The UK government is hostage to financial markets

This is not (entirely) Rachel Reeves’s fault

As I’ve written before, I don’t warm to Britain’s Chancellor of the Exchequer, Rachel Reeves. This is mainly because of her poor communication skills – she is certainly more on top of her brief, and responsible, than her two immediate predecessors, Jeremy Hunt and Kwasi Kwateng. It seems that the British public shares my prejudice. She is popularly spoken of as a liability. But I think this reflects much wider problems within this government.

Government finance policy needs to achieve four things. It needs to ensure that the government has the resources it needs to deliver on public services and social insurance policy; it must ensure that there are appropriate incentives in the tax and benefits system for the economy to work effectively; it needs to balance supply and demand in the economy at large to ensure that there is full employment and low inflation; and it needs to ensure that the financial markets are kept happy. The problem for the government is that it is the fourth requirement that is dominating the other three.

What do I mean by “keeping the financial markets happy”. It is hard to be precise, but the immediate measure is cost of government debt – what the government must pay to borrow money over the maturities it needs to finance itself. This is more complicated than it appears at first, because it can also affects requirement three – balancing supply and demand. As Britain operates its own currency, which is not pegged to any other, it has the option of financing itself by creating money. This has been done recently through the policy known as “Quantitative Easing”: letting the Bank of England buy longer term government debt. The danger is that this creates extra demand in the economy and causes inflation.

The government’s predicament is defined by three things: elevated inflation, high levels of outstanding debt, and internationally elevated levels of interest required to finance that debt. Inflation is not high, but at the top end of an acceptable range. If it rises then political disaster beckons – firstly because people feel that their living standards are being eroded, and secondly because the cost of home mortgages arises, causing widespread financial stress. The government therefore feels it can’t take liberties with large budget deficits or monetary financing. Debt, meanwhile, is nearly 100% of GDP, a historically high level for peacetime – courtesy the financial crisis of 2007-09, and the covid crisis of 2020-21. A large amount of debt means that interest payable becomes a bigger issue. And the cost of government borrowing is at historically high levels compared to the USA and Germany (both of whom are themselves under some stress) – though not especially high in absolute terms by 20th century standards.

Listening to commentators, you would think that interest costs had the same economic implications as real spending, like running the NHS – just as interest costs are very real to ordinary households. This isn’t really true – it isn’t about mobilising real economic resources, it’s about shuffling wealth around the financial system. It does not in fact have much direct impact on the first three government objectives, but it is critical to the fourth, and so indirectly impacts them. It is possible for nations to get into debt spirals, like households do – but actually pretty rare. The outcome is usually a grim austerity-based international re-financing, with a loos of sovereignty, or else hyperinflation, which usually leads the same way. It’s very rare in developed economies. The Eurozone crisis of 2010, affecting Greece, Spain, Portugal, Ireland and Cyprus has a lot to do with the fact they were part of a common currency area. The interwar catastrophes in Central Europe can be linked to war reparations and naive macroeconomic management. The question is whether this rarity is because finance ministries are so afraid of it that they are more cautious than they need to be – or because the management tools available to modern developed economies are powerful enough to fend off the risk, provided they control their own currency. 

In Britain’s case there is no doubt that the government is scared stiff of financial chaos when managing its debt, and is very risk-averse. The financial wobble that brought down the government of Liz Truss in 2023 is seen as a cautionary tale. The reasons for this financial crisis are pretty technical, and arguably just bad luck, but it has made people more cautious than ever. And it certainly did for any suggestion that governments could ignore financial markets. But nobody knows exactly what will cause a breakdown – except that the processes are non-linear. Trouble can happen with little warning.

So how do governments keep markets happy when, as seems to be the case for Britain now, warning lights are flashing? It’s a matter of confidence and trust. The benchmark bond maturity is 10 years, and the ability to issue bonds cheaply for greater maturities makes the overall management process easier – an art that the Bank of England is very good at. So investors need confidence that the currency will hold its value for that long, with regard to domestic prices and, to some extent, with other currencies. I think investors are looking for two things, on top of a strong underlying economy: consistency and restraint. Consistency means that the broad contours of the country’s financial management will remain constant (or perhaps drift in a conservative direction) over the long term. Restraint means that there are checks and balances within the system to ensure that levels of debt do not explode unsustainably.

With this in mind the Coalition Chancellor George Osborne set up the Office for Budget Responsibility (OBR) in 2010 (a moment of high financial stress), and this system has been maintained ever since. The OBR is independent of government and reports on government financial plans twice a year, coinciding with fiscal events, one of which is the annual Budget. It prepares its own economic forecasts and shows how much the government’s published plans will affect the economy. This is the basis on which the government can show that it is adhering to its fiscal rules, without fiddling the forecasts, and governments were prone to doing before 2010. Fiscal rules set limits for the size of budget deficits and levels of debt. This system delivers consistency and restraint for as long as governments stick to it. Tinker with it, and markets become much harder to manage. Ms Truss tried to play fast and loose by letting her Chancellor, Kwasi Kwarteng, deliver a major fiscal event without and OBR report.

But this approach comes at a huge cost. The first issue is that the OBR’s forecasting methods are conservative, though not inconsistent with mainstream economics. That means that radical ideas for reform will be treated with scepticism – the up-front costs are fully loaded but the subsequent benefits treated very conservatively. This is a feature, not a bug. Evaluating reform schemes to distinguish between the half-baked ideas from lobbyists and wonks, and really promising ideas is beyond the competence of such an outfit – and anyway often requires a degree of political judgement. Most ideas that come through the political system are in the former group. Even where the OBR accepts that there will be benefits, it is often over-optimistic. Past reforms to benefits in Britain have not yielded the expected savings for example. The markets want conservative projections, not political manifestos. Alas most promising efforts at radical reform entail substantial costs up-front costs, so adherence to fiscal rules can be severely limiting.

There is another problem. The OBR figures give a false sense of precision. Even estimates of current economic data, such as GDP, inflation and, especially, productivity, are uncertain – never mind future projections. We may live in an Information Age, but reliable data on the economy as a whole is unattainable. I have seen earnest discussions about trends in productivity – and yet the estimates used are bases an uncertain data and heroic assumptions. The only hard data is that on tax receipts, government spending and the level of national debt.

And so the government is forced to take OBR forecasts as holy writ, and tailor its policies to producing forecast outcomes rather than real ones. And Ms Reeves has given us an unedifying display of managing minuscule “headroom” calculated by the OBR. Reforms to the benefit system, where legitimate questions can be asked about its effectiveness, end up looking more like brutal cuts than intelligent redesign. But if Ms Reeves doesn’t play this game she risks trouble in the financial markets.

The biggest problem for the government is that the previous government, and its Chancellor Jeremy Hunt, ruthlessly gamed the system to secure temporary advantage, in the hope that this would turn the political tide in time for the election. The “headroom” was cut to minimal levels; unrealistic assumptions about future cuts to public spending were pencilled in for the next parliament. This was used as the basis to cuts to employee National Insurance that were plainly a very bad idea. This was obvious enough at the time, but Labour failed to call the antics out. That left them supporting unrealistic expectations that they are now paying for. By being politically risk-averse they ended up by taking big financial risks.

What the government is clearly hoping for is a change in the economic data – especially GDP and tax receipts – that will start to give it more margin with which to enact policy. The consensus is very pessimistic (a view that I share for a number of reasons), but good news might emerge from something as insubstantial as a change in public mood – or a reinterpretation of the economic data. Clearly Labour hoped that the formation of a new adult-minded government would be enough to lift the mood. That failed to happen as international news, and especially the antics of President Donald Trump, only made things worse.

One way to give the government extra headroom would be increase taxes. You can make a good intellectual case for doing this on mainstream taxes (income tax in particular), but the government feels that this would be political suicide. They may well be right. The left wants to find ways to tax the wealthy – but this is much easier to do in theory than in practice, and its economic effects are uncertain. One of the props to the economy has been the influx of money from wealthy individuals abroad to buy property. Mess with this and you could get a currency crisis.

So the government looks trapped. It clearly needs to make radical changes to public services and social insurance, so that these are both more effective and less costly. But this means dealing with social problems at source, working across traditional departmental lines, rather than tinkering at the edges with budgets in the search for marginal “efficiencies” that often cause further cost downstream. 

The government has some ideas. It is boosting NHS budgets and hoping that this will enable radical reform to make it more efficient. It wants a drive to renewable energy to reduce energy costs. It hopes that a substantial increase in house-building will lift economic growth (though how putting people in better houses will make them more productive is less clear). It is raising the minimum wage and employer National Insurance in the hop that this will incentivise higher productivity. Each of these efforts (except perhaps the last) is worthwhile but also undermined by compromises. Social care has not been explicitly brought into the scope of NHS reform. Budgets for the energy transition have been crimped. Planning reform is not as radical as it might be. The government seems to be ignoring the implications of raising the cost of lower paid employees on social care – a big driver of health costs.

The government’s luck could turn. This can happen quickly and unexpectedly. But meanwhile, as the FT’s Stephen Bush puts in in a well-written article “Not quite enough may prove to be Labour’s epitaph.” But we should not blame that on Ms Reeves.

Also published on Substack

President Trump grapples with the Ukraine problem. It’s harder than he thought

I am finding it much easier to blog on Substack that here, and I’m starting to think that I should stop posting here at all, and subscribe my loyal email followers directly to Substack.

Anyway, I posted on Substack last week on the topic of Ukraine, and then went abroad for a few days – not posting it here. I returned yesterday and I’ve done an update. I’m posting both here.

Here’s the first, posted on 17 February

What can Trump achieve in Ukraine?

Don’t expect a lasting settlement

Gloom is spreading over European politicians as the nature of the USA’s Trump administration becomes more explicit. They are joining the legions of people shocked by that regime doing pretty much what they said they were going to do, and having to discard to the more optimistic gloss that they had been hoping for. Commentary is being overwhelmed by this sense of shock, which is not very helpful for people trying to understand what is happening. The forthcoming negotiation over the Ukraine war is about three things: a ceasefire, American military and financial support for Ukraine, and sanctions. The Trump regime simply doesn’t have the bandwidth to deal with more complicated problems, like a territorial settlement or a long-term security architecture.

First, let’s look at these three in turn. I have no doubt that Donald Trump sincerely wants the killing to stop. For all his violent talk he is actually quite squeamish about violence – and he craves the recognition that he would get from halting the actual exchange of fire. The only practical way of achieving this is an early ceasefire based on the current position of the two sides, pending some further form of negotiation – in which his regime will not really engage. Other members of the regime, such as the Vice President, JD Vance, are probably less bothered by this, however. And Russia does not want a ceasefire without getting more of what it wants to neutralise Ukraine and make it easier to attack at a future date. 

The biggest prize for the Trump regime is to stop financial and military aid to Ukraine. They have developed a narrative that this aid is creating hardship in America itself – and this seems to be accepted by the bulk of their supporters. They imagine that cutting all foreign aid (excepting Israel, of course), and waste within Federal bureaucracy, will transform the country’s budget deficit problem. Many senior people in the administration, including the President, almost certainly believe this. In fact it is only by tackling Social Security (i.e. state pensions) and health spending that a serious dent in the US finances will be made; that is off-limits. This is weakest part of the regime’s negotiating position. Russia thinks that it can win relatively easily if this support is withdrawn – after all the turning point in the war so far came when US aid was suspended at the end of 2023. However this does offer US leverage over Ukraine.

America’s negotiating position is much stronger when it comes to sanctions. Europe has a stronger incentive to lift these than America does – as that would allow European countries to diversify their sources of natural gas – and away from America. Because of this strength, the Trump regime is placing huge reliance on it. It is hard to know how important this is to the Russians.

The American hope is that the lifting of sanctions will be enough for Russia to agree to an immediate ceasefire, and that the prospect of loss of American aid will do the same for Ukraine. This might be combined with a limited swap of territory: with Ukraine withdrawing from the Kursk region, and Russia from the Kharkiv one. Some kind of negotiation process would then be put in place for a longer term settlement that will never in fact happen. America will block Ukraine’s access to NATO – but they will be unable to stop European countries from giving security guarantees. It is by no means impossible that the US will withdraw from NATO, meaning that it can’t veto Ukraine’s entry, but limiting the value of its worth. It is more likely that Mr Trump will seek to neutralise NATO by sitting fat, dumb and ugly inside its structure – much as the country does within the World Trade Organisation.

What if this plan doesn’t work? Russia calculates that America will stop its assistance anyway, and may not be so worried about the lifting of sanctions. And they might hope to talk Mr Trump into lifting them anyway. That may be too optimistic on Russia’s part. Mr Trump can sense when he’s being stitched up, and will walk away abruptly when he does. That is what happened in his attempt to negotiate a deal with North Korea – and this has many similarities. What happens then? My best guess is that US aid would continue, but would be renegotiated with Ukraine’s European supporters, and with Ukraine itself. The gloomier prospect is that he will walk away from the whole thing, blaming Ukraine and Europe, and ending the aid – which is the outcome Russia seeks.

This is putting the European powers in a tough position, as they at last recognise. If the war continues, they need to find an effective way of continuing to support Ukraine. This is, after all, the most cost-effective way to keep Russia at bay. If there is a ceasefire, then they need to reevaluate the Russian threat, in the knowledge that American support will be limited at best.

Much has been made of America giving away part of its negotiating position in advance. But there are many ways to negotiate and you shouldn’t listen to so-called experts on this. In negotiating terms The American government has put the ball in the Russian court. The Russians will be expected to move from their own hardline negotiating position in order to give proceedings a start – though they are unlikely to do this in public. An immediate ceasefire will be the critical point, though, and I doubt that they will concede this early. 

Donald Trump is not a great negotiator on the international scene – but he isn’t a dummy either. A ceasefire and frozen conflict is not the best outcome, but it would be an improvement on what is happening now. No better outcome is available for the time being. We must hope that Mr Trump has the patience to secure it.

And here’s the update, posted today, 23 February

How are the Ukraine negotiations going?

Not well, but there is hope

I posted last week on President Donald Trump’s negotiations to end the Ukraine war. I said that they would revolve around three things – a ceasefire, ending US aid to Ukraine, and lifting sanctions on Russia. There would be no long-term resolution of the dispute, which would be kicked into the long grass. How is it looking?

The Americans say that they are seeking a long-term resolution, rather than my rather short-term analysis. My prediction is that they will find this hard going. Russia is offering its own version of a long term resolution, but this will prove unacceptable to the Ukrainian government, even under extreme duress. Moving Russia from its solution will be just as hard.

The remarkable thing about events so far is that there seems to have been little negotiation at all. Mr Trump has spoken to the Russian and Ukrainian presidents; Russian and American officials have met in Saudi Arabia; the Americans have tried to strong-arm Ukraine in giving up mineral rights to the US in return for nothing – supposedly to recoup past American aid. Following the first of these Mr Trump has parroted Russian talking points, such as the war being Ukraine’s fault, and that President Volodymyr Zelensky’s mandate has expired, on top of his flat rejection of most ofUkraine’s war aims (starting with the reclamation of lost territory). After the talks in Saudi, American officials gushed about the business opportunities available in Russia for American businesses. But Marco Rubio, the Secretary of State, did not offer a date for a meeting between the Mr Trump and Vladimir Putin, the Russian president; he said this would be done once the Russians proved that they were serious. In other words the Russians hadn’t shown they were serious yet. I take this to mean that they haven’t offered a ceasefire. Mr Trump then backtracked on some of his remarks, and appeared to be showing the Ukrainians slightly more respect. 

The Russians are cock-a-hoop. Their plan is to get America to stop its aid and lift sanctions, without giving away a ceasefire, and then to force Ukraine into a humiliating defeat. Ukraine would be seriously hobbled if it lost access to the US Starlink system and to American Patriot missiles, if nothing else. They think things are going their way, because the Americans, and Mr Trump in particular, seem to be conceding all their negotiating points without a fight. This is surely too optimistic on their part.

What to make of the American attempt to bully Ukraine into conceding mineral rights? The curious thing about this is that it would give America a stake in a continuing Ukraine – especially since many of the minerals in question are in the Russian-occupied zone. Those rights would not be secure if Russia got its way in Ukraine – it would violate Russia’s sphere of influence. It is for this reason that Mr Zelensky may give ground on this. It would also be pretty useless without a ceasefire.

The Russians are not responding to Mr Trump’s negotiating tactics, which seem to a sort of tennis strategy – I make a concession and then it’s your turn. They are going to have to try putting real pressure on Russia for them to offer a ceasefire. I’m not sure that has dawned on Mr Trump yet. But it must have on some of his advisers – even if others (including the Vice President J D Vance perhaps) would happily cut Ukraine off and walk away.

What has become crystal clear, though, is that Mr Trump has no idea what the war is about. He seems to think that it was a stupid misunderstanding that got out of hand. He hasn’t grasped that for Russia the war is about incorporating Ukraine into its polity and suppressing Ukrainian nationalism – and for Ukrainians it is a desperate fight to stop this from happening. It is all much more serious that he appears to think. And it’s all much harder than he thought to stop it. 

I’m clinging to the hope that Mr Trump will realise that he is being stitched up by the Russians and start getting tough. And I’m sticking to my original prediction.

Understanding MAGA economics: the thinking of Peter Navarro

Former Director of the Office of Trade and Manufacturing Policy Peter Navarro speaking with attendees at The Believers Summit at the Palm Beach County Convention Center in West Palm Beach, Florida in July 2024. Photo: Gage Skidmore, CC BY-SA 2.0 <https://creativecommons.org/licenses/by-sa/2.0>, via Wikimedia Commons

President Donald Trump plans a radical economic policy that ditches conventional macroeconomics. This week’s Economist refers to three strands of economic thought within the administration: conservative mainstream, America-firsters, and the tech tycoons. The conservative mainstream favours low taxes, deregulation and small government, but favours trade. America-firsters are hostile to international trade and immigration. Tech tycoons have a particular slant towards regulation of the tech industry, favouring some businesses but not, generally, the giants – and like some types of immigration. It is the America-firsters who present the biggest challenge to conventional economics – and lie at the heart of the way Mr Trump himself thinks, and it is likely to be the regime’s guiding philosophy. 

Mr Trump himself has shown no grasp of economic thinking. But he is advised by people who are economically literate, and who do promote the America-first stance. Chief among these is Peter Navarro, who is close to Mr Trump. Last weekend the FT published an article about him by Gillian Tett, featuring an interview. I think it is important to understand the thinking of people I disagree with, so this article gave me the basis to try and understand America-first economics, which might also be called MAGA economics. 

To get a flavour of Mr Navarro’s thinking, here are some quotes from him, drawn from Ms Tett’s article. Each paragraph is a separate quote:

Ricardo is dead!

America, the piggy bank, will continue to be plundered by a trade deficit that transfers more than half a trillion dollars of American wealth a year into foreign hands . . . [through] industrial espionage, rampant cheating, intellectual property theft, forced technology transfer, state capitalism and currency misalignments… It’s long past time for the ivory tower to reimagine and re-engineer its models of trade!

Net tariffs will lower the US trade deficit and thereby boost real GDP growth while slowing the transfer of US assets into foreign hands, thereby preserving US wealth. 

As domestic investment and production increases and supply chains become more stable and resilient, real wages will rise, inflation will fall and our nation will be more secure.

Saying that Ricardo is dead is akin to saying that arithmetic is obsolete. Indeed some commentators think that many MAGA types, including Mr Trump himself, don’t have a grasp of arithmetic. David Ricardo’s theory of comparative advantage, a regular topic on my blog, is cold, hard and irrefutable logic – and there is plenty of evidence of its operation in the global economy. So what do people mean when they say it is “dead”? They mean that this theory has lost its power to guide policy. In the MAGA context I think there are two aspects to this. First is that the USA is a huge and diverse economy in its own right, and should be close to self-sufficient, with a huge variety of comparative advantage within its own borders. And, indeed, the country’s dependence on foreign trade is generally low compared to other developed economies.

But more attention is given to the fact that the US trades with a large deficit to the rest of the world – creating a current account deficit of 3.4% of GDP. This is one of the biggest deficits in the world (according to The Economist’s statistics only Greece and Egypt have larger ones amongst the economies they report on). And this is the focus of Mr Navarro’s second quote. In a well-ordered, one might say “fair”, economic system, deficits and surpluses should be small and temporary, except in situations where there is a strategic intention to transfer resources from one economy to another. A substantial and continuing imbalance, in the absence of such a strategic intent, is evidence of misalignment. Conventional economists talk in terms of currency valuation – but industrial espionage and the other unfair practices doubtless contribute – and there is evidence of all them in the case of China (running a surplus of 2.1%, not counting Hong Kong, which has a 12.2% surplus on its much smaller GDP).

The result of a current account deficit is that it must be funded by the supply of capital by foreigners, or by the running down of the nation’s own assets held abroad. In America’s case, this may be through direct investment in businesses or property on US soil, through to the purchase of US Treasury bonds, funding the US government. US ownership of US domestic assets is being steadily diminished. An aggressive policy of tariffs would encourage more businesses supplying US consumers to be based in the US. This would create more demand for US workers, and so raise their level of pay, as well as creating an economy less exposed to the vagaries of world events. That is the essence of the last two quotes, and it is surely the thinking at the heart of MAGA economics.

That logic has as many holes as a sieve. But the interesting thing is not to pull it apart, but to understand the broader philosophy that makes this weak logic sustainable. The clue is in the name “America First” or “Make America Great Again”. It is the horror at the idea that the US is losing relative ground to other economies, and especially China – and that this is being facilitated by a open approach to trade and investment that seems to say “Walk all over me”, or, in more Christian terms “Turn the other cheek”. Good quality American jobs have been disappearing abroad. A pandemic in China snarls up US supply chains. China is finding the wealth to build up huge armed forces which are pushing against US influence in the Far East and elsewhere. In this view economic policy is as much about political power and social stability as about economic efficiency and wealth. Tariffs policies may not be enough to sort out America’s trade deficit, for example, but they might if combined with other policies – and that is where the debate should be. Liberal economists want to make the world as a whole a better place, and are relaxed about other countries doing well, so long as this is not at anybody else’s expense – and most would argue that is the case for China’s rise, by and large. America gets cheaper products, and it’s easier to run a budget deficit allowing more public spending or lower taxes (because all that foreign funding enables it).

One interesting aspect of this idea of economic policy is that it is very similar to how the Chinese government sees things on its own behalf too. That is illustrated by another article in The Economist, showing how nervous China’s leadership is about Chinese firms investing abroad – with anxieties about exporting jobs and technical knowhow. This is in contrast to how America’s governments used to see things. India’s government has this tendency too. I think comes back to an earlier point of mine: big economies aren’t so dependent of foreign trade in the first place, and can think of being economically self-sufficient. Of the world’s large economies only the European Union (arguably not a single economy) has a liberal outlook to international trade. Smaller countries, like Britain, can’t afford such an outlook – which is making the world a more difficult place now that America is retreating from those ideals.

This post is published on Substack here

Thinking Liberal moves into Substack

I started my blog, thinking liberal.co.uk, in 2011, when political blogs were quite popular. I used Facebook and Twitter to find interested readers. That was quite popular then. My blog had quite a reasonable impact – people mentioned it to me at party conferences. I interacted with people on both Facebook and Twitter. That was a brief moment of glory – it has since faded into something followed by a few friends and a small band of others whom I have picked up on the way. I don’t know how many, as the statistics seem to be dominated by bots and fakes; even the rather limited mailing list seems to have quite a few dodgy items.

Facebook and Twitter are now well down the path of enshittification, a process first described by Cory Doctorow in 2022. An online service starts by favouring the interests of customers and people to the point of lunacy: everything is free and under your control. Gradually the process of monetisation takes over until customers (and staff) are left with a very weak product, but little alternative because these have been squashed through network effects. Facebook made it harder and harder to use for the distribution of political thought. It was attracting too much controversy (mainly because of its use to promote conspiracy theories and fake news), and the simplest solution was to block all of it, not just the bad stuff. My feed is now full of things I never asked for, driven by sponsorship or an algorithm. Posts from a few friends show up from time to time (to which I need to respond if I am to have any chance of seeing them regularly) – but blink and you miss it. The feed refreshes and the post vanishes. You can find things by searching for the poster, but it’s hard work. For a while I could mitigate some of the problems by creating a Facebook page for my blog, which if people “liked”, they were much more likely to pick up posts on their feed. When I most recently visited this page, however, I was shocked. It was full of junk content put there by algorithm. I had expected to see a sequence of the posts I had made. It has been completely enshittified. To make it work I would need to buy promotion.

Twitter, meanwhile, made it harder for me to post links to my blog long before Elon Musk decided to trash it. Tools that allowed an automatic post ceased to work. I have long since ceased to post, though my account still exists, as some of the notifications are interesting, though even this has tailed off.

Then along came Substack – a blog distribution system. This has proved very popular amongst political bloggers, and so I thought I would give it a try. I’m not entirely sure how it works, or how far along the path of enshittification it has travelled – though the journey has clearly started. One particular feature, though, I will not use: paid subscriptions. I write the blog for my personal pleasure, and because I find that writing helps clarify thought. It is irregular, and I have long since abandoned any idea that it can be seriously influential. I don’t need the money. I suspect that subscriptions are an important part of the Substack business model, though, so this may not be sustainable in the long term. We’ll see.

My plan is to publish all my future posts here. The WordPress website will keep going – this at least is pretty much under my control, and acts as a record of my writing. Email subscription there seems to be costless and easy, so I will keep going with it; Substack will simply been an alternative channel. I may drop the Facebook page – though it does seem to be pretty costless to keep going. I will also keep posting on my main Facebook feed, as I know a few of my friends are picking it up. I will probably stop the silly AI pictures (unless people say they like them). I put these on to improve the chances of the Facebook algorithms favouring them – and to avoid the copyright issues arising from using real pictures. 

So let’s see what happens!

You should be able to find my Substack page and subscribe here.

Ukraine: boiling the frog

Viewsridge, CC BY-SA 4.0 https://creativecommons.org/licenses/by-sa/4.0, via Wikimedia Commons

It is more than a year since I last posted on the war in Ukraine. That was May 2023, just before the Ukrainian counteroffensive got underway. That post stands the test of time reasonably well. The general mood now in the West is pessimistic and I think the war is heading towards the unstable frozen conflict that I envisaged then.

Since last May the Ukrainian counteroffensive came and went. Some advances were made, but it was a strategic failure. Recriminations continue, but the bigger truth is that the Russian army proved much more adept in defence than attack. Last May I wondered how robust the Russian army would be, given how the scale of its losses earlier in the war had weakened their army. Now we know. Before the offensive, the BBC had made much of the “game-changing” influence of modern tanks, such as the Leopard and Challenger. Alas not so. There was also a big push for F-16 fighter aircraft. These were promised but are still not operational – though they are supposed to be arriving soon. As autumn approached a crisis developed over the next tranche of US aid, which got stuck in the House of Representatives. This did not get resolved until 2024. Meanwhile supplies of ammunition dried up, severely constraining Ukraine’s war effort, and allowing the Russians to take the initiative. They crept forward in Donetsk and then switched to Kharkiv, where Ukraine’s defences were weaker, and they make comparatively rapid advances. But Ukraine rushed in reinforcements and the front stabilised. Russia continues to inch forward in some areas, but Ukraine is now able to push them back on occasion. Meanwhile Russia has intensified its aerial bombardment of Ukrainian infrastructure, including the use of glider bombs, which Ukraine finds hard to counter. Ukraine has had successes too, as it increasingly attacks targets in Russia. Occupied Crimea has come under particular pressure, as has Russia’ oil refining capacity.

What are we learning from this? Russia’s immense losses of personnel, and expenditure of ammunition, continue, but this seems to be sustainable. The economy has been reoriented to supplying munitions, and additional supplies have come from North Korea. China is playing a critical role, albeit without explicitly supplying lethal materials. But Russia still seems unable to deliver a large-scale, coordinated offensive. It makes frequent and costly small-scale attacks, pushing the front back gradually, and placing Ukraine under relentless pressure. It is also making progress in drone tactics and countermeasures, and in its aerial attacks. In many respects the Russian war effort is highly sophisticated – even if it struggles in some basic military tasks. Russia is honing a sophisticated war machine, with a deep knowledge of modern warfare. It would be a formidable opponent to NATO, should it attack the Baltic nations, for example.

The big question is how long Western support for Ukraine will continue. It is now probable that Donald Trump will retake the US presidency in January 2025. He is a Ukraine sceptic – though nobody really knows what he would do in office. European governments are under growing pressure from the populist right, for whom the war does not seem a priority. The Russian strategy seems to be to keep up the gradual pressure on the front line and Ukrainian infrastructure, and to wait for Ukraine’s allies to force it into talks based on territorial concessions.

So it is not hard to see why Western media, and BBC correspondents in particular, seem to be generally gloomy. But they are often wrong. They expected Russia to win easily in February 2022; then they expected the Ukrainian counteroffensive, aided by those tanks, to make substantial gains. More recently, they have exaggerated the threat posed by Russia’s offensive on Kharkiv. The BBC’s senior foreign correspondent Jeremy Bowen, in particular, recently delivered a gloomy report from the Kharkiv front suggesting that the Russian advance was ongoing, well after the front had in fact stabilised. We are seeing the stresses on the Ukrainian side, but we see few of those on the Russian one. Western weaponry is flowing again, and we can expect the pressure on Russia to grow in the coming six months. But it is hard to see that Ukraine will be in a position push the Russians back in any substantial way, although they could provoke crisis for Russia in Crimea by damaging its logistical infrastructure.

Incidentally, I have found the best reporting to come from The Economist. The BBC gives you no more than a flavour of the journalistic zeitgeist along with some eye-catching stories – which seems to be all it seeks to do in all its news reporting (Gaza and the British election are other cases in point). My other source is the regular updates from the American tank tank, the Institute for the Study of War. But this has degenerated into mainly a stilted account of Russia’s “information operations” with little broad perspective.

My guess is that, if Mr Trump wins, there will be a ceasefire early in 2025 based on the front lines as they then stand, followed by peace talks. The latter will go nowhere. Both sides will prepare for a resumption of hostilities, but will be under growing pressure not to do so. If Mr Trump fails to win, then this process will take much longer.

Western strategy to oppose Russia seems to be to “boil the frog”. If you make the water too hot too quickly, the frog jumps out – or in this case resorts to nuclear escalation. But increase the temperature gradually and it will eventually succumb. (Incidentally, I have no idea whether the frog and boiling water metaphor has any basis in fact… A frog did get into our kitchen yesterday, but I released it back into the wild rather than try to investigate that question). The war may become increasingly untenable in Russia, as its impact on daily life grows, and in the absence of tangible benefit. Vladimir Putin’s position might then become untenable, perhaps after part of the front line collapses through a breakdown in military discipline.

Well, maybe. It is more likely that a ceasefire will happen, with Ukraine losing a substantial part of its territory, followed by a frozen conflict that might erupt at a future date. Either way, the prospects are grim.

Weaponisation of everything with Mark Galeotti: Defence & Security Circle meeting Monday

A follower of the blog emailed me to say that this forthcoming meeting of the National Liberal Club’s Defence & Security Circle may be of interest to readers, at 18.30 to 19.30 on Monday 4 April 2022, at the NLC or online. Presenter is Russia expert Mark Galeotti . “Free, fearless and forthright”.

I have Zoom link – so get in touch if this is of interest.

Focus on Fake

This morning I received this from a loyal subscriber, promoting a programme of seminars that which really does sound quite interesting (link in the text below):

Dear Matthew,
Firstly, thanks for being one of my key “liberal” places of good quality information. It is great to receive your emails that gently remind me to look at the new material.
As Chair of the Defence & Security Circle of the National Liberal Club, my all consuming volunteer thing, I am asking you a huge favour: we have been given at last minute a NATO project to deliver starting 1 December on fake news, disinformation and hostile players.
It is free, balanced and offers podcasts, videocasts and hybrid events.
I need to get the info out to asd many people who are liberal, moderate, policy thinking and concerned about values – to get in person attendees this Wednesday and to garner zoom online participants. It is a cracking program: 3 x 1 hour sessions you can dip into and events in EDinburgh and Manchester later on 6 and 13 December respectively.
Our website with the registration links is Focus on Fake (nlcdefence.org.uk)
I feel crap asking at this late stage – but I’m channeling my inner Aussie can do attitude.
If you feel at all able to do so – your network would be a suitable and most respected addition to politicians, media influencers, students from KCL and everyday people.
Happy to discuss or answer questions. I’m also charged with creating podcasts with bloggers and vloggers … might I entice you to give us 15 minutes in a chat?
Cheers
Noel

The political consequences of Covid-19 depend on what the government does afterwards

There has been an understandable rallying round by the public during the Covid-19 crisis. Here in Britain, as in most places, the governing party has seen its popularity rise (the main exception is the USA). Will this last?

As with so much else in this crisis the answer seems to depend on which party you supported in the first place. Conservatives think they will keep the opposition parties on the back foot for the long term. The obvious precedent is the Falklands War in 1982. In spite of the initial calamity, which could be blamed on a careless government, people rallied to the flag. Mrs Thatcher’s Conservatives had been doing very badly in public opinion polls beforehand, but they won a landslide in the next two elections.

Opposition supporters, on the other hand, think there will be a reckoning as the dust starts to settle, and the government’s handling will be judged as inept. We are starting to see signs of a concerted assault on the government this weekend. The Sunday Times is running a story claiming that the government failed to follow scientific advice at the start and lost five weeks in its initial response. Kier Starmer, the new Labour leader, has joined in, after being reticent beforehand. Will the charges stick?

I certainly think the government made a false start. Contrary to what is repeatedly being said, though, this was not because they were ignoring scientific advice. That advice was muddled and contradictory; there were plenty of senior science types who backed the government up, though others were urging an earlier lockdown. There was a disastrous dalliance with the idea that the country should allow the virus to spread and build herd immunity; this was following one of the many strands of scientific advice. What was lacking was political nous. Politicians, not scientists, should be the experts on what the public will accept, and how best to communicate what the government wants it to do. The reason why so many governments went fast and hard for a lockdown in other countries was mainly political. It was a very simple message to communicate and it made them look decisive. Boris Johnson, the prime minister, showed poor judgement and has nobody else to blame.

But once the government grasped that the critical issue was not to overload hospitals, they started to do much better. The NHS built up capacity in intensive care with impressive speed, and, unlike in Italy, they have not been overloaded. The whole chain from reporting symptoms to admission to the ICU has been thought through and works (unless you live in a care home, unfortunately). Two issues nag, apart from neglect of care home residents: the slow rate of testing and the lack of personal protective equipment (PPE). Both partly go back to the government’s slow start, as other countries got ahead of the UK in stressed global markets. There has also been organisational ineptitude, especially in the case of testing. Public Health England, in charge of the testing (not actually part of the formal NHS) seems to have been using methods copied from Soviet Russia. They have been slow to take up available capacity, and getting the tests to the people that need them has been not been given much thought. Most people are expected to drive themselves to facilities set up in car parks, and even this is badly managed – I was caught in a 20 minute traffic jam outside the facility set up in Chessington World of Adventures, which I just wanted to drive past, and which would ordinarily handle much higher volumes with no disruption at all.

Still, the public probably don’t think anybody else would have done better – it doesn’t bear thinking about what would have happened if Labour had won the election last December and Jeremy Corbyn had been prime minister. I suspect the attacks on the government will resonate with the usual suspects and change few minds.

Much more important is what happens as the crisis subsides. There are some tricky decisions ahead about how and when to release people from the lockdown, but I don’t think the government is going to get this badly wrong. For all the criticism, it is managing the issue quite sensibly. The real risks are when life starts to return to normal, and the government works out what to do next.

Top of the agenda is our old friend Brexit. The government insists that it will not ask for an extension to the transition period, which ends on 31 December. It evokes too many bad memories of how Theresa May’s government lost control; there is also a powerful myth in the government’s inner elite that delaying deadlines weakens the government’s negotiating position. This is risky; the country is likely to plunge head first into a hard Brexit that could be very disruptive. On one view it would be throwing salt onto the woulds left by the pandemic; on another the pandemic will have dome so much damage already that few people will notice. We’ll have to see.

Next comes the economy. This deserves a separate post. The signs are that damage to the pre-crisis economy will be severe and there will be no quick bounce back. Also government finances will be in tatters. The challenge will be to make sure that panic about the latter does not prevent action about the former. With ultra-low interest rates, government finances are not nearly as scary as they will look. The early signs are that the Treasury has learnt from its mistakes after the Great Financial Crisis, and ministers are not ideologically averse to throwing government cash around. That should prevent catastrophe; the public will forgive a degree of recession.

But the big issue will be catching the zeitgeist of how to change things after the crisis. In my last post I said that people will want to get back to where we were before. But there will still be some shock and reevaluation; the public will expect more than a shrug. What to do about the working-class heroes of the crisis, the nurses, hospital workers and care home workers, will be central. There is a public perception that these groups are undervalued by society. But what to do? Paying them more will be very expensive on public finances and almost certainly need more taxes to balance it. If the government picks up and runs with this idea they could prove unstoppable at the next election. It would mean trashing 40 years of Conservative ideology. But that doesn’t mean it won’t happen.

Alas other issues thrown up by the crisis, such as the precarious nature of so many jobs, and the poor housing conditions of so many of the less well-off, will be rapidly forgotten by most people, and the government will take little or no action. A more interesting question is whether people will feel more sensitive to environmental issues, forcing the government to take these more seriously. Previous crises would suggest not, but this is a different crisis in a different time.

Politically all crises represent both threat and opportunity. There is plenty of both this time. It will be a real test of political mettle. We haven’t seen anything yet.

Why I have been offline

It’s been one of my longer periods of silence on the blog, and I’m still not ready to post at my old rate. I owe my readers an explanation.

Covid-19 is today’s excuse for everything. It has been an important part of what has been happening to me, but it isn’t the reason that I haven’t had time to devote to my blog. That is because in the New Year my wife and I finally took the plunge to move out of London. We’ve been plotting it for years, to the mounting boredom of our friends and relations. We are frustrated with our life in the big city. We love the countryside and feel trapped in London. We also want more space and less jostling with our neighbours. We weren’t looking for the full rural experience, but to take a big step towards it, to live somewhere with more space and with better access to the countryside: preferably a very short walk.

So in January we took steps to put our terraced house near Clapham Common on the market. I was hoping for a bit of a “Boris bubble”, before relief at the breaking of the political deadlock was overwhelmed by the contradictions in what the new government was trying to do, and an overdue global recession struck. Our plan was to achieve a quick sale if possible, so we promised “no chain”. In other words we were happy to move out to temporary accommodation in the probable event that we were unable to synchronise a purchase.

This proved well-timed. The local property market had been dead, but with quite a few potential buyers. Very few properties were coming onto the market. In a week the house had 40 viewings and we had five offers, though none for the asking price. We picked one of these, with our objective of a quick but secure sale in mind, negotiated a slightly higher offer, and we had exchanged contracts before Valentine’s Day.

This left the other half of our plans to move a bit adrift. We had been doing a bit of surreptitious looking over the previous two years. We initially focused on West Sussex and the Chichester area. But we were unimpressed with what was on the market there, and it was relatively expensive. So we started to investigate East Sussex, in the Battle and Rye area, and lined up several viewings. There were some near misses, but none quite hit the mark. We did find the area just as beautiful as further west, so we made a second visit, just as we were about to exchange contracts.

This time we combined the east of East Sussex with the region where the two parts of Sussex meet, in the area around Lewes and Eastbourne. This part of the world quickly grew on us. Lewes is a lovely and interesting place. The South Downs are nearby. And it is within easier reach of both central London and the west of the country, where most of our relatives live, than Rye. We found two properties we really liked there, and offered on one of them. After a bit to and fro our offer was accepted before my birthday on 21 February, though it was clear that there would be a gap between moving out and completing on the new property.

And so started the process of preparing to move out. We had been living in our house for nearly 24 years, and our entire married life. Although we had done a lot of sorting out last year, the amount that still needed to be done was massive. We set a completion date of 27 March, a bit later than our buyers wanted, but about as quickly as we thought we could manage. As usual I was more optimistic than my wife, but on this occasion she proved correct. Getting ready became overwhelming. Sorting things into boxes to take, or into various categories of throwing out. We made regular trips to the dump and local charity shops. We also needed to work out what we would need for our temporary accommodation and what was to be put into storage, without having any clear idea of how long the temporary interlude was going to be.

And then came Covid-19. Like most people I didn’t see the seriousness of the impact until quite late. It was something happening in China. But as it took hold in Italy it slowly dawned that it could affect our plans to move. So our feelings differed from most people. We were willing the government to slow down on imposing restrictions, while most people thought the government was dithering (and most people were surely right). And while most people were stocking up for the crisis ahead, we were doing the opposite to minimise what we had at movement day. Slowly restrictions started to get in the way. The charity shops stopped taking donations and then closed altogether. Some quite usable things went to the tip instead. And then the tip closed, and more stuff had to go into regular bin collections. And the question nagged: would we be able to move at all on 25 March, when we had booked our removal company?

On Monday 23 March, I honestly thought we’d lost the race. Boris Johnson announced lockdown, and the four reasons that we could go out of the house, and completing a house move wasn’t listed. At this stage a high proportion of our stuff was packed; only the bedroom wasn’t taken over by boxes. Normal life had become impossible: we were camping in our own home. It was worse for the people moving in. The wife was six months pregnant and they had a young child. Their rental contract expired at the end of March. The emergency might be able to stave off eviction; it would not delay a new arrival.

On Tuesday we contacted our removers. They were keen to proceed, though they wanted to telescope a two day move into one. Government restrictions on work were vague, it turned out, and ministers talked of keeping the economy going. That gave our removers the wiggle-room, and we were asking no questions. Our relief was immense. It was only slightly marred by Premier Inn calling us in the evening to tell us that our booking for Wednesday to Friday was cancelled. We realised that staying at home after the removal had started was not a practical proposition and had planned to stay there. We managed to find a local apartment instead, though this proved not nearly as comfortable.

On Wednesday our removers turned up. A first there were five of them, and then eight. They worked hard and cheerfully, and got the job done. They marvelled how just the two of us had managed to accumulate so much stuff; we lamely said that a lot of it was inherited. That gave us Thursday and Friday morning to pack up the stuff we weren’t putting into storage, and to clean the place up a bit. On Friday completion happened and we became technically homeless.

We are now in Broadstairs, Kent, in a holiday apartment. We are then moving into a house nearby that a friend owns as a holiday hone and very generously offered to us for as long as we needed it. Our purchase is frozen, without us being able to exchange contracts. We are one end of a four property chain; nothing can move until restrictions are eased. On the Friday that we completed the government published explicit rules on the property market, effectively freezing it. We had only just made it. The landlady of our current apartment now says that she can let only to key workers; we would not have qualified. While our position is certainly not what we had been hoping for, it could have been a lot worse. Compared to the stresses that so many are now enduring our problems are small beer.

Up to the 27 March we had been focusing on completion to the exclusion of everything else. Since then, we have been recovering from the whole exhausting experience. I have actually been quite busy. There was a backlog of work on my various voluntary duties, and two online meetings last week. That has kept me pretty busy; there will be not let up for another week or two, with an ongoing audit and two important compliance deadlines to meet. And then the lockdown will finally catch up and I will have for reading, thinking and blogging (though most of the backlog of reading is in storage!). Service will resume.

The Brexit chaos offers Labour an opportunity

Most people who follow British politics are in despair, as neither government nor parliament are able to plot a way forward with sufficient backing to succeed. But perhaps the small band of advisers to Jeremy Corbyn, Labour’s leader, who famously think that Brexit is a subsidiary issue, are sensing opportunity.

When Mr Corbyn was elected as Labour leader in 2015, Conservatives were gleeful, foreseeing a generation of permanent Tory rule. But Brexit and a blinkered leader have undone them. In 2017 they threw away a massive poll lead and lost their parliamentary majority. In recent months they have retained a consistent poll lead over Labour. This is not enough to break the deadlock, but enough to keep Labour out. But that could change.

Consider the possible outcomes of the current impasse over Brexit. A strong possibility is that the country will crash out of the EU on 11 April without a deal. Neither government nor parliament wants this, but neither can they agree on a deal, nor do they have the courage to revoke the Article 50 withdrawal process altogether. So what are the likely consequences?

It is hard to know just how bad things will be in the event of a no-deal Brexit, as most commentators are either pumping up the dangers or dismissing them. But some of the more thoughtful Brexiteers, like Michael Gove, the Environment Secretary, are clearly rattled. Agricultural tariffs seem to be what is spooking him. Agriculture is not a major part of the economy by monetary value, but politicians the world over know that it packs a big political punch. There will be other problems, not all entirely attributable to Brexit, that will add to the misery. The British car industry is flat on its back. This is partly to do with Brexit, and the effect of planning blight on an industry that has to investment for years ahead. But also it is almost entirely foreign-owned and the underlying economics has changed to make repatriation of manufacturing to home countries more advantageous. A no-deal will accelerate its decline and the massive loss of prestige that will go with it. And there will be a hundred other smaller humiliations, that will be felt keenly by the better-educated and more worldly third of the population who never wanted it in the first place.

It gets worse. Britain will still have to deal with the EU and work out new agreements to allow a thousand things that we take for granted to keep going. This will not be easy as Brexiteers promise, and further humiliating climb-downs are in store. The only place where the hard Brexiteers may be proved right is Ireland. The Irish Republic is only now facing up to the consequences of its hard line on the Withdrawal Agreement and finds itself in a very sticky spot, just as the DUP and the Tory supporters predicted.

In the chaos Labour should be able to force a General Election, even if the government tries to struggle on. The Conservatives don’t have a majority, and have been struggling with a stream of defections. The DUP may well decide that the fun of propping it up is over and withdraw its support. The Tory position will be desperate. If Labour are able to launch their strike quickly, they may not even be able to change leader. In that event they stand no chance of presenting a coherent and convincing case to electors. More likely they will manage to find somebody new, but though he (or much less likely, she) might experience a honeymoon, there will not be enough time for them to get a strong grip on the organisation. Meanwhile Labour, and everybody else, will throw back at the Brexiteers that will then be in charge of the party, all their false prospectuses about Brexit and the no-deal.

What happens if Britain manages to avoid a no-deal? One scenario only gives the Tories a chance: if they are able to get Theresa May’s deal through parliament at the fourth attempt, and then leave in a relatively orderly fashion on 23 May. But to do that they will need a substantial block of Labour MPs, and if the Labour leadership resists, that surely will not happen. Ruling that out, what could happen is some sort of long stay of execution to renegotiate the deal and organise a General Election.

What does Labour do then? It needs to promise a new exit deal to be confirmed by a further referendum. To win, Labour must rally the Remain voters who will no longer be able to support the Tories: that means promising a referendum. But they also need to rally at least some Leave supporters. The importance of these to Labour has been exaggerated, but the party will still need all the votes it can get. But the leadership can still say that it is in favour of Brexit, and will campaign in favour of its new deal when that referendum comes. If that looks a little weak, the Tories will be struggling to come up with a coherent alternative. With decent execution (never a given in British politics after Tony Blair) this could be a winner for Labour.

But are still problems for them. The first is Scotland. Labour has always struggled to win without a substantial bank of Scottish seats. But they have been outflanked on Brexit there by the SNP, who remain organisationally strong. It is hard to see what killer arguments they can use against them.

A second problem for Labour is that it still lacks traction in rural and suburban England. Mr Blair conquered these areas by promising neoliberalism. Labour can’t do that this time. Also they are broadly pro Brexit, so any referendum promise will get in the way. Some form of “progressive” alliance with the Lib Dems, the Greens and even with TIG might help to unlock these seats. But Labour’s strategy for dealing with these parties is to crush them, not lend them a hand.

Which is related to the third problem: the Tories will try to change the subject, as Labour so successfully did in the last election. They will not talk about Brexit any more than they really have to. Instead they will paint Labour as loopy lefties, who can’t be trusted to run the nation’s finances, the forces of law and order, or to control the borders. Labour might think that the country is fed up with “austerity”, but the voters they need to win over think that being careful with public spending is a good thing.

That makes it hard for Labour, but not impossible. Their shadow chancellor, John McDonnell, understands the need for a disciplined message on economic management, and the party’s campaign managers surely realise that abstract ideas like austerity cut little ice compared to concrete messages on impacts of cuts to education and police funding, for example.

The Labour leadership is reaching its moment of truth. Their strategy of sticking to a narrow, leftist agenda (unlike Mr Blair’s broad centrist one) is inherently risky. But the Tories may be gifting them their chance. Will they be up to the task?