UK Hits the Wall First: The Welfare-Bureaucratic State Is Unsustainable

UK Hits the Wall First: The Welfare-Bureaucratic State Is Unsustainable. By Gerard Baker.

The West has been in a bubble of money manufacture since 1982. It is this extra money (and the taxes it generates) that has made the current historically-high levels of welfare and bureaucrats possible. But nothing can grow forever, and in any case the money bubble is in its last days.

So every nation is going to be wrestling with this choice soon: cut back on welfare and bureaucrats to allow some private dynamism, or stagnate in a mess of high taxes, socialism, and endless squabbles over re-distribution of a small pie.

Liz Truss, the new PM of Britain, recently struck out boldly to cut taxes (all the way back to the level of 2021 !! how radical, not). But the political system wouldn’t wear it and she was shouted down and forced to back-pedal.

In the tool kit of the big-government progressives who have spent decades diligently constructing the ever-expanding state, there is no more efficient device than the ratchet.

In economic terms, it has ensured that in almost all advanced economies, the state grows ever larger. Once a certain level of taxes, benefits and other spending is set, it is almost impossible to reduce it. The constituencies that benefit from the expanding fiscal largess are always louder than those who don’t. The inexorable logic of self-aggrandizing government departments and employees ensures their work expands to demand new revenue. The dominant voices in a media system that thinks publicly funded services are morally superior to private-sector activity drives the ratchet upward.

Now and then, with a Herculean effort, a truly determined government can push back and temporarily reverse or at least halt the movement. But the forces of expansion soon reassert themselves.

It is this iron law of fiscal expansion that helps explain the turmoil that has engulfed the new British government of Liz Truss.

UK PM Liz Truss and her Chancellor, Kwasi Kwarteng

Two weeks ago, Boris Johnson’s successor launched a new fiscal plan. The main elements of it were tax cuts — a reduction in the basic rate of income tax, the cancellation of a payroll-tax increase and a planned corporate tax increase, and the elimination of a 45% income-tax rate, reducing the top bracket to 40%. The plan was controversial in two ways that have large resonance for the wider world: a financial one and a political one.

Start with the politics. Every bien-pensant intendant of our statist establishment denounced the decision. “I am sick and tired of trickle-down economics,” Joe Biden tweeted, in a subtle and undiplomatic dig at the domestic policy of our principal ally. …

The financial press, which used to try to assess the economic effects of government decisions dispassionately, but is now a wholly owned mouthpiece of the left, chimed in. …

You probably wouldn’t have guessed that, after these measures, the size of the U.K. tax burden has gone all the way back to what it was in 2021. …

But there it is—the ratchet effect. Try to shave a little off tax to improve incentives for work and investment and raise Britain’s abysmal productivity, and you are cast by the vast army of U.S. and international financial bureaucrats, socially conscious asset managers and media organizations as a heartless Hayekian tyrant, kicking away the crutches that keep Brits from being consigned to the poorhouse.

The big picture of the bubble. Yes, the graph below is a couple of years old but nothing has changed: still at record and a-historical levels of money (dwarfing 1929), on government support since the GFC of 2008, but destined to collapse soon. The graph is for the US, which has the best statistical transparency, but all the west is similar. Note that this is not just government debt but all debt (which equals the amount of money, because modern money literally is someone else’s debt).