keep share prices high; groupthink; and investors left to rue their foolishness. The list of casualties when the share price collapsed from a high of £1,000 included Sir Isaac Newton, who lost upwards of £40m in today's money. The main beneficiary was Sir Robert Walpole, who as chancellor handled the crisis deftly and went on to become prime minister.

Lesson to be learned: what goes up comes down.

2. September 1931 and the departure of sterling from the gold standard

In the early years of the Great Depression, Britain and most other major countries were subject to the strictures of the gold standard, under which governments agreed to exchange their paper currency for a fixed amount of the precious metal. The gold standard ensured that countries facing balance of payments deficits could not devalue their way out of trouble but instead had to deflate their economies to regain competitiveness. Britain had suspended membership of the gold standard at the start of the first world war but rejoined in 1925. The result was slow growth, high unemployment and pressure for cuts in welfare spending to balance the budget. A minority Labour government collapsed under the strain and a new national government - still with Labour's Ramsay MacDonald at its head - bowed to the inevitable and came off the gold standard in September 1931. Other countries followed suit.

Lesson to be learned: bad economics equals bad politics.

3. September 1992 and Black Wednesday

Over the course of the 20th century, it was Labour governments that took the political flak for devaluation. The exception to that was the day speculators led by George Soros forced Britain out of the European exchange rate mechanism (ERM) and inflicted a blow to John Major's Conservative administration from which it never recovered. Britain had joined the ERM in October 1990, less than two years previously, and was committed to keeping the pound within a set range against the German mark. The ERM effectively operated as a looser form of the gold standard and had many of the same defects. Pressure on the pound intensified as the UK struggled with recession at a time when reunification led to higher German interest rates. Soros and his fellow speculators saw the pound as a one-way bet and on Black Wednesday (16 September 1992) they were proven right. After announcing that interest rates would be raised to 15% to defend sterling, resistance crumbled and the pound was allowed to float. Economic recovery followed swiftly but Major's reputation was permanently tarnished.

Lesson to be learned: be careful of importing your economic policy from overseas.

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4. September 2008: Lehman Brothers and the near death of the global banking system

The global financial crisis had actually begun more than a year earlier but culminated with the bankruptcy of Lehman Brothers, a middle-ranking US investment bank, on September 2008. Lehmans came to symbolise everything that had gone wrong across the banking sector: institutions had taken big bets on the US housing market, creating new opaque and complex financial instruments that magnified gains in the good times but left them exposed when the market turned down. Investors were unsure which banks were nursing the losses so assumed that all of them were in the same boat. Banks lacked the capital to cover their potential losses and when the US government allowed Lehmans to go to the wall panic set in. Even the most powerful banks were seen as vulnerable and ultimately governments were forced to step in with injections of public money. In the UK, the Royal Bank of Scotland and Lloyds were partly nationalised, while central banks slashed interest rates to mitigate the economic fallout. Fifteen years later, the banks look healthier but the global economy has never fully recovered.

Lesson to be learned: A bubble is a bubble so never believe people who say: "It's different this time."

5. September 2022 and the short-lived premiership of Liz Truss.

As a historian, Kwasi Kwarteng ought to have been aware of the perils of September but Liz Truss's chancellor was eager to make his mark quickly after being appointed in the month. Kwarteng sacked the Treasury's top mandarin, Tom Scholar, decided not to run his proposals past the government's spending watchdog and then seemed surprised when the biggest package of tax cuts in 50 years was greeted with the loudest of raspberries from the financial markets. The plan to kickstart Britain's sluggish economy was an instant flop. Within a week the pound had fallen to its lowest ever level against the US dollar and the Bank of England was forced to launch an emergency bailout of the UK pensions industry. Mortgage rates soared, and Kwarteng was summoned home from a meeting of the International Monetary Fund to be sacked by Truss, who was forced out shortly afterwards. Orthodoxy returned under Rishi Sunak and Jeremy Hunt, who became the fourth chancellor of 2022.

Lesson to be learned: Mess with the financial markets at your peril.

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Beware September: five cautionary tales from economic history

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From the South Sea Bubble to the undoing of Trussonomics, this month of the year keeps providing lessons

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UK faces stark choice of higher taxes or decline in public services, warns IFS

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The IFS has a strong opinion on UK taxes, but is there an alternative they are ignoring?

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The IFS has a strong opinion on UK taxes, but is there an alternative they are ignoring?

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UK faces stark choice of higher taxes or decline in public services, warns IFS

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Even if taxes rises are chosen, system needs root-and-branch reforms as all main levies are flawed, finds study

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GDP or Gross Domestic Product is one of the most important tools for looking at how well, or badly, an economy is doing.

GDP helps businesses judge when to expand and hire more people, and it lets government work out how much to tax and spend.

What is GDP?

GDP is a measure - or an attempt to measure - all the activity of companies, governments and individuals in a country.

In the UK, new GDP figures are produced every month, but the quarterly figures - covering three months at a time - are the most widely watched.

In a growing economy, each quarterly GDP will be slightly bigger than the quarter before, a sign that people are doing more work and getting (on average) a little bit richer.

Most economists, politicians and businesses like to see GDP rising steadily because rising GDP usually means people spend more, more jobs are created, more tax is paid and workers get better pay rises.

If GDP is falling, then the economy is shrinking - bad news for businesses and workers. If GDP falls for two quarters in a row, that is known as a recession, which can mean pay freezes and lost jobs.

The Covid pandemic caused the most severe recession seen in over 300 years, hurting business and employment, and forcing government to borrow hundreds of billions of pounds to support the economy.

Although higher prices have squeezed consumers' budgets in more recent months, the UK has avoided going into recession.

According to the most recent official statistics, the economy grew by 0.2% between April and June - slightly higher than expected.

How does GDP affect me?

If GDP is growing, the government will use that as evidence to say that it is doing a good job of managing the economy. Likewise, if GDP falls, opposition politicians will say the government is running it badly.

But it's not just a report card on how the government is doing. If GDP is going up steadily, people will pay more in tax simply because they're earning and spending more. This means more money for the government to spend on public services, such as schools, police and hospitals.

Governments also like to keep an eye on how much they are borrowing in relation to the size of the economy.

For example borrowing was equivalent to about 14% of GDP in the first year of the Covid pandemic, the highest proportion since World War Two.

How is it measured?

GDP can be measured in three ways:

Output: The total value of the goods and services produced by all sectors of the economy - agriculture, manufacturing, energy, construction, the service sector and government

Expenditure: The value of goods and services bought by households and by government, investment in machinery and buildings - this also includes the value of exports, minus imports

Income: The value of the income generated, mostly in terms of profits and wages.

In the UK, the Office for National Statistics (ONS) publishes one single measure of GDP, which is calculated using all three measurements. But early estimates mainly use the output measure, using data collected from thousands of companies.

The UK produces one of the quickest estimates of GDP of the major economies, about 40 days after the quarter in question.

At that stage, only about 60% of the data is available, so the figure is revised as more information comes in.

The ONS publishes more information on how this is done on its website.

What are its limitations?

GDP growth doesn't tell the whole story.

There are lots of things the statistics might not take into account:

Hidden economy: Unpaid work isn't captured in official figures, such as caring for an elderly relative

Inequality: GDP growth doesn't tell us how income is split across a population - rising GDP could result from the richest getting richer, rather than everyone becoming better off

Just because GDP is increasing, it doesn't mean that an individual person's standard of living is improving.

If a country's population increases, that will push GDP up, because with more people, more money will be spent. But individuals within that country might not be getting richer. They may be getting poorer on average, even while GDP goes up.

So the ONS publishes a figure for GDP per head (of population), which can often tell a different story to the main GDP number.

Critics have argued that GDP doesn't take into account whether the economic growth it measures is sustainable, or the damage it might do to the natural world. Alternative measures have been developed.

In 2010, the ONS started measuring well-being alongside economic growth. This measures health, relationships, education and skills, as well as personal finances and the environment.

In 2019, New Zealand's Prime Minister, Jacinda Ardern, released the country's first "well-being budget", prioritising health and life-satisfaction rather than economic growth.

Despite its limitations, GDP is still the most widely-used measure for most government decisions and international comparisons.

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A basic guide to how the economy is measured and what that calculation is used for.

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Marmite maker Unilever's sales soar after hiking prices

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Greedflation in action. And raising interest rates won't do a thing to reduce it.

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Greedflation in action. And raising interest rates won't do a thing to reduce it.

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In the year to June, food and soft drink price inflation slowed to 17.4% but remains close to historically high levels. Overall UK inflation eased to 7.9% in June, said the Office for National Statistics.

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Marmite maker Unilever's sales soar after hiking prices

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The consumer goods giant reports growth based almost entirely on lifting its prices.

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UK inflation: which goods and services have risen most in price?

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How much have different goods increased in price over the last 12 months?

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How much have different goods increased in price over the last 12 months?

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UK inflation: which goods and services have risen most in price?

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From sugar to olive oil and holiday centres to pet products, how costs have soared

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Public sector pay: Will rises for doctors and teachers cause inflation?

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So many economists have been asking this for 6 months or more. Why has it taken so long for mainstream outlets to ask it?

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So many economists have been asking this for 6 months or more. Why has it taken so long for mainstream outlets to ask it?

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Public sector pay: Will rises for doctors and teachers cause inflation?

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The government warns that increasing public sector pay could cause inflation.

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So George Osborne has a new podcast. What do the victims of his austerity policies get? | Aditya Chakrabortty

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Chakrabortty beautifully explains why I am so, so angry.

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Chakrabortty beautifully explains why I am so, so angry.

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ew things became Alan Clark less than retirement. "My mind races," the Thatcher-era Tory junior minister raged into his diaries. "I am hungry for news and gossip, resentful at John Major ... how could they? Although, of course, the cruelty of politics is its attraction."

If only he'd hung on for the arrival of podcasts. Today, Clark would be a cert to host his own politics one, sweeping the crumbs from Westminster tablecloths into a regular 50 minutes of audio content: reminiscence, gossip and crisp, chilled cruelty - Who's down? Who's out? - all generously sponsored by a manufacturer of probiotic yoghurt.

It has become SW1's premier cottage industry, providing gainful employment for disused ministers and ersatz advisers. Another diarist, Alastair Campbell, fronts The Rest is Politics with Rory Stewart, a show so popular it tours theatres. Soon their competitors will number George Osborne and Ed Balls, who are about to launch an economics show.

A format is fast emerging: two big names (all the better for advertisers to see you with), almost always men, season current events with some inside-the-room recollections of Vladimir's body language or Tony's office management. It is informed yet accessible and, as a report this month from the Reuters Institute shows, it draws an audience very different from the wider public: younger, more educated and, crucially, richer.

Central to the format is that the silverbacks come from either side of a political divide spanning no more than two inches. They cannot be too left or too right. They must disagree, but agreeably. Osborne last week described Balls as a former "bitter foe" turned "firm friend".

Reading those words, a memory came back to me from seven years ago. In the spring of 2016, I sat in a small front room in a cramped terrace house. Opposite were Paul and Lisa Chapman - and the story they had to tell, in all its routine awfulness, explained the brokenness of British politics.

They had lived and worked in the Northamptonshire town of Irthlingborough for decades, until Paul started to suffer tremors, shakes, sudden falls. He'd got Parkinson's. Once the fastest postie in town, he found that his body would no longer do what his brain wanted. Lisa gave up her cleaning job to care for him, and now the couple had to rely on social security. But there was no security, not six years into Osborne's spending cuts, which research showed hurt people with severe disabilities 19 times worse than the average.

For the Chapmans, this meant undergoing an assessment that claimed he was far healthier than the reality - and being robbed of benefits that were rightfully theirs. In front of me, Paul recalled what he'd told Lisa: "You go round your mum's. I'll clear off and I won't take my tablets or my insulin. And it'll be over then. I won't be here."

What rings in my ears even now is the confusion in his voice: he'd never expected this illness, this foreclosed life or this official sadism.

Whenever he is wheeled into another studio as an elder statesman, Osborne is never asked about people such as the Chapmans, or scientists' research that shows 300,000 extra deaths were caused by his austerity programme. Nor do I expect it to be a major feature of his podcast - not when Balls himself went along with so much of the austerity agenda. Perhaps there'll be some light ribbing about the former chancellor's career after Westminster. How many jobs are we up to now?

In 2003, Campbell was a salesman for an illegal war prosecuted on dodgy evidence that killed between 280,000 and 315,000 Iraqis, according to the estimates of Brown University in the US. On the 20th anniversary of the start of the Iraq war, he was interrogated on his podcast not by a relative of one of those killed, or by a maimed soldier or by one of the million Britons who marched in opposition - but by Stewart, who after the invasion became a latter-day colonial administrator in the shattered country. It is fair to say their conversation on the matter was less heated than it gets on the iniquities of Brexit.

Light entertainment is the great launderer of political reputations. A few years ago, TV quiz shows turned Boris Johnson into the serial liar you could have a pint with. Cookery and bad dancing transformed Balls from an economist into a household name. The pretence is that they've shed the Westminster carapace and are now on civvy street. Yet long after he left Blair's court, Campbell continued to help run election campaigns, while as editor of the London Evening Standard Osborne would run front pages to help Matt Hancock, his former chief of staff-turned-health secretary.

This time round, the great redeemer is the podcast boom, fuelled by venture capital. It is a giant speech bubble, which middle-aged politicos will use to rehabilitate their tarnished names. Perhaps the public will learn to love Osborne, who has always struck me as far more personable than that deluded Sloane David Cameron.

A few months after I wrote about the Chapmans came the vote for Brexit - and with it a newfound desire by the political classes to listen to voters and to arguments they had long ago tuned out. Post-Brexit, post-Corbyn, post-Johnson, that era is now over. In vogue today is a room-temperature liberalism, defined by cosy agreement and willing blindness to those unpleasant facts and those unfortunate people who don't fit. But they haven't gone away.

I spoke to the Chapmans this week. Paul's Parkinson's has got much worse and their benefits aren't enough for the rising costs of food and fuel. Last winter, they didn't put on the central heating and Lisa went over to her mum's for a few hours of warmth a day. Paul broke his little finger in December but was so numb with cold that he only felt the pain in February. As well as borrowing from relatives, they've started selling off things: his model cars and fish tank, her CDs and DVDs. Now they plan to sell that terrace house.

Lisa said: "We done it right; we both worked, we bought our own place." Who did she blame? "All of them in Westminster: liars." What did Paul make of Osborne's latest gig? "All those jobs are like awards for him. He's top of the pile." What did that make him and Lisa? "Oh, we're bottom of the heap."

These two need no lessons in the cruelty of politics. Someone should give them a podcast.

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So George Osborne has a new podcast. What do the victims of his austerity policies get? | Aditya Chakrabortty

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Entertainment launders reputations. No wonder washed-up politicians are so keen to invest in this great speech bubble, says Guardian columnist Aditya Chakrabortty

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Using austerity economics to crush UK inflation would be a cure worse than the disease | Richard Partington

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More and more commentators are questioning the BoEs inflation policy

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More and more commentators are questioning the BoEs inflation policy

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or more than a year Britain has been trapped with the highest inflation rate in four decades. Rather than making serious inroads to shift this uncomfortable fact, the past month's economic developments have turned the country to panic.

The view in the City is the Bank of England has lost control. After a parade of bad news, leaving it backed into a corner, the central bank's latest rate increase was as much a plea to financial markets to be taken seriously again as it was an inflation-busting tactic.

Over in Westminster, the government has invited half of corporate Britain for tea, biscuits, and crunch talks on Downing Street in an effort to appear " 100% on it ", as Rishi Sunak's once surefire bet to halve inflation this year risks lying in tatters.

Both camps have seen their credibility shattered in the past month, as financial markets bet that a recession is the price Britain must pay to tame the inflation beast stalking the nation. But while there are clear and obvious problems with soaraway prices, this is a trade-off the country mustn't embrace lightly.

Across the economy the fallout from 13 consecutive interest rate rises in less than two years grows clearer by the day. Millions of mortgage holders are facing a surge in their borrowing costs, adding to the strain on household finances. Next come the nation's water utilities, drowning in debt after years of reckless borrowing, plunging Thames Water into crisis. With interest rates expected to hit 6% by Christmas, this trickle of bad news could rapidly become a flood.

In the inflation hysteria of the past fortnight, concerns over the impact of rising interest rates were given a back seat as the government and central bank scrambled to restate their authority. Yet there is a growing danger: lacking credibility, might the reaction for monetary policy - what the Bank does - and fiscal policy - what the Treasury does - be to oversteer?

The big concern is that, despite the lessons of the 2008 financial crisis, austerity economics is back with a bang in the name of fighting inflation. It would be a cure far worse than the disease.

More economists are sounding the alarm over this risk.

Andy Haldane, the former Bank of England chief economist, had been held up by monetary policy hawks as an important Cassandra of the current mess. But although he went against the grain to call for higher rates in early 2021, he now advocates a pause.

The view in the City is the Bank of England has lost control. Photograph: Thomas Krych/Zuma Press Wire/Shutterstock

There are good reasons for caution. Most of the impact from previous interest rate increases has yet to be felt, largely because of the nature of Britain's mortgage market. With most people buying at least a two-year fixed rate mortgage, there is a lengthy delay, typically of about 18 months, before monetary policy bites.

Nowhere is this more clearly seen than in Britain's ticking mortgage timebomb - where 2.5 million mortgage holders will reach the end of cheap fixed-rate deals before the end of next year. A typical borrower will be hit with a £2,900 annual rise in their repayments, according to the Resolution Foundation, sucking a total £15.8bn of spending power out of the economy by 2026.

While inflation has remained higher than anticipated in recent months, it has not been by a significant margin. Rather than a fall to 8.4% in May, inflation stuck at 8.7% was of course a worrying signal of inflation persistence. But there are dangers in setting too much store in short-term developments, if the long-term path back towards the Bank's target level of 2% remains intact.

One reason UK inflation has proven stubbornly high should fade this week. Millions of households will see a modest fall in their gas and electricity bills from July after the reduction in the Ofgem energy price cap to £2,074 a year for a typical household - down from the £2,500-a-year level set by the government's energy price guarantee.

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Although still eye-wateringly high, the consultancy Capital Economics expects the development to subtract about one percentage point from overall CPI inflation in July. It expects a sharp fall in the headline rate to 6.7% for the month.

Inflation in food and drink should fade, too, from the highest levels since 1977, as declines in global agricultural commodity prices feed through to the supermarket shelves. Elsewhere, producer price inflation - measuring factory gate prices - is now below 3%, helped by falling wholesale energy prices. This should, in time, feed through to consumer prices.

Most economic forecasters expect inflation will fall back closer to 4-5% by the end of this year, before dropping near 2% by the end of 2024. That is still consistently higher than the Bank's 2% target rate but there is more danger in rushing to hit that target over the short-term than taking a more flexible approach.

The focus should be on bolstering the productive capacity of the economy, not dismantling it

To be sure there are factors pushing in the opposite direction, particularly in the labour market, where Brexit and underinvestment in healthcare, skills and training are adding to the inflationary impetus. With near-record job vacancies unfilled, companies are putting up wages.

However, a breakdown on the supply side of the economy is a fairly poor excuse for tighter fiscal and monetary policy to crush demand.

The Bank has freely acknowledged in the past it is powerless to address these problems. For the government, there can be no good to come from further restraint in public sector pay, when the NHS and other public services are already at breaking point. In the face of persistent inflationary pressures, the focus should be on bolstering the productive capacity of the economy, not dismantling it.

Instead of panic over short-term inflation risks, there is a need for cool heads to prevail. A scorched-earth approach to tackling inflation would be too heavy a price to pay.

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Using austerity economics to crush UK inflation would be a cure worse than the disease | Richard Partington

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Caution needed rather than panic measures over short-term risks after credibility of government and Bank of England hit

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Is Rishi Sunak picking the right targets in his anti-inflation battle?

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Is Rishi Sunak gaslighting the entire country over inflation?

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Is Rishi Sunak gaslighting the entire country over inflation?

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Is Rishi Sunak picking the right targets in his anti-inflation battle?

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After asking borrowers to hold their nerve, the prime minister now seems to be preparing to further squeeze public sector workers

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I looked for happiness in the world’s most contented nation – and learned the importance of pessimism | Lucy Pearson

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Is money (GDP) the only thing that determines happiness like neoclassicals say? Ask the happiest nation on earth: Finland.

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Is money (GDP) the only thing that determines happiness like neoclassicals say? Ask the happiest nation on earth: Finland.

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I looked for happiness in the world’s most contented nation – and learned the importance of pessimism | Lucy Pearson

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Yes, Finland has nature and saunas in abundance. But to my surprise, I learned that pessimism has a vital part to play, says writer Lucy Pearson

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Thread by @andyverity on Thread Reader App

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Andy Verity (BBC) is the only mainstream media economics correspondent who (1) understands macro economics, and (2) is brave enough to say so.

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Andy Verity (BBC) is the only mainstream media economics correspondent who (1) understands macro economics, and (2) is brave enough to say so.

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Here's something the review of the BBC's coverage of issues like tax and the public finances said recently: "Too often, it's not clear from a report that fiscal policy decisions are also political choices;' /1

'...they're not inevitable, it's just that governments like to present them that way. The language of necessity takes subtle forms; if the BBC adopts it, it can sound perilously close to policy endorsement.'

Wise words. So when the government (or opposition) uses the language of necessity - 'we can't do X because we can't afford to' - due scepticism should be applied.

They may be dressing up a subjective political choice as an objective reality - making us think 'running out of money' is as much of a real risk for a sovereign government issuing its own currency as it is for a household or firm. But it's simply not.

This is mainstream economics - something politicians of all stripes have studied. In a post-gold-standard world, currencies are not tied to the value of a precious metal but are issued by 'fiat'. In other words, the government just orders cash into existence.

If any of those politicians who've studied mainstream economics presents a policy choice as being dictated by necessity eg they 'can't afford' something because the government would 'run out of money', they need to be asked a few challenging questions, like:

Don't you remember what they taught you when you studied PPE? A sovereign government issuing its own currency can't run out of money. And by the way - that £300bn the government spent in 2020/2021 - where did that money 'come from'?

If they're giving you a properly economically informed answer, they'll say, the government/Bank of England (ultimately the same thing) created it from nothing. @chrisgiles please wait for the next few tweets before you react:

@chrisgiles This most emphatically does NOT mean there are no constraints on spending. There are very real constraints on spending - it's just that the nature of those constraints is nothing like those constraining the finances of households or firms.

In simple terms (because I'm a reporter hoping to communicate things so anyone could understand them, not a textbook) the real constraints on spending have to do with the risk of creating - or worsening inflation.

I said 'real constraints' in contrast to fiscal targets - with have a history of being missed or ignored with very little discernible economic consequences.

That's because they too are a political choice - a subjective answer to questions like - how much 'fiscal discipline' do we have to demonstrate (ie not announcing new spending measures without matching tax rises or spending cuts) in order for the forex markets not to sell the £?

Only a kamikwasi chancellor would spend with abandon. To say governments can't run out of money most emphatically doesn't mean - please note 'DOESN'T mean' there are no constraints on spending. There are very real constraints.

But what they really have to do is with the capacity of the economy to absorb the spending. What the hell do I mean by that (asks someone who didn't study PPE or economics as a degree - because the ones who did should know)?

And it's not an automatic relationship. Just because you spend more doesn't necessarily mean it's inflationary. It depends on the capacity of the sector you're spending it on. Capacity means, for example, workers, raw materials energy.

* * *

Missing some Tweet in this thread? You can try to force a refresh

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Thread by @andyverity on Thread Reader App

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@andyverity: Here's something the review of the BBC's coverage of issues like tax and the public finances said recently: "Too often, it's not clear from a report that fiscal policy decisions are also political choic......

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Britain is the Dorian Gray economy, hiding its ugly truths from the world. Now they are exposed | Aditya Chakrabortty

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Britain's economy is bad, it's been bad for a long time, and it will continue to get worse. #happyfriday!

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Britain's economy is bad, it's been bad for a long time, and it will continue to get worse. #happyfriday!

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ou know the central conceit of Oscar Wilde's The Picture of Dorian Gray, of course you do. A lad of sun-kissed beauty is presented with a stunning likeness of himself. Disturbed at the notion that he will grow old while the painting doesn't, he locks it away - where it is the portrait that ages and uglifies while Dorian stays boyish and beautiful. But perhaps you've forgotten what happens next.

The story has come to my mind many times, as the foulness of British politics becomes ever harder to ignore. Genteel liberals wonder how their land of cricket whites and orderly queues could be ruled by a grasping liar such as Boris Johnson and I hear a whisper on the wind: Dorian Gray. The New York Times and Der Spiegel report in bewilderment on a country with pockets of deep poverty and unslaked anger, and again rasps that hoarse voice: the horror was hidden here all along.

Now it's all out in the open. In one of the richest societies in human history, inhabitants are starting to twig that by 2030 or thereabouts they will earn less per head than the Poles they so recently patronised. Whatever the politicians and pundits may argue, this debacle owes nothing to Jeremy Corbyn or Brexit or any supposedly un-British "populism". It is homegrown and has deep roots.

Like Dorian Gray, Britain has for too long presented one face to the world while concealing the awful truth. The author of that novel, Oscar Wilde, was the son of an Irish nationalist and a graduate of Oxford, where he became a fine student of the British upper classes and their mellifluous hypocrisy. He would have recognised much of the mess we're in, because it grew among shadows and cover-ups. From Tony Blair's Cool Britannia through to George Osborne's " march of the makers", our rulershave trumpeted every false success, while ugly facts have been waved away as anomalies: from the former manufacturing suburbs and towns turned into giant warehouses of surplus people, to the fact that 15% of adults in England are on antidepressants. We're winning the global race, claimed David Cameron, even as the population's life expectancy fell far behind other rich countries. We shan't stunt future generations with debt, he boasted, as our five-year-olds became the shortest in Europe.

Or take the housing bubble that politicians pretended was true prosperity - until this week, as the Bank of England hiked rates for the 13th time in a row and the prospect of it bursting began to terrify them. Yet the Westminster classes blew their hardest into that bubble. As soon as estate agents were out of lockdown, Rishi Sunak gave up £6bn of taxpayers' money for a stamp duty holiday - an act as prudent as pouring petrol on a fire. Many of those he lured up the property ladder will be hardest hit by rising mortgage rates. Analysis done for me by UK Finance suggests that 465,000 house purchases during that tax break were financed with two- or three-year fixed rate mortgages - the very ones running out right now. In other words, nearly half a million households took the chancellor's inducement; many will plunge into dangerous financial straits; some face losing their homes. They were mis-sold a dream by Sunak. Still, at least the Tories enjoyed a bounce in the polls.

Helmut Berger stars in the 1970 film adaptation of The Picture of Dorian Gray. Photograph: Sargon/Kobal/Rex/Shutterstock

"Sin is a thing that writes itself across a man's face," Dorian is told by his portraitist Basil Hallward. "If a wretched man has a vice, it shows itself in the lines of his mouth, the droop of his eyelids, the moulding of his hands even ... But you, Dorian, with your pure, bright, innocent face and your marvellous untroubled youth - I can't believe anything against you." The picture of Dorian, which would have revealed the grotesque truth, is hidden away. So, too, has the UK avoided admitting its ills. Even now, in a country where patently so little works for people who rely on work for their income, commentators and frontbenchers still blame supposedly all-powerful interlopers: Boris, Nigel, Jeremy. And from Sunak to Starmer, all push growth and jobs as the remedy for what ails us.

Yet growth in this country is falling and not because of Ukraine or Covid or Brexit. Since the 1950s, the growth rate adjusted for inflation has been on a gentle but insistent downward slide. Our economy has become ever more stagnant and dependent on debt. It is fatuous to pretend this is going to turn around through magicking Britain into an AI free-for-all or a jolly green industrial giant. Employment? One in four employees are on low weekly wages - either because the pay is too low or the hours aren't enough - while the average real wage has flatlined for many years.
Much of this analysis comes from a new book, When Nothing Works, written by a team of scholars. Although specialising in economics and accountancy, what they have produced is an essential text for understanding British government: the polarised politics of a highly unequal and increasingly stagnant society.

Take the issue at the top of today's agenda: wages. Why can't you and I take home more money? Because of a lack of productivity, politicians will say. Yet the researchers point to how labour has got a smaller and smaller share of economic output since the 1970s.

If the same share of GDP was paid out in wages today as in 1976, the average working-age household would have an extra £9,744 a year. We haven't lost that 10 grand a year through laziness at work but because politicians from Thatcher onwards smashed up trade unions, undermined labour rights, and crowed over the result as a "flexible labour market". What they really created was a low-wage workforce, in a low-growth country ruled by politicians with low ambitions for everyone bar themselves.

"The prayer of your pride has been answered," Basil counsels Dorian, when he finally sees the portrait and its horrific truth. "The prayer of your repentance will be answered also." When Nothing Works will inevitably be termed pessimistic, but it is no such thing. Realism comes from facing who we are and dropping the pretence that a growth miracle is just around the corner. Instead of trying to boost "the economy", it is high time to boost our people: to ensure they have the basics they need to live a life free from indignity and free to flourish. This will come from redistribution rather than growth, from replacing extractive businesses with fair ones. Such ideas will not go down well in SW1, where both Tory and Labour are increasingly hostile to pluralism and brittle in their dogmatism. Self-knowledge is the hardest knowledge, as one of the book's authors, Karel Williams, says. And self-delusion leads eventually to disaster.

Unable to face his loathsome self-image, Dorian slashes that portrait. He is found by servants. "Lying on the floor was a dead man, in evening dress, with a knife in his heart. He was withered, wrinkled and loathsome of visage. It was not till they examined the rings that they recognised who it was."

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Britain is the Dorian Gray economy, hiding its ugly truths from the world. Now they are exposed | Aditya Chakrabortty

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Our rulers painted false pictures of success while real wealth and wages withered away, says the Guardian columnist Aditya Chakrabortty

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The Guardian view on food price caps: better at taming inflation than rate hikes | Editorial

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This a heterodox take on what is causing inflation and why raising interest rates are not a solution 

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This a heterodox take on what is causing inflation and why raising interest rates are not a solution 

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The Guardian view on food price caps: better at taming inflation than rate hikes | Editorial

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Editorial: When the economy doesn’t work in the way that theory suggests, it’s time to junk the theory

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UK economy in growth 'doom loop' after decades of underinvestment

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"If the economy is the engine, investment is the fuel" and it seems we've been running out of fuel for decades

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"If the economy is the engine, investment is the fuel" and it seems we've been running out of fuel for decades

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More than half a trillion pounds' worth of underinvestment by government and business over recent decades has left Britain's economy trapped in a growth "doom loop", according to a thinktank.

Sounding the alarm as the economy struggles to gain momentum, the Institute for Public Policy Research said the UK risked falling further behind comparable wealthy nations without a sharp turnaround in approach.

Business investment is lower in the UK than in any other country in the G7, and 27th out of 30 OECD countries, ahead of only Poland, Luxembourg and Greece.

Highlighting a severe shortfall in public and private investment stretching back over several decades, the IPPR's research showed that Britain had ranked below the G7 average since 2005 for spending on infrastructure, research and development, skills and training.

Had the UK maintained its position at the G7 average since that date, the private sector would have invested an extra £354bn in real terms. If public sector investment had also held that position, the UK government would have invested an additional £208bn between 2006 and 2021.

However, the UK has steadily slipped down the global investment league tables as successive governments have held back from boosting expenditure, alongside a faltering performance in the private sector - amounting to a shortfall versus the G7 average worth the equivalent of 30 Elizabeth line rail projects.

The centre-left thinktank said low investment put Britain at risk of being left behind in a global race to develop the green industries of the future, which are forecast to be worth $10.3tn (£8tn) to the global economy by 2050.

The findings come as Rishi Sunak's government attempts to reboot economic growth with a focus on boosting business investment, including with a package of tax reliefs announced as part of the spring budget. Business leaders say political and economic instability, Brexit, high inflation and rising interest rates are deterring firms from investing in Britain.

The IPPR said increased public investment could "crowd-in" private sector investment and give confidence to companies to choose the UK as a place to build the green companies of the future - provided the government invested with a sense of longevity and certainty, as Joe Biden's administration had done in the US.

George Dibb, an associate director for economy at IPPR, said: "If the economy is the engine of a country, investment is its fuel. But the UK's tank is running on empty and it's harming economic growth, driving inequality and slowing progress towards net zero and energy security.

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"Currently, the UK is experiencing a debilitating case of investment-phobia, and the government's aversion to investing to seize future opportunities is stopping us from getting out of the growth doom loop we find ourselves in."

The government was approached for comment.

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UK economy in growth 'doom loop' after decades of underinvestment

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Institute for Public Policy Research points to £500bn-plus underspend compared with other advanced economies

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The Guardian view on food price caps: better at taming inflation than rate hikes | Editorial

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At long last it appears more economists are waking up to the fact that raising interest rates is not an effective way of fight the current inflation.

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At long last it appears more economists are waking up to the fact that raising interest rates is not an effective way of fight the current inflation.

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The Guardian view on food price caps: better at taming inflation than rate hikes | Editorial

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Editorial: When the economy doesn’t work in the way that theory suggests, it’s time to junk the theory