BRITAIN´S IMPENDING BANKRUPTCY / MACLEOD FINANCE

Britain’s impending bankruptcy

The sheer costs of rising and unfunded welfare obligations in Britain leading to financial collapse are a lesson for all G7 nations. There is no escape.

ALASDAIR MACLEOD

The British public believes that individuals have a fundamental right to welfare benefits and free healthcare. 

Just as the fallacies behind communism led to the collapse of the USSR and Mao’s China, European socialism is facing the same fate.

Beyond a certain point, all forms of socialism are bound to share communism’s destiny because they subscribe to the same Marxist philosophy. 

They believe that the state knows best and must control all economic activity either through ownership, command, or regulation. 

And they believe that free trade exploits the workers and enriches the capitalists— a mantra that is openly driving British government policy.

It is to the frustration of free traders that the political agenda increasingly destroys economic activity. 

Nowhere is this truer today than in Britain, where an inexperienced socialist government is comprised of ministers whose knowledge of political economy has not progressed much beyond the ideological naivety of university debating societies and the protest marches of their youth.

All major democracies appear to suffer from this intellectual immaturity to varying degrees. 

In Britain’s case the affliction has become acute. 

We know, or should know, the eventual outcome of social redistribution and idler’s entitlement. 

The productive elements in an economy become increasingly burdened by ever rising taxes. 

And the demands for welfare handouts grow unsustainably, faster than taxes can be raised to pay for them. 

That was the situation even before the Labour party was elected; now it has accelerated it towards eventual collapse.

On gaining office, Britain’s puerile ministers set about rewarding those they call the workers. 

Predominantly, these are members of powerful trade unions, the paymasters of the Labour party. 

New powers and protections for trade union members are enshrined in the Employment Rights Bill 2024, which has not yet completed its passage through Parliament. 

It will disadvantage businesses by imposing extra costs and operational rigidities. 

It will discourage employment.

Heavily unionised railways are being renationalised as operating contracts fall due. 

Strikes and go-slows will return along with filthy carriages and cancellations. 

Generous pay rises, higher than the rate of consumer price inflation have been handed out to government sector employees.

The consequences of Rachel Reeve’s first budget as chancellor have been to drive high-paying taxpayers abroad at great revenue cost and are leading to job losses particularly in small and medium-sized businesses up and down the country. 

Though the true cost is yet to be reflected in official GDP figures, there is no doubt about the British economy is regressing.

The Chancellor repeatedly claimed that she inherited a budget deficit of £22bn from the previous administration. 

As a result of her actions, that rose to £70bn in the fiscal year to March. 

The lesson is clear: public spending must be cut. 

But recent attempts to reduce welfare payments were met with a full-scale parliamentary rebellion from Labour members of parliament whose electors are heavily dependent on welfare payments. 

After all, without welfare there is no Labour party.

Perhaps it is provident that the collapse of Britain’s welfare state is being faced by an officially socialist administration for two reasons. 

The bankruptcy of the state, having been inevitable even under previous Conservative administrations will now occur sooner than it might have otherwise, offering the prospect of an earlier return to economic reality. 

And socialism, as opposed to capitalism will get the blame.

This cannot be said of European nations and the North Americans: Trump’s inevitable failure will be blamed on the Republicans[i], and Carney in Canada is a moderate socialist who can bend with the wind. 

As for the Europeans, their democracies are overwhelmingly coalition governments which in a crisis allows everyone to escape blame.

The background to the gathering welfare crisis includes a number of important factors. 

Economies require reliable energy. 

It is not accidental that climate change activism is driven by socialist radicals, who have found a new cause following the collapse of communism. 

Instead of famers producing food, they are subsidised by governments to cover their fields with solar panels while fossil fuels are being taxed out of production. 

This is bound to raise basic food prices.

The European motor industry has been directed to stop producing diesel and petrol automobiles in favour of electric vehicles, which few customers want. 

Seeing the opportunity, Chinese manufacturers have flooded the market. 

Do not be surprised if European manufacturers claim enormous government subsidies to avoid going bust.

All these woes combine with the covid shutdown legacy, which destroyed businesses’ cashflows. 

By shutting down significant economic activity in 2020, not only did government budget deficits soar but central banks which had already suppressed interest rates flooded their economies with additional credit through quantitative easing. 

The consequences have been predictable: the purchasing power of currencies subsequently fell, forcing central banks to raise interest rates leading to an ongoing financial crisis. 

For the moment, the debt bubble is being sustained by hopes that interest rates will fall.

This misunderstands the role of interest rates. 

It is not, as the socialists would claim that they are the pound of flesh demanded by usurers, but fears of loss by those who have capital to lend. 

Collectively, lenders and investors are just beginning to realise the extent of these risks; but perhaps not yet the inevitability of the debt traps ensnaring welfare-driven economies.

Under its socialist government, Britian in common with the other G7 nations is discovering that higher taxes cannot keep pace with government spending commitments. 

Those taxes are what also cover government debt interest, and if the debt grows at a faster pace than the ability to cover the interest upon it, a financial crisis ensues. 

During such a crisis, interest rates rise to reflect the growing risk, making the crisis even worse. 

That is the classic debt trap.

For the moment, these dynamics have only recently become a topic for debate among foreign holders of US dollars. 

So far, the dollar has been mostly sold in exchange for other G7 currencies, indicating that the dangers faced by the latter are yet to be appreciated. 

But the dollar is the poster child for all fiat currencies. 

And as the dollar’s growing risks begin to be reflected in higher US treasury bond yields, the finances of welfare states will come under scrutiny as well.

It is little wonder that central banks, their governments, and their new wealthy not indoctrinated into welfare statism are running for the hills and buying gold. 

They understand that it is the ultimate refuge from credit risk.

The wider investing publics in the welfare states are blissfully unaware of the credit catastrophe in the making. 

But by degrees they will begin to realise the danger to their currencies and their underlying investments — most likely when against their expectations bond yields begin to rise again, destroying the illusion behind government finances.

________________________________________

[i] Trump’s tariffs will drive the global economy into recession and the US economy with it. The only people who deny this are his own supporters.