Advice to the UK government: keep quiet and stop doing so much

For some observers, this is the inevitable result of a government now regularly polling less than twenty percent of the popular vote, with little financial wriggle room, and a media whose whole industry - and its underlying economics - demands eye-catching content. For others though there is something structurally broken in the process of collating a Budget where economic actors hold their breath - and close their wallets. The risk of ending the wrong side of decisions by a state sector now encompassing 44% of all UK economic activity is just too great.

Inevitably there are truthful elements to both these assessments. It is also important not to be too provincial at a time when the United States has just experienced its longest-ever government shutdown. Whilst France has burnt through five prime ministers in two years trying to pass budgets that bring the country into line with EU fiscal rules. The UK is not alone in her tribulations. Ageing populations, and adjusting to higher debt interest rates, is challenging government finances around the world. This comes at a time when taxpayers are being asked to fund new energy generating capacity - so central to establishing capability in AI - and higher levels of defence spending. Federal finance fatigue might be alliteration we just have to get used to.

But looking back at the last week as Labour tied itself in knots over a manifesto commitment on income tax, it is clear to me that saying less, and doing less, has considerable merit for a government at risk of crowding out the private sector.

Let’s take the ‘saying less’ aspect of this first. Former Downing Street Chief Adviser, Dominic Cummings, has called ministerial obsession with communications the “media entertainment service”. It is hard not to agree with him. The decision of the Chancellor, Rachel Reeves, to do a Budget-framing press conference earlier this month has aged badly. It is not just ministers. Many government advisers have come from, or hope to return to the media. This means that their careers are enhanced by the regular dispersal of privileged information. This form of leaked gossip is not a victimless activity. I see firsthand the corporate deals that get put on hold in the run-up to well-trailed fiscal events. Recent economic data is clear that UK households have pared back their spending amidst near-constant speculation surrounding tax increases. There has been a surge in affluent Britons - with options on where and when they pay their taxes - taking pre-emptive action ahead of recent Budgets. Much of this activity has been based on misplaced speculation surrounding a new broad-based wealth levy.

Many of my colleagues in the economics profession have criticised the suggestion that this government may shortly move to a single economic forecast and fiscal event each year. This would be a reduction from the current schedule of two. The criticism is that this would result in reduced transparency and accountability. There is at least an equal, if not stronger counterargument that halving the frequency of feverish speculation would be good for economic growth.

Then there is the second cultural shift that is needed - that of the state simply doing less. Clearly there are significant areas of activity that only the public sector should deliver. Defence, law and order, and the government acting as insurer of last resort are essential, and the least contentious. Then there are areas such as energy markets, housing, healthcare, transport, and education where there is a debate on the scope of the public and private sectors. The stool of tax, spending, and borrowing decisions should always include a fourth leg - a judgement on the optimal reach of the state sector.

For some readers this will bring back memories of privatisation and the associated ideological battles of the 1980s. That may be a suitable subject for a future column. For now, let’s consider well-meaning policy interventions that act to raise costs for private sector activity. Often these end up putting pressure on the public finances – and result in higher taxes. In both housing and energy there are two UK markets where there is clear evidence of this self-defeating dynamic playing out.

In housing, the rising costs of development has now reached a point where it is now uneconomic to build in half of London - leading to a cratering of new housing supply. This looks set to spread to many of the UK’s major cities. This has fiscal implications even before considering the enormous social and wellbeing impacts of constrained housing supply. There should be no celebration that the government is now devoting £39bn of taxpayer money over the next decade to the Affordable Homes Program. This is the opaque cost of regulation emerging as a very visible cost to the taxpayer. The latest housing minister, Steven Reed, is making encouraging noises that he understands this with a recent package of measures to strip back some supply-damaging planning measures. But the left and right hand appear to be acting independently of each other. The Renters Reform Bill will constrain supply of build-to-rent properties putting further pressure on taxpayer to step in. It is a self-defeating approach that simply ends in higher taxes.

When it comes to energy the huge cost of net zero subsidies is now baking in costs for generations of future taxpayers. This stems from constraining multiple forms of energy supply in recent years. UK governments have presided over supply-impairing windfall taxes of up to 78p in the pound acting as a strong disincentive to future investment. There has been the outlawing of relatively cheap onshore wind, and even the rejection of nuclear power station applications on the damage it could do to the Welsh language. The end result is that taxpayers must now subsidise new energy capacity as these interventions have helped made it uneconomic to produce entirely privately-funded supply.

If the root cause of the events of the last week is scarce taxpayer monies in the face of near-infinite demands, it is a culture of doing less that represents the only sustainable future. Any other way will result in the UK government running out of other people’s money.