Posts about British economy and social issues

What does it mean for a nation to become bankrupt?

The reason I ask that question is because I read in the UK Guardian article yesterday (published August 11, 2025) – As dark financial clouds gather, Labour has to heed its past: when it chooses austerity, it loses elections – that “Britain is in danger of going bankrupt. It may happen slowly or quickly, but since Labour took office this possibility has increasingly been promoted and discussed in the press, by opposition parties and in the City of London”. And when the author of that article poses his own question: “What exact form will this bankruptcy take?” – he offers the rather tepid response that it will happen because the government is “spending too much, generally on people who have little”, which offers nothing by way of clarification or definitiveness. So it is useful to interrogate the notion of a nation going broke. Can it happen? Can Britain become insolvent?

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The British government’s obsession with the fiscal rules is driving the economy towards recession

The UK economy is heading into a malaise. The latest news – UK construction activity in July falls at steepest rate since Covid (August 6, 2025) – and – UK services sector has biggest fall in orders for nearly three years (August 5, 2025) – confirms that there is a slowdown underway. That was prefaced by rising unemployment and falling overall GDP growth in previous data releases. However, when we examine statements coming from the Labour government, the Prime Minister is hinting that there might be tax rises in the Autumn Statement because a neoliberal oriented ‘think tank’ has told it that there is a £40 billion gap in the fiscal outcomes, which will breach the self-imposed limits specified in their fiscal rules. So the Government is contemplating more austerity and contractionary policy at a time when private spending is subdued and the economy is going backwards. It just demonstrates how the obsession with these fiscal rules grossly distorts fiscal decision making and focuses government eyes on all the wrong things. I am still amazed when I think how stupid we all have become for thinking that any of the stuff is acceptable.

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Britain’s Leeds Reforms – jumping the shark comes to mind

Last week (July 15, 2025), the British Chancellor delivered the – Rachel Reeves Mansion House 2025 speech – which is an annual event where the Chancellor outlines the state of the economy and what the government is doing. Mansion House, London – is the official residence of London’s Lord Mayor and is located in the heart of the City (financial district). If you want to see an echo chamber in action then this is one place where you will find one. All the self-important characters from the financial markets being duchessed by a sycophantic chancellor all in the one place. Perfection. Reeves was there to tell the ‘markets’ what they had longed for over the last 15 years – that the so-called – Leeds Reforms – would see the regulatory and supervisory framework that was erected after the GFC largely abandoned and that they could get back to relatively unfettered ‘greed is good’ operations again. Perfection. Apparently, the Chancellor has been convinced by the speculators that they hold the interests of the British working class at the centre of their hearts and that they will do everything in their power to advance those interests through their own operations. And, ladies and gentlemen – pigs might fly.

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British Labour Government should ignore irrelevant fiscal ‘black holes’ and worry about the political hole it is digging for itself

The lack of correspondence arises when a government tries to operate within the tight constraints of unjustifiable fiscal rules by proposing legislation that cuts billions in government support for programs that are the difference between abject poverty for millions and a modest standard of living is once again coming to the fore in Britain. The Labour government is obsessed with achieving fiscal rules that are not only arbitrary but cannot be precisely assessed given the deficiencies in the available data and the forecasting techniques. However, the Chancellor tries to convince everybody that there is precision and that major austerity has to be imposed to fit the government fiscal outcomes within the arbitrary constraints they have imposed. Those constraints do not have any context in the things that matter – reducing disadvantage, dealing with inequality, climate change, health care etc. Yet the constant reference to a ‘black hole’ – the difference between the estimated fiscal trajectory and the fiscal rules constraint leads the government to ill-considered policy hacks aimed at keeping the outcomes within the rules. The visceral reaction against the hacks then leads to the situation we have seen in Britain recently, which further undermines the political viability of the government. The only hole that the government should be worried about is the political hole it is digging for itself as a result of its obsession with imprecisely measured and essentially irrelevant ‘black holes’.

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The arms race again – Part 2

This is the second part of my thoughts on the current acceleration in military spending around the world. The first part – The arms race again – Part 1 (June 11, 2025) – focused on background and discussed the concept of ‘military Keynesianism’. In this Part 2, I am focusing more specifically on the recent proposals by the European Commission to increase military spending and compromise its social spending. The motivation came from an invitation I received from the Chair of the Finance Committee in the Irish Parliament to make a submission to inform a – Scrutiny process of EU legislative proposals – specifically to discuss proposals put forward by the European Council to increase spending on defence. The two-part blog post series will form the basis of my submission which will go to the Joint Committee on Finance, Public Expenditure, Public Service Reform and Digitalisation on Friday. In this Part, I focus specifically on the European dilemma.

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The arms race again – Part 1

The Chair of the Finance Committee in the Irish Parliament invited me to make a submission to inform a – Scrutiny process of EU legislative proposals – specifically to discuss proposals put forward by the European Council to increase spending on defence. This blog post and the next (tomorrow) will form the basis of my submission which will go to the Joint Committee on Finance, Public Expenditure, Public Service Reform and Digitalisation on Friday. The matter has relevance for all countries at the moment, given the increased appetite for ramping up military spending. Some have termed this a shift back to what has been called – Military Keynesianism – where governments respond to various perceived and perhaps imaginary new security threats by increasing defence spending. However, I caution against using that term in this context. During the immediate Post World War 2 period with the almost immediate onset of the – Cold War – nations used military spending as a growth strategy and the term military Keynesianism might have been apposite. These nation-building times also saw an expansion of the public sector, which supported expanding welfare states and an array of protections for workers (occupational safety, holiday and sick pay, etc). However, in the current neoliberal era, the increased appetite for extra military spending is being cast as a trade-off, where cuts to social and environmental protection spending and overseas aid are seen as the way to create fiscal space to allow the defence plans to be fulfilled. That trade-off is even more apparent in the context of the European Union, given that the vast majority of Member States no longer have their own currency and the funds available at the EU-level are limited. We will discuss that issue and more in this two-part series.

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What is the purpose of fiscal policy? Don’t ask Rachel Reeves!

It’s been a week of grand fiscal statements. Tuesday, it was for Australia as I discussed yesterday – Australian fiscal statement – rising unemployment amidst a moderate fiscal contraction (March 26, 2025). Then yesterday in the UK, the Labour Chancellor delivered the British Government’s – Spring Statement 2025. Both statements come at a time when the mainstream economics consensus is shifting with the US pushing protection and defunding many global initiatives. And, one of the statements was in the context of an impending federal election (Australia) and from a government that is in danger of losing that election to a bunch of populist Trump-copiers. And the content reflected that. The UK Statement was from a Government currently in no danger of losing office but which is progressively entrapping itself in its hubris and fiscal rules. An interesting juxtaposition. Anyway, the British Chancellor has lost all understanding of what the purpose of fiscal policy is. What is the purpose of fiscal policy? Don’t ask Rachel Reeves!

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British government spending cuts will probably increase the fiscal deficit and make the ‘non negotiable’ fiscal rules impossible to achieve

The British press are reporting that the Government there is planning further spending cuts of the order of billions of pounds because the economic environment has changed and the current fiscal trajectory is threatening their self-imposed fiscal rules thresholds. We already heard last week how the Government is significantly cutting Overseas Aid as it ramps up military expenditure. Now, it is reported that billions will be cut from the welfare area and the justification being used is that there is widespread rorting of that system by welfare cheats. There are several points to make. First, getting rid of rorting is desirable. But I have seen no credible research that suggests such skiving is of a scale sufficient to justify cutting billions out of welfare outlays. Second, quite apart from that question, the micro attack on the welfare outlays have macroeconomic consequences. The British Office of Budget Responsibility estimates that the output gap is close to zero which means it is claiming there is full employment. Even if that is true, that state is underpinned by the current level of government spending (whether it is on cheats or not). If the spending cuts that are targetting rorting are not replaced by spending elsewhere then a recession will occur and the Government will surely fail to achieve its ‘non negotiable’ fiscal rule targets. It is a mess of their own making.

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Britain can easily increase military expenditure while increasing ODA to honour its international obligations

It is hard to keep track of the major shifts in world politics that are going on at the moment. I am in the camp that saw the extraordinary confrontation between Trump/Vance and Zelensky as demonstrating how embarrassing the US leadership has become. I am not a Zelensky supporter by any means but the behaviour of the US leadership was beyond the pale as it has been since January. I am no expert on geopolitical matters but it seems obvious to me that the US is now opening the door further for China to become the dominant nation in the world as the US sinks further into the hole and obsesses about who should thank them. And the latest shifts are once again going to demonstrate how dysfunctional the EU architecture has become. If it is rise to the post NATO challenge then its obsession with fiscal rules will have to end and they will have to work harder to create a true federation. I am skeptical. The shifts are also once again demonstrating that mainstream economic thinking is dangerous, something I can claim expertise to discuss. The recent decision by the US Administration to hack into the USAid office is probably not the definitive example of this point because it is more about being bloody minded than ‘saving’ money. It will just further open the door for China though. However, the decision by the UK Labour government to reduce Overseas Development Assistance (ODA) to (according to Starmer/Reeves logic) ‘pay’ for a rather dramatic increase in military expenditure is a classic example of how policy goes astray when mainstream economic thinking in general, and the British fiscal rules, specifically are used to guide policy.

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Britain and its fiscal rule death wish

Governments that adhere to the mainstream macroeconomic mantras about fiscal rules and appeasing the amorphous financial markets have a habit of undermining their own political viability. As Australia approaches a federal election (by May 2025), the incumbent Labor government, which slaughtered the Conservative opposition in the last election, is now facing outright loss to a Trump-style Opposition leader if the latest polls are to be believed. That government has shed its political appeal as it pursued fiscal surpluses while the non-government sector, particularly the households, endured cost-of-living pressures, in no small part due to the relentless profit gouging from key corporations (energy, transport, retailing, etc). The government has not been riven with scandals or leadership instability. But its amazingly fast loss of voting support is down to its unwillingness to take on the gouging corporations and also to claim virtue in the fiscal surpluses, while the purchasing power loss among households has been significant. The same sort of death wish is arising now in the UK, although the British Labour government is at the other end of its electoral cycle which gives it some space to learn from its already mounting list of economic mistakes. The British government situation is more restrictive than the case of the Australian Labor government because the former has agreed to voluntarily constrain itself via an arbitrary fiscal rule.

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