Rishi out Starmer in. All change.

Well we have a new Government in the UK. Only 1 in 3 people voted for Labour yet they have a massive majority.  The majority of the 65% of the population who didnt vote Labour will not have much patience or support for our new Government.

Labour have yet to do anything but  I thought it would be useful to capture this moment in time before Rachel Reeves and Bagpipe Starmer (he does drone on) start making excuses and blaming his predecessors.  It's all too easy to create a false narrative so here's my snapshot of what Labour are acutally inheriting before this snap-shot in time is lost or droned out by the spin machine.

The Economy

Well it's fair to say Labour are not inheriting a fabulous economy.  The outgoing far left conservatives have hardly been frugal with State spending or setting low taxation. However is the economy in as bad shape as Labour will claim? Certainly the conservatives coming into power 14 years ago inherited a pretty big economic mess left by Labour.

So where are we? 

Inflation has fallen to 2%. Energy prices are actually falling. It's likely interest rates/mortgage rates will fall (the "impartial" Bank of England didnt reduce rates as they thought it would be seen as election interference).  The FTSE, after decades of stagnation, is rising rapidly. Merger and acquisition activity in the UK is dramatically up. The pound is now at a 2 year high against the Euro.  The economic indicators are actually pretty good.

The far left conservatives have been busy spending on State socialism.  51% of the working population either work for the government or are funded by the government. Of the the 32 Million UK workers that means  16 Million work for the government.  Allegedly the population is 68 Million (I personally think there's millions of invisible people here) which means there 36 Million people are not working (children, students, pensioners, welfare etc). Government employees dont create wealth - Government is not a product we sell - it's something forced upon us so the 16 Million actual workers are carrying the other 52 Million people. 

Government spending in 22-23 was 45.6% of GDP - not tax take - 45.6% of the economy.  That had risen from 44.5% in 21-22. Spending in April 2024 was £111.7 Billion - £4.4 Billion more than April 2023 - basically 4.1% up annually.    Assuming the economy grows at 2% and expenditure grows at current pace then government spending will have grown to 48% of the economy by the end of the 5 year Labour term - that's and additional £321 Billion more.  The 16 Million real workers are going to have to generate an additional £20k each in tax over the next 5 years.  This ignores any spending bonanza that Labour are planning. I've been a bit optimistic here assuming the economy will grow 2%.  It grew 0.2% in Q1/24 (in other words it contracted when inflation is factored in) - if Labour achieve the same dismal performance then State spend will be >50% of GDP before their end of term in office.

The problem Labour are inheriting is the size of the State.  Tony Blair massively grew the size of the state.  More regulation.  More bureacracy. More this. More that.

The conservatives have done very little to control it. At the end of the austerity period they had merely managed to keep it the same as when they inherited the mess from Labour after the financial crisis.  Since 2020 however the size of the State has grown substantially. 

Historically governments saved during the good times and spent during the lean times.  That ended decades ago.  Nowadays it's spend, spend, spend.

Now UK tax revenues as a percentage of GDP are 33.3% whereas expenditure is about 46% of GDP.  How are government funding this shortfall in tax revenues?  Well the Conservatives have been hitting the credit card and so will Labour.  It's highly unlikely they will balance the budget and slash State spending by £311 Billion per year (to put that in perspective the NHS cost £185 Bn in 2023).

The cost of the interest payments on the government's credit card  was £111 Bn last year. It's only going to get worse - there is no surplus (ie paying down the national debt).

So what are the options? 

- Increase taxation. Currently it's 33.3%. The highest ever achieved in the UK was 36%. Certainly not 46% which would be needed to achieve a balanced budget. The level of taxation has already reached levels where people decide it's not worth working (approx 1M people in their 50s have decided not to work) or they up and leave to some more tax friendly country.

- Grow GDP. Governments that have tried to stimulate growth usually create bubbles.  It usually means subsidies.  For companies to grow and contribute to GDP they need freedoms.  The reality is there is more regulation and bureaucracy then ever.  Planning compliance documents for infrastructure projects running into tens of thousands  of pages.  Armies of analysts digesting bureaucratic banking compliance documents.  In all probability it's going to get worse.  Bagpipe Starmer is a lawyer - he loves paperwork and bureaucracy. It's going to get worse not better. The rules need to be slashed not enhanced.  The conservatives have not been very [small] business friendly.  Small businesses pay a marginal rate of 26.5% corporation tax whilst Goliaths like Amazon would pay 25% - assuming they paid corporation tax.  Instead Amazon paid zero corporation tax and received £1.6Bn in tax credits...

[At university I dated a couple of lawyers and I am friends with a couple of lawyers - never ask a lawyer "can I do this".  The answer will always be no.  You need to ask "I've done this. How can I not get into trouble" - lawyers will then think creatively. If Starmer is a typical lawyer then he will be risk adverse and not creative. He will love rules and want more.] 

Civil servant pension liabilities. In 2022 the unfunded liability for civil servant pensions was £2.3 Trillion (yes Trillion not Billion).  This is bigger than the GDP of the UK. Now the size of the State has ballooned and therefore the unfunded liability has grown - who knows how big it is now.  It's highly likely that the size of the State will grow.  Labour are promising more NHS staff, more police, more this, more that.  All of these will be eligible for final salary pensions.  The bill is only going to get bigger. When Labour claim in their manifesto that it's fully costed - I bet it doesn't include pension liabilities.  No-one is costing or budgeting for the lifetime cost of final salary pensions. It's a giant Ponzi scheme - they only worry about the current liabilities (ie those that have retired).

All politicians know about the elephant sized pensions time bomb.  Their solution is uncontrolled immigration to fund the current account liabilities. Except with 50% of immigrant workers working for the state it doesn't actually solve the problem....it makes it worse.  A giant Ponzi scheme where you have to lure in more suckers to pay into the scheme.

Europe

The situation in Europe is more chaotic.  Marie le Pen looks set to be elected not just in the EU but run France.  Although labelled as "Far Right" her party could be implementing a massive "Far Left" spending spree.  (I havent got a clue what Far Right means anymore - her party's policies are actually Socialist - I think Far Right is a label when  someone doesnt like what someone is doing or wants to label them as racists).  Germany is not in great shape. Italy already has a Far Right Prime Minister and Austria and Netherlands looks set to follow. 

So what does this mean for Labour.  Well expect the pound to gain against the Euro.  Good news for imports - things will get cheaper and therefore reduce inflation.  Something Bagpipe Starmer can drone on that he's doing a good job.  The bad news is our exports to Europe will be more expensive.  Ultimately that could mean our exports reduce, UK businesses find it harder and therefore GDP falls.

It's likely European bond prices and cost of borrowing will rise - France has bigger debt problems than the UK and increased cost of borrowing will have an impact on the whole of the Eurozone as they use the same currency.  Marie Le Pen is planning a huge Left Wing spending Bonanza - all of which is unfunded (what Governments actually balance the books nowadays anyway). Assuming the bond markets are happy with Starmer then the cost of borrowing to fund the deficit might fall if the UK is viewed as lower risk than Europe. 

Ultimately the UK is likely to be in better shape than Europe.  Something else for Starmer to drone on about. 

USA

Well the battle between the geriatrics will soon start.   That supposedly youthful vigor and energy of the "US of A" is reflected in it's leaders.  The USA has the mother of all budget deficits.  Currently $33 Trillion and growing at about $1.4 Trillion per year.

The US stock market is a bubble which could burst at any time. 

The US is a big trading partner of the UK.  If things go south in the US then Starmer can surely use that as an excuse for failing to turn things around.

What next?

In summary Labour are not inheriting a particularly good situation however there are some positives which they are inheriting. In all probability the economy is in worse shape than Labour left it when the Conservatives came to power.

However I predict Labour will do nothing to control or reduce the size of the State.  They will do nothing to improve the productivity of the State (which is very low). They will do nothing to reduce the Welfare bill.  They will do nothing to help businesses flourish. In short costs will rise and GDP will stagnate.

Reform has the right idea - tell government departments to cut costs by 5% each year or the corporate help will arrive and cut it for them. Services are worse now than 5 years ago yet costs have ballooned.  Clearly spending more money hasnt made things better  - its made it worse - therefore logic dictates that cutting costs will make things better !

In all probability, in 5 years time at the end of the Labour term, the economy will be in worse shape than today.  Bigger deficits, stagnant GDP, bigger unfunded pension liabilities.

So what will happen?  Either the budget deficit will have to rise to compensate for the shortfall or taxes will rise.  If taxes rise too much then it will be a disincentive for business (and individuals) and GDP will fall making the budget deficit worse. 

How can Starmer be succesful?  Do the exact opposite of his lawyer training - he need to  have a rules & law bonfire to encourage business. He needs to slim down the size of the State and prioritise.  

Start sacking the armies of regulators and compliance officers or at least make them do their job and regulate.  We have rules but they are not enforced eg water company sewage discharges.  

If Labour wants water to be in public ownership it could do it for £1.  Basically enforce the rules and the water companies will be bankrupt - governments can step in and buy them for £1.

Finally he needs to stop the final salary pension elephant getting any bigger or as a bare minimum declare it on the budget balance sheet in order to acknowledge the elephant in the room. That will never happen - Denial is a coping mechanism ! 

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Post article notes.  Well since I wrote this on the 6th July 2024, France has ended up in paralysis - Le Penn didn't get in but neither did anything like a majority.  Lots of different factions. Dont expect much to happen in France for a few years.

Since Starmer has been in, the economic conditions have got worse.  Although on the positive side, the deferred interest rate cut happened however inflation is up, energy prices are set to rise (whilst pensioners are set to freeze to death) and it looks like GDP is set to fall. 

Was this a legacy of the conservatives or a result of Labour's policy? Certainly a housing crisis is looming.  Landlords are fleeing the market and selling up before Labour impose draconian rules on landlords and massive capital gains taxes if they sell up. The losers are tenants - typically 20+ applicants for every rental property - expect spiraling rents before rent controls are imposed.

True to his word Starmer is droning on about how bad things are with the Conservative inheritance. Black hole this.  Black hole that.  He's been on a massive spending spree giving money to the armies of civil servants.   Starmers popularity rating has plummeted in his first 50 days in office.

One thing Starmer has said which is true is that things are going to get worse before they get better [I think that means when Reform or some other party get elected in 5 years that things will then get better].  Starmer says it's going to take 2 terms in office to make things better.

Rubbish and drivel.  Starmer is gutless.

Javier Milei was elected to power in Argentina on the 10th Dec 2023. When elected - Argentina was a basket case.  Rampant inflation of 150%, massive budget deficits etc.  It's amazing to think that about 120 years ago Argentina was one of the worlds richest economies.  Unfortunately decades of socialism has frittered away the wealth.

Since Milei's been in power he has slashed wasteful government spending,  achieved the first budget surplus in over a decade,  the IMF now have confidence in Argentina and so supported him with $44Bn credit as a result. Inflation is expected to be down to 13% by year end. Confidence in the Argentine economy has resulted in stronger shares and favourable bonds.  Milei has scrapped rent controls (which Labour want to introduce) - as a result Landlords are more willing to rent out property so more property is available and rents have fallen 20% as a result.

He's done all this in about 200 days whilst Starmer has moaned alot in the first 50 days of office,  stole from pensioners and given generous pay rises.

Maybe Milei should be the next UK prime minister.  He has balls unlike droning Starmer.