This is worse than the IMF-bailout crisis

As Labour’s annual party conference in Liverpool gets under way, chancellor Rachel Reeves will have one eye on 26 November. That is when she will deliver what some are calling a crunch budget.

And no wonder. Britain’s fiscal and economic situation is dire. Successive governments have been relying on fantasy economics, in which a country can live forever beyond its means. Public debt (£2.8 trillion as of March 2025) is now fast approaching the equivalent of one full year’s annual output, with no real plan to end the borrowing. Behind the tattered cloak of the fiscal rules, so beloved of Reeves, governments have refused to bring spending down in line with the taxes generated by a stagnant economy.

Recently, however, critical voices have started making themselves heard. Commentators and economists insist the ever-increasing debt pile is unsustainable. They point to the rising yields Britain is paying on long-dated government debt, the highest among the G7 advanced economies. This is what the media are discussing as a developing ‘bond-market crisis’.

This means that the usual financial lenders – pension funds, insurance companies, investment trusts and banks, both domestic and foreign – are demanding ever greater returns for lending to the British state. Partly this is justified as offsetting Britain’s relatively higher inflation rate. But it is also testament to investors’ mounting concerns about Britain’s economic future. They can’t ignore the palpable absence of a coherent government plan to bring borrowing under control.

Liam Halligan, a Telegraph columnist and host of the Planet Normal podcast, argues that Britain seems stuck in a high-debt, low-growth doom loop. Not only have successive governments failed to reset the public finances after the huge expense of the Covid lockdowns, the current Labour government is now also in the perilous situation of having to borrow to service existing debt.

Why does Halligan call it a doom loop? Because paying the interest costs of existing debt is adding to today’s borrowing. This increases the amount of outstanding debt, thereby tending to inflate further the cost of debt servicing, requiring even more borrowing. And so on and so on. Halligan points out that last year the government borrowed £148 billion, which is about five per cent of GDP. That’s concerning enough. But over two-thirds of this amount – £105 billion – was spent just on servicing existing debt. That is nearly double what the government spent on defence.

As a result, Halligan and other level-headed economists have been warning that Britain is heading towards a 1970s-style debt crisis – that is, at some point soon, those bond investors might stop lending. Critics claim we could be looking at a situation similar to that which faced James Callaghan’s Labour government in 1976, when it had to resort to an International Monetary Fund (IMF) bailout.

That some commentators are now drawing these analogies with the 1976 crisis is understandable. It highlights just how bad the public finances are today. But, as ever, these analogies can obscure the historical specificity of both crises, then and now.

A lot has changed in the past half-century. In the 1970s, for instance, Britain stood out as the ‘sick man’ of Europe, which made it especially susceptible to a boycott by financial investors. But today, Britain is far from exceptional. There’s now a huge hospital ward of equally sick countries with unsustainable public finances – not least, France and the US. Both have even higher debt levels and anticipated budget deficits than Britain. They also share a similar political inability to do much about their problems.

Britain in 1976 was in the grip of a falling currency crisis, as well as a public-spending crisis. At the time, it had little choice but to appeal to the globally recognised lifeboat of the IMF, one of the few institutions capable of rescuing Britain. Since then, the IMF has become a rather less respected body. At the same time, the huge financialisation of the global economy has created many more liquidity options for governments under financial pressure.

Indeed, international financial funds are much larger today than they were in the 1970s. They are fuelled by the spare surpluses produced worldwide, but not utilised for productive investment. As Ruchir Sharma showed in What Went Wrong With Capitalism (2024), during the 1970s, the value of the financial markets was roughly equal to the value of goods and services produced by the global economy. Today financial markets are nearly four times larger in size than the global economy.

These inflating financial funds have to park their money somewhere. In a bubbly world of risky assets, even British government debt can seem a relatively safe place. So while the British government is highly unlikely to appeal to the IMF for funds, and its borrowing costs will certainly have risen, it could still conceivably access funds from private investors.

This is not to put a positive gloss on the situation facing Britain. In some ways, Britain finds itself in a much worse state, economically and politically, than it did in the 1970s.

We know that Britain’s public finances are in a terrible state. But the productivity slump following decades of insufficient investment in better technologies is posing an even greater problem. The lack of investment means that the growth in output per hour of work has been trending downwards steadily since the 1970s. It reached a postwar peak of an annual four per cent in productivity gains in the 1960s before falling to about half that rate during the 1980s. After the 2008 financial crash, productivity plummeted before moving only marginally above zero.

This matters in terms of Britain’s ability to access borrowing. For as long as productivity and economic output are moving steadily upwards, potential financial institutions are more willing to lend – because the state to which they’re lending will be able to service their loans. And, whenever the full debt falls due for repayment, the loan is likely to represent a manageable sum as the economic cake will be much larger by then.

Even back in the recession-hit, high-inflation, strife-torn 1970s, annual output per head of the British population still managed to increase by over a fifth in real terms. This wasn’t quite at the productivity levels of the 1960s, but it still represented a reasonable rate of growth in the eyes of financial lenders.

Today, such momentum in Britain’s economy is long gone. In the decade up to 2024, output per head barely rose at all. It was up by just over six per cent across the whole decade, which amounts to less than one-third of productivity increases of the crisis-hit 1970s.

The absence of those steady increases in productivity, which had continued since the Industrial Revolution in the early 19th century, explains why people’s living standards are no longer rising. Moreover, over the past half-century, the decay in productivity growth has also deprived the state of the funds necessary to upgrade and improve public infrastructure, utilities and services.

In short, the productivity slump drives and underpins the incapacity of the state, and the degradation of public services and infrastructure. Indeed, it is the problem of productivity growth that has produced the government’s most pressing economic challenge: how to deal with the unprecedented peacetime expansion in public indebtedness.

If productivity decline is a result of economic constraints that have been built up over time, the grim state of the public finances is different – it is primarily a political problem.

Since the 1980s, successive governments of all political stripes have side-stepped the reality of the productivity slowdown. Whether through wishful thinking, stupidity, complacency or cowardice, this dereliction of duty, this refusal to confront the problem, has been compounded by governments’ efforts to maintain and expand day-to-day public services and welfare entitlements. They really have acted as if ‘money is no object’. This is a matter of bad political choices, not economic fate.

It’s in this political realm that Britain, and most other advanced industrialised countries, are in a much worse situation today than they were 50 years ago. Whatever you think of the individual politicians prominent in the 1970s and earlier, they were always willing to exercise political leadership. They were guided by particular strategic visions.

By contrast, today’s politicians are leaders in name only. Writing in The Sunday Times, journalist Matthew Syed, a Labour Party member until recently, pithily summed up the Keir Starmer government: ‘This is a government with no rudder, no map, no compass, no vision, no helmsman, no clue.’

Back in 1976, Callaghan, the newly appointed Labour leader, and his chancellor, Denis Healey, clearly recognised the seriousness of the UK’s economic and fiscal position. They didn’t need any fiscal rules or an instruction from the Office for Budget Responsibility to arrive at that judgement. Under their leadership, the government continued making public spending cuts to reduce the deficit, well before it signed Britain’s famous Letter of Intent to the IMF in the middle of December.

The qualitative political difference is that the government then was acting on its own authority, exercising its own judgement, demonstrating its own leadership. The IMF didn’t ‘force’ Labour to launch its curbs on public spending. Yes, the US administration and others were certainly putting pressure on Britain to give up its costly delusions of post-imperial grandeur, and to stop living beyond its means. And successive British governments’ attempts to retain an international status for sterling were also proving increasingly burdensome. But the Callaghan government was nevertheless acting on its own terms, doing what it thought was in the national interest, not hiding behind orders from the IMF technocrats in Washington.

It was not even the case that an IMF loan was that unusual back then. Many other countries, Britain included, had borrowed from the IMF before, although the 1976 loan deal was the biggest to date. Moreover, the idea that the loan saved the UK from national bankruptcy is an overstatement. The 1976 deal acted primarily to reassure international investors that the government was serious in its objectives. It provided a stamp of approval for potential lenders. The loan itself was only half utilised, and was fully repaid by May 1979.

Throughout the 1976 crisis, Callaghan and Healey demonstrated a determination and resolve palpably absent today. They stood firm in their commitment to spending reductions in the face of opposition from their own MPs and some ministers. This was despite Labour not even having a majority in the House of Commons. It makes for quite a contrast to Starmer and Reeves. Despite their ‘landslide’ majority of over 170, they capitulated almost instantly in the face of opposition to their modest welfare-reform proposals.

There was no such pusillanimity from Callaghan in September 1976. He took the fight to the Labour Party conference in advance of the IMF loan deal being signed. That’s when he made his landmark speech, effectively rejecting postwar ‘Keynesian’ political orthodoxy – namely, that state intervention, through fiscal and monetary policies, could sustain capitalism. Callaghan did not hold back in spelling out the harsh circumstances.

He told the delegates about the necessity of confronting harsh realities, cautioning that, ‘for too long, perhaps ever since the war, we postponed facing up to fundamental choices and fundamental changes in our society and in our economy’. He continued:

‘We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and that insofar as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step.’

Peter Jay, an economic journalist and future UK ambassador to the US, pronounced Callaghan’s speech ‘the most breathtakingly frank public announcement since Saint Paul’s first epistle to the Corinthians’. This may have been overegging it somewhat – Jay was Callaghan’s son-in-law, and is also thought to have written the key parts of his father-in-law’s speech. But Callaghan’s was certainly a bracing, politically courageous intervention.

Healey’s intervention at the conference was perhaps even more dramatic. He was scheduled to fly off to attend an IMF meeting in Manila, but at the last minute decided to postpone his trip. Instead, he commandeered an RAF plane and flew to Blackpool to back up his boss’s arguments. On his arrival on stage at the conference, amid booing and general unrest, he quickly asserted himself: ‘I don’t come from the Treasury. I come from the battlefront.’

As the Guardian’s political editor, Ian Aitken, described Healey’s performance at the time, he ‘put his head down… and bulldozed the Labour Party conference into giving its full and overwhelming support to the government’s attempt to save the pound’.

Whatever you think of the politics and policies of the Callaghan-Healey team in the late 1970s, their robust political leadership shows up the timidity and ineffectiveness of Starmer and Reeves. If the IMF was ever to get involved today, it would only be because Starmer and Reeves were buck-passing daunting decisions to another technocratic institution, more unaccountable even than the Office for Budget Responsibility.

Properly getting to grips with Britain’s grave financial difficulties is just as much a political as an economic challenge. It will require a style of political leadership not seen since the 1980s. It will demand a willingness to engage with the electorate and spell out hard truths. And it will need politicians with the resolve to take tough decisions.

We can’t expect such qualities from today’s shallow, managerial political class. So British people will have to create such leaders themselves. We need a new generation of politicians who take their responsibilities seriously. Who will stop evading responsibilities in the deluded belief that they can run a profligate state forever. Because sooner or later, a brutal reality will intrude on their fantasy.

Phil Mullan’s Beyond Confrontation: Globalists, Nationalists and Their Discontents is published by Emerald Publishing. Order it from Amazon (UK)