Matthew Lynn

There is not a lot of good news on the British economy at the moment: prices are rising rapidly, job vacancies are falling and taxes are almost certainly going to be hiked again in the autumn to fill the ‘black hole’ that has opened up in the nation’s finances. But there is this. Free money is back. ‘Real’ interest rates, which are the only ones that matter, have plunged back close to zero. But we shouldn't celebrate too soon: this is going to be a disaster for the economy – and we will all have to live with the consequences. Today’s inflation data from the Office for National Statistics came out far higher than anyone expected, with prices now rising at 3.8 per cent. Only last week, the Bank of England cut interest rates to 4 per cent. The net result?

The Chancellor Rachel Reeves is threatening a round of tax rises. RMT is on strike over the bank holiday. And something or other is going on with Masterchef. As the summer unfolds, British domestic politics is worrying about all its familiar issues. In the background, however, something far more serious is happening. The country is going quietly broke, and hardly anyone cares.  Very soon the Chancellor will be raising our taxes to pay the interest on our outstanding debt On the bond markets, the yield on the UK’s 30-year gilt rose yesterday to 5.6 per cent, overtaking the equivalent US yield for the first time in a generation, and approaching its highest level since 1998.

As figures out today show the salaries at the top of business soaring, there are plenty of good reasons for the chief executives of the FTSE 100 to be paid a lot more – at least if you look at it dispassionately. These companies are catching up with global salaries. They need to attract talent from around the world. And they need to stop businesses from moving to New York. The trouble is, we also have a Labour government that is searching for more tax revenue and backbenchers and party activists determined that the ‘rich’ should pay more. Against that backdrop, paying yourself a couple of million more does not look so smart. With soaring taxes and a higher cost of living, most people are feeling squeezed for cash.

Over the last few years, we heard a lot about how the giant turbines that dominate hillsides and coastlines across Britain and Europe would power a new era of prosperity. They will generate an endless supply of cheap, environmentally friendly energy. They will create hundreds of thousands of ‘well-paid green jobs’. And the countries that embraced it would become the technological leaders of the 21st century. Indeed, the former prime minister Boris Johnson promised to turn the UK into the ‘Saudi Arabia of wind’. And yet, the outlook for the wind power industry currently looks far from secure. Today, Orsted, the Danish giant of the industry, has been forced into what is effectively a state-funded bailout. Has the wind has been knocked out of wind power?

Major listed companies have already switched from London to New York. The non-doms are all fleeing for Milan and Dubai. And now it turns out that company directors are quitting Britain in record numbers. The exodus of entrepreneurs is accelerating all the time. And yet, so far the Chancellor Rachel Reeves and Prime Minister Sir Keir Starmer have remained completely silent on the issue. Surely, sooner or later they will have to say something? An analysis by the Financial Times this week found that almost 3,700 company directors have left Britain over the last few months, almost double the number before the Budget. Given the time lags involved in filing data with Companies House, the total is likely to be far higher by now.

The global trading system is adjusting to the tariffs levied by the United States: for most goods they look likely to settle at roughly 15 per cent. The microchip industry will carry on much as before, the auto manufacturers will adjust, and even if it means drinking more Californian instead of French wine, the drinks trade will settle down. There is just one exception: pharmaceuticals. President Trump is determined that drugs should be manufactured on American soil. And if he follows through on that, Britain risks losing one of its last major industries. The tariffs on pharma imports will start with just a few percentage points, but the plan is for them to escalate very quickly.

It was, at least, far better than the City feared. Shares in banks and finance houses such as Lloyds and Close Brothers were soaring on the London market this morning after the Supreme Court rejected claims that they potentially owed tens of billions in mis-sold car finance. Instead, they are likely to get away with a mere £9 billion to £18 billion instead. But this still doesn't address a pretty important question: it is not really clear why Britain’s motorists deserve a few billion from the banks. All it is doing is putting us on a slippery slope to an out-of-control compensation culture.  A lot of holidays will be paid for with the spare cash After the markets closed on Friday, the Supreme Court surprised the City by finally making a sensible decision.

It doesn’t look like the Chancellor will hit her target for turning the UK into the fastest-growing economy in the G7. Nor has ‘stability’ unlocked a wave of foreign investment. Instead, it has plunged. As for Rachel Reeves’s fiscal rules, they have been missed almost every month since they were announced. Now there is more bad news for the Chancellor. Business confidence has collapsed to an all-time low. It is not hard to work out why the mood is so bad Leaving the EU’s single market was tough for Britain; so was the financial crash of 2008 and 2009. The pandemic, too, was never going to make business owners feel good about life. But still, 2025 is looking like our country’s economic nadir.

The government is briefing that Rachel Reeves is ruling out a wealth tax, and won’t surrender to pressure from the left on the Labour backbenches to raid the assets of the rich. It will only accelerate the exodus of the wealthy from the UK, they say. It won’t raise any serious money. And just about every other country that has tried it has had to abandon it. That may reassure a few millionaires anxiously scanning property websites in Dubai and the Caribbean. But there is just one catch: the Chancellor has broken every other promise she has made so far – so why not this one as well?  Reeves will almost certainly have to break her election pledge not to raise any of the three main taxes The spin could hardly be clearer.

Banning the baguette, perhaps? Or making it compulsory to eat a sandwich at your desk at lunchtime? If you think hard enough, it is possible to imagine reform that would create more anger in France. Even so, prime minister Francois Bayrou's plan to scrap two public holidays is right up there. Bayrou wants to reduce France’s 11 public holidays in a bid to kick-start France's economy. Bayrou said Easter Monday had 'no religious significance', and the whole nation had to work and produce more. He said that bank holidays had turned the month of May into a gruyère – a Swiss cheese full of holes. He said that bank holidays had turned the month of May into a gruyère Unsurprisingly, the plan has sparked a public backlash. Rightly so.

We probably won’t see the return of shoulder pads, big hair, or yuppies swilling champagne in the bars around Liverpool Street. Even so, the Chancellor Rachel Reeves will promise a return to the go-go spirit of the 1980s in her Mansion House speech this evening, with a pledge of ‘Big Bang’ style deregulation to boost growth and get the financial markets moving again. There is just one catch – and it's a big one: Reeves is making the wrong reforms, and all Labour's other policies are destroying confidence. The Chancellor's shake-up is doomed to fail.

We will no doubt hear lots of familiar excuses if later this week, as seems increasingly likely, the British steel industry faces 50 per cent tariffs on its exports to the United States. There hasn’t been enough time. The White House has been too busy, and so has the Prime Minister. The trouble is, none of them make sense. And so when these tariffs kick in, the Labour government, which we might expect to defend a traditional heavy industry, will have abandoned steel to its fate.  When the 9 July deadline for the suspension of President Trump’s tariffs expires, we can expect chaos in the global trading system. The EU’s over-confident and arrogant negotiators have failed to reach a deal, leaving every exporter in the bloc facing huge tariffs from Thursday onwards.

The Chancellor Rachel Reeves was in far better form when she appeared again in public alongside the Prime Minister Sir Keir Starmer yesterday. The tears have been wiped away and she has a smile, even if a slightly forced one, back on her face. The reason is not hard to work out. She has started preparing the ground for another round of big tax rises in the autumn. And that is the one thing she is good at. Reeves is back in her comfort zone.  In the wake of the backbench rebellion that forced the government to abandon its welfare reforms, and with the U-turn on the winter fuel allowance, a ‘black hole’, as Reeves would no doubt describe it, has opened up in the government's finances.

When the Prime Minister Sir Keir Starmer gave his full backing to his Chancellor Rachel Reeves, the brief panic in the markets following her tearful performance in the House of Commons subsided. Gilt yields stopped rising, the pound clawed back some lost ground, and the markets recovered their nerve. It was easy to spin that as bond investors backing Reeves. But is that really true? The markets have seemingly already lost confidence in the Chancellor. They simply prefer stability to chaos, and they quite rightly fear that any of the plausible alternatives will prove even worse. Bond investors have already lost faith in the Chancellor 'She will be the Chancellor for a very long time to come,' said Starmer this morning.