Transcription
How serious is the financial crisis? Are we in a 1931, 1976, 2008 situation where emergency action will have to be taken, where extreme measures will be necessary to get things back on an even keel, or are we in a situation where things are just about recoverable?
I was very struck by some of the figures that came out in the first quarter's public expenditure, um, and income figures. These give deep cause for concern. First of all, interest payments are going up markedly. From April to June, the taxpayer had to fund interest payments of £41.4 billion. Sounds a lot of money for one quarter, but even worse, it was up by 26.7%, or £8 billion more than the previous year. The long end of the gilt market, the 30-year gilt, has seen interest rates rise to a level not previously seen since before the year 2000. Actually, I think 1998 is the last year it was at these levels. That's really important because any money spent on interest is money that can't be spent on public services, and it has to be funded out of taxation. You can never afford to get into a situation where you are borrowing to pay your interest.
And then public sector pay. This was one of the immediate failings of the Labour government. They agreed to extravagant pay settlements, and this is now coming through in the figures. So public sector pay for the quarter was £74.4 billion, up £8.5 billion, or crucially 13%. Now, a 13% increase in the pay bill when inflation is running at 3.8% is simply not sustainable. Public sector pay cannot go up any further. It is already too high. And we are already seeing complaints from within the public sector and strike action threatened in the public sector as they demand more pay. But you cannot have the public sector wage bill rising at a level that is over 9% higher than the inflation bill. That cannot last. It puts pressure on the taxpayer. It puts pressure on the books, and it will have to stop. It will have to be brought down.
And then something that is also of concern on the other side of the ledger, income tax. It was good in July, but in April to June, it was £1.4 billion lower than expectations. Income is squeezed. Expenditure is rising. And the interest expenditure, of course, is not controllable. There's nothing the government can do to cut the level of interest expenditure. That is simply what the market demands, um, and there is no other way of funding the expenditure a government makes than accepting the market interest rates.
So this is all deeply concerning, and there's another bit that I'm also worried about, and that is we're seeing a repeat of what we saw last year coming from the Treasury. These are the briefings in relation to tax rises that are scaring people. I saw in one of today's papers somebody saying, "I hear that stamp duty might be about to be abolished. Should I therefore delay buying a property that I'm about to buy that has a significant stamp duty bill attached?" This is a really stupid thing for the government to have allowed to happen. You want people to carry out their ordinary transactions without trying to adjust their behaviour because of tax changes that may or may not happen. My guess is there won't actually be any change to stamp duty in the budget, that it's much more complicated than it's been advertised as, and that anyone considering a transaction may as well go ahead with it. But the government itself, Rachel Reeves and the people who brief on her behalf, have created this uncertainty. What does this do? It stops transactions. It lowers economic growth. And property transactions are really very important. Why? Because when people move house, they need movers. When they move to their new house, they redecorate. They bring in the builders. They put in a new boiler. It is an engine of economic activity that is being slowed, not by what tax policy actually is, but what it's briefed that it might be. This is the epitome of foolishness, of bad financial planning, of bad policy and media management coming out of the Treasury itself.
But it's not just that. It's also the suggestion that there may be effectively a wealth tax on properties and that there'll be a change in property taxation of a fundamental kind which is simply going to make more rich people wish to leave the country. The feeling that whatever you do in the United Kingdom, you can't be certain of the basis on which you've been taxed. So you think you'll buy your house and you'll pay council tax. No, you may in fact pay a 44% levy annually, which will be a multiple of your council tax, fundamentally changing the economic decision you may have made to come and live and work in the United Kingdom, or if you're a young person setting out on your career, to set your career in this country rather than going away.
So at this stage, I think we should be worried that we are getting close to the 1931, '76, '08 style of financial crisis. We're not yet there yet. It is not irrecoverable. What could be done to deal with it is a number of things. First of all, we need to get government expenditure under control. The pay rises being asked for need to be refused. Benefits should be frozen next year rather than going up with the inflation rate in September. The government needs to show that it is serious about using your money. The Bank of England should be told to stop selling bonds, which has a saving of some billions of pounds a year. Carbon capture and storage should be abolished, which is a saving of £20 billion.
If the government can get a grip on expenditure, it doesn't need then to raise taxes. If it raises taxes, then the risk of a real financial crisis goes up, spirals up, because that is the doom loop, and we are getting really perilously close to the doom loop. As a broad principle, you cannot have a deficit that runs at more than nominal GDP. If you do, you end up running out of money. Currently, our deficit is 5.1%, and our nominal GDP is below that level. GDP growth is low, even though inflation, 3.8%, is relatively high. And if you try and tax that away, you find that you reduce economic activity, and that that increases the deficit, and say you increase taxation further.
Let me just make the doom loop theory clear. The government has a deficit, so it increases taxes. It finds that the country is already at its maximum level of taxation, and therefore people change their behaviour and have less economic activity because they cannot afford or do not want to pay the taxes. They leave, they don't sell property, they avoid capital gains tax by holding on to assets for longer, and so on. You then find that the lower economic activity and the lower tax that comes from higher rates means you need to raise taxes further because you're trying to make up for what you already haven't got, and that then continues with a further reduction in economic activity, and I think we are very close to that. And the next budget is going to be really important, and markets preempt what is going on in the gilt market indicates that the markets, the international markets, are already very nervous us that we are entering this doom, doom loop. Hence the highest 30 rate, 30, 30-year rates that we've had since 1998.
And markets and economies depend on confidence. Very often when you look back in history and you think what created that crisis, what led to things getting out of control and then suddenly collapsing? Well, it's people simply change their mind. That if you look at stock markets and stock market bubbles, people think that something was worth a PE of 100 times. Then they wake up and realise that that's actually discounting earnings for so long that it's not. It's worth a PE of 10 times, and the stock goes down by 90%. So crises come when confidence disappears, when people fail to carry on believing things that are fundamentally improbable. In 2008, the idea that people with no jobs and no money would pay their mortgages, a fundamentally improbable proposition, people decided it was improbable. The market collapsed. That's the worry. That's where governments have to try and create confidence by sensible policy. They're not doing the sensible policy. The markets are beginning to indicate their stress, and therefore we must be very careful. And as I say, we're not there yet, but would I be buying sterling at the moment? Would I be buying gilts at the moment? Not yet. No, because the risks are rising.