It is not that long since a former prime minister, one Boris Johnson, looked ahead to this decade as the “roaring twenties”. The fact that three prime ministers have followed him into office in the 2020s, and we are still only in early 2026, perhaps tells its own story. This has been a decade of shocks, not roars, and they are still coming thick and fast.
The pandemic was followed by the Russian invasion of Ukraine, Donald Trump’s “liberation day” tariffs last year, and now the US-Israel war on Iran and huge Middle East instability. Many would add the self-imposed shock of Brexit to that 2020s’ list.
The effects of the latest shock, and Trump’s miscalculation, are plain to see. Higher inflation is on the horizon when a fall was expected; the cost of government borrowing and fixed-rate mortgage rates are on the rise and the government is under pressure to “do something” fiscally, either by cancelling a planned increase in fuel duty, or by reviving some of the household energy support last used after the Russian invasion of Ukraine.
It is early days, and it may be unnecessary, but the Treasury’s reluctance to get dragged into any new spending commitments, or to give up on planned tax increases, is plain. The public finances may finally be on the mend, at least according to the most recent official assessment, but they remain very fragile, and it would not take much to knock them off course.
That fragility, along with the backdrop of a decade and a half of weak growth, was the subject of something I have been meaning to write about for a while. This was a lecture given a few weeks ago by Lord (Terry) Burns, former government chief economic adviser and Treasury permanent secretary, its most senior civil servant.
Burns came to prominence in the 1970s at the London Business School (LBS), whose forecasts were for many years carried in this newspaper. He was recruited by the Thatcher government as chief economic adviser in 1980, a post he held until 1991, when he was promoted to permanent secretary, since which time he has held a number of private and public appointments, and chaired important commissions and inquiries.
His lecture, UK monetary and fiscal policy 2007: Could we have done better? was delivered for the Institute of International Monetary Research, chaired by the prominent monetarist economist Professor Tim Congdon. And the answer to the question Burns posed himself was a clear yes.
When he left the Treasury, the Labour government of the time had a fiscal rule which was to keep government debt, public sector net debt, below 40 per cent of gross domestic product. Now it is well over 90 per cent, having skirted close to 100 per cent in recent years, and is officially predicted to rise much more in coming decades. In cash terms, the debt has risen from less than £600 billion at the end of 2007 to nearly £2.9 trillion now.
How did this happen? Weak growth resulted in subdued tax revenues in the 2010s and for the government, there was only so far that austerity could go in constraining public spending. The usual explanation for weak growth since the financial crisis is that the productivity growth the UK previously relied on was snuffed out and has yet to be relit.
Burns has a different take on this, or at least the causes of it. This is that the regulatory response to the financial crisis, tougher controls and higher capital requirements for the banks, had the effect of severely constraining bank lending to the private sector, that is businesses and consumers. Without finance, the economy’s ability to achieve the kind of growth rates considered normal before the crisis has been hampered.
The level of bank lending to the UK private sector has only just returned to its spring 2009 level and other countries have had a similar experience. As he says: “I find it difficult to avoid the conclusion that the financial crisis and the regulatory response have had a severe impact on the economies of the major industrial countries. They have contributed to low growth, low inflation and low interest rates.”
Out of this arises a number of things. It explains why the near-zero official interest rates of the 2010s were not inflationary but also that without the constraints on bank lending, rates could have been “normalised” much sooner after the financial crisis, providing ammunition to cut when the next shock emerged.
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It also suggests that while an initial bout of quantitative easing (QE) might have been necessary during the financial crisis — when the banks were reeling — there would have been no need for it to have been maintained for much longer, and certainly not in response to Covid. The banks, if less constrained by a regulatory overshoot, would have taken on the task of driving the money supply. The unwinding of QE is now a significant cost to the Treasury.
Burns does not suggest that subdued bank lending is the only cause of more than a decade and a half of weak economic growth but he argues that it is an important one. And it means, in turn, that the UK’s public finances have never been properly repaired. Chancellors have been unwilling to raise taxes in the face of weak growth, not least for fear of tipping the economy into recession.
Fuel duties are one of the “key taxes” Burns cites as failing to keep up with GDP, for political reasons, and even now the chancellor is under pressure from opposition parties to abandon her plans to reverse the emergency cut introduced after the Russian invasion of Ukraine.
He recalls that during Covid lockdowns, he and the other former LBS stalwarts, Bill Robinson and the late Sir Alan Budd, spent hours online discussing Keynes’s 1940 pamphlet, How to Pay for the War, and the need for a temporary tax surcharge that, he says, “would have reduced both the need for the government to borrow and the excess demand pressure that emerged afterwards”.
My columnist colleague Rishi Sunak would say that he had plenty of ideas when chancellor for paying for Covid, including a health and social care levy, which later fell by the wayside, and other proposals that were vetoed by the former prime minister mentioned at the start of this piece. Researchers at the London School of Economics and Warwick University came up with a well-worked plan for a temporary wealth tax, temporary because they thought a permanent one would not work.
In the end, though, government debt emerged from this decade’s shocks higher, and with the public finances still vulnerable. For Burns, ahead of the latest shock, the priority was clear: “We need an aggressive fiscal retrenchment covering both taxes and spending to begin the process of reducing the weight of debt and to build more headroom into the rules … None of this needs to happen immediately but measures to reduce spending and increase taxation should be legislated to come into effect over the course of the parliament.”
Will it happen? I would bet against it. Chancellors are in the job for a relatively short time, at least according to recent experience — there have been eight in the past ten years — and kicking the can down the road is the easiest thing to do. As long as that is the case, the debt will continue to go up.
PS
Talking of chancellors, Rachel Reeves will deliver the Mais lecture at the Bayes Business School at London’s City University on Tuesday and has promised to focus on growth. If you think you have read that sentence before, she also delivered the Mais lecture on March 19, 2024, when shadow chancellor. Her growth speech comes after Friday’s disappointingly flat GDP figure for January, though admittedly erratic factors played a part.
The Mais lecture, named for Lord Mais, a former lord mayor of London and pro-chancellor of the university, usually has the word “prestigious” put in front of it. It has been running since 1978 and in that time has been given by five Bank of England governors — Gordon Richardson, Robin Leigh-Pemberton, Eddie George, Mervyn King and Mark Carney — and seven chancellors. They were Geoffrey Howe, Nigel Lawson, Kenneth Clarke, Gordon Brown, Alistair Darling, George Osborne and Rishi Sunak. You can increase it to eight if you include Roy Jenkins, a former Labour chancellor.
There have been legendary economists, Lionel Robbins and Friedrich Hayek, and political big-hitters, including Michael Heseltine and Tony Blair, and one economic journalist, the great Samuel Brittan.
Reeves will, however, be the first person to deliver two Mais lectures. Her first had mixed reviews. Let us see if this one fares any better.
david.smith@sunday-times.co.uk