A 1976-style financial meltdown is "very much on the cards"
Prof Jagjit Chadha, the outgoing head of the highly-influential National Institute for Economic and Social Research, warns that a UK fiscal collapse "is now a real and present danger".
I think it’s fair to say that here on When The Facts Change, and in my “Economic Agenda” columns in the Telegraph over several years now, I’ve done my bit to highlight the precarious nature of Britain’s public finances.
I warned as far back as September 2022, in a Telegraph piece headlined “The tumbling pound risks humiliation for Britain” – ahead of Liz Truss’s infamous “mini-budget” –that the UK was flirting with genuine fiscal dangers. And that sharp and highly-influential global investors were starting to worry about the UK’s sovereign debt market.
Back in June 2024, just ahead of the current government’s then almost inevitable general election victory the following month, I foresaw in “Ghosts of the 1970s haunt Labour’s resurrection” that Keir Starmer’s party, with Rachel Reeves as Chancellor, “could soon face borrowing difficulties”.
And in January this year, I declared explicitly and not for the first time – in a piece entitled “We face a return to 1976 unless Reeves changes course” – that Labour was borrowing and spending far too much, and that the UK economy, in the aftermath of the Chancellor’s tax-hiking October 2024 budget, was in danger of stalling – given the debilitating impact of ever-rising tax rates on economic growth.
“Yes, the Tories left the public finances in a mess but Labour then hiked borrowing and spending much more,” I said in that Telegraph column back in January. “If Reeves and her ideologically-driven acolytes double down and think they can ignore what the markets are saying, then we do face a return to 1976” – which was, of course, when the UK faced the ignominy of declared itself effectively insolvent, going “cap in hand” to the International Monetary Fund for a bailout.
We are now very firmly back in the same territory. Britain is clearly borrowing and spending way beyond its means – and has been for some time, under successive governments. During the last full fiscal year – April 2024 to April 2025 – the OBR originally forecast the UK would borrow around £80 billion.
In the event, our borrowing during that twelve-month 2024/25 period was £151 billion, of which a staggering £105 billion – over two-thirds – was spent making interest payments on existing public sector debt. And in June, the government borrowed £20.7 billion, of which a jaw-dropping £16.4 billion – over three quarters – went on debt interest.
Last month, I wrote a When The Facts Change (WTFC) post entitled: “Britain’s public finances are starting to resemble a Ponzi scheme”. “Looming in the background is the spectre of 1976,” I wrote in that post.
“Back then – again under a big-spending Labour government, in hoc to public sector unions and belligerent backbenchers, which kept pushing tax rates up – the UK ended up with an IMF bail-out, which sparked a plunging currency, sky-high inflation, and years of economic and political chaos”.
“Britain is now hovering close to the cliff-edge of a similar fully-blown sovereign-debt crisis,” that same WTFC post continued. “Back in 2008, in the aftermath of worst financial collapse since the late 1920s, HM The Queen asked, ‘why no-one saw this coming?’ The same can’t be said this time around,” the July WTFC post continued.
“Lots of serious people, not least highly-influential investors – are now seriously concerned that the UK’s public finances are on the brink of systemic collapse. Yet almost our entire political and media class – not least our Labour government – remains determined to ignore this reality”.
I’m a journalist, but also a professional economist. And, for a long time now, the major investors and serious economic policymakers I talk to, while we’ve shared concerns about the inherent fragility of the UK’s public finances, they have not spoken out publicly.
But earlier this week, I conducted a 45-minute no-holds-barred interview with Professor Jagjit Chadha – who led the National Institute of Economic and Social Research (NIESR) for the best part of decade, from June 2016 to December 2024.
NIESR is, along with the Institute for Fiscal Studies (IFS), the most influential and highly-respected economic think tank in Britain. While the IFS is judge and jury when it comes to “microeconomic” aspects of taxation and spending, the “National Institute” is the go-to shop for serious, independent analysis and forecasts of the UK’s “macroeconomy” – the big picture.
Since the middle of the last decade, then, Jagjit Chadha, a Cambridge economics professor with a host of other credentials, has led the “National Institute”. Here’s a short trailer of my When The Facts Change interview with Professor Chadha.
Professor Chadha, as I said, ran the National Institute of Economic and Social Research for almost a decade up until December 2024. Previously he was Professor of Economics at the University of Kent, Professor of Economics at the University of St Andrews and is a Fellow at Clare College, Cambridge.
Yet Professor Chadha is no “academic innocent” – he has worked at the Bank of England on Monetary Policy, as Chief Quantitative Economist at BNP Paribas, and has served as Chair of the Money, Macro, Finance Study Group. He has acted as Specialist Adviser to the House of Commons Treasury Committee and academic adviser to both the Bank of England and HM Treasury, and to many central banks, as well as the Bank for International Settlements.
I feel that Professor Chadha’s interview with me is important and of genuine public interest – so I have made the thrust of his comments freely available in the trailer above. I also gave the transcript of my entire interview with him to the Telegraph – which has rightly reported his comments prominently.
But if you want to hear my entire interview with Professor Chadha, please become a paid subscriber to When The Facts Change.
These are worrying economic times. I am doing what I can to report on and even influence the direction of UK economic policy-making. Over the coming weeks, I will be interviewing more economically-influential figures, providing them with a platform to speak freely, openly and if necessary at length about the state of our nation.
Please help me to do that by backing When The Fact Change
