I really dislike Tony Blair.

There, I’ve said it. In a public forum. To thousands of people. Phew.

Of course, I know that many Brits have their own reasons for being less than keen on the ex-prime minister. Maybe you’re one of them.

But there’s a very particular reason that I dislike Tony Blair. (It’s not the only reason… just the one that’s relevant here.)

It’s the enormous damage that his government inflicted on the UK’s public finances. That legacy still weighs on the country to this day. Blair left the UK in a much weaker financial position than when he took office.

Specifically, under the Tony Blair (and then Gordon Brown) government, public spending per capita and adjusted for inflation went through the roof.

What’s more, despite years of supposed “austerity” and “Tory cuts”, the reality is that things are just as bad now. Vast gobs of money continue to be thrown into the meat grinder of government waste.

This is something that’s never received much airtime. After all, it’s hard for the likes of the BBC to talk about bloated budgets, when they’re carrying so much lard of their own.

But here at Fortune & Freedom we’re prone to expose things that others sweep under the carpet.

Tax and spend, go round the bend

Facts matter, so here are some numbers to back up my claims.

Under Labour, between 1997 and 2010:

  • Government spending increased by 120%
  • As a percentage of GDP, spending went from 35.6% before Blair came to power to 46.3% by the end of Brown’s government
  • In relative terms, that’s an increase in the spending ratio of 30%
  • Adjusted for inflation, total spending increased by 72%
  • Further adjusted for population growth, real (inflation-adjusted) spending per person increased by 60%.

Just digest that last point for a minute. It really is quite staggering when you think about it.

Spending per person, adjusted for price increases, went up by well over half, and nearly by two thirds.

Expressed in today’s money, it went from £8,550 a year to £13,684 a year. That’s for every man, woman and child that calls the UK home.

To be fair to Blair, a piece of that increase happened under the three years of the Brown government. That was partly because welfare payments increased as the global financial crisis struck and unemployment went up.

But the vast bulk of the underlying, structural spending splurge happened under Blair’s watch.

But hold on. We’ve now had a decade of “austerity” and “Tory cuts”, I hear you cry. Surely that’s solved it?

Not so fast. Since David Cameron came to power a decade ago:

  • Real government spending has increased a further 3%
  • Real government spending per capita has decreased by less than 4%, once population growth is accounted for
  • As a percentage of GDP, spending was 39.8% in the 2019-20 fiscal year, still way above the 35.6% level of 1996-97, just before Blair moved into Number 10.

Maybe that’s what David Cameron meant by The Big Society. As in, “We quite like Big Government, so we’re going to stick with it”.

Anyway, it shows how once government spending is in place, it’s mighty hard to scale it back down again.

Below I’ve summarised the figures, in case anyone thinks I’m making this stuff up.

(For the mathematically minded, the “% change under both” line is the compound combination of what happened under Labour and the Tories. It’s not additive.)

Here’s the bottom line: overnment spending exploded under Labour, and the Tories have barely managed to keep a lid on things.

Government spending in the last fiscal year of 2019-20, adjusted for inflation, was still 77% above the pre-Blair level.

Taking account of population growth, real government spending per Brit is still up by 54%. More than a half higher!

Tony Blair is the single person most responsible for that. That is why I really dislike him.

Borrow like there’s no tomorrow

The essential problem is this.

When government spending rockets – in relation to GDP, or on a per person basis – it leaves the country in a much worse financial position.

Then, when an unexpected emergency comes along… you know, like a global financial crisis or a massive viral pandemic… it has to be tackled from a position of relative weakness.

Instead of entering the crisis with structurally low overheads and government debt – which would leave plenty of wriggle room – the government has to dig the country into an even bigger hole.

The current government’s economic measures in the face of Covid-19 (sorry to mention it) – to protect jobs with furlough payments, or to support businesses that would go under otherwise – look broadly sensible.

Of course, there are details to dispute. Plus, now that we know so much more about the virus – who is most at risk and better ways to treat people – it’s high time that we moved on from lockdowns and such like. The economic damage is already huge.

But wouldn’t everything be so much better if the UK had gone into this crisis in strong financial shape? With a lower level of regular government spending? With a much lower level of government debt?

Spending this year will rocket once more. And as for government debt, it’s already more than two trillion pounds.

Two trillion pounds! It’s just staggering.

That’s a massive 103.5% of GDP. Which is the highest debt level in relation to the economy since 1960. That’s when the UK was still weighed down by much of the vast debts of World War II.

Tax to the max

There are three ways that the government is likely to deal with this problem:

  1. Goose up inflation
  2. Borrow (even) more
  3. Raise taxes.

Nigel and Nick have previously talked about the threat of a return to higher inflation.

That route is a sort of tax on savers, since the purchasing power of their money falls over time. Especially with interest rates being as low as they are and expected to stay that way.

As for borrowing more, that’s likely too, because it’s ultra-cheap… at least, for the time being.

The problem is, borrowing is a tax on the future. Sooner or later, the government will have to pay more normal interest rates again. That means at a level above the prevailing inflation rates (so lenders can make a real return).

When the huge debts come due, and have to be repaid by borrowing at much higher interest rates, then the killer chickens will come home to roost. The government’s interest bill will rocket. It’s the sort of thing that major financial crises are made of.

In the meantime, the third option – higher immediate taxes – also seems likely. This will hit you directly in the pocket from day one, either by what gets deducted from your income, or what gets loaded into the prices of things you buy.

Rishi Sunak, our currently popular chancellor, has already flown various tax kites around in public. So it seems likely that higher taxes are coming soon.

Of course, there’s a fourth way that government could address this structural problem. Instead of tax to the max, how about it swing the axe?

By which I mean, take serious steps to cut public spending. And I don’t mean frontline services or cash welfare payments either. I mean bureaucratic waste.

I’ve witnessed plenty of waste up close. That’s been in the private, profit-driven sector. I shudder to think what’s it’s like in the public, empire-building sphere.

Will we see any significant cuts to government spending? I very much doubt it.

Instead, the government hacks will try to grab more tax.

That will be right now (raise tax rates), over time (through the inflation tax), or in the future (by borrowing and taxing the future). But tax they will.

This will make finding ways to preserve and grow your wealth even more important that before. Which is what we’re all about, here at Fortune & Freedom.

What do you think is most likely? Who or what will they tax? Will they attempt to inflate the debt away? Will the government keep digging us into a bigger and bigger debt hole?

Let us know at [email protected].

Rob Marstrand
Investment Director, Fortune & Freedom