Reflecting on Labour's first term in office (a 2029 retrospective)

It's now 2029 and Labour's 5 year term in office is coming to an end.

Who could have expected things to get so bad?

OK the warning signs were there. Politicans around the world were losing control of spending. Government debt was rising faster than GDP.   Inflation was bubbling under the surface and volatile. 

Like the First World War, it's only with hindsight we can see what sparked the economic turmoil.

What was the Franz Ferdinand moment for Rachel?

For the UK it started with Rachel's budget.  She committed to increase borrowing and change fiscal rules to ignore some unfunded debt. On the surface this looked lowish risk but like a butterfly flapping it's wings it triggered economic chaos.

For decades successive UK government had less tax income than the government spending.  The feeble attempt in 2008 at austerity did little to quell the appetite for government spending. 

By  2024 UK Government debt had reached a staggering £2.7 TRILLION - £37,900 for every person in the UK and roughly 100% of GDP. Rachel probably thought it was OK to grow this as France was in worse shape and hadnt exploded. France was EU3.2 TRILLION (110% of GDP) and EU47,470 per person. Similarly the USA  had reached $35.4 TRILLION (122% of GDP) which was equivalent to $102,485 per person. 

Rachel knew she had at least try and  balance the books to fund her Government spending programme and in the Autumn 2024 budget she decided to tax business and borrow more money for "investment". 

She increased the minimum wage by 6.7% when inflation was running at 1.7% in September 2024.  This was an inflation busting pay rise for 1.6 Million workers. This benefited roughly 5% of the working population (36.8 million working people). However the real cost of the minimum wage increase and national insurance change was closer to 10% for businesses. 

Pretty soon those earning a little more than minimum wage were also demanding an increase.

The first casualty of this was the night-time industry which accounted for 2.08 million jobs. Pubs, restaurants were already struggling - a quarter of all pubs had already closed since 2000. The younger generation were "pre-loading" with cheap alcohol to avoid high bar prices. It was a perfect storm for pubs and restaurants - rising costs, falling demand due to higher prices. The Treasury was depending upon the £12.6 BILLION in  alcohol duty and other taxes from this industry.

Many pubs and restaurants were left with little choice but to reduce staff numbers to absorb the increase in their wage bill.  Some restaurants and pubs were able to increase their prices to recover the increased costs however this drove up inflation.

 Although Rachel initially won on tax receipts  it didnt take long for business margins to be squeezed and tax receipts started to fall.  As unemployment started to rise so did the benefits bill - she had little choice but to borrow more money to pay the benefits.

As inflation ticked up so did Bond interest rates. With £2.7 TRILLION in debt which was growing, the cost to service the debt started to grow.  Initially it was £112 BILLION in interest payments but with falling tax revenues, falling GDP output  and increased Government debt, pretty soon the interest payments started to rise faster than Rachel could plug the gap.  Just like Liz Truss, Rachel thought she could spend her way out of trouble but the more she spent the more the bond market responded with higher rates.

Pretty soon everyone was starting to feel the pain.  The rich realised the Pound was under pressure and looked where to shelter their money from inflation.  The USA Dollar and Euro equally looked like they were in trouble. Property looked too risky given Rachel's stance.  Gold was seen by many as the safe haven and BitCoin was starting to look less like speculation and more as a safe haven immune from government interference. Gold prices rose rapidly but there wasnt enough gold for everyone at this high price.  Gold had turned into a safe haven bubble.

 After years of everyone paying by card, cash made a come back.  But no-one wanted to be locked into Pounds when inflation was making it lose value every day.  Swiss Franc, Qatari Dollars even Vietnamese Dong were now the default currency of the people. These currencies were not exposed to high inflation so holding them was lower risk than the Pound.  Of course this created a problem for the Banks - everyone was withdrawing cash in Pounds to exchange into more secure currencies.  Rachel had to intervene to stop a banking crisis just like her previous Labour cronies - Gordon Brown and Alistair Darling. 

Looking back,  it was surprising how quickly this all happened.  Hopefully the next Government can follow the example of Milei in Argentina and turn around Broken Britain.