John Redwood's Diary
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Budget just means more tax,spend, borrow

October 29, 2026 3 Comments
The budget boosted spending again, taking the 2027-8 total up to £1504 bn from  £1416bn  this year. That’s another increase of £88bn.  Borrowing was up again to £146.1 bn . The need to also borrow an additional £166.5 to roll over retiring debt takes the total bond issue nesxt year  to £312.6bn. The forecast deficit for 2027-8 was stated at  £98.5bn last time but this has risen to £146bn . So the government has increased spending by £88 bn next year over this  and will be borrowing £47.6 bn more than the previous forecast.
     Debt interest shoots up to £155 bn from £135 bn with benefits up by £30 bn and health by £15 bn. The government acknowledges that benefit spending is too high and rightly wants to get  more people into work and off benefits. It however still lacks a strategy to do so and is still following policies that lead to higher unemployment and fewer job vacancies. The big increase in National Insurance, the increases in Minimum Wage and public sector wages, and a range of anti business tax measures from Business rates to the  Packaging tax have helped the numbers on benefits to climb higher. The government has been sent the Milburn Report it commissioned into getting young people into employment, education and   training but has not yet  published it nor responded to it. They will need to adopt a range of measures to help create more jobs suitable for young people and to set out the right balance of incentives and conditions for benefits to get more into jobs. This is policy delayed.
      The same is true of the unresolved issue of the Defence budget. The Chancellor resigned from the Starmer government over its refusal to spend 3% of GDP on defence by 2030 on the way to 3.5% to meet the NATO commitment  by 2035. This has been put off until sometime next year as part of a wider review of Public Spending. This budget has not provided for additional tax revenue to meet the need for more spending, so the assumption must be the Chancellor expects to find spending reductions elsewhere to cover  the additional  money for our armed forces.
    The government takes comfort from the kind words of the IMF saying the government has a plan to get the deficit under control. The problem with this is the Plan assumes much tougher spending controls in the next two years than the government has imposed over its first three years in office. Past experience tells us that governments usually give in to spending pressures when the tough year approaches. They can do so because the target moves on by one  year every year, so the Year 3 target never has to be hit. It is very unlikely if this government  holds an election after 4-5 years that it will enforce very tight spending limits on itself around the time of the election.
     The government is also exploiting  the extra flexibility or looseness over the Fiscal Rules Rachel Reeves introduced to allow it to spend more on capital account. It is directing more money to the National Wealth Fund and the British Business Bank who in turn can borrow more to finance spending, They can create assets which the government deducts from the debt figure. It wishes to provide more stimulus by backing or part financing energy and transport investments in particular. The OBR has warned the government that if it does take more control over the water industry it would then need to include that industry’s large debts and substantial capital spend as part of public spending and debt.
    In order to cover the costs of modest giveaways to energy users and some small businesses, the government decided on an extra 3% tax on bank profits. The danger of this is it will reduce the amount of money commercial banks have available to lend to businesses needing capital to grow and consumers needing money to buy homes and bigger ticket items. This is a tax to slow growth and to tempt some banks to divert more business to other banking centres who keep their tax rates down.
     The budget was advertised as a steady as she goes budget, a budget to try to please backbench MPs whilst not threatening the bond markets. It was instead a continuity Starmer/ Reeves budget, with taxes up, spending up and borrowing up. That recipe did not work well for them and will not work well for the new team.  The OBR gave it poor marks, moving growth next year down  to just 1%. That is not enough to solve the country’s financial problems.

What to expect in the Budget

October 28, 2026 45 Comments

The main aim is to check out the budget judgement. The starting point is the 2025 Budget forecast for 2027-8, with the Rachel Reeves £164 bn increase in spending,  £66bn of extra tax rises and £ 98bn of extra borrowing added to the outgoing Conservative government plans for 2027-8. It is unlikely the government can add much to the spending and borrowing given the impact of the Fiscal rules and the fragility of the bond market. It is also unlikely they will go for a further large tax hike, as the Reeves ones led to fewer jobs, higher unemployment, higher prices, and enterprising people and money leaving the country.

 

The OBR revised forecasts may make the position tighter. They may need to increase the inflation assumed driving up costs, increase the allocation for higher interest charges on the debt given the increase in interest rates, and lower the assumption of a housing boom in 2027 based on easier planning rules. There may be some offsets in the slightly better productivity and growth figures achieved this year so far.

 

The government’s growth strategy rested heavily on more housebuilding and greater public sector investment. This latter has taken time to put through with delays to planned water, rail and energy infrastructure investments, cancellation of some road  schemes and limits on local government capital given  budget pressures. The government is likely to boost the National wealth Fund and British Business Bank and hope they can lever in more private capital. They will use the greater flexibility of the looser Reeves Fiscal rules to keep some of the borrowings for these projects off the balance sheet for debt control.

They will suppress future spending growth by delaying the increases for defence and the extra costs likely from the Milburn review to get more young people into work.

The ideas to ease pressure on family budgets will be small. It is ironic that  they will useBrexit freedoms to lower some tariffs, taxes on UK consumers, whilst trying to realign us with EU rules and taxes that will impede growth.

The Chancellor finds his flexible friend to spend and borrow more

October 26, 2026 36 Comments
The budget will be full of extra borrowing as the government tries to find ways to boost GDP through bigger spending programmes and additional public sector investment. John Healey  inherited plans from Rachel Reeves to spend £145 bn more and borrow £97 bn more in 2027-8 than the outgoing Conservative plans for that year set out in the 2024 forecast. This big increase was only possible thanks to Reeves relaxing the fiscal rules and saying there would be better control on spending in the final fifth year of the forecast. She made the Fiscal rules  her flexible friend, to help disguise her spending binge.
Mr Burnham  does not think that enough. There is the unfunded increase in defence they are pledged to deliver. There are the growing claims of the nationalised industries, the soaring benefits bill and the surge in public sector wages. As tax has already been pushed up by £66 bn from the Reeves tax raids, and as some taxes now yield less as the rates go up, this government will likely go in for concealed extra borrowing. There might be a  tax raid on the banks as well, just when they need them to lend more to power growth.
The government is likely to rummage  through the worst of the Gordon Brown funny money playbook  of Private/public financings. Take   Sizewell, a new nuclear project. The government owns 44% of it so it says it does not have to put it on its balance sheet as it is just below 50%. However the Treasury will borrow over £36 bn to build it. It will pass that money to the National Wealth Fund who will lend it for interest to Sizewell, secured against putting an extra charge into everyone’s electricity bill.
Under the Reeves relaxation if the government borrows to spend on a new asset it can net the value of the asset off the borrowing when calculating state debt for the fiscal rules. So if you take out a mortgage you could say I do not have any debt because the house is worth more than the borrowings. Yet you do have a real debt and need to pay the interest on it. You could pay off the debt by selling the house but then you would be homeless, facing big rent bills.
The government’s biggest investment spend is on HS2, now likely to cost around £100 bn. As this government has pledged a nationalised railway it should not deduct a value of the track from the borrowings. Were government policy to change and sale became a possible option, what value would you put on it? It is likely to be a heavily  loss making line after allowing for the interest charges on the debt. A new owner would probably want the debt written off, so its value would be small at best and negative if the buyer had to take debt.
The government thinks the state financing bodies, National Wealth Fund, British Business Bank and Great British Energy are ways of increasing spend from more borrowing without counting as state debt. This will need careful analysis as the likelihood  is the risk remains with the state so the  extra  debt should  count as a state liability.
  They are also looking at a way of getting borrowing into defence to up defence spend without it counting as state debt. If it is expansion of private sector defence contractors with proper risk transfer to them then that could work, but not if the risk and effective  debt obligation remains with the taxpayer.
Next year Sizewell will probably need over £6 bn and HS 2 £3 bn, around £10 bn for the pair. British Steel will need £500m for losses without any money for the replacement electric arc furnace they are discussing. Council houses are a lot dearer in public spending terms than Housing Association, where the private money is not regarded as state debt.
The budget will be a wonder of creative accounting, delayed decisions and unfunded liabilities.

So why does the government want us to stock up for disaster?

October 24, 2026 58 Comments

In the  case of each  kind of event the government thinks  might need us to keep some tins of food and some water in the store cupboard it is the government that should be taking action to prevent the event from  happening.

If it’s hostile countries or terrorist groups disrupting our undersea cables, issuing cyber attacks and damaging UK facilities that is an argument for the government to get on with strengthening our defences and putting in a sufficient Defence budget. Where are the ships to patrol our nearby seas and the counter forces to stop illegal criminals getting into the country?

If it’s hot weather leading to us running out of water why the delay in putting in the new reservoirs? If the threat of flood in winter where the new containment and storage measures?

If it is running out of power, where are the back up facilities, the energy stores, the stand by generators that can work when the wind has gone on strike and the sun gone to bed?

If it is poor harvest and a food shortage, where are the grants and support for farmers to farm, and to put in farm irrigation with more fruit and vegetables under cover?

Most of us agree we need greater national resilience. Current policy forces dependence on more and more imports, with all the extra risks to supply that that brings. We are increasingly dependent on the goodwill of foreigners for energy and food, and on their ability to provide for themselves and for us. That may not always be possible.

My IEA article on the collapse of the UK car industry

October 23, 2026 75 Comments
Two collapses of the UK car industry
Car output in the UK over the last century has been subject to two major crashes. One was in Mr Burnham’s much loved 1970s. The other is happening this decade. Output peaked at 1.92 m vehicles during 1972, our last year before entering the European Community. Many UK brands and past success stories were concentrated in the conglomerate British Leyland.  During our first decade in the EEC and its Customs Union output slumped to 868,000  by 1982. BL was taken into  government control in 1975 and kept afloat by public money. It struggled to survive with its output plunging from 916,000 cars produced in 1972 to just 405,000 in 1982, a fall of 56%.
The 1980s and early 1990s saw a rebuild of the industry, with the government helping attract in substantial Japanese investment as Nissan, Honda and Toyota added substantial new capacity alongside Ford and Vauxhall. Part of BL was sold off to BMW who were only interested in continuing the Mini as a major product. Industry output recovered from the 1982 low to reach 1.78 m in 1999. The new Labour government took  over in 1997.  By 2009 as they prepared to leave office output slumped to just under 1 million as the economy  battled the banking  crash and recession of 2008.In 2005 when the residual Rover Group left over from BL got into financial trouble the government only offered temporary relief so the brands were subsequently  sold off to a Chinese company. They decided to make cars under the MG brand in China.
By 2016 under the Coalition and the Conservatives output had recovered to 1.72 m. As net zero policies were rolled out the industry started to lose ground, and lost substantial output over the covid lockdowns, taking it back down to 920,000 in 2020. Instead of sustaining a recovery post covid in recent years a major slide has been underway under both the Conservative and Labour governments. The industry prepares to close all its factories making petrol and diesel cars in time for the ban on making any more of them  which comes in  in 2030. Output was just 717,000 in 2025 and falling.
Why did the industry fail?
The big falls in the 1970s occurred for three main reasons. The first was the removal of tariffs on cars and the easing of  trade barriers against European competition. The UK market saw imports account for just 5% of the total in 1965. This leapt to 56% in 1979, with most of the gains occurring after entry of the UK into the European Community. Continental producers in Germany, France and Italy were good at exploiting the market opportunities whilst the UK failed to stay competitive with product or prices as the tariffs were removed. Leading international groups took advantage of market opening to shift production from UK factories to continental ones to get economies of scale. They integrated their UK production and amalgamated their models with their continental businesses. They no longer thought they needed different designs for the UK from the EEC.
The second was the chaotic labour relations in a strife torn UK . Managers were unable to win  over employees and get them to accept positive leadership . Unions wanted to drive wages higher in an inflation ridden economy and were willing to strike often to do so.
The third was the decision of the government in 1975 to buy up 95% of the shares of BL, to direct the business, appoint the Chief Executive and finance the investment. By doing this they acquired control of the largest part of the UK car industry. They with their chosen managers failed to design and produce a streamlined and profitable car range as they played around with the large number of brands and plants they inherited.
Where BL had a good selling product like the Mini they did not charge enough for it to make a sensible profit. They badge engineered the vehicle so they were selling an Austin, a Morris, a Wolseley and a Riley version adding to production and sales costs and competing against themselves with brand promotions. Where they had ageing product as with the main Austin and Morris saloon cars they failed to develop products that could outsell the new popular Ford ,Vauxhall, VW and other European competitors.
The end result is no-one makes and sells cars under most of the brands they once held, including the death of Austin, Morris, Triumph, Wolseley, Riley, Vanden Plas and Rover. Jaguar survived but has not produced a single car for sale over the last year. Mini survived under BMW ownership and launched new models  but is now mainly made abroad. Land Rover has survived . MG has changed from making  UK built sports cars to making family vehicles running on batteries made in China.
Why has the industry plunged to even lower depths this decade?
The 2020s started badly with covid lockdowns hitting all European producers. Now well into what should be a sustained  recovery the UK has continued to decline. The main reason is government decisions to force the pace of transition from making diesel and petrol cars to making just battery vehicles. The UK industry failed to explain to the government that their timetable was too demanding. The main players accepted the unrealistic targets set only to discover there were not nearly enough willing buyers of  battery cars. Government  tipped in some modest subsidies for the new electric vehicles and made it dearer and more difficult to buy petrol or diesel. Electric cars are spared high taxes on fuel, unlike the fossil fuel based alternatives. They have favourable tax treatment when bought by companies. Still they remain a minority choice of the public. At the same time diesels in  particular have experienced a very sharp decline adding to the difficulties of car makers. They have to rush to write off their investments and move to close plants.
On the other side of the account the manufacturers have failed to put in much new electric capacity. Jaguar has gone a year without a car to sell and is only just getting round to offering a single choice of vehicle with battery propulsion at a much higher price than many of the older petrol and diesel cars that sold well. It is putting in a large battery plant but will be launching dear new vehicles which will not be affordable in the mass market. Range Rover is planning new all electric products.  BMW is making most of  its all electric Minis outside the UK. A major investment plan to make larger car batteries in the UK was dropped. Nissan is the one large manufacturer  that has committed to switching  production to new EV cars with UK made batteries. Government and other companies over the last seven years have watched as China has cornered the market in materials and components needed to make batteries, and has launched big  ranges of battery cars at very competitive prices.
How much of the  UK car industry will revive?
The government is determined to end all production of petrol and diesel cars in three years time. It wants the production lines and many of the factories closed. It looks as if that is going to happen.  Vauxhall, Ford,  Honda and other makers of petrol and diesel cars in prior years are not planning to make any battery cars in the UK. Toyota is also importing EVs but has said it might later start to produce a battery car in the UK. There is no firm project or timetable.   The industry will be a lot smaller than in its heyday. Many jobs making petrol  and diesel cars will go, much capital will be written off and the UK will be importing far more from China.
The industry is keen to see the UK adopt Made in Europe rules and standards and to impose a high tariff on Chinese imports. This is unlikely to make much  difference to the many plans for leading manufacturers to cease making cars in the UK or to avoid returning to UK manufacture. The higher the Chinese tariff wall imposed the more they might be able to switch some of our imports from China to EU factories. This would come at the cost of a slower transition to battery cars and would give the UK consumer a worse deal.

Buses and trains preoccupy Mr Burnham

October 22, 2026 36 Comments

 

Downing Street South must have a cluttered desk. There is the delayed need to pay for a better defence settlement. There is the Milburn Report on how to get people back to work, delayed until after a budget it was meant to influence. There is the escalating benefits  bill as more young people get a sick note for life . There is the  brain drain as more talented and hard working people and businesses flee UK taxes.There is the collapse of high energy using businesses, throttled by the UK’s super dear energy.There is the progressive closure of all our petrol and diesel car factories thanks to the early ban in 2030. There is the threat to the Falklands and the disastrous and expensive attempted give away of the Chagos. There is the delay in getting our own oil and gas out forcing us to rely  on dear and less reliable  imports.There are many more problem files in the in box.

So what does Mr Burnham do as he sits at his desk in Downing Street North? He plans £2 bus fares, reviving an old Conservative policy. He dreams up new fines for people playing loud music on buses and trains. He imagines a nationalised rail and steel industry will work fine, and dreams of an industrial strategy which remains unconnected to government reality.

Where has he got to with his first pledge, to offer every rough sleeper in every postcode somewhere to live? How can he pass more powers to Mayors whilst giving away hard won rights to self government in his proposed Re set with the EU? Why can’t regional Mayors say No to illegal migrant accommodation?Why can’t they use any extra grant to cut taxes? Why can’t they turn down plans for developments they do not like?

Talking about buses, noisy trains and devolution from Manchester to look away from the growing inbox in Downing Street south is not  a good way to do the job.

 

You do not save the Union with more devolution

October 21, 2026 37 Comments
My Conservative Home article
I support the Union of the UK. I despair of the way the SNP in Edinburgh and the Labour government of Mr Burnham wish to go over all the old arguments about Scottish “independence” . We  were told that was all  settled by a referendum for a generation. The UK has been governed as a united kingdom, so important military facilities have been located in Scotland. Scotland provides a substantial amount of the Union’s wind power to the mutual benefit of those living on both sides of the Scottish border. There is free trade and free passage of people over the notional border.  Unpicking it all would be costly and divisive.
I also believe in the democratic resolution of issues and have no wish to retain an unwilling people and region in our Union. That is why I supported holding a referendum and agreeing that just the Scots should vote on the issue of whether they still wanted to stay with us. They said they did. You cannot keep asking the same question about something that has such big constitutional and political ramifications. Investors and governments making  decisions about where things should be located need some certainty. Uncertainty about Scotland remaining in  the Union puts off some investors and introduces strategic reluctance about Scotland  into UK government thinking.
As an Englishman who prefers them to stay I would not have worried if they had voted to leave but would have argued for a clean, full and fast untying of the links. England would have shed a lot of borrowing and saved substantial tax revenues which currently flow north so financially would have benefitted. There is more to being a nation than money, but it would have been some compensation for the emotional and political loss.
What is so frustrating to most voters today is to see the governing party of the Union and the governing party of Scotland spending so much time on this issue we thought  settled. They both put out misleading statements and both fail to analyse the problem in a way that can produce a good solution.
Labour in Westminster have wrongly thought for more than fifty years that offering the Scots devolution to their own Parliament would end their quest for independence. Each time it does not they offer more devolution of powers, further fragmenting government. As I forecast in my Death of Britain? book in 1999 it just fuels the SNP. It encourages an SNP government to keep making more demands of London, threatening London with Scottish exit if there are not more gifts of power and money sent to the Scottish Parliament. Mr Burnham last week  tried a counter by pointing out the Scottish government centralises decisions in Scotland and says they should devolve more themselves to large Councils or powerful Mayors. The SNP predictably answers by ratcheting up the independence language. I accept that people in Scotland have voted for a devolved Parliament, so we need a find a better way of letting it function without it just being a means to campaign for break up of the Union.
The SNP do not seriously want independence. They have for years been sketchy about what an “independent” Scotland would be like. They lost the last referendum as their campaign failed to answer obvious questions convincingly. What currency will they have? Who will pay all the extra taxes when grants from England end? How will they be able to sustain their large borrowings without the UK credit rating? What will replace the lost defence jobs? What terms would they get to enter the EU? Would they be able to negotiate all the trade deals they would lose when exiting our shared Agreements? Would there still be a common travel and work area with England and Wales?
The SNP have said they would want to enter the EU. That would mean they would immediately surrender the right to choose their own laws in a wide range of areas and have to accept over 100,000 laws the EU has already settled and imposes on members. It would mean they would need to follow what socialists call the austerity economics of the EU, with demands they keep borrowing to less than 3% of GDP and debt to under 60%. It would mean accepting EU taxes and having to make a contribution to a large and growing EU budget out of new taxes on the people of Scotland.
The SNP used to  say they wanted to keep the pound sterling as their currency. It greatly limits a country’s ability to run its own economic policy if it uses the currency of another. It would mean Scotland had to accept interest rates for its savers and borrowers set by the Bank of England, with Scotland no longer being a consideration or having any representation around the Bank table. That sounds like being a monetary colony of England, not like independence.
Now they say that they would live with the pound for an unspecified time then maybe get round to their own currency.  If they opted for the Euro as part of a big package to join the EU, that too means the end of any idea of settling your own interest rates and money policy. They seem to think they could join the EU with an opt out from the Euro but there is no guarantee they would secure that concession the UK  negotiated for itself when the Euro was created.
The SNP are clear they want to move the UK nuclear deterrent out of Scotland and become a nuclear free country. They would ask to join NATO and would seek to establish their own military forces and intelligence systems. There would be a long transition to fill as they did so, and Scotland would be far less well defended without some agreement to rely on UK forces and presumably to pay for the service the rest of the UK could continue to provide. The loss of shared intelligence with the US and Five Eyes would be particularly damaging.
More importantly, what would need to be done at the border with England? Trade and people flow freely all the time we are one country. It is naive to think that could continue if Scotland asserts independence, and of course impossible if Scotland joins the EU. In the EU Scotland would need to impose border controls over  people and goods to conform with the Schengen rules and with the Customs Union.  The problems the EU has created over the Northern Ireland border might get repeated.
Both sides in this worrying dispute are undermining  the interests of voters in Scotland and in the rest of the UK. The SNP are trying to sell a new kind of dependence for a Scotland that would be dominated by the EU and dependent on doing deals with the EU, NATO and other international bodies. The UK government keeps applying the medicine of devolution to an illness which is made worse by that treatment. No wonder the rows go on and on with no resolution possible.  The SNP and Labour look like two bald men arguing over a comb.

Reflections on the French riots

October 20, 2026 50 Comments

We hear that protests about poor conditions in French schools and unfairnesses at universities have broadened into general protests about everything from the cost of living to the state of the Middle  East. The far left party Insoumise denies responsibility for the state of the  streets and the left generally criticise the police for inflaming things with too much tear gas and too many rubber bullets.

What is clear is that the protesters express their anger in a self defeating way.  Small businesses are looted and ransacked. Great public buildings  are damaged or burned down . Bond markets take fright making it dearer for the government to borrow. Many  law  abiding hard working people fear for their local shops and property and face the riots and tear gas when they venture out.

These protests make the economic issues worse. They terrify some of the people they say they want to help.  They do not offer solutions.

President Macron had a Marie Antoinette moment dancing in a privileged box as Paris  highlighted poverty and public sector austerity. His attempts to crack down with curfews on the many who do not riot shows his weakness.The centre of French politics has not held. We await the electoral contest between right and left.