Britain heads for disaster – what can be done to fix our economy?

There is good news and bad news about the prospects for Britain's economy. First, the good news. The UK’s problems are relatively easily solved. A lot of money is pointlessly being thrown down the drain by the government, such as paying Mauritius to get rid of the Chagos Islands, rejoining the Erasmus scheme (to curry favour with the EU and the pro-EU lobby in the UK) and on asylum hotels. There are taxes that could be cut that would both raise revenue and stimulate growth, such as the taxes on oil and gas production in the North Sea, bringing back VAT rebates for tourists and reintroducing non-domicile status. Many of the recent tax increases, such as on inheritance, capital gains and private education, will raise little if any revenue, but harm growth. They could swiftly be reversed.

Curbs on welfare benefits and public administration would save money and increase incentives to work, as would restricting immigration to those with taxable employment. There is no need to cut public services, such as health, education and law and order, if productivity is improved. The NHS has made a good start with a 2.5% increase in 2024-2025, amply supported by data and anecdotal evidence. There is much more to go for, reducing the need for extra money to improve services. Deregulation would deliver savings for both the private and public sectors.

The resulting improvement in growth would lower the budget deficit further and lead to lower gilt yields, reducing the cost of financing the UK’s debts. This would enable tax cuts and create a virtuous circle of economic growth, improving public finances and prosperity, as experienced by Sweden in recent decades.

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How Britain can learn from the US

The results of such a course of action are starting to be seen in the US, despite the perhaps premature tax cuts of 2025. Harsh restrictions on immigration and tariffs on imports have not, as many expected, been detrimental to growth, which is expected to have been 2% in 2025 and to accelerate in 2026, driven by productivity growth of 3.5%. Unemployment is ticking up, but while the government is shedding workers, the private sector is picking them up – the inverse of the situation in the UK.

Despite better growth, both bond yields and inflation in the US are lower than in the UK. The budget deficit only fell 2% in the year to September 2025, but relative to gross domestic product (GDP), it fell from 6.3% to 5.9%. Since then, the deficit has fallen 27% year-on-year, so a fall to 4% of GDP is likely in 2025-2026. The debt-to-GDP ratio in 2026 would then still rise, but fall thereafter.

There have been distinct structural improvements in the UK since 2008. Before then, growth was increasingly driven by private-sector credit expansion. This meant overindebted companies, unstable banks, debt-financed consumer spending, property speculation, too much mortgage debt and low savings, all of which was unsustainable. Since then, the savings rate has doubled, the proportion of households with mortgages has halved (and 80% of those with mortgages are now on fixed rates) and private-sector finances are much stronger. Future growth in the UK is likely to be much better balanced than in the past.

Don’t expect a change of course under Labour

The bad news is that the economy is unlikely to improve while the current government is in office – in fact, things are likely to get worse, with a stagnating economy, a persistently high budget deficit, stubborn inflation and rising unemployment. An early election is very unlikely; governments facing certain defeat, as in 1997, 2010 and 2024, hang on until the last possible minute, which means mid-2029. It is even possible that the government could delay the election beyond five years by changing the law that governs the dissolution of Parliament.

Some might hope that a funding crisis in the gilts market will force the government to perform a drastic U-turn in economic policy, but the precedent from 1976 is not encouraging. Then, there was only an L-turn, followed by three years of precarious stabilisation with some modest improvements. There will be no Damascene conversion. Just as likely is that the government will use the next three years to make life as difficult as possible for its successor through regulation, obstructive laws and strengthening its grip on the civil service and public sector in general. The next government may need to wield a chainsaw rather than follow a more evolutionary path.

Javier Milei has proved in Argentina that no country is in such desperate economic straits that it cannot be turned around swiftly and relatively painlessly by the right measures, speedily implemented. Moreover, this can be a recipe for electoral success. The UK has not passed the point of no return, as Argentina seemed to have done long ago, but people, though not necessarily investors, will have to wait.

Since Milei’s election in October 2023, the price of Argentina’s 5% 2038 bond has trebled. Bond investors in the UK may despair of the current government, but they will not want to be caught out when the tide turns. This argues against a funding crisis; too many investors would see such a crisis as a buying opportunity. Similarly, those waiting to buy UK equities in such a crisis are likely to be disappointed.

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