This is effectively what is severely damaging the UK economy.
Massive wage compression caused by increasing the minimum wage too quickly, has severely reduced the pay differentials between unskilled work and skilled work.
So basically, University graduates with a few years of experience are now making the same amount as an inexperienced worker that started working at stacking shelves in a supermarket.
Not only does motivation and aggregate productivity crater, but the graduate with quite a lot of student debt gets very angry (what was it all for?) and they start looking at voting for the populist parties like Reform.
The UK is definitely headed for a serious stagflationary crisis.
The last budget damaged the economic trajectory to such an extent that the revenue vs spending imbalances (driven by the spending on the old and unproductive) became much more acute.
At that point investors responded by driving up the risk premium on UK Gilts. 10Y is at 4.8% and 30Y at 5.2%
UK is basically broke at this point. Either they start cutting spending or the UK goes down the path of Argentina in the early 20th Century.
Do you see UK needing an IMF or other such financial plan soon? We almost started a pool on it last year but thought the consequences of it ever getting public were too severe.
They have no funds to do any investments and they can’t cut welfare costs. The open market costs of borrowing are going to be very expensive. They are in.a very tight spot.
Cutting spending is essentially transferring the problem from the government to the people right? So the government numbers may improve but nothing really improves. Am I missing something?
UK needs to get the economy to grow. That’s what either party is not talking about whilst they worry about balancing the budget. The budget is a mess already.
The UK Govt sends way too many tax transfers to the old and unproductive (this is basically consumption).
In order to boost growth, it needs to send them less money (so less consumption) and direct more money towards productive capital infrastructure (more investment).
The primary reason the UK is floundering today is that they have systematically under-funded the capital infrastructure over the last 20 years to give more and more financial bungs to the old and unproductive group in the UK.
Now they spend more money constantly patching up a failing infrastructure then they do improving it.
Mmmm I don’t think UK has the political will to cut benefits. I mean imagine the triple lock is from 2011 and the pensions discussion we had above which seemed to indicate that the govt gave pensioners the investment reserves but left the pension increase guarantee in place.
I agree that they need to invest. The problem is none of the two parties ever talks about what it wants to invest in and what if thinks the payoff will be. So each budget ends up being an attempt to do the loaves and bread miracle.
Sainsbury appears to be thriving. Good to see they are providing decent pay rises but they seem also to be preparing consumers for a wage-price increase. Unlike in Canada, food price inflation in the UK is not easing.
Canada was on the cusp of requiring an IMF bailout in the early 1990s until the Liberal Finance Minister, Paul Martin, saved the day. His tough medicine created short term pain but longer term prosperity. He also put our earnings-related social security plan (the CPP) on a long term sustainable basis. He is still alive if the UK government wants to give him a shout.
Excerpt from his bio:
** Martin faced a $43 billion budget deficit when he was appointed finance minister in 1993. Not to mention two international agencies, Standard and Poors and Moody’s, had slashed Canada’s credit rating and The Wall Street Journal was calling Canada a “Third World banana republic.”
He cut government spending deeply — slashing $25 billion from the federal budget in just three years — but he then went on to post five budget surpluses and ramp up spending when Canada got back on its fiscal footing.**
no one’s safe. It’s gonna be a long 4 years.
