Reality And The Fiscal Wake-Up Call From Britain

We are not solving our deficit problem.

You can see what’s going to happen to the United States down the line, because no one takes this problem seriously. Most Republicans don’t. Most Democrats don’t. The American people certainly do not. 

All you have to do is take a look across the ocean at Great Britain. On Wednesday, there was a shocking and fraught moment that happened there. The Wall Street Journal reported:

Investors sold off British government bonds and the pound fell sharply on Wednesday after the Labour government abandoned plans to cut ballooning welfare costs and the country’s Chancellor of the Exchequer was seen crying in parliament. The selloff came hours after the government of Prime Minister Keir Starmer shelved a plan to cut disability payments following a rebellion by Labour’s own lawmakers. 

The U-turn raised the prospect of the government hiking taxes or issuing more debt to fund its welfare system. It also casts doubt over the future of Rachel Reeves, the U.K. chancellor, who took the job just over a year ago promising a return to economic stability in Britain by sticking to strict spending rules.  The pound sank in value, losing more than 1% to trade at $1.36. U.K. government bonds, too, tumbled in price, sending the yield on 10-year gilts up 0.12 percentage point to 4.581%. That far outpaced the more muted gains for yields in the U.S. and in other major markets. 

“Markets have latched onto the idea that Reeves’s departure might be much more imminent,” said Mark Dowding, chief investment officer for fixed income at RBC BlueBay Asset Management. “That is unsettling investors in terms of what that means of the Labour government’s commitment to the fiscal framework.” 

Of course, the Labour Party didn’t have any commitment to the fiscal framework; they are a far-Left party. They were never going to be fiscally responsible.  

This is demonstrative of a crisis that is eventually going to face every Western government, including the government of the United States. “The government’s climbdown points to a broader truth for governments across Western Europe, where weak economic growth means countries are struggling to raise enough revenue to pay for rising costs from an aging population, the Journal stated “With voters largely wary of spending cuts, that leaves higher taxes, which could hurt growth further, as the most likely outcome.”

“Britain is already on course to register the highest tax burden since World War II thanks to big spending during the pandemic and paying out for energy subsidies after Russia’s invasion of Ukraine. Meanwhile its growth prospects remain meager,” the Journal noted.

If you look into the future for the United States, this sort of thing could happen here, too. The United States is demographically growing only because of immigration.

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The reality is that the fertility rate in the United States is actually below replacement levels, at 1.66 births per woman. The United States is not replacing its own population. The only way we are able to do that is through large-scale immigration, which we have stopped, which means we have a shrinking tax base, an aging population, just like Western Europe, slower but similar.

We also have the possibility of serious economic stagnation, absent a massive breakthrough in AI that suddenly translates into higher productivity.

If all of that materializes and we don’t cut any of the massive welfare state that we have built, we are going to end up inflating our way out of this. That’s the reality. As I’ve said myriad times, there are only three solutions to massive debt: inflation, massive tax increases, or austerity. Our population is so used to its benefits that they do not want austerity.

But eventually, the West is going to have to grow up and recognize that the welfare state has costs attendant upon it. And those costs are going to have to be paid for by someone; they can’t be kicked down the road indefinitely. You can’t just magically manufacture money and hope the economy is going to continue to sail forward.

So, what does the United States need? It needs massive economic growth, and eventually it’s going to need some real cuts to the size and scope of government.

The kind of cuts in the Big, Beautiful Bill are not going to do it. They need to be a lot larger than that.

I know that’s an unpopular view. It also happens to be an economically sane view that very few people in politics are willing to take because most people don’t want to hear it.

But we must be willing to listen to reality, even if it’s painful, for one reason, and one reason alone: In the end, reality always wins.