Modern Monetary Theory—or MMT—was dismissed by traditional economists right away. But I didn’t want to do that. I wanted to learn as much as I could about it before drawing conclusions. So I approached MMT with an open mind and read the academic work by its theorists and critics. I then wrote a book that presents my conclusions.

I think we all need to understand what MMT says, as it’s a deeply seductive theory with the potential to change how people discuss policy. Unfortunately, it isn’t a sound economic theory. In this article, I debunk some of MMT’s mantras, which are found all over its literature.

The government is not constrained like a household

MMT assumes the treasury is allowed to create money to fund its spending. The usual rules intended to limit this practice, such as central bank independence, are assumed to be non-existent or not enforced.

As a result, MMT concludes that the central government does not have financial constraints. In other words, it cannot “run out of money” like a household, it doesn’t need to “find the money” to do public works, and so on. These are some of MMT’s most publicised conclusions.

But there’s a problem. What MMT says is a truism. What it really says is, “If the government is allowed to create money, then it cannot run out of money.”

Every economist knows this. The question is never whether it is technically possible to let the government fund its spending with money creation—we know it is. The question is whether it is a good idea. Most economists think it’s not.

Economists don’t think we can trust politicians to use money creation judiciously for political reasons and due to inflationary bias. MMTer William Mitchell suggests a “wise government” can use the power of MMT to increase prosperity. I grew up in Argentina, so you can see why I’m a bit skeptical about this.

In addition, economists don’t believe there’s much to be gained economically from operating the MMT way. They don’t think GDP can be permanently increased and unemployment eliminated by letting the treasury create money, which is what MMTers ultimately suggest.

If an MMTer tells you the government doesn’t have financial constraints, tell them, “Yes. If we let the treasury create money, then it cannot run out of money. Everyone knows that. How is this insightful?”

Taxes and bonds are not used to fund the government

MMT tries to prove that central bank independence is completely fictitious, and thus MMT’s suggested policies can be applied without major changes to current institutions. You just need to analyse accounting details more carefully to see the truth.

For example, according to MMT’s analysis, the US federal government creates new money every time it spends. Whenever it collects taxes, it completely destroys the money from the record. MMTer Stephanie Kelton says, “Clearly, government spending cannot be financed by money that is destroyed when received in payment to the State!”

MMT’s analysis is incorrect—it suffers from numerous technical and logical problems. For example, MMT says that when the US treasury moves money into its account at the central bank, that money is “destroyed.” In reality, the balance in that account goes up and is properly recorded, as in any bank transfer. MMTers seem to be thrown off by how statisticians calculate common money aggregates, such as M0 and M1, which don’t include the balance in the treasury’s bank account.

The error has been pointed out to MMTers to no avail. In Stephanie Kelton’s 2020 book, The Deficit Myth, she insists the US federal government creates new money every time it spends and destroys money when it collects taxes.

If an MMTer tells you the government doesn’t need taxes before it can spend, ask them, “If the balance of the treasury’s bank account is zero, how can it continue spending without taxes or bonds?”

Government deficits increase our savings

According to MMT, a government deficit is a surplus for the rest of us. In The Deficit Myth, Stephanie Kelton says, “Fiscal deficits don’t eat up our savings; they enlarge them! … That’s because government deficits are always matched—penny for penny—by a financial surplus in the nongovernment bucket … Fiscal deficits will always lift our collective (financial) boat.”

It is technically true that a government deficit puts more “financial wealth” in the hands of the public. This is an accounting fact—if the government creates money or issues bonds, it puts more financial assets in the hands of others. But this doesn’t mean people get richer in real terms, as financial wealth is not the same as real wealth.

To see the problem just consider the case of Argentina. Thanks to government deficits, many Argentinean households have been able to save millions of pesos! But they don’t seem to be getting any richer.

Tell the MMTer, “If the government gives one million newly created pounds to every household, that’s a deficit of the government and a surplus of households, just like MMT says. Why don’t governments do this to end poverty?”

Note that MMTers often says things that are technically true but economically meaningless, and this was one example of it. Here’s another example: MMTers often say that a monetarily sovereign government cannot default on debt that it owes in its own currency. Once again, is it technically true that the government can always create money to wipe out its debt. But it is likely it would still default on its debt economically, as the resulting inflation would make the debt repayments worth less than expected by creditors.

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The government should budget based on resources, not money

According to MMT, market economies always have a huge number of idle resources lying around, or “slack.” For example, some MMTers think there is 25% spare economic capacity in Europe.

The government should create money persistently and use it to mobilise those spare resources, they say. This doesn’t cause inflation because the government doesn’t compete with the private sector for the same resources. Inflation only kicks in after all resources are fully utilised, and this is very far away.

According to MMTers Yeva Nersisyan and Randall Wray, “government spending creates ‘free lunches’ as it utilises resources that would otherwise be left idle.”

Note that this line of thinking seems to have inspired Zack Polanski, who recently said, “The fiscal rule we need to have is to make sure that inflation doesn’t go higher than the skills and resources that we have in our economy.”

Unfortunately, MMT’s analysis suffers from numerous theoretical problems. For starters, it relies on a simplistic and outdated theory of inflation. For example, the theory gives no role to expectations about the future, and it assumes unemployment can be brought all the way down to zero without causing inflation, which most economists disagree with.

In addition, MMT’s theory of “slack” is unworkable. It relies on a non-standard interpretation of Keynes’ General Theory, which was disproven long ago, in order to show that slack is severe and permanent regardless of wage and price adjustments. The theory suffers from well-documented issues. MMT’s reliance on subpar theories makes it underestimate inflation and overestimate slack.

On the practical front, it seems difficult for the government to only mobilise idle resources. For example, it’s hard to design a job guarantee program in such a way that it would not compete with the private sector for at least some of the same workers.

Moreover, politicians may not be incentivised to perform realistic calculations of resources and slack. For example, MMTers Yeva Nersisyan and Randall Wray analyse the Green New Deal in terms of resources, as opposed to budgets, as prescribed by MMT. However, their calculations aren’t credible. For example, they argue that free college “pays for itself” because productivity gains exactly offset the required resources. No detailed calculation is provided for it. The same goes for many other components of the Green New Deal.

Ask the MMTer, “If economic slack is so severe, why do we usually have positive inflation every year? Can we trust politicians to analyse resource requirements and economic slack carefully?”

If you want to learn more about MMT, including its views on hyperinflation, Bitcoin, and the job guarantee program, get a copy of my book If You Can Just Print Money, Why Do I Pay Taxes?: Modern Monetary Theory Distilled and Debunked in Plain English.

-Friedrich August von Hayek (1960)

“Freedom is a fragile thing and it’s never more than one generation away from extinction. It is not ours by way of inheritance; it must be fought for and defended constantly by each generation”

-Ronald Reagan (1967)

Classic liberalism has one major disadvantage in the battle of ideas: it is counterintuitive. It consists of ideas that do not come naturally to us. Quite often, it even asks us to actively override our initial emotional reactions, impulses and gut feelings, and to think things through properly rather than go along with what “feels right”. You can be “instinctively socialist”; you can be “instinctively conservative”; but few people are “instinctively liberal”. What would it even mean to be “instinctively liberal”? At best, people can have an instinctive aversion to authority, but that, on its own, is more likely to lead to a juvenile libertinism than to a consistent liberalism. (Although some of our conservative critics would, of course, argue that that is exactly what classical liberalism is.)

But this major disadvantage also has one minor upside: it means that classical liberals have interesting stories to tell.

If you ask a socialist how they became a socialist, or a conservative how they became a conservative, the most likely answer will be: “I have always felt that way; I was just not able to articulate it, until I read X, or met Y, or joined Z.” Thus, most of their intellectual development will have consisted of finding post-hoc rationalisations for what they already believed. They will have started with the conclusions already largely formed, and then looked for ways to justify those conclusions in retrospect.

A classical liberal is much more likely to tell you a story involving some internal conflict, some agonising, some painful self-interrogation. There will also be much greater variability in their stories, with people coming at it through very different pathways. If you get a bunch of liberals into a room and ask them for their political “origin stories”, what you will get is bound to be both entertaining and informative.

A great example of that genre is the book The New Right Enlightenment: Young Authors on the Spectre That Haunts the Left (henceforth “TNRE”), published in 1985, on which this article series is modelled, and to which it is, in a sense, a sequel.

TNRE is a collection of essays by twenty people who were then up-and-coming thinkers of what was then called “the New Right”, in which they explain their political outlook, and how they got there. It was not technically an IEA publication, but it was commissioned and edited by Arthur Seldon, then Editorial Director at the IEA, and it contains several chapters from people who would later join the Institute in some capacity or other. I consider it an IEA publication, even if the IEA’s logo is not printed on the cover.

What Seldon et al meant by “the New Right” was essentially classical liberalism, although in hindsight, the title of the book was poorly chosen. According to Google Ngram Viewer, the use of the term “the New Right” peaked around the time TNRE was published, but then began to decline. It was also prone to misunderstandings, and even a lot of the authors of TNRE did not seem particularly happy with it.

Be that as it may: TNRE can be read as a mini-primer on the Austrian School of Economics, the Chicago School of Economics, the Virginia School or Public Choice School, and the political theories of Robert Nozick and Karl Popper. The added personal element – people reconstructing their own intellectual journeys – makes these abstract ideas more relatable, but it does this without being self-indulgent.

To the extent that TNRE is a primer of classical liberal ideas, it is a timeless classic. A present-day reader can easily forget, over long passages, that the book is over 40 years old. To the extent that it is about the authors’ personal intellectual journeys, though, it is quite clearly a product of its time, describing generation-specific experiences. Most of the authors of TNRE were Baby Boomers¹, the youngest ones were early cohorts of Generation X². There are no Millennial authors in TNRE, for the simple reason that the oldest Millennials³ were four years old when the book came out, while the bulk of them had not been born yet. The earliest cohorts of Generation Z⁴ would not be born for another 12 years.

Why does this matter? Would the experience of a budding liberal born 20, 30 or 40 years later than the authors of TNRE really be so fundamentally different from theirs?

In some important ways – yes, very much so. The political/ideological spectrum has changed quite a lot since 1985, the zeitgeist has changed, the way we engage with political ideas has changed, and the most salient issues of today are no longer those of 1985.

For a start, TNRE authors still used the old rule of thumb that a classical liberal is somebody who is “right-wing on economics; left-wing on social/cultural issues”. This is a reference to the “Nolan Chart” from the 1960s, which forms the basis of most versions of the political compass. As far as ultra-simplified rules of thumb go, it worked remarkably well for about half a century. But it presupposes a political Right which is interested in economic progress, and a political Left which is socially/culturally permissive. In the context of a NIMBY Right on the one hand, and a censorious “woke” Left on the other, the political compass no longer works in that way.

Related to that: while classical liberals were undoubtedly a minority in 1985, on an issue-by-issue basis, most of their opinions were not so unusual. What made classical liberals unusual was their package of opinions, and the consistency with which they applied them. Thus, the authors of TNRE did not have a general sense of political isolation. Rather, their experience was that wherever they went, they would find common ground with people on some issues, while provoking strong disagreement on others.

The policy challenges the country faces have also changed. The domestic backdrop to TNRE was Keynesian-interventionist postwar consensus, which was in the process of being rolled back by the Thatcher government, but that process was by no means complete at that stage. The international backdrop was the Cold War: none of the authors could have known that the Berlin Wall would not survive the decade.

Britain did not have a housing crisis yet, so the housing market and the planning constraints on supply are only mentioned once in TNRE. Immigration and Britain’s relationship with the EU are side issues; climate policy and transgenderism are not even that.

The way people engage with political ideas has changed even more radically. Twitter, Bluesky, YouTube, Twitch, TikTok – these things are not even imaginable yet. The only time technology is mentioned in TNRE as a means to spread political ideas is when one author proudly describes how he uses a computer to make political posters.

In short, there is a lot to be said for a present-day sequel to TNRE, written by Millennials and Zoomers, to talk about their intellectual journeys, and make classical liberal ideas relatable to members of their generation.

The title “Millennial Liberalism” is, of course, a response to “Millennial Socialism”. A lot of media stories have portrayed Millennials as a generation of Corbynites, and Gen Z as a generation of Polanskiites. Judging from opinion surveys, this portrayal is largely correct. But there is such a thing as a Millennial-Zoomer Liberalism too, even though it is clearly not a mass movement, it is not fashionable, and people will never chant “Ohhhhhhh Ludwig von Miiiiiiises” at Glastonbury.

The upside of this is that Millennial Liberals and Zoomer Liberals are among the brightest and most independent-minded members of their generations. These are people who have a genuine interest in ideas: unlike Millennial Socialists or Zoomer Socialists, they are not doing this in order to boost their social image. They are not going along with the fashions of the time, and they are not trying to fit in. The upside of ‘uncool’ ideas is that you can at least be sure that nobody ever adopts those ideas in order to ‘look cool’.

So I have asked some of those Millennial and Zoomer Liberals to tell me their stories, which is what they will do, in this article series. Unfortunately for me, I am slightly too old to qualify for a contribution of my own: I was born in 1980, which makes me part of the last cohort of Generation X. What I can do, though, is abuse my position as editor to say a few words about my own ideological journey here.

And you cannot stop me.

Like countless other people before and after me, I went through a typical “confused, clueless teenage commie” phase from about age 15 to 17 or 18. I had copies of the collected works of Marx, Engels and Lenin, but never made it past the first few pages, because it was difficult to read, and, like most Millennial and Zoomer Socialists today, I was much more drawn to the “rebellious”, “cool” image of socialism than to the actual ideological content. (I would, of course, have denied this at the time, and was genuinely unaware that that was what I was doing.) Still, while my ideological commitment was extremely superficial and ill-informed, it felt real, and it was not so easy to let go of.

At the age of 17 or 18, I started to develop a grudging appreciation of the market economy. I remember reading a booklet written by a liberal economics journalist which made an impression on me: Wundertüte Marktwirtschaft: Was kann sie leisten – was müssen wir leisten? (“The market economy as a goody bag: What can it achieve – and what do we have to achieve?”). It described basic economic concepts in extremely simple terms, one of them being Adam Smith’s “invisible hand” – the idea that, in a market economy, you can do things that benefit other people even if that is not your intention. You do not get rich simply by “being greedy”. In a market economy, economic transactions are voluntary. I cannot force you to trade with me. If I want some of your money, I need to offer you something that you want, and are prepared to pay for.

More: whatever it is that I am offering you, I am probably not the only one vying for your custom (or at least not for long). Others will try to do the same. I need to outcompete them. I need to offer you something better and/or cheaper than them. When one of my competitors comes up with a more appealing offer, I need to match that somehow.

This sounds trivial today. But it was a mind-blowing realisation for me at the time, because I started applying it to things I saw around me. I started noticing that pattern in real economic life. In particular:

Two years earlier, a regional brewery had launched a new style of beer. It turned out to be extremely popular, and other breweries tried to respond to it in various ways. As a budding beer enthusiast, I enjoyed the results of that competitive process, but I never once thought about why this was happening. More generally – I never once asked myself why, every time I set foot into a shop, the shelves were full of nice things offered at reasonable prices. To say that I took things for granted would be an understatement. All the good things that a modern market economy has to offer were, from my perspective, just somehow there. And that was it. That was early-stage Niemietzonomics. Everything is just somehow there.

Also around 1997 or 1998, I developed an interest in the postwar period, and especially the West German Wirtschaftswunder, the economic miracle that turned a war-torn wasteland into one of the most prosperous countries in the world. I knew from my grandparents’ anecdotes that things had not always been this way, but my theory for how things get better over time was analogous to my theory for how goods get into the shelves: they just somehow do.

Except, as I then learned, there was nothing “somehow” about it. The Wirtschaftswunder was the result of active political choices, which were controversial at the time. It started in 1948, when Business Secretary Ludwig Erhard abolished price controls overnight, and the shop windows started to fill up almost immediately. Erhard, who was influenced by a group of liberal economists (the original neoliberals or “Ordoliberals”), was initially very much in a minority with his pro-market views. The two largest parties – the Social Democrats (SPD) and the Christian Democrats (CDU) – both initially supported a semi-socialist economy with a raft of nationalised industries.

So, for a while, I was torn. I accepted the case for a market economy at a logical level, but my heart was not in it. The market economy seemed right, but it did not feel right.

I thought that a good solution to that inner conflict would be to become a social democrat. So in the Federal Election of September 1998, I voted for the SPD, a few weeks later, I joined the party. It seemed like a good compromise: the SPD was a left-wing party; they had Marxist roots which they still cherished in a nostalgic way, but they were also explicitly accepting of the market economy (and had been since 1959). The party had a proud history, which I found extremely appealing. Born out of the political struggles of the Bismarck era, they later became the bedrock of the ailing Weimar Republic, and in the Republic’s dying days, they were the last man standing against Hitler. I generally hate the expression “on the right side of history”, but in this case, for once, it just fits.

Still, joining them did not really resolve my inner conflict: it just transformed it. I soon learned that the party was torn between a market-friendly “Blairite” wing and a traditionalist left wing, and I found myself firmly on the side of the former. The left-wing of the party seemed overly emotional – indeed, childish – to me. For example, even though government spending at the time was about 48% of GDP, left-wingers were constantly warning about an imaginary “dismantling” of the welfare state.

They also had a tendency to unduly moralise economic outcomes and economic policy decisions. For example, many public sector programmes, such as the pension system, were running chronic deficits, which the Blairites wanted to close with modest spending cuts. Rather than presenting alternative plans, the Left denounced such plans as “socially unjust” and “unfair”. For me, these were not matters of fair vs unfair, or just vs unjust, at all. They were just matters of basic arithmetic. You cannot constantly spend more than you bring in. How is that not obvious? How is that even a discussion?

Or similarly in labour markets: unemployment was very high at the time, in part because a system of centralised collective bargaining prevented wages to vary with productivity. The Left did not accept that argument, claiming, instead, that it was “unfair” that people in less productive parts of the country should be paid less: they work just as hard! Some of them even thought it was “unfair” that East Germans earned less than West Germans, despite the obvious East-West productivity gap.

What estranged me from the Left was that I had started to think like an economist. I started to think of market outcomes as amoral signals of supply and demand, not as moral judgements.

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I attended local party meetings, where I was usually in a minority of one with those views. It became clear to me that while the party tolerated its market-friendly wing, they would never truly accept it. Their heart was not in it, and it never would be. After about a year, I started to accept that, as much as I liked my comrades on a personal level, I did not really belong in that party.

But where else to go? Defecting to the Right was completely out of the question for me. I may have become “economically right-wing”, but I still strongly rejected social conservatism and nationalism. The aforementioned Nolan Chart may have been past its prime, but around the turn of the Millennium, it still worked perfectly for me. I was economically right-wing, but socially and culturally left-wing.

There was, of course, a party which occupied that quadrant of the Nolan Chart, and that was the liberal Free Democratic Party (FDP). In early 2000, I reluctantly defected to them, still insisting that I remained a bit of a Leftie, and that it was specifically the party’s left-liberal wing that I identified with.

Those were also the early days of online discussion forums, a forerunner of what we now call “social media”. Each party had its own forum, and, then as now, the extremes were heavily overrepresented. The conservative forum had its fair share of far-right nationalists, the social democratic forum had its fair share of literal communists, and the liberal forum… well, they had the libertarians.

I did not like those people at all, the libertarians. They were arrogant. They were elitist. They came across as lacking in empathy. But they were really challenging to argue with. They were smart, they were knowledgeable, and they were infuriatingly consistent. They did not win me over, but I found them interesting enough to look up some of the names I picked up from them, such as Milton Friedman, Friedrich August von Hayek, and Ludwig von Mises.

I finished school in June 2000, and then relocated from the state of Rhineland-Palatinate to the state of Bavaria to do my National Service. It was not a bad experience overall, but it was not exactly intellectually stimulating, so I decided to fill that gap by reading up on libertarianism. Some books were available from the liberal Friedrich Naumann Foundation, others from an online bookstore called “Amazon” which I had recently discovered. The early Austrian School types wrote in German, which was neat, but Milton Friedman, rather inconsiderately, did not. There were German translations of his books, but they had tiny print runs, and were impossible to get hold of. (Needless to say, every word Naomi Klein or Noam Chomsky ever uttered was instantly translated, and available everywhere.) Armed only with school English, reading Friedman in the original was a pain. But by then, I was sufficiently captivated by the ideas to keep going.

I cannot remember at what point I realised that I had moved over from left-liberalism to libertarianism. There was no single breakthrough, just a series of realisations that I was wrong about many things.

An example is the welfare state. I believed that the state was generally a bad entrepreneur, and that a competitive marketplace was a better way to provide goods and services. But for a long time, it just did not occur to me to expand that kind of thinking to social protection and welfare services. It did not occur to me to think of the welfare state as essentially a nationalised industry, providing services which, in the main, could also be privately provided.

I also developed an interest in real-world approximations of free-market reforms. I read about Thatcherism, Reaganomics and “Rogernomics”.

After National Service, I spent the spring and summer of 2001 travelling through Central America. Although I loved the region, I was also shocked by the poverty and underdevelopment I saw there, and became more interested in Development Economics as a result. I was particularly drawn to successful examples of countries that had recently grown out of poverty, and it was in this context that I learned about Hong Kong, Singapore, and Chile. I came to the conclusion that, while there were no pure libertarian development models, opening up and liberalising the economy was indispensable for escaping poverty. Naturally, this led me to believe that globalisation was the best thing ever.

It was the worst possible time to come to that conclusion. In October 2001, I moved to Berlin, to study Economics at the Humboldt University. It was the heyday of the anti-globalisation movement. They were all the rage on campus, and impossible to avoid.

I hated them.

They were frustrating to argue with, because they had that typical left-wing combination of ignorance and over-confidence, mixed with a strong sense of imaginary moral superiority.

Another peculiarity of Berlin in those days – just over a decade had passed since German Reunification – was that you could still very easily tell whether you were in the East or in the West. Eastern and Western Germany were still, in lots of ways, two different countries, and nowhere was this more obvious than in Berlin.

As much as I hated socialism as an ideology, I was also weirdly attracted to East Berlin’s frozen-in-time dystopian vibe.

But it was not just vibes. At the time, people did not yet treat the late-stage GDR, the fall of the Berlin Wall, and the process of reunification, as “history”. It was still, in the broadest sense, “the present”, and a frequent topic of conversation. They talked about it in the way British people today would talk about Brexit: yes, a few years have passed, but it’s not over, and it feels far to recent to be “history”.

The standard opinion was that the GDR represented a perverted version of socialism, which had lost touch with the original Marxist ideals. Describing the failure of the GDR as a failure of socialism was considered the most cringeworthy thing a person could possibly say: a surefire way to out oneself as a complete ignoramus. Attitudes to socialism were treated as an implicit IQ test: dumb people judge socialism by its real-world outcomes, smart people judge it by its original intentions. (Needless to say, I was already one of the dumbest of the dumb people even then, and I have only become dumber in the meantime.)

Otherwise, I discovered the books of Murray Rothbard and David Friedman, and was flirting with those more radical versions of libertarianism for a while. I had also started to write for a small libertarian magazine, eigentümlich frei. My ultra-libertarian phase was short-lived, though, and in the mid-2000s, I reverted to a more conventional Hayekian liberalism.

Berlin is a very, very left-wing city. Nonetheless, I managed to track down the city’s 12 or so classical liberals, and gathered them at the Libertärer Stammtisch (=the libertarian regular’s table or meetup group, held at a pub in central Berlin). It must have been through them that I became aware of the Institute for Free Enterprise (IUF), a tiny free-market think tank that was just being formed. In May 2006, they organised a conference on free-market economics with speakers from around the world. One of the speakers was a Brit, who represented an organisation called the “Institute of Economic Affairs”.

-“He talks a lot of sense”, I remember saying to the chap next to me. “Any idea what that organisation is?”

-“What, the IEA? Oh yes! They’re great! They were the ones who prepared the ground for the Thatcher revolution, in the 1970s.”

-“Sounds interesting”, I said. “Think I’ll send them a CV, and apply for an internship there.”

I think there should be more of those, though, especially for hyper-topical books. After two to three years, you can sift a lot of the chaff from the wheat. You can see which books were purely catering to the mood of the moment, and which made a more lasting contribution.

James O’Brien’s book How They Broke Britain was released as a paperback almost exactly two years ago, with the hardcover version half a year earlier. Reading it now, I think even someone sympathetic to Mr O’Brien’s view of the world, such as it is, will have to admit that this book is all chaff, and no wheat.

When I say that How They Broke Britain is a bad book, this is not simply my way of saying ‘I don’t agree with it’. I don’t judge books primarily on that basis (although the temptation is admittedly sometimes hard to resist). I have, for example, previously recommended the book Slavery, Capitalism and the Industrial Revolution by Maxine Berg and Pat Hudson on the IEA Blog, despite the fact that it is clearly an attempt to rehabilitate the Marxist ‘Williams Thesis’. Since the Williams Thesis – the idea that Britain’s Industrial Revolution was financed by profits from the slave trade – is wrong, the attempt to rehabilitate it is also wrong. But this is a book which you can judge by criteria other than ‘Is the book’s central thesis correct?’, such as ‘Did I learn things from this book that I did not previously know?’, or ‘Can I use this as a source of factual information, even if I draw very different conclusions from that information?’

How They Broke Britain is very much not that kind of book. It is more like a written version of one of James O’Brien trademark angry monologues on his LBC show.

Let’s start with the ‘broken Britain’ diagnosis. Left-wing commentators are often good at identifying problems, even if I’m rarely convinced by their solutions. James O’Brien cannot even get that right. He cannot even properly explain what he means when he says that Britain is ‘broken’. Is this about the British economy? Is it about social indicators? Is it about the state of our public services? Is it about social cohesion? It seems to be a bit of all of the above: in the introduction, O’Brien runs us through what looks like a collection of negative news stories. But this everything-is-awful kitchen sink approach doesn’t add up to an assessment of the state of the country. In what way is Britain ‘broken’? Broken compared to what? Broken compared to when? Broken compared to whom? What would an un-broken Britain look like? What would be a better alternative?

These are not minor details. Bear in mind that the political mood in 2023 and 2024 was one of relentless pessimism and negativity. I couldn’t name a single commentator, of whatever political persuasion, who would have argued that Britain was in good shape at the time, and that we should just keep doing what we were doing then. When everyone thinks things are bad, publishing another book which says ‘Things Are Bad’ is not much of a contribution. In such a context, you need to be more specific. You are not arguing against someone who thinks everything is fine, because no such person existed in Britain in 2023 or 2024.

Not even the then government’s few remaining supporters (the Conservative Party was hovering around 20% in the polls) would have said that. When a political party has been in government for an extended period, what usually happens is that one wing of the party gets its way more often than others, and then at least that wing of the party is happy with the results, even if the others are not. The Thatcherite wing of the Tory Party is generally happy to defend their party’s record in government from 1979 to 1997, because they identify with it, and ‘own’ it. Ditto the Blairite wing of the Labour Party, with regard to party’s record in government from 1997 to 2010. What is unusual about the 2010–2024 Tory government is that towards the end, every faction within the Tory Party seemed unhappy with it for a different reason. Those on the Right of the party were unhappy, because immigration had shot up to the highest levels ever recorded. Those on the Left of the party, meanwhile, were unhappy because they thought the party was becoming too ‘Faragist’ in rhetoric. Social conservatives were unhappy, because the party had done nothing to stop the ‘Great Awokening’. The socially liberal wing, meanwhile, didn’t like the ‘Culture War’ rhetoric that the party had adopted in response. The Thatcherite wing was unhappy, because neither public spending nor the tax burden nor public debt had come down, and there had been no notable economic liberalisations in those 14 years. But the ‘Mayite-Timothyite’, communitarian wing wasn’t happy either, because neither had there been a complete break with liberalism. And so on. This is what’s remarkable about Late-Stage Tory Britain: no particular political camp felt ‘ownership’ of Britain’s overall socioeconomic model. No particular political camp identified with the way things were going. Even East Germany still had a few defenders in 1990, who identified with the system, and who stood by it. Britain, in 2023/24, had no equivalent of that.

I was expecting James O’Brien to argue that Britain was in a bad place, because it had been hijacked by a bunch of small-state neoliberal/libertarian extremists such as the IEA, and yes, there is a bit of that in the book, but that’s not really his argument. A full-throttled attack on free-market economics would at least have given me something to work with. But O’Brien’s argument isn’t really that the state is too small, or that it doesn’t regulate enough. No: the book is mostly a criticism of the personalities and perceived character flaws of the people who were in government from 2010 to 2024, as well as the people in the media, the think tank sector etc who O’Brien perceives to be close to them. This is not a book about bad policies (other than, obviously, Brexit), it is a book about bad people. I’m sure O’Brien would protest against that characterisation: he would say that his book is not just about individual bad actors, but also about an ‘ecosystem’ that enables them. But by ‘ecosystem’, he also means ‘bad people’. So that’s really all this is: a book about bad people, surrounded by other bad people, who enable them to do bad-people things.

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That’s James O’Brien’s entire theory of governance: when you have Bad People in charge, bad things happen. Not because Bad People do specific, identifiable bad things that can be shown to have specific, identifiable negative impacts. No – the Bad People just sit there, and emit bad vibes. And then everything is bad.

The problem with the Bad Vibes Theory of Governance is that countries have often done quite well, in important respects, despite having Bad People with Bad Vibes in charge. Donald Trump, I think it’s safe to say, has all the negative characteristics which O’Brien attributes to British politicians on the Right and their imagined ‘ecosystem’, and in spades. Yet despite all that, the US has been doing quite well on measures that policy could realistically influence. For example, between 2015 and 2024, US real median household incomes grew by 15%, compared to a mere 6% in the UK. Poverty in the US fell by three percentage points over the same period. Even the number of people without health insurance, one of America’s long-standing problems, fell by 1.5m. Would these numbers have looked even better under a Clinton-style Democrat or a more Romney-style Republican? Probably, yes. Trump did not ‘cause’ these improvements – but neither did he stop them with his Bad Vibes, that’s my point. In the second half of the 20^th century, there were plenty of unsavoury governments in the world that I would not have wanted to live under, but which nonetheless oversaw remarkable economic progress, and all the benefits that flow from that. If you tried to build an economic model around the Good Vibes Theory, the empirical results would not be kind to it.

Conversely, Britain now has a government that O’Brien would broadly approve of, vibe-wise. In terms of measurable outcomes, remarkably little has changed, and if the OBR forecasts are to be believed, not much is going to.

Fine, O’Brien is not an economist, so maybe I’m looking at this in the wrong way. But as an account of recent political history, the book is just as worthless. Even bad people usually have something that motivates them. They don’t just get out of bed in the morning, thinking, ‘Today, I want to be double-extra-super-über-bad.’ They do things which make sense from their perspective, and on their terms. So what are those? Sure, O’Brien thinks a lot of our political figures are simply stupid, so he thinks there isn’t much going on between their ears that needs explaining. But even a person who isn’t particularly bright can still have a worldview which they get instinctively, and they will have smarter thinkers behind them which have influenced them. It is possible to explain where people are coming from even if you thoroughly disapprove. People have done this writing about the motivations of Hitler, Stalin and Osama Bin Laden, so I’m sure it’s possible to try to imagine why someone might support Brexit. (In case it matters: I’m not a Brexiteer myself.)

The only chapter which does a little bit of that is the one on Dominic Cummings. O’Brien is clearly intrigued by Cummings. He sees him as neither stupid, nor obviously evil, and that puzzles him: how can a non-stupid, non-evil man support stupid, evil things? Why isn’t he on James O’Brien’s side, like all the smart and good people in the world?

But those passages are very much the exception, and even they remain at a fairly superficial level. James O’Brien has zero intellectual curiosity, which is not a good starting point for a book like this. While we can probably all agree that 2010–2024 was not Britain’s finest period, it was nonetheless a fascinating period, a period of real ideological clashes and realignments. In order to write insightfully about such a period, you need some intellectual inquisitiveness; you need to be the sort of person who wants to know why people think the way they think, no matter how wrong they may be.

James O’Brien has none of those qualities. All he has is a lot of rage, and a strong sense of moral and intellectual superiority. Where he is getting that sense from, I’d really like to know, because there is nothing in the pages of this book which would justify it.

If I told you that a company’s website traffic fell by 40 per cent in one year, that its userbase had completely crashed and that its revenue went up 17 per cent in the same year, would you believe me?

This is what happened to Stack Overflow, the world’s largest question-and-answer site for software developers. Since 2008, programmers have posted technical problems there, other programmers have answered them for free and the result is an archive of 83 million questions and answersⁱ that became one of the open web’s most valuable public goods. The question-and-answer format was so effective that it generated an entire Stack Exchange ‘cinematic universe’ of spin-offs around topics from theoretical physics to personal finance and theology.

The website recently received a sleek new look, but it is doubtful that anyone has noticed. These days, Stack Overflow feels like a boarded-up high street. Only ghosts amble around those discussion threads. Ghosts and large language models.

These ghosts inspired the trick to Stack Overflow’s profitable survival. The company pivoted towards licensing its human-curated content to the AI companies whose large language models are now scraping its contents.

Prosus, which acquired the platform for $1.8 billion in 2021, reported $115 million in revenue for the year to March 2025, driven by API partnerships with OpenAI and Google.ⁱⁱ Monthly questions cratered from over 200,000 in 2014 to 25,000 by December 2024.ⁱⁱⁱ By January 2026, the figure was 2,640.^iv In February 2026, Stack Overflow and Cloudflare co-launched a pay-per-crawl system, charging AI bots for access in real time.^v Fewer visitors, more money. So far so great, but the archive is finite, and almost nobody is adding to it.

Everyone else is selling

Platforms that spent two decades giving content away for free have discovered that the same content commands a price when fed to a large language model. Reddit disclosed $203 million in data licensing contracts in its February 2024 IPO prospectus, including a deal with Google worth $60 million annually.^vi By Q2 2025, AI licensing contributed $35 million in a single quarter, about 10 per cent of Reddit’s total revenue.^vii Axel Springer, the Financial Times, Condé Nast and the Associated Press have all signed similar agreements.^viii

The reason AI companies find this human-produced content so valuable is that large language models seem to only be trainable on human-produced content. In a 2024 paper in Nature, Shumailov and colleagues showed that AI models trained on outputs generated by other language models lose information.^ix A follow-up paper the following year established that even small proportions of machine-generated data in a training set can cause the same harm.^x As AI-generated text floods the open web, clean, human-authored training data becomes scarcer and more valuable.

Regulators and protocols

Legislators around the world have not hesitated to introduce new regulations around AI activity. The European Union’s AI Act requires providers of general-purpose AI models to publish summaries of their training data and respect rights-holders’ opt-outs, regardless of where a model was trained. In March 2026, the European Parliament called for a register of every copyrighted work used in AI training.^xi Some countries have leaned towards more liberal regimes. Japan permits copyright exceptions for training, and US courts have been moving towards ‘transformative use’ defences.^xii

In September 2025, a coalition including Reddit, Yahoo, Medium and Quora launched Really Simple Licensing, or RSL, an open protocol allowing publishers to embed machine-readable licensing terms in their websites. By December, over 1,500 media organisations had endorsed the specification.^xiii The protocol supports pay-per-crawl and pay-per-inference models, and the nonprofit RSL Collective functions as a clearing house.

Nevertheless, as of early 2026, no major AI company has signed up.^xiv Chiefly because compliance is so hard to measure. In spite of some efforts to create protocols which prevent bots from scraping a webpage without a licence, no one can reliably tell in real time when and who is scraping the content of a particular webpage. Property rights without measurement are unenforceable, and unenforceable property rights are not really property rights at all.

Have you got a licence for that?

The open internet was built on millions of people contributing local knowledge to a decentralised commons. The proposal now is to selectively fence off that commons through property rights enforced by licensing. If data has value, then it should have a price. So the logic goes, but licensing deals are bilateral arrangements between large platforms and a handful of AI labs. In this budding licensing system, things like personal blogs or small academic journals that don’t have negotiation power are either deprived of these property rights or at the very least would linger in a grey area.

Copyright law already gives publishers ownership over their content. The problem with current data licensing models is that this right lacks three things it needs to function as the basis of a market: clear boundaries, low transaction costs and measurable use. Compare a human-authored paragraph on the internet to a farmer’s field. A fence may serve as the field’s visible boundary. If the farmer wants to sell access to his field, both parties can agree on terms because the thing being sold is observable. As far as a written paragraph is concerned, copyright law says the author owns it, but there is no fence, as the content is potentially visible to anyone with a browser. A crawler can copy the text without the author knowing, and once the paragraph enters a training set, it is hard to verify whether or how it was used. The property right exists on paper but lacks the practical machinery that makes property rights tradeable.

Ronald Coase argued that if property rights are well defined and transaction costs are low, private bargaining will produce efficient outcomes regardless of who holds the right initially. By this standard, the data licensing market fails on both conditions. Rights are poorly delineated in practice, and transaction costs are enormous as negotiating a bespoke deal with each AI lab is only feasible for platforms the size of Reddit or Stack Overflow. The result is that large players can afford to negotiate bilateral deals, but everyone else is left out. Personal blogs, small academic journals, and niche forums that lack negotiation power are either deprived of the value of their property rights or linger in a grey area where those rights go unpriced.

RSL is an attempt to lower transaction costs through standardisation, much as commodity exchanges standardised grain contracts in the nineteenth century. But standardisation alone is insufficient if the underlying use remains unmeasurable.

A potential market-based solution

If the problem is measurement, the answer may be to stop measuring inputs and start pricing outputs instead.

Enterprise customers, such as banks deploying AI for compliance or hospitals using it for diagnostics, need to know that a model’s outputs are reliable and legally defensible. What companies want is a guarantee about the product, so a warranty on the AI model’s training provenance gives them that.

Working backwards, we can assemble the following chain of incentives. The AI company wants to offer the warranty because enterprise customers will pay more for warranted models. But it cannot credibly issue its own warranty, for the same reason a car manufacturer cannot inspect its own safety record. An independent intermediary issues the warranty instead, with its capital at risk if a claim is triggered. The intermediary therefore certifies the training data before underwriting, vetting its provenance and authorship. Certified content then commands a higher licensing fee because AI companies need it to obtain warranty coverage. Publishers invest in certification because certified content is worth more money. Each party responds to a price signal from the party immediately downstream.

The system brings a number of benefits. First, it enables price discovery across the whole market. Today, Reddit knows what its data is worth because it negotiated a deal with Google. A mid-sized trade journal has no idea, because no good mechanism exists to reveal that price. An insurance system creates one. The intermediary’s certification tiers and the warranty premiums attached to each tier produce a visible schedule of prices.

Second, it delivers consumer protection. Today, an enterprise deploying an AI model has no recourse if the model produces poor output because of bad training data. It may not even know who supplied the data. A warranty creates the missing link. If the model fails, the warranty pays out. The intermediary then can push the cost of failure back to the responsible party. This would bring AI models into the same type of system other industries use today. A car buyer does not directly sue the steel mill that provided materials for the car. If something goes wrong, the car buyer claims on the warranty, and the manufacturer traces the fault.

Third, like all insurance systems, it pools risk. Any single publisher faces unpredictable revenue. An insurance pool absorbs these shocks across many publishers, just as homeowners’ insurance absorbs the cost of a single house fire across many premiums.

Fourth, and most importantly for the long-term health of the open web, it gives platforms a direct financial incentive to pay contributors for new content. Stack Overflow’s archive is finite and ageing. If the certification system rewards fresh, human-authored content above old archives, then Stack Overflow earns more by attracting new contributions than by reselling old ones. Attracting more quality content usually involves paying contributors. Stack Overflow has actually already begun exploring this, but the incentive is currently weak because licensing revenue is all about selling access to existing supply. It’s not hard to imagine that an insurance system would drive higher premia for fresh products in many circumstances.

For solo bloggers and anonymous contributors, a voluntary publisher mutual that pools small contributions and distributes revenue by quality score could complement this system well, with membership voluntary and governance set by the members themselves.

Whether the current licensing gold rush is a sustainable business model or a brief arbitrage opportunity depends on whether property rights in data can be made practical, not just legal. The insurance model suggests they can, by pricing quality at the output rather than tracking every input.

When the famous French socialist novelist Jean-Paul Sartre visited the Polish People’s Republic, he described it as a kind of socialist surrealism: “a socialist country where church festivals are public holidays.” Although Sartre was himself a socialist, he inadvertently made a powerful argument for public choice theory when he added: “a country where one can talk with the waiter in English or German and the cook in French, but the Minister only through an interpreter.¹”

This “socialist surrealism” has led many to argue that the Polish People’s Republic was not really socialist. Jan Toporowski, writing in Jacobin, claims that “Poland’s road to socialism was blocked.” Toporowski argues that economists such as Oskar Lange and Michał Kalecki developed sophisticated models through which socialism could have achieved both efficiency and equality, but that the Polish United Workers’ Party ignored their insights and instead pursued policies that led to failure. To assess this claim, we must first understand what Lange himself proposed.

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A lot of people on the political Right are instinctively suspicious of New Towns, because the whole concept feels a bit socialist to them. Why should a bunch of bureaucrats and town planners get to decide where people are allowed to live? What next – New Diets and New Dress Codes imposed by government apparatchiks?

This would be a fair criticism if we had an otherwise liberal planning system. In my ideal world, there would indeed be no such thing as a Whitehall-led New Town programme. There would be lots of privately planned and privately financed developments of all scales and sizes, some of which might well look a bit like a New Town, and there might be local initiatives by fiscally self-funding local authorities to create new settlements. But none of those projects would ever make it anywhere near the Housing Secretary’s desk. The Housing Secretary (if such a position still exists) would probably never even know the names of these places.

But alas, we are a million lightyears away from my ideal world. We already have a system of nationalised development rights, which means that development always involves the decisions of town planners and bureaucrats. Within that system, I don’t see why one large development project of 10,000 housing units is ‘more socialist’ than ten small ones delivering 1,000 housing units each.

New Towns are mostly remembered as a postwar policy, but there were projects you could describe as ‘New Towns’ well before then. Over on the Works In Progress Substack, the economic historian Samuel Watling has summarised their history. Broadly speaking, the New Towns of the 18th and the 19th centuries were largely private enterprises, while the interwar New Towns tended to be local government initiatives, and the postwar New Towns were driven by the national government. Watling defines a successful New Town as one which broadly replicates the economic outcomes of the nearest economic centre, and an unsuccessful one as one which lags noticeably behind. He spots a clear pattern: the successful New Towns were the ones that became closely economically integrated with the nearest economic centre, either because of geographic proximity or good transport connections. The struggling ones were the ones that tried to form self-contained economic units. New Towns are fine if their aim is simply to satisfy housing demand, but not if they become part of a grand plan to redesign economic life.

Put differently, the successful ones were the ones that accepted the country’s economic geography as it was, and went with the grain. The unsuccessful ones were the ones that tried to ‘correct’ the country’s economic geography, because the planners thought they knew better. It is this latter approach which can be reasonably described as ‘socialist’. New Towns, then, are not intrinsically socialist – but they can become a socialist tool in the hands of people who think like socialist planners.

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Suppose a place has a high employment rate, high productivity figures and high wages, but also high housing costs. It is not a Hayekian ‘pretence of knowledge’ to point out that that place probably needs some housing nearby. But it very much is a Hayekian pretence of knowledge if you try to rip up a functioning economic unit, and shift economic activity around, because you think it should take place somewhere else instead.

I’m not particularly familiar with any of the places where Labour’s New Towns are supposed to go, but they seem to be either close to an identifiable economic centre, or well connected to one. If so – these are not socialist New Towns. They look a lot more like the successful than the unsuccessful predecessors.

That’s a good thing – but it does not make the New Towns a brilliant policy. (‘Not socialist’ is a low bar indeed!) The danger is not so much that the Government will build Magnitogorsk-on-Thames, but that they will overburden their New Towns with all kinds of social and environmental requirements which threaten their viability. This is what they are already doing with conventional housing developments, which is why housebuilding rates refuse to go up. While a welcome step, New Towns cannot be a substitute for a wider overall of the housing and planning system.

The multilateral trading system formalised by the WTO’s founding in 1995 delivered the largest sustained liberalisation of trade in modern history at its time. That achievement should not be taken for granted, as it would be a tough sell in today’s climate. As Bryant himself put it: one generation believes in free trade, the next assumes it and the third forgets it. Between 2015 and 2023, protectionist measures worldwide more than quadrupled.

Some countries are now even trying to push below this multilaterally established ‘floor,’ the prime example being the American assault on the most-favoured-nation principle. The US produced a reform paper last December arguing that MFN impedes liberalisation. The real motive, as Alan Beattie noted in the FT, is that Washington cannot get proper trade agreements through Congress and wants to legitimise ad hoc ‘gunboat deals.’ More troubling still, the EU appears willing to entertain the argument. Commissioner Šefčovič has gone as far as to suggest that MFN as a principle is ‘not sacred’.

Britain should not follow this path. As the minister himself noted, a British car contains components from dozens of countries. An Airbus is 30 per cent British. According to the World Bank, the UK was the fourth largest exporter of goods and services in the world in 2024, and the fifth largest importer. British consumers and firms depend on that openness. Imports keep prices down, widen choice and supply the intermediate goods that manufacturers need to compete abroad. An economy this embedded in global supply chains benefits enormously from a principle that guarantees predictable market access. Undermining MFN is a losing strategy.

The WTO deserves serious reform, but reform is difficult because the institution is designed to be slow. Decision-making operates by consensus, giving any single member an effective veto. The Doha Round, launched in 2001, was never concluded. The Appellate Body has been frozen since 2019. When the Government Procurement Agreement committee needed a new chair, Hong Kong blocked the appointment of a Taiwanese candidate on transparently political grounds, leaving the position vacant for years.

None of this means the WTO should be abandoned. It means we should stop expecting it to be the engine of liberalisation and understand it instead as a guardrail. If the WTO sets the floor, bilateral and plurilateral agreements are where countries actually innovate. The UK-Australia FTA, which entered into force in May 2023, eliminated tariffs on over 99 per cent of Australian goods exports. Its chapters cover digital trade, procurement access beyond WTO levels and financial services commitments that exceed even the CPTPP.

The CPTPP itself is a great example of innovation when it comes to trade agreements. Its e-commerce chapter has become the template for digital trade rules in the region and beyond, whilst WTO negotiations on e-commerce remain stuck. Even the EU-Australia deal, expected to be signed this week after nearly eight years of talks provides some decent outcomes on critical minerals and procurement, but the pace is slow.

To make things confusing, in the same week the Trade Secretary championed free trade at Chatham House, his department announced a steel strategy. From July 2026, import quotas will be cut by 60 per cent and out-of-quota tariffs will rise to 50 per cent. The government is also launching a WTO process to raise bound MFN steel tariffs permanently.

The construction industry already expects higher project costs at precisely the moment the government wants to build 1.5 million homes. There is a more market-friendly alternative: boost demand rather than restrict supply. Liberalising planning, permitting faster building of housing and infrastructure would grow the domestic market for steel without taxing every firm that uses it.

The Trade Secretary is right that somnambulism, in the sense that following the lead of bureaucracies that operate at glacial speed and have few incentives to evolve, is a real danger. The WTO is too slow to drive the next wave of liberalisation, or even to preserve the status quo, from the looks of it. Bilateral deals are where the action is. Britain should be concluding more of them, faster, while defending the MFN floor and choosing to protect consumers rather than giving hand-outs to favoured industries at the expense of everyone else.

The state-funded pressure group Action on Smoking and Health (ASH) have responded by claiming that things are not as bad as they look. The accelerated decline since 2021 is, they say, “consistent with a long-term downward trend”. While they acknowledge that “the illicit trade may also be a factor” and that “ongoing cost of living pressures may have pushed some smokers, particularly those on lower incomes, to seek out cheaper, illicit alternatives”, they insist that “declining tobacco clearances appear to be driven mainly by falling smoking prevalence and reduced consumption among those who still smoke”.

As evidence, they have created a graph showing legal cigarette sales since 2015. This seems to show a fairly steady longterm decline, albeit interrupted by the COVID-19 pandemic, with sales in 2025 only slightly lower than one might expect.

You will notice that the decline in legal sales slowed significantly during the pandemic. ASH say, rather cryptically, that the pandemic “disrupted smoking behaviour, coinciding with a spike in tobacco purchasing which has since faded”. What form did this disruption take? Did the number of smokers increase? No. Office for National Statistics figures show that the smoking rate fell from 14.1% to 11.7% between 2019 and 2022. Did smokers consume more cigarettes? No. A study published in 2024 found that the number of cigarettes smoked by the average smoker “remained stable” between October 2019 and 2023 (note that this contradicts ASH’s assertion that there has been “reduced consumption among those who still smoke”).

The best explanation for the increase in legal sales relative to the number of smokers during the pandemic is that lockdowns and travel bans prevented people from buying tobacco abroad and hindered the ability of black market traders to import and sell illicit tobacco. The hump shown in ASH’s graph between 2020 and 2022 reflects smokers being temporarily unable to access non-duty paid tobacco, both legal and illegal. It is further evidence that Britain has a large black market in tobacco.

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This is even more apparent if you include the sale of rolling tobacco, which ASH fail to do. By only looking at manufactured cigarettes, they miss an important part of the market and a very important part of the black market. Legal sales of rolling tobacco actually rose during the pandemic, from 6.5 million kilograms in 2019 to 8.6 million kilograms in 2021. If you translate kilograms of rolling tobacco into cigarettes at a conversion rate of 2,000 cigarettes per kilogram, we find that the sale of legal cigarettes rose by 8% during the pandemic. When opportunities to buy illicit and duty-free tobacco returned to normal in 2022, legal sales began to fall sharply. It doesn’t really matter whether you use 2021 or 2022 as the baseline. The former gives a decline of 52% while the latter gives a decline of 46%. Both figures comfortably outstrip the decline in the number of smokers and therefore the number of cigarettes actually being smoked.

When we look at total cigarette sales, including cigarettes made from rolling tobacco, the post-2021 decline is much more dramatic than ASH make it look. This was a period of large, successive increases in tobacco duty which hit users of rolling tobacco particularly hard. A growing number of smokers were priced out of the legitimate market. As the graph below shows, the steep decline in legal sales in recent years far exceeds both the longterm trend and the decline in the number of smokers.

ASH cite a study which they say shows that “the vast majority of smokers do not buy illicit”, but that is based on a telephone survey and it has no data since 2022. For obvious reasons, people may not be willing to admit to engaging in illegal transactions with a stranger over the phone, and the kind of people who are most likely to buy illicit tobacco may be the least willing to take part in a survey, but the survey still found that the number of smokers who buy tobacco abroad (legally or illegally) trebled between 2019 and 2022, albeit with a sharp decline during the pandemic.

ASH also cite HMRC’s tobacco gap estimates which, they say, show that “illicit tobacco consumption is stable as of 2023/24 and has declined substantially over the long term”. But the whole point of my article was that HMRC’s estimates are wrong. The claim that the tax gap is only 13.8% is not consistent with any of the data on legal sales and cigarette consumption. The Office for Statistics Regulation has expressed concerns about the methodology and even HMRC says that its estimate has “high uncertainty”.

HMRC’s flawed estimates have given a fig leaf to groups like ASH to hide the true scale of Britain’s black market tobacco problem. It is a problem that has become increasingly visible on the high street, in empty pack surveys, and in the simple mathematics outlined above. It is simply not possible for legal sales to be falling so much faster than cigarette consumption without the black market growing at pace. The government and ASH can continue to bury their heads in the sand, but the truth is becoming inescapable.

Can free markets save the West? My answer is they can help save it - but they are only part of the solution.

The West’s problems are undoubtedly in significant part economic. In Europe above all, we have built societies of slow growth and increasing collectivism. But our problems are also political, cultural and democratic. We seem to lack confidence in our own values and the institutional and cultural frameworks which brought success. If we are serious about revival, we have to understand all these things together. We are not dealing simply with a growth problem. That problem is itself a symptom, in part, of a wider crisis of confidence in the institutions, habits and loyalties on which free societies depend.

The nature of the growth problem

But let us look at the growth issue first. As we can see it is mainly a European problem.

The fall in growth has been more dramatic in Europe’s leading economies than in the US. America has continued to generate growth in a way that Europe has simply not. (I’ll come back to the UK story in a moment.)

Why has this happened? Why is Europe’s growth so poor?

I point to three factors. First, high and increasing levels of tax and spend.

Second, energy policy, and in particular the impact of net zero. Third, and without exaggerating it, the removal of the UK as a competing European economic model - not because of Brexit, but because of a long series of British choices which began well before it.

Let’s look at these in turn.

Tax and Spend

The great continental economies at the production frontier - France, Germany and Italy - were already in the year 2000 high-tax, high-spend societies by the standards of the developed world. Since then, they have gone further still, as Chart 2 shows.

The United States has also seen an increase too. This is not a problem unique to Europe. But America started from a much lower base and has remained, by comparative standards, a relatively low-tax, low-spend economy. That difference matters.

It matters because states do not spend or tax in a vacuum. High levels of taxation absorb resources, distort incentives, and direct effort away from useful economic activity and towards transfer, administration and compliance. And over time, if you do enough of that, you reduce the energy, dynamism and risk-taking which growth depends on. You also change the tone of politics itself. The larger the state becomes, the more politics becomes a struggle over slices of a fixed pie, and the less it is about creating new wealth.

That is especially true in economies already at the frontier. If you are France or Germany or Britain, to get growth you need entrepreneurship, innovation, productivity improvement, and experimentation of all kinds. You need, in short, a system that rewards successful effort and allows failures to be rapidly liquidated. Instead we have systems that entrench incumbents, protect insiders and make every decision more political. And that is showing up in the growth figures.

Energy

Then there is the second factor: energy.

Since the mid-2000s - really since the beginning of the climate panic - energy consumption per head has fallen across Europe. In the EU27 it is down by roughly 20%. In the UK it is down by 40%.

This is the result of deliberate policy. We have chosen to make energy, and particularly electricity, more expensive by a forced transition to renewables. It is a a system of state-directed shortage and unpredictability in one of the most basic inputs into economic life.

And energy is not just another sector. It feeds into all parts of the economy. When energy is too expensive, everything becomes more expensive. Investment is deferred or cancelled. If governments deliberately constrain supply in pursuit of ideological targets, they do not create a modern economy. They create stagnation. Cheap and abundant energy is not a luxury appendage to growth, but rather one of the preconditions of civilisation as we have known it in the modern West. A society which reconciles itself to having less energy each year is reconciling itself to doing less, making less, and in the end just being less.

The biggest supply-side reform available to most European countries today is simply to abandon the current crazy energy policy. If you want growth, bring the market back into energy policy and make energy abundant, reliable and cheap. It is not complicated.

The UK story

Now let me turn to the third factor, the UK story. Go back to the 1990s. At that point, European capitalism was still recognisably divided into two broad types, as thinkers like Michel Albert, Peter Hall, and David Soskice, were describing.

On the one hand, there was the UK and Ireland: the Anglo-Saxon model. This emphasised shareholder value, individual success, competitive markets, relatively short time horizons, lower taxation and lower public spending. It was not identical to the United States, and it did not go as far, but it was recognisably in that family.

On the other hand, there was the western European, Rhineland model. That emphasised consensus, stakeholder interests, long-term commitments, skill formation, stronger social institutions, greater employment protection for insiders, and a larger public sector.

There were advantages and disadvantages to both. But there was a real difference. There was genuine competition between models. There was more than one plausible answer to the question of how a prosperous European society should be organised.

What has happened since then? The answer, I think, is that the UK model has largely disappeared. There is now, in effect, only one European economic model. There are variations on a theme but they are all more similar than different. Over the last quarter-century, Britain has gradually converged with the continent - and that convergence is still continuing.

In one area Britain has gone further - energy policy. Britain has adopted a particularly virulent form of net zero, as you can see in the third chart. Our energy consumption per head is now down to the same levels as decades ago. That is an astonishing thing to say about what is still supposed to be a modern industrial nation, and this is surely the main reason behind the collapse in growth that we saw in the first chart.

The consequences of Britain going off the pitch have been serious. First, there is no longer an alternative, recognisably European version of a liberal low tax market economy. America largely remains America. But within Europe itself, the internal contrast has faded.

Second, there is no longer meaningful competition between models. And Europe tends to perform best when there is such competition - when different countries are trying different approaches, learning from each other, and exposing each other’s failures. Uniformity is often presented as convenience and sophistication, but in reality it often means that bad ideas spread faster and are challenged less often. A continent in which almost every member of the establishment class believes roughly the same things about regulation, migration, energy and the role of the state is a continent which finds it very hard to correct course. And so it is proving.

Third, and perhaps most important, Europe has become unable fully to realise how distinctive its present model now is. When everyone around you is making the same mistakes, decline begins to feel normal. It becomes harder to see how far you have drifted from the conditions of success. Only looking outside Europe shows Europeans that they are slowing down - but Europeans still have a presumption, if unavowed, of cultural superiority and lack of willingness to learn from elsewhere.

So what about supply-side reform, the wider use of markets, a greater degree of competition? These things are of course extremely important, but I don’t think they can be a cause of the experience of the last decade or two. There was a big wave of supply side reform in the 2000s but since then, although things have not got any better for a decade or so, they haven’t got worse either.

I am of course all in favour of better planning systems, lighter regulation, freer labour markets, lower barriers to enterprise, and all the rest of it. Every country has its specific blockages. In Britain, our planning regime is an obvious example. Supply-side reform will help, certainly. But it is not obvious, taking Europe as a whole, as the chart shows, that this is the specific explanation for the problems since 2008. Since then, the main forces depressing growth across the continent have been taxation, spending, and energy. Those are the phenomena that need to be tackled.

The wider issues

But, as I said at the start, that’s not all. And here is where I part company with the analysis of some free marketeers, and even more with some libertarians’. I do not believe our problems are just about economics. Culture matters too.

As I have said before, I believe that on a historical perspective Europe’s and the West’s economic success is fundamentally related to the emergence of the modern nation state. It is no accident that the great drive to success in the late eighteenth and nineteenth centuries happened first in the traditional existing nation states, and spread with nationalism across the continent. In short, nation-state formation and industrialisation proceeded to a significant extent in parallel.

That was not coincidence. Free markets require more than contracts and prices. They require a willingness to experiment, to change, to disrupt traditional ways of doing things. They require people to accept churn, uncertainty and unequal outcomes. That will not happen unless people feel they are part of a broadly cohesive community; unless they believe that that community can provide collective protection against the worst risks; and unless they think it is well governed, so that entrepreneurialism pays off rather than being arbitrarily punished. It also requires them to know that they can adjust course and solve problems as they emerge - that the democratic process genuinely means something and that elections can change things.

Unfortunately, what we are seeing in Europe is the gradual decomposition of the nation state, under two main pressures.

The first is the transfer of powers to Brussels: the steady disempowerment of national decision-making, and the promotion from above of particular ideological assumptions about government, economics and society. All this has happened without any true replacement at EU level by a European state capable of commanding democratic loyalty. Power has moved upwards, but legitimacy has not followed it, and the democratic link to national electorates has disappeared somewhere in the transition.

The second pressure is the large-scale migration, into at least some of our countries, of people from cultural backgrounds very different from our own, with social norms very different from our own, combined with a wilful blindness of Western elites about the challenges this poses for integration. This process is changing what existing citizens think of as their country, is requiring the creation of new and unpopular national stories, and is undermining the bargain upon which national welfare states rest. In short it is starting to undermine the factors which make a nation state an effective arena for politics and economic development.

Both these pressures are affecting the cultural, political, and democratic norms that have hitherto regulated nation states in Europe. The political and economic bargains on which they are based are beginning to fray. If, as I argue, the nation state and economic modernisation are closely linked, then you must expect economic growth to be affected if the nation state starts to decay. And that is exactly what we see.

I believe that solving the cultural and political problems has to go hand in hand with solving the economic ones. That is why our situation is worse than in the last great run of crises in the 1970s. Today, we face economic problems for sure, but we also have a deeper uncertainty about who we are, our systems of governance, and whether our countries still possess the solidarity needed for democratic capitalism to work. These things need to be resolved too.

So can free markets save the West? Yes - but not on their own, and not in abstraction from the society in which they operate. We need leaders willing to shrink the state, end the net zero madness and restore abundant energy. We need leaders willing to revive national democracy, rebuild cohesion and defend the culture of the nation state. We need leaders who understand that prosperity is not produced by bureaucracy, and that a civilisation survives only when it still believes in itself. If we don’t find them, decline will not merely continue, it will become our settled condition. The West can still be saved. We know how. But where are the leaders who will take this task on?

Most people in my line of work are obsessed with the concept of the ‘Overton Window’, the range of socially permissible ideas, and in particular, with the way ideas cross the window’s boundaries over time. I share that obsession myself. In this day and age, how could you not?

When I first came across the concept, the examples people would use to illustrate it were examples of attitudinal changes that happened over the course of a generation or so. Then came the Great Awokening, which meant that ideas that had been completely mainstream until 5 minutes ago were now suddenly beyond the pale. More recently, we saw a backlash against ‘wokery’, which means that some of those previously exiled ideas have re-entered the Overton Window. In our time, it has become possible to be an ‘Overton Window watcher’, who sits at the boundary of the Overton Window, and watches ideas arrive and leave.

Inside the Overton Window

My one criticism of our Overton Window obsession, though, would be that by focussing almost exclusively on what happens at the window’s boundaries, we neglect movements within it. These matter too. It is possible for an idea to successfully break into the Overton Window, and then get permanently stuck in its outer layer, rather than moving on towards the centre, where it has a chance to become an actual reality.

The outer layer of the Overton Window contains ideas that you can express in public without everyone freaking out and yelling at you, but which are nonetheless not widely popular. A good example of this is republicanism, the idea that Britain should abolish its monarchy, and become a republic. It is a perfectly respectable opinion. Republicans do not have to fear negative social repercussions for expressing their views. Monarchists will disagree with them, but they will try to persuade them that they are wrong, rather than call them traitors or lunatics.

It has not always been this way. There was a time when expressing anti-monarchy views was genuinely controversial. Republicans have managed to break into the Overton Window – but once they were on the inside, they stopped. They never moved much further than that. No major political party has adopted the abolition of the monarchy, or a referendum on the subject, as an official manifesto commitment. At no point has the UK come close to becoming the United Republic of Great Britain and Northern Ireland. 

We could call this the ‘republicanism trap’, or, if you’re one of those impressionable readers who think German compound nouns automatically look philosophical and profound, the Republikanismusfalle. It’s when an idea becomes socially acceptable, but still fails to make an impact, because it gets permanently stuck in the outer layers of the Overton Window.

Social Health Insurance meets politics

There is a possibility that the idea of replacing the NHS with a Social Health Insurance (SHI) system will meet the same fate. This idea broke into the Overton Window about three years ago. You can see this from the fact that the NHS Confederation, the Health Service Journal, the Health Foundation, the King’s Fund and the Nuffield Trust have all published papers or articles critiquing SHI. They would not have done this before. When an idea is outside of the Overton Window, you do not write papers or articles explaining why you think it’s wrong. You just dismiss it, or ignore it. The Royal Geographical Society does not argue with the Flat Earth Society. 

Breaking into the Overton Window was a real triumph for SHI supporters. The danger now, though, is that SHI will be stuck in this outer layer for a very long time – and arguably, Reform’s awkward and short-lived flirtation with SHI has been a setback.  

In 2024, Nigel Farage must have sensed the vibe shift in the way we talk about the NHS, because he said several positive things about the French health insurance system. What happened next was interesting. 

I mentioned the SHI-critiques by the NHS Confederation, the Health Service Journal, the Health Foundation, the King’s Fund and the Nuffield Trust. These are all, in my view, unconvincing, but they are intellectually honest critiques. They critique actual SHI systems, not some silly strawman version of them, and they engage seriously with the idea. This is exactly what that debate should look like. 

Politics, of course, is not like that at all. Politics is not about being right, it’s about winning. 

So, predictably, Farage’s pro-SHI statements triggered the usual scaremongering about Americanised healthcare. His opponents ignored the bit about France, zoomed in on the word ‘insurance’, and then went on to claim that ‘insurance’ means that you have to pay for every treatment out of pocket. They also claimed that the poor would go without healthcare, and that the prices you would have to pay would be American ones. The Labour Party, for example, claimed that under an insurance-based healthcare system, patients would have to pay £10,958 for an appendix removal, £23,000 for a hip replacement, £1,045 for an ambulance, and £1,368 for an A&E visit. These prices have, apparently, been taken from the US, and just been converted from $ into £. 

This is misinformation of the crudest kind – but then, Farage is really the last person in the country who could claim to be unfamiliar with a populist style of politics. He should have anticipated such responses, and he should have had a list of ready-made rebuttals on hand. Instead, Reform quickly dropped the issue, and reverted to reaffirming their commitment to a free-at-the-point-of-use NHS. 

Look. I don’t know the first thing about political communication, and would never pretend to. I’m an impractical ivory tower guy, and I don’t do ‘real world’ stuff. But I know a fair bit about manufactured hysterias around the NHS, because I’ve studied the 40-plus-year-history of them, which is why I know that the above strategy never works. Once you have been accused of being an enemy of the NHS, your opponents will never drop that accusation. And if you appear to row back on things you said earlier, they will only interpret that as an admission of guilt. Once you are in that position, the only way out is forward. You have to own every word you said, and double down on it. 

I’d normally say that Reform’s communication problems are a problem for their press team, not me, but in this case, they’ve made it a problem for anyone who supports SHI alternatives. If you look at the responses from Labour and others, it’s quite clear that they are not just attacking Farage and Reform. They are attacking the very idea of insurance-based healthcare. Reform have given their opponents an easy opportunity to spread misinformation about SHI, and then they just ran away and refused to clean up the mess.

Basic facts about SHI

Since Reform are neither willing nor able to do it, let’s address these claims here.

At the most basic level – what does ‘insurance-based healthcare’ mean?

‘Insurance’ is the way we deal with costs that are unpredictable from the perspective of an individual, but predictable enough from the perspective of a large group. I have no idea what my healthcare costs are going to be this year: it could be zero, it could be hundreds of thousands, it could be anything in between. But these things average out, so at the level of, say, the borough I live in, the city I live in, or the country I live in, we can work it out in advance with a reasonably high degree of accuracy. It therefore makes sense for groups of people to get together, and pool their resources for that purpose. Everyone pays some money into a common pot, enough to cover the group’s anticipated healthcare costs, and then the ones who get sick get to draw on the pot to pay their medical bills.

If we use ‘insurance’ in this most general sense, even the NHS could be described as ‘an insurance-based healthcare system’. We do not usually think of it in those terms, because the specifics of the system obscure it, but all it would take to make this clear is a few minor accounting tweaks. The NHS is funded out of general taxation, not a specific, earmarked ‘NHS tax’. But we could very easily convert, for example, a part of income tax into a ring-fenced NHS tax. This would not change the nature of the NHS in the slightest, only the financing mechanics would be a little different. 

Once we have an NHS tax, we could relabel it ‘National Health Insurance Contribution’ or ‘National Health Insurance Premium’. Again, nothing would have changed. But we would suddenly have ‘an insurance-based healthcare system’.

I’m not trying to play linguistic games here. I’m merely pointing out that there are commonalities as well as differences between the NHS, and the health systems we would normally describe as ‘insurance-based’. They differ in that, in the latter, the insurer does not double up as a monopoly provider of healthcare. Rather, it buys healthcare on a competitive marketplace. If it is an SHI system, there is more than one insurer: there are multiple – sometimes over a hundred – competing ones. Those are important differences. What the systems have in common with the NHS, though, is that there is a pooling mechanism for healthcare costs, such that you pay for it primarily via your premiums, not at the point of use.

It is therefore plainly dishonest to scare people by telling them they would have to pay for their ambulance, their appendix removal and their A&E visit under an insurance-based healthcare system. A system in which you have to pay for everything out of pocket is not an insurance system, it is just no system at all.

If an insurer refused to pay for clinically necessary treatment, that would be a straightforward breach of their contractual obligations, and thus illegal. In fact, insurance-based systems are typically much more explicit about what exactly you are entitled to than the NHS. In the NHS, you are only entitled to ‘healthcare’ in general, but not to any specific kind of treatment.

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What about co-payments?

It is true that most SHI systems are not 100% free at the point of use. Small user charges play a supplementary role. However, this is simply because most health systems in general are not 100% free at the point of use. Most tax-funded, state-run healthcare systems also have co-payments, which can be just as high as in SHI systems, or higher. Anecdotally: I used to know a Norwegian who lived in Germany, and who expressed surprise about how low the co-payments were, compared to Norway. Norway has a tax-funded health system, Germany has the world’s oldest SHI system. The question of co-payments is independent of the type of healthcare system you have. It is simply an entirely separate debate. Even the NHS could, in principle, introduce co-payments any day. It would be seen as a violation of its founding principles, sure, but it would not make it a different healthcare system.

What happens to those who can’t pay their insurance premiums, though?

In SHI systems, the answer is: the same thing that happens in the UK to the people who can’t pay taxes, which, as we have established, contain an implicit health insurance premium. Those people are still entitled to treatment, and other taxpayers pick up the tab, which we could think of as an implicit insurance premium subsidy. In SHI systems, that implicit premium subsidy is simply made more explicit. It becomes an actual transfer payment that you can see in the accounts.

So no, you won’t have to pay the (absurdly precise) figure of £10,958 for an appendix removal; and you’ll still get your appendix removed if you can’t pay insurance premiums; and whether there will be a co-payment or not is an unrelated debate.

Where next?

The NHS is no longer the sacred cow it once was. Criticism of it, and advocacy of an alternative, has entered the Overton Window.

But are we at a stage yet where a political party could openly call for the replacement of the NHS with a different system? Or would such a party instantly consign itself to electoral oblivion?

I have no idea. Again, I don’t deal with ‘real word’ politics. But what I do know is that if a party or other political organisation is tempted to do anything of that sort, it cannot do it in a non-committal ‘I’m just asking questions’ way. You cannot just lob the word ‘insurance’ into the arena, and then duck. You have to have a clear idea of what alternative you actually want, you have to anticipate a barrage of misinformation coming your way, and you have to know exactly how to respond to that.

SHI may be in the Overton Window now, but not everyone got the memo, and old taboos die hard.

The Chancellor deserves credit for honesty. Her second Mais Lecture delivered this week contained a reasonably clear-eyed diagnosis of the country’s economic maladies. Amongst them, she notes that Britain’s productivity growth since the 2008 financial crisis has been consistently weak. Planning rules have rationed housing and infrastructure, while an accumulation of regulatory barriers has steadily raised the cost of doing anything at all. It is somewhat reassuring to hear these issues spelled out clearly.

The trouble starts when the Chancellor moves from diagnosis to treatment. Her answer is the ‘active and strategic state,’ working in partnership with business to shape markets, pick sectors and steer investment. The speech is studded with a collection of new hubs and programmes, which by themselves have a questionable track record, and steers clear, for the most part, of some much-needed substantial changes on planning, taxation and the regulatory environment.

Planning reform: necessary and insufficient

The Chancellor rightly identifies Britain’s planning system as ‘a direct obstacle to investment.’ In terms of progress already made, she highlights the reintroduction of mandatory housing targets, the opening of grey belt land and some limits on local committee vetoes.

These are welcome steps, however, the gap between ambition and delivery is already large and growing. The Office for Budget Responsibility expects net housing additions to fall to 215,000 in 2026, down from an average of around 260,000 in the early 2020s. The government’s 1.5 million target requires roughly 300,000 homes per year, a rate the country has not sustained since the post-war building boom. Industry surveys paint an even bleaker picture: almost all senior development leaders reported low or very low confidence in the market heading into 2026, citing planning delays, rising construction costs, labour shortages and viability pressures.

The fundamental problem is that mandatory targets and grey belt adjustments operate within the same discretionary framework that makes British construction so expensive. Without a genuine shift towards a more liberal planning system, the targets will remain aspirational.

Hubs, zones and units: action for the sake of action

The speech introduces the usual density of new entities and programmes: innovation hubs, digital campuses, growth labs, an AI Economics Institute to monitor the impact of AI on labour markets, a Youth Jobs Grant and the list goes on.

This proliferation of named initiatives is a beloved British policy tradition. It creates the impression of purposeful activity without addressing the underlying constraints that make activity so difficult. The question that hangs over every new hub and incubator is the same. Why do these sectors need bespoke institutions rather than a general environment in which enterprise can flourish? If planning rules were sensible, energy costs competitive and regulation proportionate, firms in Cambridge and Manchester would expand without needing a development corporation to hold their hand.

The Chancellor has also pledged to procure up to £1 billion of quantum computers from the first UK companies to produce them at commercial scale. This is a bet on a technology whose commercial timeline remains currently uncertain, placed with taxpayers’ money, through a procurement mechanism whose details are unspecified. It may work. It may not. But it is the kind of targeted industrial intervention whose track record gives some reason for scepticism.

Youth unemployment

The Chancellor notes that youth unemployment stands at over 16 per cent and declares the government ‘will not leave a generation to languish without prospects.’ She announces record investment in training, apprenticeships, a Youth Guarantee and a new £3,000 Youth Jobs Grant. What the speech does not say is that the government’s own policies have contributed materially to the problem.

The 2024 Budget raised employer National Insurance contributions and significantly increased the National Living Wage. The combined effect has been to raise the cost of entry-level hiring sharply. Retail employment costs alone rose by £5 billion in 2025. The cost of employing a full-time entry-level retail worker increased by roughly 10 per cent, and for part-time workers by over 13 per cent. When hiring becomes more expensive, employers naturally prefer experienced candidates who can deliver immediate productivity. Young people, who by definition lack experience, are pushed to the back of the queue.

The Chancellor’s response, a billion-pound suite of subsidies, grants and guaranteed placements, amounts to treating a wound that her own fiscal choices inflicted. It would have been cheaper, and more effective, not to have inflicted it in the first place.

Two genuinely welcome ideas

Against this backdrop, two proposals in the speech stand out as genuinely promising.

First, the Chancellor’s commitment to reform non-compete clauses. Around five million employees in Britain work under contracts containing non-competes, and research consistently shows that these clauses suppress job mobility, depress wages, and inhibit entrepreneurship. The government’s working paper, published in November 2025, considers options ranging from statutory time limits to an outright ban and identified evidence, particularly from Austria’s 2006 reforms, that restricting non-competes for lower earners increases mobility into better-paying jobs.

Second, and more significant, is the announcement on fiscal devolution. The Chancellor has asked officials to develop a roadmap for giving regional leaders control over a share of national taxes, including income tax, with a publication expected at this year’s Budget. She has also announced £2.3 billion in City Investment Funds backed by business rates retention for major city regions in the North and West Midlands.

The Chancellor is right that ‘it is no coincidence that Britain is one of the most politically centralised of advanced democracies, and one of the most geographically unequal too.’ Local authorities are asked to plan for growth but capture almost none of the fiscal reward when growth materialises. The result is a system that generates neither strong incentives for local economic development nor meaningful accountability for local outcomes. Creating real budgets with real constraints, where the proceeds of growth benefit the places that generated it, would be a positive, and perhaps overdue, change.

However, fiscal devolution works best when local authorities can compete on rates and set their own terms. If the planning, regulatory and tax environment remains unchanged, devolved fiscal powers may amount to rearranging the furniture in a locked room.

The active and strategic state

The Chancellor’s speech is long on institutional creativity and short on the thing that would actually make the biggest difference: a general, sustained reduction in the cost of doing business in Britain. Planning reform that deserves the name. Energy policy that prioritises cost reduction over target-setting. A tax regime that does not penalise hiring. Regulation that doesn’t inflate costs and blocks economy activity.

On regulation, the Chancellor’s own position is conflicted. She rightly identifies the accumulation of regulatory barriers as a drag on growth yet simultaneously signals a desire for closer regulatory alignment with the European Union. EU regulatory frameworks are, in many areas, precisely the kind of prescriptive, compliance-heavy regimes that raise costs for firms. If the goal is a lighter regulatory environment, voluntarily reimporting the EU’s approach is a strange way to achieve it.

The ‘active and strategic state’ is presented as the corrective to the ‘passive state’ of the past. However, the British state has not been passive. The Chancellor herself concedes as much when she observes that previous governments delivered ‘a highly centralised regulatory state, indifferent to the structure of the economy, lacking in strategic focus.’ Is the promise then the government will do more but ‘aim better?’ Rebranding interventionism as ‘strategic’ does not change its nature.

A more considered approach to addressing the UK’s productivity deficit would be to systematically reduce the supply-side barriers the Chancellor identified in her speech, rather than expanding the discretionary powers of the state that created those barriers in the first instance.

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The government would like to pass this legislation with the minimum of public and parliamentary debate. Its Impact Assessment (IA) suggests that it does not really know what it is hoping to achieve and has no idea what the consequences will be. It is a solution looking for a problem.

The IA offers two possible objectives for a indoor vaping ban: firstly, reducing people’s exposure to the “potential risks” of “second hand vaping” and, secondly, reducing the number of people who vape “whilst being mindful of the role vapes can play as an effective quit aid for adult smokers.”

Secondhand vaping

A number of studies have looked at the impact of secondhand e-cigarette vapour on bystanders. In various experiments, levels of particulate matter, cotinine (a biomarker for nicotine) and several other chemicals have been measured in the air during and after an e-cigarette has been used. In some studies, researchers have ‘exposed’ non-vapers to e-cigarette vapour in a confined space and measured levels of certain chemicals in the blood or urine. I have written about these studies in detail elsewhere, but the main finding is that, under realistic testing conditions, the levels recorded are very small, often undetectable, and comfortably below the safe limits for indoor and outdoor air quality.

When Public Health England looked at the issue in 2016, it concluded that “there is no evidence of harm to bystanders from exposure to e-cigarette vapour” and advised that vaping “should not routinely be included in the requirements of an organisation’s smokefree policy”. In its Impact Assessment, DHSC admit that the evidence of harm from passive vaping is “limited” and therefore do not try to monetise the “benefits” of banning it in every workplace, pub and club in the land. The idea that “secondhand vapour” poses any kind of health threat to third parties is wild speculation. One might as well ban hot drinks, cooked food and candles.

Reducing the number of vapers

It is not clear why reducing the number of people who vape is an appropriate goal for government, let alone why it is important enough to require coercion on private property. E-cigarettes are a legal, low-risk product that can only be purchased by consenting adults. Reducing use among minors is a legitimate policy objective, but that is hardly likely to be advanced by banning vaping in the workplace.

In the IA, DHSC says that it wants to reduce “vaping prevalence, particularly around children and young people, but also non-smoking adults with the aim of reducing attractiveness and uptake whilst being mindful of the role vapes can play as an effective quit aid for adult smokers.” This is an extraordinary basis for the creation of a new criminal offence. DHSC is saying that adults should be prevented from vaping in sight of other people in case other adults decide to emulate them. It is essentially saying that a law is needed to force individuals to set a good example to others. I can think of no precedent for this.

It is highly debatable whether making people go outside to vape will make them less visible to the general public. Will it make fewer people vape? DHSC admits that it does not know, nor can it be sure whether there would be any societal benefits if it did. The most it can say is that if people stopped vaping (and using heated tobacco) “there is a possibility that the health of those no longer using heated tobacco products, or vaping improves” (my italics). Remarkably for a government Impact Assessment, it doesn’t monetise any potential benefits because “we cannot conclusively say whether these policy options will impact smoking, heated tobacco product, or vaping prevalence or consumption, and therefore whether there will be an improvement on health.”

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Still more remarkably for an Impact Assessment of a putative health policy from the Department of Health and Social Care, the authors give an assurance to the tobacco industry that it has nothing to worry about:

“Tobacco manufacturers are not expected to be directly affected by this legislation as they will likely only be impacted if consumption of products fall.”  

The makers of tobacco products arguably stand to benefit from a vaping ban because the most likely outcome is that it will indeed reduce the number of vapers, but only because some ex-smokers go back to smoking and some would-be quitters decide not to switch to vaping. There is ample evidence from a range of studies showing that policies which discourage vaping have the unintended consequence of encouraging smoking. This is true of flavour bans, advertising bans and e-cigarette taxes. Less research has been done into vaping bans, but it seems to be true of those too. Indeed, it would be surprising if it wasn’t since the freedom to use e-cigarettes in public places, albeit only if the owner permits it, gives vaping a competitive edge over smoking. If people have to go outside to vape, they might rationally decide to smoke instead, because nicotine from cigarettes reaches a higher peak and stays in the bloodstream for longer than nicotine from vapes.

DHSC admits that banning vaping by law in millions of buildings could lead to “a slowing of smoking cessation at a societal level” and that “policies which reduce the appeal of vaping products may however have unintended consequences.” It says that it has “tried to mitigate against this” by making the vaping ban slightly less draconian than the smoking ban, by which they mean that they are going to allow people to vape outside hospitals. The idea that this would give vaping any meaningful advantage over smoking is risible.

The IA pays far too little attention to the most obvious consequence of a vaping ban. Since vapers are overwhelmingly ex-smokers, there is a fundamental contradiction in DHSC’s stated aim of cutting the number of vapers “whilst being mindful of the role vapes can play as an effective quit aid for adult smokers”. A deterrent against vaping is, in effect, an inducement to smoke. Thanks to years of misinformation and scare stories, most people already believe that vaping is at least as dangerous as smoking. And thanks to excessive tobacco taxation, the black market is supplying cigarettes to anyone who wants them for less than it will cost people to vape once the e-cigarette tax is introduced in October 2026. From a health perspective, the government is pushing all the incentives in the wrong direction.

The costs

The IA does not have enough confidence in the policy to attribute a single penny to it as a ‘benefit’. This is highly unusual. But it is able to make a partial estimate of what the policy will cost. It says that the various new restrictions on smoking outdoors and vaping and heated tobacco use indoors will cost £531.8 million, mostly from businesses having to put up new signs and train employees. This is not a trivial price for the hard-pressed hospitality industry to pay for a policy that will drive some of its customers away. Many pubs already ban vaping of their own volition, but there is a big difference between having a private policy that can be enforced at the owner’s discretion and having a legal obligation not to allow vaping at any time. As with the smoking ban, it will be the proprietor, not the individual, who will be fined for non-compliance.

Businesses will face further costs if they currently permit vaping and lose customers after the ban is introduced. Plenty of pubs, bars, clubs and casinos are in this position and there has been no outcry from the general public about vaping being permitted in them. The authors of the IA say that they cannot be sure that businesses will lose customers from banning vaping and so they don’t attempt to put a price on it, but it is a major concern for many in the trade.

Last but not least, we must consider the wellbeing and life satisfaction of 5.6 million adults who will be legally prohibited from vaping from millions of buildings, including - for some people - buildings they own and work in. A ban on vaping would be deeply illiberal; an example, perhaps, of pathological altruism (“behaviour in which attempts to promote the welfare of another, or others, results instead in harm”). In a bizarre section of the IA, the authors imply that the government would be doing vapers a favour by casting them outdoors:

“We acknowledge that under ‘rational choice’ assumptions, the restriction of locations where individuals can vape may result in a loss of consumer surplus. However, it can also be argued that becoming free of addiction improves consumer surplus.”

Aside from the fact that a vaping ban is not going to free anybody from addiction, addiction is only a problem if the behaviour is blatantly self-destructive, which does not seem to be the case with e-cigarette use (or caffeine use, which also results in trace quantities of chemicals being emitted into the air). The authors of the IA resort to this rather Orwellian definition of freedom because it allows them to duck the hard fact - which they acknowledge - that stopping people from doing the things they want to do imposes a cost of them, a cost that should properly be accounted for in an Impact Assessment.

On the flip-side, the IA does consider the consumer surplus of people who might enjoy not being around vapers, although it does not attempt to put a monetary value on this either. Some readers may find the ‘nuisance factor’ to be the most compelling argument for a ban, but why should the desire of some non-vapers to avoid vaping everywhere trump the right of all vapers to vape somewhere? Some people find dogs annoying, but there is no national policy on dogs in pubs. Like vaping, they are permitted in some pubs and not in others, but that is a decision taken by the owner of the property to suit the preferences of his clientele. Some people found smoking in pubs annoying but the smoking ban only came about when the government was persuaded that it posed a non-trivial health risk to staff. The same is clearly not true of vaping. In the absence of a substantive health risk, a free market between businesses with different rules should prevail.

A public consultation on this policy runs until 8 May. You can respond to it here.

Introduction

The start of hostilities with Iran has had an immediate impact on global oil and regional gas prices, most notably in Europe and Asia. Brent crude at the time of writing have risen 50% in a month and are above $105 a barrel. European and UK natural gas have doubled, or tripled versus the previous decade of mostly stable low prices. It has also impacted the cost of borrowing with UK yields on long-term bonds rising towards 5.5% above the ‘crisis’-level incurred during the 2022 ‘mini-budget’.

The situation is volatile, reacting to hourly headlines, particularly as they concern strikes on regional production facilities and Iranian aggression towards shipping in the Straits of Hormuz - a choke point for around 20% of global cargoes for both oil and gas. Iran says they will permit passage for Chinese and non-aligned states. But they continue to fire on ships, and may not be fully in control of decentralised drone and missile batteries. Whose range can extend up to 300km, exposing 1,000km of the sea route from the Gulf States to the Indian Ocean to potential attack. Shipping insurers and captains are reasonably nervous and cautious.

The US war aims meanwhile are unclear. If ‘regime change from the air’ is possible that is not yet evident on the ground. Iran have appointed the former Ayatollah’s son to the new top job, likely to signal continuity, and there is as yet no revolt by any branch of the army or a general uprising. If that doesn’t happen, the course of the conflict is unpredictable. A Kurdish insurgency could invoke a unifying response from the Shia Persian majority and Azeri Turk minority of which Khamenei was a member. Meanwhile US boots on the ground still seem unlikely. There is no border with Israel and Trump’s base is deeply hostile to ‘forever wars’. His domestic popularity is falling as prices rise at the pumps, which some have reported as “10 cents a day”.

It would then be reasonable for Western governments, particularly in Europe to plan, with cool heads, for a period of higher prices. The G7 considering the release of strategic reserves and securing new supplies from marginal exporters, particularly in Africa, may help, but many need to look closer to home at their own policy choices.

Where we are

The UK’s climate and energy policies for the last 25 years have left us almost uniquely exposed to this kind of crisis. Net zero policies prioritise decarbonisation over security of supply and affordability, and lead to ideological stances such as ignoring our own supplies of fossil fuels onshore (the fracking moratorium) and in the North Sea (crippled by a windfall tax, complexity and uncertainty).

The decision to ignore nuclear energy for 30 years, and then make it as expensive as possible with crazy safety standards and environmental rules was a boon to a growth in renewables, particularly offshore wind. But renewables require more land, more connections, balancing services and a duplicate grid of standby capacity given their unpredictable unreliability. That capacity at the moment is invariably gas. While most of the current wind fleet is rewarded by a ludicrous incentive scheme called the Renewables Obligation, which is linked to wholesale power prices, which tend to be set by gas, to which additional carbon taxes have been added.

That’s why going into this crisis we had some of the most expensive energy in the world, despite sitting on some of the largest reserves of fossil fuels in Europe.

Policy Options

In the short-term the only tools for respite available to the Government are removing policy costs and targeting support to avoid hardship.

In transport the Government can reduce fuel-duty (which is already too high compared to other implied carbon taxes), or remove VAT from duty (every 5p of duty is actually 6p of tax), or reduce VAT from 20% to the 5% applied to domestic energy bills, or scrap the biofuels mandate, a relic of policy ideas from 2008 that mandates blended fuel.

For energy-intensive industry (glass, ceramics, steel, chemicals etc.) the Government is considering a British Industrial Competitiveness Scheme (an extension of older policies) which may relieve around 500 firms from some policy costs and save them 25-30% on their bills. But this is redistribution of costs to other businesses and households not a real saving. This is hard to avoid, these policies fund things like wind subsidies and the capacity market, which implies addressing them properly will require wider reforms and may be subject to legal challenge.

Scrapping the North Sea windfall tax, or better scrapping both it and all the related complexity of allowances, special regulatory standards, and other taxes might have a medium-term impact in restoring investor confidence. It’s a similar story with fracking. It needs tax and regulatory equivalence to other extractive industries, not special treatment. All energy industries need more sensible planning and environmental rules, to avoid being tied up for years then overturned by manufactured claims of infringement of some mad law being interpreted by activist judges.

The Government’s preferred approach to helping households with rise in power and heating bills since 2019 is the energy price cap, which until 31 March 2024 could not rise above £2,500 per ‘typical household’ dual fuel bill. It means bills lag crisis events, regardless as to whether suppliers get hit with higher prices sooner. In 2022-23 this led to the bankruptcy of many retail energy companies, and it suppressed prices that otherwise would have risen to £4-5,000, around 3 times our current levels.

Like most price controls it’s a terrible idea that masks price signals, and encourages waste. In an energy crisis we want high prices to encourage less use, particularly for non-essential activities like heating swimming pools. Without preventing essential services, like the elderly staying warm in winter. We want those signals to get through to suppliers, so they invest in new sources of supply.

It is likely that the anticipated £100-150bn cost of the subsidy in 2022 is what triggered the market confidence event that exposed the LIBOR crisis and ended the 49-day premiership of Liz Truss. A smarter, cheaper approach would have been targeted welfare for relief of temporary hardship. At the time the administration claimed this would have taken too long. Presumably then, such a package is ready now, and if not, it would be wise to address that deficiency rather than repeat the error.

Without such distortions, in the long-term markets will adjust. Higher prices drive new investment in alternative supply and alternative energy, while dampening demand for non-essential energy use. For example, after the Iranian revolution in 1979, oil prices doubled, with higher prices persisting until the mid-1980s. But they did fall, and the shock precipitated new producers and industries, like Japanese car manufacturing, and early interest in the potential of renewables.

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The cost of net zero and alternative paths

The central strategic question for UK energy policy is Net Zero. Predictably the latest crisis has restored the incentives for fans to claim it’s our insurance policy. But this claim is patently wrong when tested against the evidence of pre-crisis high prices, which in turn have been caused by Net Zero policies and failing (often wilfully) to understand that system costs matter more than marginal costs of production. Sunshine and gusts of air may be free, capturing them, connecting them, balancing them, storing them, offsetting their absence, and financing all of that, is not.

A simple change that would reflect reality is that all and any carbon targets are an aspiration, not legally binding. While the related premise of carbon budgeting, inferring the state central planning of the entire economy to meet them, needs to go. The goal of a sensible energy policy linked to a sensible growth policy is the delivery of secure, affordable, abundant energy, in that order, with low impact on the environment and climate a related benefit from innovation, not an end in itself. Higher growth is more likely to achieve decarbonisation than higher climate ambition that strangles growth.

Such a policy would be technology neutral, and encourage a market that rewarded ‘firm power’ delivery not infirm capacity idling on standby. Particularly if matched by regulatory reforms that prioritised fast delivery over the living standards of hypothetical spiders.

It’s likely on current options that this would mean newer nuclear power displacing most gas power and older renewables in the next two decades. But it’s uncertain, and dealing with that uncertainty efficiently is the major benefit of markets over Government plans.

Whether or not we use most of the oil and gas we sit on is not an argument against developing it. It’s either a genuine insurance policy against crisis events as it’s there and accessible. Or it’s a source of revenue from exports and taxes to develop the alternatives. Both improve our security of supply. Arguing conversely we can rely on any such global resources bar our own, as a Minister did this week, is irrational.

The future of new renewables should be one of subsidy-free market competition, which was always the goal of the support policies. They clearly have niche uses, and in sunny climes, or places with vast amounts of windswept land, exciting potential. If their costs genuinely fall, they will thrive. But the low carbon industrial complex the UK has created between Government, producers and lobbyists to hit capacity targets to the exclusion of the public and immiseration of the kingdom needs to go.

Conclusion

In brief if we want not just to survive the current crisis, but thrive the next time, we need a focus on growth, innovation, markets, and targeted support to alleviate the worst consequences for those most at risk. We need to use the resources we have to develop the future resources we need, and if successful export our success. Showing genuine leadership on the world stage through the example of our prosperity, rather than incurring derision for our self-imposed delusions and decline.

In the last full financial year, government support just to keep the trains running cost us £12 billion. This did not include our ‘investment’ in HS2 and other new schemes.

We are now approximately at the halfway stage of renationalising passenger services, with big providers such as LNER, Northern, Transpennine, Greater Anglia and West Midlands already back in the public sector. Transport for Wales and ScotRail have been run by the devolved governments for some time.

While it would be silly to expect any significant change so quickly, it is worrying that the current Railways Bill is still fairly inchoate and Heidi Alexander and her team have not yet developed anything recognisable as a strategy for Great British Railways - although renationalisation has been Labour policy for many years.

Part of the selling point of nationalisation was the savings from ending the duplication of privatised management, administration and other staffing, which might do something to improve the industry’s poor productivity performance. But that is likely to mean job losses, and the unions are already making grumbling noises on this.

They are making it clear that they wish to retain – and extend - their veto over meaningful change. Take the case of the reopened line between Oxford and Bletchley/Milton Keynes, intended to be part of the eventual East-West line to Cambridge and the Silicon Fens. The track has been approved for service for nearly a year and a half. But no passenger trains have run yet, or are in immediate prospect.

RMT are insisting that on each train there be a guard or ‘train manager’ whose almost entire function will be to open and close doors. This can perfectly well be done by the driver, as passengers on the underground, Transport for London, c2c and many other services can attest. The union, which won a similar battle on Merseyrail a few years back, is in no mood to give in now there is a Labour government in office, so this expensive new line remains unused. Even if an agreement was reached tomorrow morning, it would be several months before trains could run. Drivers have to be trained and practice on new routes, and ASLEF members, in solidarity with their fellow unionists, have been refusing to provide or undergo training.

Rachel Reeves may regard further subsidising this sort of bloodymindedness as a triumph for her fantasy economics, but I’m afraid I don’t.

Normally the spring statement is a significant government event. This time, though, we have been told to expect nothing special by way of fiscal or broader economic policy changes. In one sense that is good. Every economic policy statement by this government has made things worse. No change is at least an improvement on that.

But it really isn’t enough. In an ideal world Reeves would be setting out a plan to deal with this country’s serious economic problems, some of which are of her own making, some going much deeper.

What should she be saying instead? What is my ideal Spring Statement? What does the country need?

Well it is very straightforward. It brings together many of the things we have been saying for some time. We even have a ten-point plan for her.

1. Tax and Spend: Acknowledge that taxation and spending are now too high, announce an intention to get both down by 1% of GDP a year (about £30bn) in what remains of this Parliament. As part of this, promise to eliminate the many “cliff edges” in our tax system that discourage work. Meanwhile, stop implementation of tax increases being introduced in April.

2. Pensions: Promise a new mechanism to replace the state pension triple lock, maintaining incomes for pensioners at a constant share of GDP. Reduce the generosity of future state defined-benefit pensions, to avoid the constant growth of liabilities.

3. Net Zero: Announce an end to the net zero policy. Promise to repeal the Climate Change Act. Meanwhile, freeze renewables investment, liberalise North Sea oil exploration and reduce the punitive North Sea tax burden, and legalise fracking. Promise an immediate halt to solar installation in the UK on anything other than domestic premises and scrap the ban on new petrol cars. The Government might well need more short-term measures here too as a result of the war in Iran: notably, temporary reductions in petrol fuel duty.

4. Cost of jobs: Halt the entry into force of the Employment Rights Act and the planned increases in the minimum wage for the rest of this Parliament.

5. Planning and housing: Promise another, this time genuinely liberalising, liberalising Planning Bill. Scrap requirements for affordable housing. Abolish the new rules on building regulation for buildings over 18m high. Halt the entry into force of the Renters Rights Act so as to avoid further harm to the rental market.

6. Infrastructure: Promise Enabling Acts to give the government all necessary powers to get built a defined set of infrastructure projects, including the Heathrow third runway and new nuclear power stations.

7. The NHS: Announce a Royal Commission to investigate the various European health systems and propose a mechanism to change the NHS into such a system over a 10-year period.

8. Farming: Fully reverse the inheritance tax changes for farmers and promise a major reduction in the regulatory burden on farming, in return for gradual reductions in environmental subsidy.

9. Tariffs and trade: Reduce to zero all tariffs on goods which Britain does not itself produce except where there is a clear national security justification.

10. The EU “Reset”: End negotiations on all aspects of the EU “reset” that involve alignment with EU rules without a say, that is, at least the food standards and carbon / electricity market plans. Reverse the decision to join Erasmus (saving nearly £600m this year and more in future years).

Of course we know that none of this will happen. The government’s only real strategy is to talk about economic growth while increasing taxation, spending, and regulation year on year. But doing that is a choice. There are many things which could be done which would increase growth, prosperity, and wealth in Britain. Not doing them is a deliberate choice - a choice to get gradually poorer every year. Until this reality is faced, Britain will continue to face economic decline.

The decline in legal rolling tobacco sales is particularly significant because loose tobacco has been subject to the heaviest tax rises in recent years, with the duty rate doubling since 2020. Rolling tobacco is often the last resort for low income smokers before they turn to the black market.

Converting kilograms of rolling tobacco into sticks, we find that a total of 19.8 billion cigarettes were sold legally in the UK in 2025, less than half the figure recorded in 2021 (40.6 billion).¹ This decline is far greater than any estimate of the decline in the smoking rate. These estimates vary. According to the Opinion & Lifestyle Survey, the smoking rate among people aged 16 or older in Great Britain fell from 12.7% to 9.1% between 2021 and 2024. According to the Annual Population Survey, the rate among people aged 18 or older in the United Kingdom fell from 12.3% to 10.5% in the same period. Neither survey has an estimate for 2025 yet, but the monthly Smoking Toolkit Study suggests that the rate of daily cigarette smoking in England was 10.6% in 2025, only modestly less than in 2021 when the rate was 11.4%.

Using the UK-wide figures from the Annual Population Survey below, we can see that the downward trajectory of legal cigarette sales has been far steeper than that of the number of smokers.

We know from other surveys that the number of cigarettes consumed per smoker has not changed in recent years. The conclusion is therefore inescapable: there is a large and growing market for illicit cigarettes.

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The most obvious explanation for this is that smokers have been priced out of the legitimate market by taxation. Since 2020, there have been seven increases in tobacco duty. The minimum excise tax on cigarettes has risen by 61%, the specific excise tax on cigarettes has risen by 73%, and the tax on rolling tobacco has risen by 115%. In a classic example of the Laffer Curve, these tax hikes have not led to increased revenue. Instead they have led to total tobacco duty revenue falling from £10.4 billion to £7.9 billion since 2021.

The government appears to have its head in the sand on this issue. HMRC’s official estimates of the tobacco tax gap are deeply flawed and defy belief. Its most recent estimate is that 13.8% of tobacco sales were “non-duty paid” in 2023/24, and yet it seems clear from the data above that the illicit sector has taken more market share than that in the last five years alone. Almost unbelievably, HMRC claims that the illicit share of the rolling tobacco market is at an all-time low of 22.9%.

The Office for Statistics Regulation has announced a review into the quality of HMRC’s statistics and has asked it to “monitor whether its methods are optimally capturing tax gap and market size information”. In the meantime, flawed tax gap estimates breed complacency among politicians who are currently eyeing up incremental prohibition in the form of the Tobacco and Vapes Bill. Speaking in the House of Lords last week, Lord Bethell said that he was deeply sceptical of “stories about the black market” and complained, somewhat ironically, about the “loose use of numbers in the description of illicit trade”.

The explosion of black market tobacco in recent years will not come as news to smokers, nor to anyone who pays attention to cigarette packs on the pavement and in beer gardens, but the dramatic decline in legal sales at a time when the number of smokers has been falling more modestly, is conclusive proof that we have a serious problem.

Zack Polanski has become for Generation Z what Jeremy Corbyn used to be for the Millennial generation.

During a political hype of that nature, it often feels like there is nothing anyone can say or do which would make the slightest bit of difference. Those who are swept up in the hype will go along with it no matter what, and they will be completely deaf to any counterarguments.  

But I have seen a succession of these hypes come and go over the years: they never last forever. Remember Occupy, for example? They were all the rage in the early 2010s, and for a while, it really felt like this was going to be their decade. Yet by 2013, the movement had largely fizzled out. 

Then from 2013 to 2015, there was this bizarre cult around Russel Brand, not in his role as an actor or comedian, but as a political figurehead. I could not, for the life of me, understand what people saw in him. For me, ‘Brandism’ was just teenage communism combined with inane New Age hippie clichés. And yet, establishment figures like George Monbiot and Owen Jones could not get enough of him.

The Brand cult abruptly ended after the 2015 General Election, only to be almost instantly replaced by Corbynmania. This was, perhaps, the longest-lasting political cult I have witnessed to date, but last year, the Your Party shambles finally killed the Corbynism vibe.

At the end of 2018, Greta Thunberg became a cult figure, and throughout 2019, you could barely walk through Westminster, because all the streets were clogged up by ‘climate protesters’. The summer of 2020 became the summer of BLM, whose woke ideology seemed completely hegemonic and invincible. Until it didn’t anymore.  

Sometimes, these political hypes just fizzle out, and disappear without leaving much of a trace. This is probably the best-case scenario. On other occasions, though, they leave a political legacy which outlives the movement, and the enthusiasm, which had originally created it.

Greta Thunberg has lost interest in climate change, but Net Zero is still with us. BLM are gone, but petty bureaucrats still pester us about ‘white privilege’ and the need to ‘decolonise the countryside’. Political hypes may be short-lived, but the policies and institutions they create may not be.

This is all a long-winded way of saying: I realise that nobody will ever say ‘I used to be a massive Polanski fan, and thought wealth taxes were the best thing ever – but then I read an article on IEA Insider, and now I’m not so sure anymore.’ You cannot defeat fashionable causes with better arguments. But the hype will fade one day, and opponents of wealth taxes need to make sure that the idea fades with it, rather than solidify into something permanent. That’s why it’s worth pushing back against it now, even if it may often feel like we are wasting our time.

Wealth inequality in Britain

The revival of the wealth tax as a political project is one of those political trends which spilled over from the US, and which British commentators copied and pasted uncritically. In early 2021, US Senator Elizabeth Warren came up with her ‘Ultra-Millionaire Tax Act’, a legislative proposal for an American wealth tax. It had the approval of Senator Bernie Sanders, who was then still a hero of Britain’s Corbynite Left, and therefore became fashionable in Britain, too.

The proposal makes a bit more sense in a US context than it does over here. In the US, the people in the top percentile of the wealth distribution account for over 35% of the total wealth. That is far higher than in Europe, and far higher than it used to be even in America itself, within living memory. The British situation, though, is completely different. In Britain, the people in the top 1% of the wealth distribution only hold about 22% of the total wealth, which is below the European average, and much lower than it used to be for most of the previous century.

Wealth tax fans, however, measure wealth inequality a bit differently. Zack Polanski recently tweeted: 

“The 50 wealthiest families in the UK own more than 34 million people combined. That level of inequality is totally unsustainable. A wealth tax isn’t radical - it’s inevitable.”

Similarly, Zarah Sultana also said:

“We have 50 rich families who hold more wealth than half of the country. So we need a wealth tax, but we also need to nationalise the entire economy.”

I don’t quite see why you would bother with a wealth tax if you want to nationalise everything anyway, but let’s leave that for another day. How do we reconcile the figures used by Polanski and Sultana with the ones I have just cited? 

We do not need to do much reconciling, because they can both be true at the same time. If we look at the wealth distribution of Britain, three things stand out: 

• There are millions of people in this country who own considerable amounts of asset wealth, even if they are not millionaires. (Homeowners with pension funds, basically.) So the Sultana/Polanski story, in which everyone in Britain is either a billionaire or destitute, is clearly not remotely true. If you are in, say, the seventh decile of the wealth distribution, you are essentially living the Thatcherite dream of the property-owning, share-owning democracy. 

• There are multi-millionaires and billionaires in Britain, too. Just not very many of them. We are talking about the lower tens of thousands, or less than 0.1% of the population. If you express these people’s combined wealth as a proportion of the total, it will not look that massive, because the aforementioned group – homeowners with pension funds – is so much larger.

• But there are also millions of people – roughly, the entire bottom third of the wealth distribution – who own only a fraction of the median wealth level. In some cases, this is simply because these people are very young, and have just not had the time yet to build up any wealth. But that is not the whole story: many people do start to build up wealth from a fairly young age.

In this context, if you’re bothered about wealth inequality, your focus should really be on building up wealth in the hands of those at the lower end of the distribution, rather than in taking it away from those at the very top.

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Wealth taxes and wealth redistribution

I’m sure wealth tax supporters would object that these are two sides of the same coin: that some people have too little wealth because others have too much, and that the wealth tax is the way to solve this. It is very much not. Not even on its own terms.

I’ve written about the various problems with wealth taxes before: the negative behavioural responses, the valuation bureaucracy it requires, the limited revenue-raising potential. This article is explicitly not about any of that. For the purposes of this article, I will assume an idealised wealth tax, which has never existed anywhere. Even then, it would still be true that a wealth tax is not a tool for wealth redistribution, in the way that our system of direct taxes and income transfers is a tool for income redistribution. 

Under a wealth tax, the wealthy do not transfer assets to the state. If your wealth consists of shares, you do not pay your wealth tax bill in shares; if it consists of property, you do not pay it by transferring ownership of a room to the state; and if it consists of a business, HMRC does not become a co-owner. You pay the wealth tax, ultimately, out of your income, just like income tax, even if the amount you pay is not income-related. So there is no transfer of assets from the wealthy to the state. Nor is there a transfer of assets from the state to the asset-poor. If the state spends the wealth tax revenue on the NHS, we may get better healthcare, and if it spends it on green energy, we may get lower carbon emissions. But the asset-poor are still asset-poor. If it is true that the 50 wealthiest families own more than the entire bottom half of the wealth distribution (I haven’t been able to check those figures, but how could I not take Zack Polanski’s and Zarah Sultana’s word for it?), that will still be true after the introduction of a wealth tax. 

Now, I’m not saying that a wealth tax has no impact on the distribution of wealth: it almost certainly has some indirect effects. It could, for example, force or nudge some people to sell off some of their assets, in which case, there would be an indirect transfer of wealth. But what kind of a wealth transfer would that be? Who would benefit from that? 

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The most common version of a proposal for a British wealth tax envisages a threshold of £10m. If so, it would apply to the top 0.05% of the wealth distribution. Let’s round that up to 0.1%, and let’s generously assume that it is effectively more like 0.2% or 0.3%, because people just below the threshold would also engage in pre-emptive asset sales, or at least, they would be reluctant to acquire new assets. 

Still, that’s not a lot of people, and while they are, by any definition, very, very, very wealthy, even they are not wealthy enough to flood the country with assets. If it’s a more limited asset sale – who would buy them? Presumably, not the people in the bottom third of the wealth distribution. The most likely buyers would be people closer to the sellers, say, the 95^th, the 96^th and/or the 97^th percentiles of the wealth distribution – or even just to people at the lower end of the top percentile. 

In other words, while a wealth tax may well lead to some wealth redistribution, it is much more likely to be a redistribution within the top group: from billionaires and multi-millionaires to ‘ordinary’ millionaires, and perhaps some almost-millionaires. The very top of the wealth distribution would become a little flatter, but the rest of the distribution would remain unchanged. The vast majority of the population would see no benefit, at least in wealth terms.  It would also still be true that a small number of people at the top would own more than the entire bottom half of the wealth distribution, even if “a small number” now means a few hundred families rather than 50.

The alternative: wealth creation

The only way to meaningfully change that would be to facilitate the formation of wealth in the hands of people at the lower end of the wealth distribution. In a British context, this would mean two things: building houses, and enrolling more people in private pension schemes.

The amount of property wealth is not fixed. If we increased the size of our housing stock to, for example, German, Swiss or French levels, the value of individual housing units would drop, but the value of the housing stock as a whole would increase. Home ownership rates could very easily reach their previous peak level again, which would mean millions of additional homeowners.  

The amount of pension wealth is not fixed either. We could, over time, increase it to, for example, Australian levels, by adopting a pension system more like theirs, in which people pay pension contributions into their own pension fund rather than into a state system.  

The result of this would be a ‘levelling-up’ of the wealth distribution, as the lower deciles would benefit disproportionately. It would, at long last, open up the old Thatcherite ideal of a property-owning, share-owning democracy to millions of people who are currently excluded from it. Rather than a zero-sum redistribution of wealth, this would be a positive-sum levelling-up of wealth, benefitting everyone – or at least, everyone except Zack Polanski, Zarah Sultana and Gary Stevenson.

The UK also remains an outlier, so this cannot be blamed on “global headwinds”. In particular, inflation in the euro area has been stable at around 2.0% and is expected to fall to just 1.7% in January.

The fall in UK inflation in January was helped by cheaper petrol, airfares, and food. The latter partly reflects declines in agricultural commodity prices worldwide. Inflation in the education sector also slowed, as the extension of VAT to school fees in 2024 dropped out of the annual comparison.

But otherwise, there was little change, with the core rate (excluding food & energy) slowing only marginally from 3.2% to 3.1%.

Inflation should drop more sharply in April, perhaps all the way to 2%. This would reflect the expected drop in domestic energy bills and smaller rises in other regulated prices, notably water bills and vehicle duties. In the meantime, the freeze on rail fares should lower inflation in March.

Nonetheless, tinkering with regulated prices is not a proper strategy to deal with the cost of living crisis. The government is simply transferring costs from household bills to general taxation, leaving many families no better off, while preventing markets from working as well as they should.

There is also danger that inflation does not fall as far as expected, or that it does not remain lower for long. Business surveys suggest that underlying cost pressures remain sticky, and medium-term inflation expectations are still too high for comfort. This is partly a result of government policy choices which have made labour and energy more expensive and increased the burdens of tax and regulation.

Last but not least, growth in broad money is running at annual rates of around 5%, which is also at the upper end of the comfortable range. This could mean that inflation just pops up somewhere else in the economy where prices are not being capped.

The government should refocus on getting the supply side of the economy right, freeing up markets to provide goods and services at lower prices across the board. In turn, this should ensure that more of the growth of the money supply is reflected in an increase in economic activity rather than higher inflation.

The latest ONS labour market data paint another gloomy picture of a jobs market that is steadily losing momentum. The rise in the national living wage, and its extension to younger people, higher employer NICs, and the baleful implications of the Employment Rights Act are all having their predictable consequences. At 5.2 per cent, the unemployment rate is now at its highest level since COVID, and there is little in the figures to suggest that the trend is about to reverse.

What is particularly worrying is the position of young people. The unemployment rate for 18-24 year olds has shot up from 12.7 per cent to 14 per cent in the latest figures. This group will include many recent graduates whose degrees have not lived up to their billing as a means to well-paid employment. For years, Britain prided itself on doing better at getting young people into work than many of our continental neighbours. But that advantage is slipping away. Recent OECD figures for a slightly earlier period suggest that our youth unemployment rate is now higher than the European Union average.

There are other warning signs scattered through the data. Full-time self-employment has fallen again, suggesting that the flexible, entrepreneurial part of the labour market is being squeezed. Vacancies have flatlined, pointing to weak hiring appetite among employers. Meanwhile, private sector employment has edged down slightly. The direction of travel is clear enough: firms are becoming more cautious, and opportunities are drying up.

In contrast, employment in the public sector has edged up again. Pay growth in the public sector, at an annualised 7.2 per cent, is now more than twice that in the private sector. At a time when businesses are struggling with higher taxes and mounting regulatory costs, this divergence is unlikely to be sustainable. It also risks distorting the labour market, drawing workers away from the sectors that actually generate growth and tax revenues.

There are fiscal as well as economic consequences. As unemployment rises and job creation slows, tax receipts fall and benefit payments rise. This puts further strain on already stretched public finances. The government’s claims to be promoting growth begin to look increasingly hollow when the labour market is moving in the wrong direction.

None of this should come as a surprise. When you raise the cost of employing people, increase payroll taxes, and load firms with additional legal obligations, hiring becomes less attractive. Employers respond by cutting vacancies, reducing hours, or not taking on new staff at all. It is basic economics, yet it is a lesson policymakers seem determined to ignore.

What the country needs is a major reset of labour market policy: a lighter regulatory touch, lower taxes on employment, and a renewed focus on making it easier for firms to create jobs. Unfortunately, there is currently little prospect of such a change in direction. Until that happens, we should expect more gloomy labour market releases in the months ahead.