The country’s financial collapse was inevitable: massive public spending, far outstripping income; excessively generous pensions; ineffective tax collection and government accounts, which could be interpreted as either inept or deliberately misleading.
That was Greece, 20 years ago – there are unmistakable similarities with the UK now. Another similarity is the determination of successive governments and the public to ignore the fact that such profligacy cannot be sustained.
Greece’s position had become so precarious that, when the financial crash hit in 2008, the country had no choice but to confront its failings and, under pressure from its international creditors, it endured years of hardship before emerging in a much healthier economic state.
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The problem for Britain is the bond market, which has recently sent a clear message that it will impose a heavy penalty for any further imprudence. That message can be read in the steadily rising cost the UK government has to pay to borrow money.
A year ago, Andy Burnham carelessly remarked that the country should “get beyond this thing of being in hock to the bond market”. A few months later, he tried to backtrack, arguing that what he meant was that “the system doesn’t work for (investors) either”. It didn’t feel convincing.
He kicked off his first appearance in parliament as PM with a statement on his intention to end rough sleeping and provide plentiful cheap bus services. He told the House that, in his first week in office, “we cut VAT on electricity bills and cut business rates for pubs, social clubs, and live music venues and reinstated the £2 cap on bus fares for the whole of 2027.”
It might seem churlish to ask how this was to be funded, but the answer was “by reprioritising within government”. Your sceptical writer was churlish enough to ask the PM’s representative in the Lords what had been deprioritised in order to pay for these handouts. She didn’t have any details.
But potential investors in UK plc – the bond markets – are getting impatient for details. They want to know exactly how the government intends to fund its plans for defence spending. One indication that Burnham was serious would be the scrapping of the “triple lock” on pensions, a bung to a group with a traditionally high proportion of people who vote. Successive governments have lacked the courage to tackle this. Jim O’Neill, Burnham’s former economic adviser, has called on him to break the lock as a sign to the markets of his fiscal good intentions.
There would be howls of protest but they would be quickly drowned out if he then started to tackle an issue so toxic it is very rarely even mentioned: public sector pensions. The state’s obligation to pay former public servants generous sums each month is largely unfunded and comes straight out of the public purse. The government calculates the obligation at around £1.3tn.
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The student loan book, just under £300bn at the last count, looks almost irrelevant in comparison but the assumption that most of it will be repaid means that the government accountants can treat it as an asset. Thousands of debt-burdened unemployed graduates will tell you that’s ludicrous.
The country’s infrastructure is ancient and in need of upgrading. The welfare bill is enormous. The Centre for Social Justice calculated that, at the beginning of this year, five million people were claiming benefits with no obligation to work and, every day, 40,000 people were signed off by their doctors as being unable to work.
Andy Burnham’s recipe of a dose of devolution and tablespoon of good vibes might improve the situation in the long term but, without drastic surgery to the UK’s outgoings, the bond markets will prescribe their own, very painful, treatment.
