We are asked to believe both that the UK has too little money and too much. They can’t both be true.

We are facing a cost-of-living crisis, the economy is weak, public services are struggling, and so is the private sector. Today’s younger generations have it particularly tough. Good, steady jobs are increasingly hard to come by, and house prices are increasingly out of reach.

Even after voters made their dissatisfaction clear in last week’s elections, we are still being told that between the parlous state of government finances and the challenges of rising inflationary pressures, there is nothing the government can do about any of this, and yet more ‘tough decisions’ will be needed. There is a talk of change of leadership, but no clear sign of any change in direction. There seems to be no hope.

Is it really true that regress is unavoidable?

No. We are being asked to believe that the UK is a bit like Schrödinger’s cat: we simultaneously have too little money to fund renewal and too much to prevent inflation. They cannot both be true and they are not:

• Argument #1: There is too much money in the UK chasing too few goods, and that is why we have inflation. The answer is to take more money out of the economy by raising interest rates;
• Argument #2: There is too little money in the UK. Government debt is at 100% of GDP. This is described as a ‘staggeringly high’ figure which is bound to lead to disaster unless the government lowers its spending – and the government says it is determined to take these ‘tough decisions’;
• Neither argument is correct: which means that the government does have the power to act and to protect the UK population from needless hardship.

Unless we change how we manage the economy, and the institutions which manage it for us, we will continue down a path of economic regress. We cannot afford to do that.

Argument #1 is completely false

Except for a few very rich people whose wealth continues to grow rapidly, the UK population has too little money. You may not be surprised to hear this.

The number one issue for voters is consistently the state of the economy and the cost-of-living crisis. Real wages are no higher today than they were in 2007—this is a wage stagnation we have not seen for a century.

And household debt: income ratios remain at over 100%.

For households, which cannot control their incomes and must pay back their debts, this is a serious issue. Especially if interest rates rise.

What about businesses? The story is similar: there are a small number of businesses who thrive in this environment—most obviously oil companies—but many UK businesses are stuck in a doom loop because of low economic growth. And the rate of insolvencies remains near all-time highs.

So, if neither households nor most businesses have excess money, especially now when global oil prices are taking a greater share of our spending power, would anyone be foolish enough to take more money out of the economy by raising interest rates? Unfortunately, the answer is yes: the UK would. Nobody knows for sure how the Bank of England will handle this round of inflation, but we know what they did last time and the signs are that they may be planning further rate rises.

Would anyone be foolish enough to take more money out of the economy by raising interest rates? Unfortunately, the answer is yes: the UK would.

Essentially, with interest rate rises, the idea is to balance the uncontrollable inflation in oil prices by forcing the rest of the economy into deflation. But that is such a ludicrous remedy that nobody describes it that way.

Even the Bank of England recognises that the reason we have inflation today is down to global oil price rises, not excessive domestic demand. But it does not act on that recognition: its remit does not allow it to act wisely.

So, argument #1 is almost the opposite of the truth—and, even so, it guides our handling of inflation. Does that make argument #2 true?

Argument #2 is partly false

While it is true that in general neither most businesses nor households have too much money, the argument that this is also true of the government relies on ignoring the fundamental differences between businesses and households on one hand and governments on the other.

While economists are fully aware of these differences, they seldom spell them out, and politicians and media commentators almost always perpetuate the dangerous myth that government finances are like household finances.

As a result, most of our economic discourse is dominated by debt hysteria, and in the rare event of money creation being mentioned, inflation hysteria.

In combination, the household analogy coupled with debt and inflation hysteria and the fear of upsetting the wealthy have led governments into a state of learned helplessness in which they believe that they simply cannot drive national renewal and must rely on the so-called ‘magic’ of market forces to deliver renewal.

This increasing reliance on the private sector has benefited almost no one, not even the private sector itself. For the last half-century we have seen declining economic performance as governments have retreated ever further from their responsibilities. How much more evidence do we want to see before we change direction?

Without significant change in policy, the forecasts above from the IMF will come true, and the 2020s will be the worst decade for a century.

But that does not need to happen.

The government has the power to protect the UK population

Realistically, the Labour government does face a difficult challenge in delivering national renewal.

Equally realistically, it is nothing like the challenge faced by Attlee’s government in 1946. Materially and financially the challenge was far greater after the war than it is today. At the end of the Second World War, Government debt to GDP stood at over 250%; the cost of servicing that debt was over 5% of GDP; more than half of national income had been diverted to the war effort and over 5 million people mobilised into the Armed Forces; some 5% of national wealth been destroyed, and 1% of the population lost (and the equivalent figures were even worse in some other countries).

Nevertheless, in 1948, at a time when the ratio of government debt to GDP was still over 200%, Attlee’s government founded the NHS. Also in 1948, it passed the National Assistance Act, which abolished the poor law system and established a social safety net to protect the poorest and most vulnerable, completing the work of the National Insurance Act of 1946. The social contract in the UK was transformed. Everyone, whatever their background and current financial state had access to high-quality healthcare. Everyone had access to a safety net for times when things in their lives went wrong. Everyone played a part in building this new world.

And what was the economic cost of all this largesse? We enjoyed the Golden Age of Capitalism – the most successful 35 years in our nation’s economic history. There was no cost: when you do good things, more good things happen. Our government needs to show the same level of determination that Attlee showed.

So, what should today’s government do? Two things:

1. Recognise that a fundamental change in economic approach (such as the one we set out here) to renewal is needed – one which is incompatible with its existing red-lines;
2. Recognise that the local election results show that UK population is despairing of the two traditional main parties and that this brings a real risk that what is happening to America today could happen to the UK in four years’ time. Tackling this risk must be a key priority now, not for a hypothetical second term.

There is a temporary opportunity which we must seize. And here is the Blueprint.

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