Rachel Reeves: trying to make numbers fit in is proving to be an impossible task

 

While Prime Minister Keir Starmer, Secretary for Defense John Healey, and other members of the British government can go around making all sorts of promises that they might not be able to deliver, it is up to Rachel Reeves to do all sorts of malabarismos to make numbers add up.

When she talked about pension reforms, she thought that would get more than 160 billion Pound to spend, but recent calculations show that the amount the Chancellor of the Exchequer will have available is less than 11 billion. 

In the meantime, John Healey, Secretary for Defense, has spoken publicly about building 6 munition factories, 12 nuclear submarines and so forth. More than 10 billion Pound are going to be paid to Mauritius for the transfer of the Chagos Islands. Billions of Pound are going to out to support military efforts in Ukraine, including training and sending of more than 100,000 drones (such is the number promised by Prime Minister Keir Starmer when he spoke about a tenfold increase. But there is a lot more. 

In the meantime, there is constant talk about budget cuts affecting Education, the NHS, the benefits system, the Civil Service, the BBC and so forth, on top of cuts for the elderly, the disabled and for those who look after the elderly and the disabled. But the list is a lot longer than that.

The Chancellor of the Exchequer is sitting around the table on a daily basis, including Sundays, negotiating with interested parties that are not happy with salary increases and cuts being proposed. So being Chancellor of the Exchequer in these circumstances is not the best post in the British Cabinet. When the Home Office, the Secretary for Defense, the local and regional authorities and whoever else asks for money, she is the one on the spot. The question is how long Rachel Reeves will endure the present state of affairs, before she herself decides that it is an impossible task.

UK: In just a few weeks, the British economy could be in the doldrums and much stronger leadership will be needed

 

What is happening right now is deeply worrying because the times of easy money could be coming to an abrupt end. The issue is not just rising inflation. The issue is that salaries and pensions have been pegged to inflationary pressures. 

At this point in time, asking for salary rises pegged to inflation could itself be a force towards more inflation and more borrowing when interest payments will be taking their toll on public finances.

And what if, as expected, the Treasury does not agree to salary increases that it could hardly afford? Would the state sector be ground to a halt? It is understandable that public workers that are seeing their incomes devalued are prone to ask for salary rises. Having said that, those in charge know full well that public finances have been drained and that any monies to pay for higher salaries will come from additional borrowing at a time when interest rates are going up and from an increase in taxation.

If energy is the main driver when it comes to inflationary pressures, then more energy will have to be produced and to do so all the promises in terms of a reduction of the use of fossil fuels will have be put aside. In the 1970s, Britain was almost brought down to its knees and the country was working just a few days a week. The issue was then energy or lack of it. Today, the issue is the price of it. Whoever takes the reins of power in September will have to make difficult choices. Doing less to save energy is not an option. Slowing down the British economy by enforcing energy savings will make matters a lot worse. 

We learnt from the imposed Covid lockdown leading to lack of economic activity that slowing down the British economy will cost livelihoods: businesses will be closed down and an undetermined number of jobs will be lost. Companies that generate little or no revenue at all have no reason to maintain jobs. Less economic activity endangers jobs and produces less tax revenues. If you slow down an aircraft in plain flight the time comes when the only way is down. We cannot have yet another loss of economic activity. We need energy and we need energy wherever we can find it. If foreign oil and gas producers don't want or cannot provide additional oil and gas, Britain will have to become self-sufficient and all options should be on the cards, including fracking.

Whoever is chosen as Prime Minister will have to make hard choices and implement decisions that will prove to be as unpopular as fundamentally necessary. Whether Rishi Sunak or Liz Truss is in command, he or she will have to forget about popularity contests. The popularity contest is only there to get one of them elected. Real governance demands dogged determination to do what is right.   

Employment rises but wages fall. What about pensions?

Employment rises but wages fall. What about pensions?

The news that employment is rising but wages are falling make the Bank of England postpone the announced rise of interest rates. Less income also means less savings for pensions and the realisation that with lower wages the aspiration of buying or renting homes might be nothing more than an aspiration when banks are only lending the equivalent of three annual salaries when the amount required to be able to have a mortgage is not less than eight annual salaries.

The gap between the monies available for pensions and the monies that would be required to be able to provide pensions is also growing at a faster pace than ever before because savings are not a generating high yields while interest rates remain relatively low.

Therefore, there is a vicious circle. People earn less. Because people earn less the Bank of England cannot take the risk of putting up interest rates without facing the possibility of millions losing their homes because they cannot afford monthly payments at higher interest rates. While this is happening, people who earn less save less and get less interest payments for what they save. Putting up salaries would mean less capital available to employ more people and having less people employed means having to make more welfare payments.

The situation is not sustainable because sooner than later retirement age will come and millions of people who earn little and have no savings will have not enough pension funds or no pension at all as retirement age is rising because there is not enough money available to pay pensions.