This isn’t going to work, is it? If there were any lingering doubts about the financial incompetence of this Government they were swept away last week. It is floundering and it will continue to flounder.
We can’t hope to see any of the detail, but the most likely course of events will be that Rachel Reeves stumbles on as Chancellor until there is some kind of cathartic event that forces a radical change of direction.
There is a temptation to see this in terms of personalities: how long will Reeves last and who gets the job? But it’s more helpful to see this in a historical context.
The nearest parallel to the situation is Denis Healey’s Budget in 1975. He cut public spending and increased the standard rate of income tax by 2p in the pound from 33p to 35p.
It was an effort to restore faith in the Government’s competence, stop a run on sterling and hold down the interest paid on gilts – Government bonds.
It didn’t work. The next year he had to apply for an emergency loan from the International Monetary Fund, famously not even getting to the IMF meeting in Hong Kong, but turning back at Heathrow to try to steady the markets by announcing that Britain would apply for a bailout.
No laughing matter: But global confidence in our biggest companies will continue long after our current political leaders are simply people who were important once.
That was etched in my memory as I was in the back of the plane. They announced over the intercom they were holding the flight up for some first-class passengers who had been delayed. We only learnt what had happened when we got off many hours later.
Mark Twain is reputed to have said: ‘History does not repeat itself, but it often rhymes.’ So there won’t be an IMF bailout, partly because the fund isn’t nearly as important now as it was then, but also because things aren’t quite as bad. We don’t have the same level of labour unrest, for it is only workers in the public sector who keep going on strike.
Thanks to the Office for Budget Responsibility, we have some sort of discipline over fiscal policy.
Trust is low, which is why our Government has to pay more to borrow than any other major economy, but it hasn’t collapsed as it did 50 years ago. The markets are used to working with inadequate governments and know this one won’t last for ever.
But I think there will be some sort of crisis in the next couple of years, akin to the IMF bailout. That’s where events now rhyme with those of half a century ago.
It’s impossible to see any of the details, but we can glimpse what might happen. A surge in inflation might lead to sharply higher interest rates. Another round of tax increases could force employers to make even sharper cuts in staffing than last time.
Unemployment is already rising; it could climb much faster. If more high earners base themselves offshore or cut their income in other ways, that would savage income tax revenue.
Indeed that is already happening. The top 1 per cent paid 30.7 per cent of all income tax in 2021-22. Since then this share has fallen progressively, with Revenue & Customs expecting it to sink to 26.6 per cent this tax year.
What’s frustrating is our Government can’t learn from the past.
You can to some extent understand why. Most of them are too young. Rachel Reeves was born in 1979, so she wasn’t even alive when Denis Healey turned back at Heathrow. But Keir Starmer was 14, so as an intelligent schoolboy he should have had some feeling for the humiliation that the country experienced.
What to do? We shouldn’t panic. It is really a choice of hunkering down or bunking out. Many wealthy people have indeed left, but that’s a huge decision and not practical for most of us.
Hunkering down means trimming spending where possible (which cuts VAT revenue), using every legal loophole to hold down other taxes, carrying on saving in a tax-efficient way, and looking out for investment opportunities that arise. After all, even after two dreadful days on the stock market, the FTSE 100 is still up 20 per cent on the year.
That shows global confidence in our biggest companies, which will continue as successful businesses long after our current political leaders are simply people who were important once.
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