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Burying Thatcherism: Taking Back Control
Starmer’s Legacy: Fiscal Headache
City of London: Less Golden Goose
Cost of Living: Cheap Dates
It was good to hear from Andy Burnham on Friday that he does have a plan. I had my doubts (see Winning Arguments). What this plan is, we will have to wait until Monday when he formally becomes prime minister. But that hasn’t stopped much of the mainstream media from claiming to know what his plan is, based on his Labour party leadership coronation speech last week: apparently he wants to turn back the clock to the 1970s, a decade remembered in Britain for the three day week, the winter of discontent and the appeal for help to the IMF.
Burnham is an old-hand at politics so he can hardly have been surprised at the headlines in response to his claim that “Britain took a series of wrong turns in the 1980s” and “four decades of the neoliberalism that began in the 1980s have not been kind to the places that built our Party, nor to the communities across the UK in rural and coastal areas”. Perhaps he thinks that at this degree of distance, the ghosts of the 1970s have lost their power to scare voters in the way that, for parts of the country, the traumas of the 1980s remain viscerally scarring.
That said, it is hard to disagree with his central contention that “this generation of politicians – myself included – have failed to challenge a political culture and an economic model that simply doesn’t work well enough for ordinary people”. Indeed, Wealth of Nations has been making this argument since its inception. Many of the country’s greatest challenges stem from decades of chronic under-investment, including in many of the public services privatised by Conservative governments of the Eighties and Nineties.
Where I think Burnham is mistaken is in thinking that this all comes down to ownership, if that is what he meant when he said “the country surrendered control of the essentials – housing, water, energy, transport – and left people exposed to higher costs.” The reality is that the country always had control over these industries via regulators but chose not to exercise it, preferring to prioritise keeping customer bills low. The same is true of the public services that the government does control outright, such as health, education and roads, where investment has consistently been sacrificed in favour of keeping taxes low.
The reality is that the bills are now falling due for these decades of under-investment, just as they are also falling due for the short-sighted “dash for gas” which has saddled Britain with some of the highest energy prices in the world in the wake of recent energy shocks. As regularly noted, Britain did not just spend the peace dividend, in failing to maintain and upgrade its infrastructure and vital public services, it spent the depreciation dividend (see Which Blair Project). At its core, Britain’s problem is not so much bad economics as bad accounting.
Britain’s - and Burnham’s - challenge is to rebuild resilience. During the years of “neo-liberal” ascendancy, it was assumed that resilience came through openness and access to foreign markets. But recent shocks have taught us that this can also leave us vulnerable to coercion. The question is whether it is possible to rebuild resilience while also keeping customer prices down - and maintaining the confidence of the bond markets. I believe there are ways to square the circle and will come back to this in a future post.
But as Wealth of Nations has previously discussed, we are living through a profound rupture in the global economy (see Regime Change). The new paradigm based on economic nationalism is inherently inflationary with capital and trade increasingly weaponised. Back to the 1970s indeed. The question is whether Burnham can lead Britain there in a way that learns the lessons of last time.
One of Burnham’s most critical decisions over the next few months is to decide on his fiscal strategy. It is not just that Starmer has left him with a £5 billion hole in the budget to pay for the (inadequate) defence investment plan announced last month; nor that the resurgence of the Iran war has led to rising oil prices and gilt yields which threaten to eat further into the Treasury’s fiscal headroom; or that Burnham wants to signal the change of regime with spending on his own priorities, including measures to ease the cost of living. His biggest headache is that outgoing chancellor Rachel Reeves has bequeathed him a dramatically back-loaded fiscal consolidation, with most tax rises and spending cuts slated to be delivered in the year before the next general election.
To make matters worse, not only has he committed to stick with the last Labour manifesto’s red line on not raising any of the big three personal taxes (income tax, national insurance contributions or VAT), but he has also committed to stick by Reeves’s fiscal rules. That’s a particular problem because to impress the gilt market, Reeves switched from the previous government’s rolling five year debt target to a fixed five year target, which requires debt as a percentage of GDP to be falling in 2028/9 - thus depriving Burnham of simply deferring the target for another year. In this respect, he is even more boxed in than Starmer.
Assuming he does decide to stick to these rules - and the markets are somewhat sceptical - one choice he will have to face is whether to bring forward the fiscal tightening, including the spending cuts, to take the pain now rather than just before a general election. As David Aikman, director of the NIESR, notes in a blogpost, from an economic perspective, that’s a finely balanced decision. Using a fiscal impulse model similar to one used by the US Fed to estimate the impact of tax and spending policies on growth, he finds that fiscal policy should boost growth by roughly 0.2 percentage points this year. But under current plans, fiscal policy will substract around 0.4 percentage points from growth in 2028/9. That is around a third of the OBR’s estimate of UK potential growth of 1.3 per cent.
The problem with bringing the spending cuts forward is that growth is currently weak, unemployment has been rising and there is probably spare capacity in the economy so tightening now could make things worse. On the other hand, a credible package could pave the way for the Bank of England to cut interest rates and erode the risk premium in gilts. Lower borrowing costs could lead to increased private sector investment which would lift the economy. A weaker pound might also boost demand for UK exports.
The market will be watching this closely. UBS reckons that if fiscal consolidation is weaker than planned, resulting in continued budget deficits until the next election, the debt ratio would rise to around 101% by the end of 2033. What’s more, it reckons that there has been a 0.2 percentage point risk premium baked into 10-year gilts since the start of the year when it started to look likely that Starmer would be removed, reflecting fears over weaker fiscal discipline. Indeed, the investment bank reckons that Burnham will opt to loosen the fiscal rules.
Aikman thinks that on balance, Burnham would do better to bite the bullet and bring the fiscal consolidation forward. I agree. Loosening the fiscal rules would undermine the government’s credibility and risk a market reaction. But worse would be to deliver the fiscal consolidation by further cuts to public investment on top of those already agreed by Reeves to fund the defence investment plan. That would be to repeat the mistakes of the last four decades that have undermined Britain’s resilience and that Burnham has pledged to correct.
For evidence of the problems with the UK’s economic model, look no further than the stock market. Nothing defined Thatcherism quite like the City of London, whose loadsamoney excesses came to epitomise an era, in stark contrast to the devastation of the country’s traditional industries. The financial services sector’s contribution to UK GDP more than doubled from around 4 percent in 1980 to around 10 percent today, while its contribution to UK tax revenues is even higher. What’s more, if there is one bit of her legacy that all governments over the past four decades of what Burnham calls “neo-liberalism” have tried to preserve, it was to ensure that this golden goose continued to lay its eggs.
The irony is that Thatcher never set out to turn the City into the engine of the UK economy. Her goal was to do what post-war governments had failed to do which was to revive British industry. As I highlighted in an essay for Prospect a couple of years ago, two of her most consequential reforms in terms of the fortunes of the UK financial services sector were highly contingent.
The first, her decision to abolish exchange controls in 1979, was driven by a desire to weaken a pound. Ministers feared the economy was vulnerable to “Dutch disease” as soaring North Sea oil and gas production threatened to lift sterling, undermining the competitiveness of manufacturing industry. They expected that lifting controls would cause capital to flow out of Britain, not into the City. Instead, the opposite happened, making life even harder for industry.
Her second consequential reform was “Big Bang”, a 1986 package of reforms that swept away fixed commissions, shifted trading from the floor of the stock exchange to computer screens, and opened the London market to foreign banks. But the origins of Big Bang lay in the decision of the Office for Fair Trading (OFT) under the previous Labour government to bring charges against the London Stock Exchange under restrictive practice laws - not to boost the City but to reduce costs for businesses and investors. If it had not been too late for the Thatcher government to end the legal action, they would almost certainly have done so, thereby allowing the stock exchange to cling to its cartel-like practices.
Meanwhile, arguably her most consequential reform from the perspective of the City was one from which she later resiled. The advent of the European Single Market from the beginning of 1993, which she had championed, turned London into the financial capital of Europe, as it sucked in financial services jobs from across the continent, helped it must be said by an astonishingly favourable tax regime for expats (see A Requiem for the Non-Dom Rules).
It was alway inevitable that Brexit would have an impact on the City, even if it has been less than some feared (see The Overwhelming Case for Rejoin). But as I noted here more than two years ago, the biggest casualty has been the one bit of the City most associated with Thatcher: the stock market which has suffered years of fund outflows, huge valuation discounts to comparable markets and an exodus of companies maintaining a London listing (see How Brexit Wrecked the Stock Market). Since then, despite incessant attempts by analysts and commentators to talk up the UK market, the situation has only deteriorated.
As the FT noted last week, only seven companies this year have listed in London while the value of bids for London-listed companies has outstripped new entrants’ value by 27 to 1. Indeed, since 2023 there have been 154 bids for UK companies with a market capitalisation of more than £100 million, with a combined value of £165 billion, compared to just 11 IPOs with a £100 million-plus market cap worth a combined £6 billion, according Peel Hunt research cited by Alistair Osborne in The Times. The result is that the UK stock market is down to just 3.5 percent of total global stock market capitalisation. As Osborne says (echoing what I wrote in 2024), an entire ecosystem is dying before us.
It’s no surprise, then, to read in the FT that the government last week summoned private equity firms to Downing Street to be asked why they are not listing British portfolio companies in London. After all, recent governments have already controversially relaxed listing rules, removing investor protections to try to lure business. At the same time, the government is under pressure from City brokers to support the industry with tax breaks such as scrapping stamp duty on share purchases, and new rules to force pension fund to invest in domestic shares (a form of capital controls). There is certainly an irony in an industry that benefitted most from Thatcherism - and which has been most voluble in its warnings of a return to 1970s style socialism - is now demanding protection for itself.
One of Burnham’s pledges in his speech last week is that his radical plans will reduce the cost of living:
It will take us to a country where life is more affordable and all people and places are lifted from where they are now.
A new report by Deutsche Bank suggests he will have his work cut out. Its latest Mapping the World’s Prices report ranks as the sixth most expensive city in the world out of 69 in its survey based on its “cheap date index” - a basket of items you might consume while attempting to impress, entertain, or simply spend time with a partner (or potential partner), according to strategist Jim Reid.
It includes a new pair of jeans and a dress, two one-way public transport tickets, two coffees, a meal for two, two cinema tickets, a bottle of wine to dissect the film afterwards, and finally a taxi ride home.
What’s more, London ranks as the 8th in the world for housing costs and first for a monthly public transport pass. As for the best places in the world to live, they are all European. Luxembourg holds the number one quality-of-life spot, followed by Copenhagen, Amsterdam, Vienna and Munich. Global financial hubs like Paris (43rd), New York (46th), London (47th), and Hong Kong (55th), score lower, hampered by expensive housing, long commutes, and high pollution levels. Edinburgh, in contrast, makes the global top 10 for quality of life, while Birmingham has climbed strongly in disposable-income rankings after rent.
As the report’s authors say, this is all highly subjective. Expensive or not, this Londoner is staying put.
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