The single most alarming indication of the complacency that afflicts the Westminster village is the frequent claim (usually made when a hapless government Minister is defending further public expenditure on some profligate welfare scheme or other) that, ‘The UK is still the sixth largest economy in the world and is predicted to remain so well into the 2040s’.
Yet this apparent confirmation of the nation’s continued affluence, relative and absolute, does not tell the whole story. Back in 1990 the UK was indeed the world’s fifth richest country by GDP per person; today on that measure and taking account of purchasing power parity we rank 28th with a confident expectation of falling further down this global wealth league table by the end of this decade. Put simply we are no longer the wealthy country that lies at the heart of our national narrative.
So, lesson number one for the UK’s political class, is that business as usual in economic, monetary and fiscal policy will simply not cut it. Regrettably it is a lesson that the current Chancellor of the Exchequer seems blissfully unwilling to recognise if we take at face value her spring statement. For where in her words was the sense of urgency and radical change that this age of malaise so desperately requires? Our population is ageing; the proportion of taxpayers to dependents is shrinking and if the outlook for the public finances seems grim today…
Overall UK government debt has more than tripled since the financial crisis of 2007-08; the calamitous strategy of maintaining ultra-low interest rates and the programme of quantitative easing throughout and beyond the 2010s lulled us all into thinking that borrowing ever more was somehow affordable. To put today’s clamour for interest rates to be slashed into context – the current level of 3.75% is low by historic standards. During the entirety of the eleven-year Thatcher government rates never dipped below the 7.5% level that applied for a few weeks in early 1988. For the foreseeable future we can expect to spend (and borrow) well over £100bn per year in the global capital markets simply to service the cost of persistently living beyond our means.
Regrettably it is not only interest rates levels that have returned to some sort of normalcy; the same applies to inflation and that is bad news for the UK’s public finances given the decades-long tendency for the Treasury and Bank of England to issue index linked gilts in the markets. The attraction for overseas investors is that their repayment rises with inflation, which has always meant they are willing to buy our debt at a discount. All is well and good unless and until the UK inflation rate is an outlier by international standards.
Contrary to some of the more feverish speculation, the bond market is neither part of the ‘deep state’ intent on thwarting radical policymaking nor is it collectively averse to left-of-centre, high-spending administrations. It is unsentimental in its straightforward expectation that governments, of whatever ideological hue, must have a viable, costed economic plan alongside the political will and parliamentary numbers to enact that plan. In truth it has been remarkably tolerant of a succession of UK governments in recent times despite our leaders consistently borrowing to pay for consumption (rather than investment) as well as continuing to rack up unfunded commitments in public sector pensions. Memo here to Andy Burnham (and Zack Polanski, for that matter)….….our government is only ‘in hock to the bond markets’ because of profligate welfare spending and reckless levels of accumulated debt, so if we want to get the bond vigilantes off our back, let’s have some serious proposals for living within our means.
Over recent decades we have collectively been willing to sacrifice the happiness and financial welfare of future generations for the sake of satisfying the unrealistic demands of today’s voters. This might all come to a head sometime soon with an acute fiscal crisis forcing whichever hapless politicians are in office when the music stops finally to confront the bleak economic outlook; alternatively (and perhaps more worrying still), we may simply have to resign ourselves to muddling through with prolonged stagnation and further diminished living standards.
Those of us who lived through the 1970s recognise the similarities between that era and some of our current challenges, but where might salvation emerge? Over Christmas I re-read Nigel Lawson’s magisterial memoir (The View from Number 11) and was struck by just how much intellectual underpinning and systematic monetary policy development had taken place in advance of the Thatcher government coming into office. Perhaps understandably the experience of autumn 2022 has dissuaded the two main political parties from advocating any economic strategy regarded as unorthodox (although it is often forgotten that it was the rash spending commitments on domestic energy bills rather than unfunded tax cuts that condemned the Truss/Kwarteng mini-budget in the eyes of the markets).
Meanwhile over in the Reform UK corner there is some quiet yet determined thinking going on in this space. Last autumn the insurgent force of UK politics cleared the decks by recanting on their tax-cutting, high-spending 2024 manifesto and making clear that tax cuts would only be on offer once the deficit and levels of public spending were under control. It would be unrealistic to expect any political party, especially one polling as a prospective government, to go into an election campaign with an overly pessimistic message about the state of the public finances. Nevertheless, Reform UK shows encouraging signs of a fundamental rethink about what the state should and should not do along with a clear-eyed assessment of the future affordability of long-standing welfare entitlements.
What is perhaps most interesting is the work going on beneath the radar where there is a clear appetite to look afresh at the institutional relationship between the Treasury and the Bank of England as well as the role of bodies such as the Office for Budget Responsibility (OBR) and regulators such as the FCA, PRA and FOS. The narrative here is clear: ‘For too long our country has allowed unelected bureaucrats to make the rules that govern the future of our financial system’. The fault is not in our stars but in ourselves – it is parliament that has abdicated responsibility for setting the economic and commercial direction and the UK is losing ground as a consequence. Operational independence for the central bank may or may not have been a good thing, but in the three decades since that momentous monetary decision was made, unaccountability has also led to mission creep on the part of the Bank of England, which has taken upon itself not only interest rate setting but determining the architecture of much of the domestic financial eco-system. Ironically this accretion of influence comes at a time when the Bank has consistently failed since the pandemic of 2020-21 in its sole legally mandated responsibility, namely to keep inflation at two percent.
The long era of cheap money (the Bank of England held interest rates at below one percent throughout the 158 month period between March 2009 and May 2022) has cast a long shadow across the UK economy. Wildly inflated asset prices; the creation of unrealistic expectations about managing debt on the part of consumer and business; the rapid impact on the cost of living in the ‘real’ economy and the general mispricing of risk. Many of these deeply damaging distortions are still working themselves through and have only been accentuated by acknowledged inadequacies in the central bank’s forecasting processes and economic modelling.
I remember all too well in my early years as the City of London’s MP listening to the UK central bankers of the time confidently assert that the UK economy’s benign level of inflation and consistent economic growth (an era wistfully remembered as ‘The Great Moderation’) had arisen as a consequence of the credibility of sticking to inflation targets. Almost imperceptibly we had moved away from the classic Friedmanite view of inflation as a strictly monetary phenomenon to an outlook that hinged on expectation management; if it is clear that a given inflation target will be ruthlessly pursued by the Bank of England to the extent that interest rates will always be massaged to achieve this end, then its achievement becomes self-fulfilling. However, it is no longer clear that this approach works; unsurprising it has resulted in a crisis in confidence for the Bank of England (and its counterpart central banks throughout the West). Economic growth has remained painfully elusive, but any sustained attempt at conventional stimulus from central banks at the behest of an increasingly desperate government will not be tolerated by the bond markets whilst inflation remains so high. This is the dilemma that now faces the Bank of England at a time of bubbling public anger as reduced living standards and surging unemployment have become entrenched.
None of this is made any easier by increasingly chaotic economic forecasting within the public realm. The reliability and quality of economic data upon which the stop-start budgetary process played out at the end of last year is a case in point. The Treasury was understandably aghast at the shambolic inability of the Office for Budget Responsibility to predict accurately productivity and the growth outcomes of policy options, yet the invariably off-beam forecasts of this unaccountable body, run on a shoestring with barely 50 full-time staff, are regarded as tablets of stone in their determination as to whether the government of the day has achieved its arbitrary fiscal rules. A total overhaul of this process is long overdue; its amateurish IT and data collection methodology is having a real impact on business confidence and decision making. This matters at a time when concerns are heightened over fiscal and financial risks and increased leverage within non-bank financial intermediaries such as insurers, pension funds and especially hedge funds.
By the time of the next election, I suspect the appetite will be for radical change to many of the financial mandates first put into place at the beginning of the Blair era which continued after the financial crash when its continuity successor took office in 2010. What has been lacking amongst frontline politicians has been an honest conversation with the voters as to what the limits of government ought to be and how this should all be funded. The succession of financial crises over the past couple of decades have resulted in a substantially expanded state and vast amounts of additional public expenditure commitment. In truth much of this has been popular with ordinary folk but it stands in stark contrast to the urgent necessity to unleash the entrepreneurial spirits that are essential to bringing about that ever elusive economic growth.
Written on 3 March 2026 by The Rt Hon Mark Field, former Member of Parliament (MP) for Cities of London and Westminster and Consultant at Buchler Phillips, an independent boutique firm with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.