23/08/2025 by Tony Redondo
Who remembers 1976 and the ignominy of Labour Chancellor Dennis Healey going ‘cap in hand’ to the IMF (International Monetary Fund) for an emergency bail-out and then the winter of discontent in 1978-1979?
Sadly, we all better bone up on history as there are a growing chorus of voices suggesting history is about to repeat itself.
The warning lights are already flashing red with borrowing through the roof, public spending out of control, and a tax burden already at its heaviest level since the 1960’s. Like Healey, Reeves thinks she can tax, borrow, and spend her way to prosperity. It didn’t work then and it’s not working now.
Inflation is nearly double the BoE’s (Bank of England) 2% target, real wages are squeezed, businesses are suffocating, and the bond markets are already demanding the highest yields for benchmark UK 30-year gilts since 1998. The UK government’s current long-term borrowing cost, 5.59%, is easily the highest in the G7 with the US at 4.92%, France 4.31%, Germany 3.31% and much higher than even the likes of Greece 4.29% and Spain 4.18%.
The recent better-than-expected GDP figures helped ease immediate stagflation concerns, but that data is backward-looking, and forward momentum has faded with growth expected to moderate in the second half of this year while inflation pressures remain sticky with the even the BoE forecasting it will rise further to hit 4%.
The ONS (Office for National Statistics) has reported that in the period April to July of this year, the total deficit hit £60bn, £6.7bn more than in the same four-month period of 2024 and the third-highest level since records began. Total borrowing is £100m higher than the OBR forecast. The cumulative current budget deficit, which is critical to Chancellor Rachel Reeves’ fiscal rules, is £5.7bn above estimates. Government borrowing in June was £20.7bn, up by £6.6bn compared to the previous year. Public debt has increased over the last year to 96.1% of UK GDP, with the UK’s debt servicing costs now higher than we spend on education or defence.
The respected NIESR (National Institute of Economic and Social Research) is suggesting the government is facing a £50bn black hole with higher taxes due to lower growth forecasts, policy U-turns and the threat of borrowing costs inching higher.
The RMT has announced a week-long London Underground strike in September. The move comes after the new Labour government awarded public sector workers big pay rises without conditions such as productivity targets, or changes to working practices, while also expanding workers’ rights on taking power last July. Resident Junior Doctors voted overwhelmingly in favour of further strike action, demanding a 29% pay increase after receiving a 22% in 2023–25, plus a further 5.4%. This gives the BMA a six-month legal mandate to conduct industrial action from July 2025 until January 2026. Pay review bodies have recommended increases of around 4% for teachers and 3% for NHS staff, exceeding the government’s affordability threshold of 2.8%. Unions have warned that if these rises aren’t fully funded from new money, further strike action is likely. Then there is the long-running strike action since March by the Birmingham Bin Workers.
All these strikes and threats of further industrial action have drawn comparisons to the 1978-1979 Winter of Discontent, which contributed to the fall of the last Labour administration.
Currency Exchange Rates Update
The pound slipped to a two-week low against both the Euro and US Dollar this week.
The Pound fared better against the Australian and Canadian Dollars, hitting a seven-week high against both.
This week, the key economic data releases include:
Tuesday US Consumer Confidence
Thursday EU Consumer Confidence
US GDP
Friday France GDP & CPI Inflation
Germany Unemployment & CPI Inflation
Canada GDP
What’s in the news?
UK
The BCC (British Chambers of Commerce) warned Chancellor Rachel Reeves against further tax increases in the upcoming Budget. BCC research manager Stuart Morrison said, “There must be no more business taxes in the Budget.” CBI lead economist Ben Jones highlighted the risk of stagnation due to policy uncertainty, while the IoD (Institute of Directors) noted that private sector growth is hindered by both global and domestic factors.
However, with the Chancellor refusing to budge on her £190bn spending splurge on public services in the next three years, tax rises seem to be the only way out for the government this autumn. A giant tax raid would put Labour’s manifesto commitments not to raise income tax, VAT, employee national insurance or corporation tax to the test as these make up around three quarters of total government revenue.
For the second year in a row, we seem set for another round of damaging speculation month’s out from October’s budget with rumours that Reeves could raise £10bn a year by reducing tax breaks for pension savers. The government could also lower the lump sum allowance of £268,275 for 25% of funds taken out of defined contribution pension pots for over 55-year-olds.
Income tax bands have been frozen since April 2021. Last year, Reeves said personal tax thresholds would be uprated in line with inflation from 2027, but any extension of this stealth tax would drag another 3.5m individuals to pay taxes at the higher 40% rate by 2029 while 600,000 more people would have to move into the additional 45% band.
There is mounting speculation that Reeves is considering replacing stamp duty with a new national property tax on homes sold above £500,000, impacting around 20% of the market. According to Nationwide, the average price of a home in the UK was £272,664 in July but in London, the average price is around £550,000. 10% of houses in London would be hit by a ‘mansion tax’.
Some have warned that this new property tax will result in more over-65s living in family homes they don’t need. Nationwide released data last week revealing the number of homes with two or more spare bedrooms has climbed from 44% in 2005 to 53%.
https://www.birminghammail.co.uk/news/money/five-ways-rachel-reeves-could-32216977
New polling by YouGov found that just 13% back Labour’s record in power so far with the Government’s net approval rating dropping to its lowest level to date. It took the Conservatives 14 years to fall to these levels. Starmer has managed it in a little over 12 months.
At its peak, the Labour Party had 532,046 members in 2019. By February 2025, the number had fallen to about 309,000. Support for the Conservative Party has also flagged to about 131,000 with at least 8,000 fewer members since Kemi Badenoch became leader. Membership of Reform UK has grown to over 230,000 by May 2025.
Pollsters Find Out Now reported that Reform UK is currently supported by 33% of voters, 15% ahead of the Labour Party, on 18%, and Kemi Badenoch’s Tories, on 17%. A more sophisticated ‘MRP’ survey by pollsters ElectionMaps also point to a looming political earthquake. These were the only pollsters, alongside YouGov, to successfully predict the result in nine in ten seats at the last general election in July 2024. The MRP survey puts Reform UK on course for a staggering 339 seats, up 334 on the last election, Labour on just 112 seats, down 299, the Lib Dems treading water on 77 seats, and the Tories almost wiped out, on just 35 seats, losing another 86 MPs.
Good news
UK Finance data shows a fall in the number of homeowner mortgages in arrears, with overall possession numbers significantly lower than long-term averages. The number of homeowner mortgages in arrears fell by 3% in the second quarter of this year compared to the previous quarter, with the number of buy-to-let mortgages in arrears falling by 5% for the same period.
Not so good news
Which’s Consumer Insight Tracker reports that consumer confidence in the UK economy has plummeted.
UK retailers are outraged that despite significant lobbying from over 500 business leaders, the Treasury confirmed it will not be reviewing the controversial tourist tax in October’s Budget.
Londoners spent over 40% of their incomes on rent in 2024, the highest since 2021.
The Insolvency Service unveiled a 1% upturn in company insolvencies in July compared to June with construction, wholesale, retail, accommodation and food services topping the table of struggling industries, jointly responsible for 47% of all company insolvencies. The number of compulsory liquidations increased by 14% from 2023 and was at the highest level since 2014. Administrations (up 2%) and CVAs (up 9%) were both higher than in 2023.
The UK manufacturing sector recorded the sharpest decline for new work since April.
USA
Fed Chair Jay Powell speaking at the Jackson Hole Symposium said ‘shifting’ economic risks heighten the case for a Fed interest rate cut. The Fed next meets on 17 September. Powell also warned that the labour market was cooling, and Donald Trump’s tariffs were lifting inflation. Powell said that “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” The Fed chief added that “the balance of risks appear to be shifting” between the central bank’s dual mandate of full employment and stable prices. He cited “sweeping changes” in tax, trade and immigration policies.
Expectations for a 0.25% rate cut in September surged to 83% following Powell’s speech from 75% earlier in the week.
That was sufficient for the stock market to rally with the Dow Jones Industrial Average finishing at an all-time high.
Schroders revealed that since the beginning of 2025, American investors have ploughed $15bn into UK shares. Sue Noffke, head of UK equities at the investment manager said, “We are currently seeing increased interest in UK companies from our US and international investors, with many noting the relative value available across a range of sectors”.
The EU
The ECB (European Central Bank) is forecasting sluggish eurozone economic growth of 0.9% in 2025 rising modestly through 2027 with inflation dipping below 2% before stabilising.
The timetable for the introduction of the digital Euro is becoming clearer with a window of 2027-2029 now forecast. The preparation phase is due to end this October. Then it has to be debated at the ECB Governing Council before the legal and political requirements have to be completed. The development phase is then likely to take 2-3 years.
Germany’s new ruling coalition under Chancellor Friedrich Merz has been in power for just over 100 days. Merz campaigned on a pro-business, pro-economic growth platform. German business leaders are still hopeful and optimistic but are also calling the government to action.
Others
Australian consumer sentiment jumped to its highest level in over three years in August after the interest rate cut by the RBA (Reserve Bank of Australia) lifted spirits, eased financial anxiety and hinted at a shift in household confidence. It’s been 42 months since the index last crossed the optimism threshold of 100, marking one of the longest stretches of gloom since the survey began in 1974.
New Zealand’s manufacturing sector grew in July, its first expansion in three months, led by new orders at its highest level since March 2022 and production at its strongest since August 2022. Nevertheless, the RBNZ (Reserve Bank of New Zealand) cut interest rates and retained its dovish stance with Governor Christian Hawkesby saying the RBNZ’s current forecast “troughs at around 2.5% by the end of this year”.
Quote
Alexis de Tocqueville, French diplomat, political philosopher and historian said, “A revolution is not a sudden eruption, but the accumulation of silent changes that suddenly become visible”.
