Milei-style shock therapy may be needed to save Britain from fiscal disaster

Telegraph

3 days ago

The Office for Budget Responsibility's latest report on UK finances paints a grim picture.
Economic growth has flatlined, unemployment has risen to 4.7pc – the highest since early 2021 – inflation stubbornly lingers at 3.6pc and government spending is spiralling out of control.
Every household understands a simple rule: you must earn more than you spend, or eventually hit the rocks.
Yet the UK has long been living beyond its means, maxing out its credit card.
For the year ending April 2025, borrowing reached £148bn – a staggering 70pc higher than the £87bn forecast in March 2024. Debt levels are now at heights not seen since the post-Second World War era, and once again, taxpayers are being asked to foot the bill.
Worse still, the Government shows no sign of reining in expenditure.
The Chancellor is widely expected to announce new tax hikes in the autumn. And when implemented, the real damage will have already occurred following months of speculative debate – 'will-we-won't-we' tax rises that create uncertainty and undermine confidence, dampening economic activity before any policy is even introduced.
Those advocating further tax increases misunderstand basic economics, what people need and how to get the best out of them.
Beyond a certain point, higher taxes reduce revenue by curbing economic activity – a lesson all too familiar amid rising employer National Insurance contributions, minimum wage increases, and other cost pressures.
Businesses across the country are already shedding jobs, particularly among lower-paid workers feeling the squeeze.
We may well have passed the point of optimal taxation.
Yet instead of easing the burden, the Government whispers about even more tax, including proposals for a wealth tax.
This would be disastrous, as the wealthiest 1pc already are estimated to contribute roughly 28pc of income tax. Imposing a wealth tax risks driving more mobile top earners away.
As Walter Wriston, the late chairman and chief executive of what was Citicorp, once said: 'Capital goes where it is welcome and stays where it is well treated.'
The UK, like many European nations, has lived beyond its means for too long. Month after month, deficits grow.
The yield on the UK's 30-year government bond recently topped 5.5pc – far above the 4.85pc seen in October 2022 – reflecting investor wariness.
The Bank of England has been forced to adjust and review its quantitative easing reversal following pressure from investors.
Political will to cut spending appears scarce.
Parliament's handling of the welfare reform bill signals that no meaningful spending reductions will occur, meaning taxpayers will again bear the cost.
The debate narrowly focused on trimming a few billion pounds, when the circumstances call for far deeper cuts. And nobody asks how to deliver better public services for less or how it can be fair that taxpayers fund ever-expanding budget black holes.
The UK has become addicted to the notion that government should expand its role endlessly – that bigger government automatically means a better society.
As a result, spending cuts are politically toxic: the knee-jerk response to every problem is to raise taxes to fund more spending. This is more than policy – it's philosophical, big state versus small state.
To say 'I'm from the government, and I'm here to help' remains as dangerous as ever.
Borrowing is set to rise significantly over this parliament, even as growth falters. Despite the rhetoric of engineering growth in the economy, the UK faces the prospect of a smaller economy at the end of this parliament.
The only way out is to grow the economy.
Real, sustained economic growth reduces debt-to-GDP ratios over time and generates the tax revenues needed to fund essential services.
Achieving this requires a hard balancing act: cutting spending, committing to fiscal discipline, slashing burdensome regulation, scrapping costly and anti-growth policies like net-zero mandates, and lowering taxes over time.
The UK simply cannot rely on ever-higher tax-takes to bail out unchecked spending.
We might start to look to Argentina for a solution.
Once an economic basket case with inflation soaring over 200pc and poverty affecting more than 40pc of its population, Argentina has faced nine sovereign defaults since independence, caused by persistent fiscal deficits in 57 of the past 65 years. Over half the population relied on government transfers in 2022.
Then came Javier Milei, a political outsider who was not expected to win Argentina's 2023 presidential election. Upon victory, he declared bluntly, 'there is no money', and since taking office, Milei has worked aggressively to balance the budget. While many economists initially derided his approach, it is now bearing fruit.
Argentina's economy is forecast to grow over 5.7pc this year. Inflation has dropped to 1.6pc monthly as of June, and poverty has fallen significantly – Unicef estimates 1.7 million children have been lifted out of poverty since Milei assumed power.
Milei's diagnosis is clear: 'The public sector is the illness. If a body has a virus, a germ, a bug, a parasite, you extract the parasite – you don't feed it. If you feed the parasite, you end up worse off. We got the state out of the way, and things are working better.'
Fiscal discipline, slashed public spending, ending monetary financing of deficits, and deregulation have shrunk the state dramatically.
These measures are not without pain, with over 50,000 public sector workers laid off, government departments merged or closed, infrastructure spending frozen, and energy and transport subsidies cut. But the result is a state budget surplus and a transformed economy – all within 18 months.
Being fiscally responsible also means attracting investment. If the UK is seen as a balanced, prudent economy living within its means, capital will flow in. Right now, the notion that the UK is poised for a global investment bonanza is wishful thinking.
To fix the UK's economy and become an attractive destination for investment, we must balance our books.
Like Argentina, we need a complete reset – a new philosophy and a radically different approach. This will require an honest conversation with the public about 'there is no money,' and a commitment to sustainable spending plans aligned with growth
and fairness.
Failing to act risks the UK ending up in the hands of the IMF – a fate best avoided.