The UK faces a fiscal and political problem: governments want lower taxes and stronger growth, but they struggle to restrain spending. Without spending control, tax cuts lose credibility, markets push back, and governments eventually raise taxes to cover expanding welfare, bureaucracy, and public-sector obligations.
Kwasi Kwarteng’s short period as Chancellor of the Exchequer is a case study in what can go wrong when tax-cutting policy is not paired with enough preparation and spending restraint. The goal was to make the UK more competitive by cutting taxes, but the package was rushed, poorly prepared, and not supported by a clear plan to control spending.
He argued that tax cuts can work, but only if markets believe the government is also serious about restraining spending. The lesson was not that tax cuts are impossible. The lesson was that cutting taxes without a credible fiscal framework can quickly lose market confidence.
Why the UK tax-cut plan failed
The tax-cut package failed for several reasons.
The first problem was speed. The policy was announced too quickly, without enough groundwork. The public, markets, and institutions had not been prepared for what the government was trying to do.
The second problem was spending. The government announced tax cuts, but did not show enough spending restraint at the same time. Kwarteng argued that a tax-cutting package does not need to be matched pound-for-pound with spending cuts, but it does need to show that the government understands the spending side.
The third problem was communication with the Bank of England. The Bank was not described as communicative enough about what was happening in the gilt market.
The political result was rapid. Kwarteng was dismissed after 38 days. Liz Truss lasted roughly another week after that. His view was that when a prime minister sacks their Treasury minister, it usually signals that the prime minister’s position is already severely weakened.
The spending problem
The deeper issue is not only tax rates. It is spending.
Governments often like tax cuts because they are popular with the people who pay less tax. Spending restraint is harder because it creates political opposition. Even politicians who describe themselves as fiscal conservatives often avoid the difficult choices needed to control spending.
The same problem appears across Western countries, including the UK, the US, and France.
The challenge is not always outright spending cuts. Even slowing the rate of spending growth can be politically difficult. Welfare, social security, public-sector programs, bureaucracy, and new administrative functions all create pressure for higher taxes.
Kwarteng argued that many governments are forced into tax rises because they cannot control spending. The gap between revenue and spending becomes so large that governments feel compelled to raise taxes, even when doing so damages growth.
Bureaucracy, welfare, and the fiscal state
Several spending pressures were highlighted.
One is bureaucracy. As the state expands, the bureaucracy develops an interest in preserving and growing itself. New administrative roles, compliance functions, diversity offices, monitoring systems, and public-sector programs all add cost.
Another is welfare. The modern welfare state in the UK was built after World War II, when there was a strong political demand for a better social settlement. But the system has expanded far beyond its original scope and is now difficult to fund.
Even the Labour government wanted welfare reform, but its own MPs resisted. As a result, the government needed to find an extra £5 billion in taxation.
France faces a similar problem. Governments there have struggled to pass budgets and reform pensions because the public strongly resists working longer or receiving fewer benefits.
The broader Western problem is simple: large welfare states are expensive, growth is weak, and governments are running out of politically easy ways to pay for promises.
The UK doom loop
The UK is caught in what was described as a doom loop:
- spending rises
- taxes rise to fund the spending
- higher taxes weaken growth
- weaker growth reduces the tax base
- the government then needs more tax rises
The result is economic stagnation and constant pressure for new taxes.
This is especially dangerous because capital and people are now much more mobile than in the 1970s. Wealthy individuals, entrepreneurs, and business owners can move, work remotely, use global banking, run businesses online, and choose friendlier jurisdictions.
A capital tax or wealth tax may therefore raise less money than expected because the people targeted can leave.
Wealth tax risk
One proposal discussed was a UK capital tax of 2% per year on wealth above £10 million.
The argument against it is that it ignores modern mobility. In the 1970s, many wealthy people were more rooted in one country. Today, the rich list in the UK is much more international. Many wealthy residents can relocate to Italy, Dubai, or elsewhere.
Italy’s flat-tax regime was discussed as one example. Wealthy residents can pay a lump sum tax of around €200,000 per year. Property prices in Milan were said to have risen around 50% in five years, partly because wealthy people moved there.
The point is that a predictable flat tax can attract wealthy residents, while punitive taxes can drive them away.
A possible UK replacement for the non-dom regime was also discussed. Nigel Farage had suggested a flat annual amount around £250,000. Kwarteng argued that London could probably charge more than Milan because London remains a world-class city. A figure around £300,000 per year might still attract wealthy residents.
London and safety
London remains attractive because of its history, culture, education, business environment, and English language. It is especially appealing to Americans who want an English-speaking environment and understand British culture.
However, safety has become a concern. London was described as less safe than it used to be, though still safer than many US cities and some European cities.
Migration was discussed as one factor. Earlier migration from Commonwealth countries often involved people who spoke English, understood British institutions, and were already shaped by British education or culture. More recent migration is described as larger in scale and often from countries with weaker English-language and cultural ties to Britain.
The concern is integration. If people arrive without English, without knowledge of British history or institutions, and live mainly within separate communities, social cohesion becomes harder.
Why the West is losing dynamism
The UK and Europe face weak growth compared with the United States and emerging markets.
Around the late 1990s, UK GDP per head and US GDP per head were much closer. Today, the US is described as around 80% ahead.
Europe has stagnated. The US has grown more strongly, while countries such as Malaysia and other emerging markets appear to have much more optimistic futures.
The argument is that growth is now shifting toward Southeast Asia, the Gulf, West Africa, and other developing regions. Investors and entrepreneurs are looking beyond the traditional Western centers.
Malaysia was discussed as an example of a country with strong future potential. Kuala Lumpur and similar cities are increasingly seen as dynamic, modern, and growth-oriented.
Ghana, Africa, and development
Ghana came up as an example of identity, migration, and development.
Kwarteng’s parents were legal economic migrants from Ghana. They came from a generation shaped by British education and Commonwealth ties. His father studied at the London School of Economics, and his mother trained as a barrister in London.
That background influenced his view of education, social mobility, and migration. Earlier Commonwealth migration was described as different from today’s migration because many migrants had stronger English-language and institutional ties to Britain.
On Africa more broadly, there was discussion of countries pushing back against former colonial powers, especially in former French territories, and turning toward Russia or China.
However, there is also some caution about relying too heavily on China. African countries may increasingly want capital from many sources, not only China. The better long-term strategy is to build rule of law so that capital from anywhere can invest.
Colonialism was discussed as part of Africa’s history, but not as a complete explanation for current problems. Ghana became independent when Kwarteng’s parents were teenagers, meaning most people alive today in Ghana have lived under independence, not colonial rule. The responsibility for development now lies largely with the countries themselves.
Adam Smith’s formula was cited as a guide: peace, easy taxes, and tolerable administration of justice. In modern terms, that means rule of law, low or reasonable taxes, and stability.
Hong Kong as a warning
Hong Kong was described as one of the world’s most dynamic free-market jurisdictions in the 1990s. It had low taxes, strong entrepreneurial culture, and a pro-business environment. Milton Friedman often used it as an example of economic freedom.
Since returning to Chinese control in 1997, Hong Kong has changed gradually. The concern is not that everything was dismantled immediately, but that rights, protest freedoms, expression, and dynamism have been reduced over time.
Some investors still see Hong Kong as a geopolitical hedge against the US or UK. But the city is no longer the same free-market model it once was.
The broader warning is that countries can lose dynamism slowly. The risk in the West may not be sudden dictatorship, but slow expansion of state spending, state control, taxation, regulation, and stagnation.
Tariffs and the return of protectionism
Tariffs were criticized as a retrograde policy.
From a classical liberal perspective, free trade is preferable. Tariffs belong more to the 19th century than to a modern global economy. In the 1990s, the assumption was that the world was moving toward more open trade, not less.
Trump’s tariff policy represents a major reversal of that trend.
There may be a legitimate argument for targeted tariffs if a trading partner is using forced labor, prison labor, or unfair systems. But blanket tariffs across many countries were criticized as harmful and likely bad for American consumers.
The example of Indonesia was discussed. The tariff was originally announced at 32%, then negotiated down to 19%, along with a requirement to buy Boeing aircraft. Indonesian officials were reportedly relieved because the final rate was lower than the threatened rate, even though it remained far higher than before.
Europe faced a similar dynamic, with a threatened 30% tariff reduced to 15%. The negotiating tactic made countries feel relieved at a worse outcome than they previously had.
This reflects American exceptionalism: the idea that the US can impose terms and others will accept them because of US power.
Investor visas and attracting entrepreneurs
The UK no longer has the same investor-visa pathway it once did, and this was viewed as a mistake.
A person who wants to bring £1 million to £5 million and create 20 jobs has limited options to move to the UK. That is a lost opportunity.
Trump’s proposed US “golden visa” was described as a good idea, though expensive at around $5 million.
The UK could create something similar at a lower level, perhaps £500,000 or £1 million. The problem is political envy. Many voters and politicians dislike rich people and view wealth as suspicious, even when entrepreneurs create jobs and invest capital.
This attitude makes it harder for the UK to design policies that attract productive capital.
Practical takeaway
The UK and much of the West face the same core problem: large welfare states, growing bureaucracy, weak growth, and political resistance to spending restraint.
Raising taxes may fill gaps temporarily, but it can also weaken growth, drive out mobile capital, and make the fiscal problem worse.
The countries that succeed are more likely to be those that offer:
- lower or simpler taxes
- restrained spending
- rule of law
- openness to entrepreneurs and investors
- safety
- strong education
- integration
- economic dynamism
- predictable policy
For mobile entrepreneurs and investors, the lesson is clear. Do not assume that traditional Western countries will automatically remain the best places to live, invest, hire, or build wealth. The world is becoming more competitive, capital is mobile, and jurisdictions that punish success may lose the people and money they need most.
