July 7th, 2025: Andrew Hilton’s weekly thoughts on the way of the world.

Seven/seven is obviously a resonant date in the UK – albeit not as resonant as 9/11 in the US. But, in both cases, we are still paying the price for ignoring the problems in the Middle East - partly caused by Western meddling and by a racist attitude to Arab grievances, coupled with a pathological reluctance to accept that there are still people who are willing to die (and to kill) for a religion. Add to that an equally pathological reluctance to accept that demographics alone mean that South-to-North migration will simply go on increasing unless we push the price for entry to our societies up to levels that many/most will find unacceptable. (Think John Lanchester’s ‘The Wall’.) It is a bleak future – but, then, my son reminds me that I am the only right-winger he knows whose sympathies lie with the Palestinians. Maybe, when the Gazans are kicked out and dispersed around the Mahgreb and Mashreq, and when the Gaza corniche is indeed a haven of gambling palaces and six star hotels, the next generation of Palestinians will see where their parents went wrong, and buckle down to their media studies courses, or (I guess) their jobs as waiters, croupiers and chambermaids in those same hotels. I hope so, but I doubt it.

Meanwhile, let’s look at two things that seem to have dominated the airwaves in the Anglo-Saxon world over the last week – Trump’s ‘One Big Beautiful Bill’ (note the late, official, addition of the ‘One’, presumably to undermine the ‘triple-B’ joke about the US’s likely credit rating as a result of the budget bill) and the painful saga of the Starmer Government, which seems to be imploding despite (or because of) its 156 Parliamentary majority. Note, first, that both are linked by a terror of what the bond market might do – though, so far, the answer (pace Jim Carville, and despite traders’ evisceration of Liz Truss) seems to be Not Much. (Indeed, both countries raised money last week in the markets at rates which were a little bit finer than they had to pay last time they came to market for similar tenors.)

First, Trump… I have read (and listened to) a great deal of commentary on the 940-page OBBB. Almost all of it was distinctly hostile, but only the BBC has identified a deliberate conspiracy to delay all spending cuts until after next year’s mid-terms, while rewarding ‘the rich’ right up front. One might suggest that, if this were the case, the NYT, no friend to Trump, might have noticed. Still, what is true is that the imposition of a work requirement for Medicaid doesn’t kick in until January 1, 2027 – while almost all the other provisions start in the 2025 tax year. One might also note that several of the key provisions, including tax-free tips and overtime, and a special tax break for seniors, are time-limited – in some cases, being due to phase out just as Trump steps down (something his successor, if he has one, will not thank him for)

All of that is cynical enough. But what is most misleading in almost all the coverage is that the bulk of the increase in the deficit (put at a cumulative $3.4 trillion by the CBO, but higher or lower according to political taste) comes, not from new taxes, but from making the temporary tax cuts that Trump pushed through in 2017, permanent – something that Trump always promised he would do in a second term (and something that Biden might well have done as well, since it is generally political suicide to let ‘temporary’ cuts expire). No one should have been surprised – though that doesn’t mean they shouldn’t have been outraged. In that sense, the OBBB doesn’t actually worsen the Gini coefficient; indeed, one might argue that the tax break (not actually an exemption) on tips and overtime improves it.

However… Even leaving aside the extension of pre-existing tax cuts, the OBBB does favour ‘the rich’ in several other ways. Take the increase in the SALT deduction from $10k to $40k (although that is supposed to be phased out by 2028); you have to pay your local taxes to get the deduction – which most low-income tenants do not. Ditto the huge increase in the inheritance tax deduction; you have to have a pretty sizable estate before it has any impact on you. At the same time, the tighter requirements for Medicaid are specifically aimed at the poorest (and, it is worth noting, the cuts are not being justified, as in the UK, by particularly high levels of fraud; it is just an attempt to make the hurdle higher to cut the overall cost of the programme by taking somewhere between 11 and 12 million off the books). Same with so-called SNAP assistance; those who benefit from child nutrition programmes are, almost by definition, exclusively lower income. According to the Yale Budget Lab, the end result is that the lowest income bracket will find its income down 2.5% as a result of the OBBB, while the highest bracket will see its income rise by 2.2% - not an earthquake, but certainly a significant tremor, which is bound to impact voter intentions

Of course, for (professionally) heartless economists (Larry Summers, Jason Furman etc), the awfulness of the budget is not just its unfairness; it is the fact that it helps the US cross all those debt lines that Reinhart and Rogoff laid out a decade ago. According to Furman, by 2034, the US debt ratio will be around 134% of GDP – roughly where Italy is at the present time, and well above the UK’s 98%. There’s no sign yet that the markets are too bothered – and I accept that there are economists (my friend Warwick Lightfoot, for one) who believe that we underestimate the market’s willingness to buy US paper regardless of the Government’s fiscal profligacy. But R&R say 90% is the threshold beyond which dragons lurk – and there is certainly a lot of evidence from Latin America in support of that view.

There are, of course, mainstream Republicans (for instance, commentators like Chris Caldwell and the WSJ’s editorial team) who hold their noses at some of the unfairness, and see the OBBB as a long-overdue first step to breaking the political stranglehold that the welfare state has on Western democracies – and there is, I guess, something to that. We certainly need to do something in the UK, and in Europe more generally – but, as we have just seen, even a perfectly defensible attempt to limit the manifest fraud and abuse associated with PIPs (and, yet to come, to restrict child benefit) is political dynamite, not to be touched. As I have said before, it is far easier for a politician to give public money away than to try to take it back.

Whatever, the OBBB is not popular – particularly the cuts to Medicaid and to food stamp programmes. Indeed, a new poll shows 72% of voters, including 63% of Republicans, are opposed to the tougher conditions – which certainly doesn’t help the GOP’s chances next year (though I am repeatedly told that the Republicans’ hold on the Senate, if not the House, is safe).

Which, of course, raises the question of a revolt… I am old enough to remember George Wallace’s AIP (indeed, I went to hear him speak at Philadelphia’s Spectrum), John Anderson’s third party fizzle and Ross Perot’s best efforts. But – so say some – ‘this time it’s different’ because Musk has all the money in the world, and, if he wants something badly enough, he’ll get it. Frankly, I doubt it. I don’t think Trump’s going to deport him back to Canada (or South Africa), but I do think (a) that he lost of lot of credibility, with both left and right, over DoGE, which simply didn’t do what he promised it would; and (b) that his policy prescriptions have all the appeal of a week-old wet fish. Remember his focus is not on fairness (which might have some appeal to the AOC crowd) but on cutting the deficit. That would require deeper – much deeper – spending cuts. I know he thinks the $360 billion defence budget is ripe for attack, but he will quickly learn that the biggest savings are to be had in the welfare area – and that will alienate any potential supporters on the left, leaving him with Rand Paul, Bill Kristol and very few others in his camp.

What about the UK?

It must astonish any observer from outside just how quickly Establishment support for Starmer et al has evaporated. After all, he was endorsed by pretty much everyone from the Economist to Aviation Week & Space Technology. Now, as the NYT put it, he is ‘fading away before our eyes’. I hope I am not trying to rewrite my own past by saying that I warned my tiny band of readers that this was going to be a much harder-left Administration than anyone seemed to expect, and that we would come to regret that massive repudiation of the Tories – particularly of Sunak who (admittedly, in retrospect) seems to have been a decent cove with a pretty good grasp of the intractable problems the UK faces. He, at least, didn’t make them worse. The combination of Angela Rayner’s workplace ‘reforms’ (which I really, really hate), Reeves’s one and a half budgets and Liz Kendall’s largely aborted efforts to sort out abuse in the welfare area has made a bad situation a whole lot worse – and has now provoked panic amongst the 150 (or so) Labour MPs, many in ‘Red Wall’ seats, who figure they will be out of a job at the next election. Indeed, on present evidence, they will: the latest poll suggests that, if an election were held ‘tomorrow’, Reform would have 290 seats, and Labour just 126 – down from 411. (Note that most of the Labour ‘Red Wall’ crowd are young, and won’t be able to take even reduced Westminster pensions until they hit 50; there’s financial self-interest here, as much as ideological fervour.)

The end result of all this is that the Autumn budget will be a doozie. If Reeves continues to insist (as I assume she did, prior to that disastrous PMQ) that the three main taxes should remain inviolable, I would guess she won’t be holding up the red box (though I dread to think who might succeed her: Rayner or Miliband Minor, what a choice). Income tax and VAT are clearly both back in play – along with an increase in IHT, an end to the ‘triple’ lock on pensions, and some sort of ‘wealth tax’ (perhaps, as a well-provisioned Neil Kinnock seems to suggest, on the value of one’s house). Depending on what the OBR comes up with (and what the IFS says about it), she may be looking at having to raise up to £30 billion – which can’t be done without reneging on election promises, particularly given pressure from the left and the real danger that JC and Sultana will peel away some of those disaffected lefties. (Personally, I rather like Roger Bootle’s proposal for a specific, targeted tax on Labour voters, ‘for voting Labour’.)

All of this (as Fraser Nelson is the latest to point out) is exacerbated by the massive mistake that previous (mostly Tory) governments made in not taking advantage of super-low market rates to issue long-term bonds (or even perpetual ‘consols’) that would guarantee that interest payments were manageable whatever the outlook for inflation. That we didn’t - that, in fact, the UK tended to go in the other direction, funding shorter and shorter – is being blamed on the DMO. But that seems unfair, given that the DMO is an agency that does what it is told by the Treasury. Whatever, annual interest payments on the Treasury’s debt were around £50 billion/year under Sunak; they are now around £110 billion – and they will go substantially higher if (as most still expect) the current good news on inflation turns out to be an illusion. Ms Reeves can’t be blamed for that (though the BofE can, along with a Tory Treasury). But it may not be too late. If one believes (as I do) that we are headed for significantly higher inflation (and that, at some point, the markets might well rebel against Britain’s fiscal incontinence), it would still make sense to fund as long ahead as one can. It would, after all, take the bond market out of play, which is not a bad thing.

That, of course, brings up the state of the global economy.

It is now boring to say that we can see the damage that Trump’s economic policies are doing everywhere – except in the statistics. But that is broadly true. After all, stock market indices on both sides of the Atlantic (and in Asia as well) have been remarkably sanguine about Trump’s policies. Through the end of last week, for instance, the Dow was up 6.2% ytd, the S&P was up 5.1% and Nasdaq was up 5.9%. Over here, the FTSE100 is the only major index that is actually down for the year – and that is only down less than 1%. As for the Dax, it is up 21% ytd (despite Germany’s dodgy economic situation), while the CAC40 is up 3.6% (ditto). In Asia, the Hang Seng is up 19%, the Shanghai Comp is up 3.6% - and, only the Nikkei is down, again less than 1%.

And it is not just financial markets. Last week, S&PGlobal released its final PMIs for June, and what is significant is just how few countries are now showing negative growth (ie a composite PMI below 50). Looking at the bigger advanced economies, the US’s PMI is 52.9, Japan’s is 51.5, Germany’s is 50.4 and China’s is 51.3. True France is stuck at 49.2, but that is rare. Even the UK is at 52.0, albeit only because of a stronger than expected performance on the services side. True, India leads the pack at 61.0, but it simply isn’t the case either that the global economy is in recession – or, perhaps more significant, that it is heading in that direction. It might – if Trump decides to re-impose all the ‘reciprocal’ tariffs that he ‘paused’ six weeks ago, and that are due to make an unwelcome reappearance on July 9. But, so far, the evidence is that he has learned – and that, as I have been saying for a while, his threats are no longer ideological, just ‘transactional’, ie a negotiating ploy.

Of course, we’ll find out about that later this week (perhaps even later today) – and there could be some nasty surprises given the unexpected rise in the US trade deficit to $72 billion in May, particularly with Japan (and perhaps with the EU itself, though it does seem as though Commissioner Sefkovic has managed to get some sort of ‘framework’ ‘pre-deal’ out of Trump’s team; that may be enough). But, for now, the working assumption has to be that – even though tariffs of even 10% are three times the average we have seen over the last 20 years, the global economy can probably survive another couple of years of Trump’s ranting, albeit with higher inflation, particularly if (as many suggest) Fed Chairman Powell can’t hold the line, and is pushed into lower US interest rates as early as September. (There appears to be no chance that the FOMC will cut when it meets at the end of this month, though September looks a good bet as both the Fed and the White House try to save face.)

Enough for now – despite the fact that I have (inevitably) missed a lot of things that are really important, not least he BRICS Summit in Rio, which Xi is not attending. But time presses. Back (I hope) next week – and, again, thanks for reading.

Andrew Hilton