Summer borrowin'
Plus: Thatcher Karaoke and Econ 101
In today’s newsletter:
Space Socialism and New Space Capitalism
Reaction to inflation figures and price caps
Analysis of local election results
On Wednesday the Chancellor announced a temporary VAT reduction to 5 per cent on family attractions and children’s meals, the so-called Great British Summer Savings scheme, costed at roughly £300 million and billed as consistent with the non-negotiable fiscal rules.
On Friday the Office for National Statistics reported April borrowing of £24.3 billion, the highest April figure since the pandemic and £3.4 billion above what the Office for Budget Responsibility had pencilled in. It’s worth pointing out that these two announcements don’t sit very well together.
Output rose just 0.6 per cent in the first quarter, the fastest in a year but modest still, and that has encouraged the impression of a Treasury with options. Borrowing for the year to March came in at £132 billion, barely below forecast, and the buffer against the fiscal mandate sits at around £22 billion, a margin already exposed to weaker growth, policy reversals and a debt-interest bill that set an April record.
A VAT cut funded from that buffer is still borrowing. The revenue forgone has to be made up somewhere, and a temporary giveaway timed for the summer does nothing to raise the economy’s productive capacity, so it cannot pay for itself through faster growth.
If consolidation is not happening fast enough when growth surprises on the upside, it will not happen at all when growth disappoints, which the same forecasters expect later this year as the energy shock feeds through. The government is likely going to try to close the gap through higher taxation rather than spending restraint, given that the political cost of cutting is higher than the cost of raising. Buyer beware, funding tax cuts from a shrinking buffer makes the eventual tax rise large.
Valentin Boboc
Senior Economist
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IEA Podcast: Senior Policy Fellow Lord Frost and Editorial Director Kristian Niemietz are joined by Managing Editor Daniel Freeman to discuss London’s decline, the Government’s cost of living announcements, and Wes Streeting’s proposal to align capital gains tax with income tax rates … - IEA YouTube
New Space Capitalism: Interview with Dr Rainer Zitelmann
In an exclusive interview with Dr Kristian Niemietz, Dr Rainer Zitelmann, author of ‘New Stage Capitalism’, outlines his arguments regarding the relationship between capitalism and space exploration.
He argues that the shift from government monopoly to private sector competition in space exploration demonstrates the superiority of market incentives over state-led enterprise.
He uses NASA’s Space Shuttle as a case study in how Cost Plus contracting rewarded waste, while SpaceX’s fixed-price model drove a 95% reduction in launch costs through reusable rocket technology.
Looking to the frontier, he contends that private property rights in space are not merely desirable but necessary, drawing on the model of the American West and warning that socialism, which failed on Earth, would fail even faster in the hostile conditions of outer space.
📄 Read Dr. Zitelmann’s IEA paper, Exploring the Space Economy:
News and Views
“The news that UK inflation slowed by more than expected in April is welcome but may be as good as it gets for the rest of the year. The CPI measure is still likely to rise towards 4% in the coming months as more of the cost increases caused by the Middle East crisis feed through the pipeline.
However, two factors should cap the upside, without the need for further clumsy state intervention.
One is that demand is weakening and the labour market is continuing to deteriorate. This means that corporate pricing power is limited and the risks of second round effects, including a wage-price spiral, are minimal.
The second factor, which is just as important, is that growth in broad money has been subdued. This is in sharp contrast to the rapid acceleration in money growth in 2021 which helped to fuel the surge in inflation in 2022.
In the meantime, the UK government should continue to resist calls for ‘voluntary’ caps on the prices of essential foods. This idea is not new - Rishi Sunak floated something similar when he was Prime Minister in 2023, before backing down.
However, the direction of travel is towards even more state intervention in wage and price setting, based on vibes rather than evidence. This is already costing jobs, reducing the supply of rented housing, and distorting the market for energy.
One difference this time is that the new proposal might be linked to regulatory concessions, such as relaxing or delaying new packaging rules and levies. But this is desperate tinkering. These measures are only a small part of the extra costs that government has imposed on businesses, on top of the fallout from the Iran war.
Crucially, the supermarket sector is already highly competitive, and retailers work on tiny margins. Price caps are only likely to reduce both the supply and quality of the items that are capped, while raising the prices of others.
The government should focus on freeing up the supply side of the economy and easing the constraints that are contributing to higher prices, rather than distorting markets further.”
Julian Jessop on UK inflation and government plans for price caps
"A shift may be taking place — but whether the future coupling includes two, one or none of the current incumbents is at the moment unpredictable." George Maher’s analysis of the 2026 local elections for the IEA.
Watch Daniel Freeman and George Maher’s interview here.
“The British economy today is a million miles away from ‘neoliberalism’, even if we lack a catchy name to describe what has replaced it.” Dr Kristian Niemietz reacts to Burnham’s '40 years of neoliberalism' speech in CITY am.
“Cheered on by business-hating 'public health' fanatics, the government is toying with the food and drink industry like a cat plays with a mouse." Dr Christopher Snowdon on Food Price Caps in The Critic.
NEW: Economics 101
Dr Stephen Davies breaks down why grasping this misunderstood concept changes the way you see every decision, from personal finance to government policy.
Events and Opportunities
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