In today’s Issue:

  • The credit card is maxed out at last
  • Rules relearned the hard way are back again
  • It could be worse than taxes

Fresh from their shellacking in the polls, Labour’s leadership contenders are vying for the top job…with more of the same policies.

They’re practically falling over each other to announce even more tax increases. Wealth taxes, death taxes and progressive capital gains taxes.

I suppose you can get rid of a prime minister’s promises by getting rid of the prime minister who made them…

Perhaps the tax hikes are ideological. Labour’s left has its chance to impose its wish list at last.

But you’ve got to give them credit. Because the bond market won’t…

I’ve been warning about UK government debt for a decade. At last, politicians are trying to do something about it, even if it is the Labour Party. And even if it is a tax increase.

Whatever their beliefs before getting into government, politicians don’t like raising taxes. They know it’s unpopular. They know it risks their career.

And yet, lately they’re willing to do it anyway.

Why? It’s an implicit acknowledgement that the government is spending too much and is in too much debt.

Even if their solution is the wrong one, this is an astonishing admission.

Well, politicians give it lip service all the time. But now they’re actually doing something about it. Something that is unpopular.

Trying to rebalance fiscal policy by raising taxes is a natural step for a politician. It’s going to make the underlying problem worse. But it’s still a marker of progress in the long run.

How many great journeys begin with a step in the wrong direction?

Governments only do the right thing after exhausting all other options. You can’t expect politicians to just do things properly at the outset. They have to actively learn the hard way first.

And then there are the voters. They need to realise there is no free lunch.

Generations and entire regions of the country have lived off the government’s borrowing capacity without realising it’s limited. Now they’re finding out the hard way that this has a limit. And an interest bill to boot.

Reality is biting, at last. We live in the age of consequences. The coming tax hikes were baked in long ago.

History rhymes, and we’ve been here before

Labour Party history is full of lessons learned the hard way…and then forgotten.

Remember Prime Minister Callaghan’s astonishing admission:

“We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.”

Yes, we’ve discovered how disastrous Keynesian economics and Modern Monetary Theory are before. Plenty of times, even periodically, throughout history. But we keep trying it out anyway.

Raising taxes is consistently the next step. And we’ll soon discover that won’t work either. The Laffer Curve explained why decades ago.

It’s not just Labour, to be fair. The Bank of England forgot what causes inflation in 2022. They pulled the Phillips Curve out of the drawer of disproven economic theories instead.

It’s not just the UK, either. The Dutch have proposed an unrealised capital gains tax, and the French have proposed a wealth tax. It doesn’t matter how badly these have fared in the past. They always come back eventually.

It’s embarrassing that we must periodically re-learn these lessons. But…

It could be worse

Fiddling with tax rates might seem like a nightmare. But you should count yourself lucky. In the past, we’ve pursued even worse ways to try to deal with our fiscal reckoning.

Some Labour politicians want to completely ignore the bond markets that finance their debt.

Others still think they can print money.

Price controls are on the table. Nationalisation is back. And capital controls are another traditional option.

The question is how far down the garden path we’ll go before politicians admit there is only one thing that actually works: spending cuts.

Whether your deficit is funded by borrowing, inflation, or taxes doesn’t really matter. People still cop it.

Cutting spending is the only thing that actually lightens the burden.

We just have to allow things to get bad enough to make spending cuts palatable again, before or after the IMF shows up.

How Labour’s tax plans will turn sour

There’s a simple reason I’m not worried about the tax plans of Labour’s next leader. They are too bad to last. The bond market will pull the plug before you can say “Kwasi Kwarteng.”

Tax rates are already so high that our highest-earning and most productive workers would quit their jobs. This would cause GDP and tax revenue to plunge, fast.

We’re already on the slippery slope that is the far side of the Laffer Curve. Tax hikes won’t stick.

The real question is what happens next. Whether serious tax cuts are on the table. Or whether we have to try some other ridiculous policy first.

The night is darkest before filing your taxes

We are at the point where politicians must actually do something about the budget deficit. The debate has now shifted to what it is they should do.

Labour is set to pursue yet another self-defeating solution. But at least the debate is about the right topic now.

Soon, it won’t matter what a woman is. We won’t be able to afford the toilet.

But not every country is stuck in the same doldrums. Some have already come out the other side of their fiscal crises. And some are pursuing solutions that actually work, like economic growth through energy and resources. These are serious taxpayers, unlike their green energy cousins.

If you want to invest in a place that has recently learned these lessons the hard way already, there’s something you need to see… 

Until next time,

Nick Hubble
Editor at Large