PREVIEW： Brokenomics ｜ Britain goes to the IMF？
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Summary
The IMF has run out of money and is in need of a bail-out, and there's a lot of speculation as to who's going to step up and replace Keir Starmer as Prime Minister. But is it Blair or Cameron? And what does this mean for the economy and the bond markets?
Transcript
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Now, British politics is getting mildly interesting this week because there's lots of speculation
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that we might be forced to go to the IMF, the International Monetary Fund, for a bailout
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because our government has been so completely profligate that it has run out of money yet again.
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They do have a tendency of doing this quite a lot.
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So at the time of recording, Angela Rayner is our Deputy Prime Minister
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and she's made statements throughout the years.
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She's been quite strident about people who avoid taxation.
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And she appears to have avoided paying tax on her second house, which is not really a good look.
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And this is getting pushed relentlessly in the media.
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Interesting timing because she was kind of being lined up to be the replacement for Keir Starmer,
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who has managed to achieve approval ratings of 11%, which is a new record for a British government to get down that low.
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So there's some speculation as to who's sticking the knife in for Angela,
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making sure that it stays at the top of the news cycle.
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It was thought that Angela Rayner is one of Blair's creatures.
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Now, I don't doubt that he has many, many turds in the bowl
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and he's just waiting to see which of them float to the top, as it were,
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But it's probably more likely Starmer himself is doing her in
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because he obviously doesn't have any talent for being a politician or prime minister.
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So maybe backstabbing is his skill that managed to see him rise to the top job in the country.
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I wanted to focus on the IMF stuff because, well, it's not good.
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I will acknowledge that the Labour was left with an absolutely awful financial inheritance from Tories
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They keep giving pay awards to the public sector and, you know, finding more money for Ukraine
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and just anything they can think of to spunk off an extra few billion.
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And we got to the point where government revenue is about 40% of GDP,
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And as far as I can tell, we're not in a total war.
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We're not in a life and death struggle, you know, with the Germany or the France or, you know, whoever else.
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So if we're not in a total war, why have we got total war levels of spending?
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Indeed, the levels of taxation collection is the highest since peacetime records began, which they did in 1948.
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There's a gap between how much the government collects, which is eye-wateringly high,
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Spending, I mean, actually achieved 53% of GDP during the COVID years.
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But nevertheless, that is a gap that needs to be funded with constant borrowing from the bond markets.
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And the bond markets are starting to twig that they're not going to get their money back.
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You might remember the episode we did on bonds a little while back.
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But the way it works is if for some mad, demented reason, most likely the fact that the regulators tell you you have to buy government gilts,
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And basically, once they've accumulated enough bids, they start from the bottom, the one willing to accept the lowest yield.
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And they go through the book and they fill it up.
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And when they get to the point where they filled whatever that issuance is, the last price offered is the price they all get.
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And more and more, they're having to fill it with people who are further down the yield curve.
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And as a result, the price of government debt is going up all the time.
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So you might think, OK, well, that's jolly bad, isn't it?
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But it does get considerably worse because according to the government's own projections, their own projections,
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it would appear that we're already well past the peak of the Laffer curve.
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So I'm sure you remember the Laffer curve or you know it anyway.
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Basically, the Laffer curve says that if your tax rate is zero, you get no taxes.
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And if your tax rate is 100%, you also get no taxes because who's going to do work where 100% of what you work for is going to be immediately taken from you?
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And so the curve bows between those two points, which, of course, implies there is a top of the curve,
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a tax rate where you extract the most revenue without hurting the incentive to work.
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And there's a lot of debate about where that point on the Laffer curve is.
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I suspect it's probably around 15% or something.
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And so the government sort of knows that revenue, it just can't go up from here.
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But their spending commitments, well, they know they're going to go up because they've made spending commitments.
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And by 2070, which is as far as the government projections go to,
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while revenues are going to be stuck at that 40%.
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So an enormous 20% gap between what is collected in taxes and how much is spent.
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Now, if you're interested, that 20% gap, where's the rise in that?
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Well, about 8% of that is going to be interest payments.
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And another 8% of it is paying for the Boomer Gibbs debt cost.
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And it's for this reason why I believe that cradle-to-grave welfare will be a Boomer-only experience.
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I don't think even Gen X are going to get to that point.
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Nor does it seem particularly feasible that the NHS can survive over the long term,
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and every politician feels compelled to, you know,
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abase himself, him or herself, in front of the NHS
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and tell us how wonderful it is when, you know, clearly that's not the case.
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So, going on just the government's own figures,
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you get a national debt rising from a little over 100% like it is today.
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Under their own projections, it gets 274% of GDP.
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Which is vaguely possible, because, I mean, that's what Japan is at.
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And interestingly, Japan, you know, I've talked about age demographics many times.
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Japan is just 15, 20 years ahead of us with their baby boom.
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They had a big generation, you know, like I said, 15 to 20 years ahead of the rest of us in the West.
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And what happens is you build up all these, you know, welfare ideas
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when you've got a big ratio of workers compared to retired people.
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And unless the following generations continue to have children at the same rate as the big one,
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where you decided to put all these welfare and pension provisions in place,
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You know, effectively, abortion and contraception have nuked the Ponzi scheme.
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You know, you can either have women in the workforce with complete control over their reproductive cycle,
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or you could have a welfare system and a pension system over the long term.
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And of course, I've been trying to solve this problem by immigrating as many people as possible,
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because, you know, the natives aren't having enough children.
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And then you discover the immigrants, they can't or don't work and quite like getting free houses and benefits.
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And then you have to tax the natives, the young natives, even more.
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So they can't afford themselves, let alone a family home.
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And therefore, they definitely don't start a family.
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And it is kind of a bit of a recipe for going extinct.
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So debt to GDP ratio by 2070 of 274% on the government's own baseline projections.
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However, those baseline projections are bollocks,
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because they assume a growth rate of 1.5% over the next, you know, whatever that is, years to get to get to 2070.
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We're lucky to hit, you know, half a percent at the moment.
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And so we're expecting that the growth rate will suddenly pick up and get us to a point where the debt is only hitting Japanese levels.
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But that's not the growth that we're actually getting.
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The growth that we're actually getting is 0.5%.
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And the Office of Budget Responsibility, you know, wing of the government,
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helpfully provides the data on what that would look like if, in fact, we got the 0.5% growth rate,
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which actually is realistic, as opposed to the unrealistic 1.5%.
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And debt to GDP at that point is 674%, which is, well, I mean, you wouldn't get there.
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You'd probably have a financial collapse long before that point.
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I mean, we know you can get to about 270% because Japan is there now.
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The only difference with Japan is Japan does have absolutely vast foreign currency reserves,
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because in the past they did stuff and they managed to build up quite a treasure chest.
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So you have to wonder, what is the government's plan?
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This is the government's plan to cast it forward on the current growth rate.
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So not some, you know, Hail Mary, some miracle pops out of the air
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and the growth rate suddenly goes back to what it was in the early 2000s.
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No, on current government's own projections and their own growth rate,
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