I hate to disappoint resident political columnist Richard Graham but there was sadly no obvious opportunity for me to slip in a Latin quote or two at the last States sitting. It just wasn’t that kind of meeting. However, I did try and compensate by quoting Milton Friedman a couple of times, prompted by comments from Deputy Inder (who I’m sure is a closet reader of Chicago school economics). Admittedly, Friedman’s four ways of spending money lack the classical elegance of Cicero, but they have the advantage of explaining a surprisingly large part of government.
For those unfamiliar with Friedman’s argument, you can spend your own money on yourself, your own money on somebody else, somebody else’s money on yourself, or somebody else’s money on somebody else. It is in the first case that you have the strongest incentives both to economise and to obtain value. And it’s the fourth situation, i.e the one that covers States expenditure, where incentives to do either are the weakest (go figure).
Between quoting Friedman in the States and discussing Ayn Rand on Substack this week, it has been quite a highbrow few weeks for me. Ayn Rand, you ask? The great Objectivist thinker of the 1950s? High priestess of heroic individualism? Yes, that Ayn Rand.
To explain – as I mentioned last month, I’ve begun publishing on Substack. One of the attractions is the opportunity to recycle five years’ worth of old Guernsey Press columns and introduce them to a new audience. It also gives me the opportunity, perhaps, to say ‘I told you so’ at regular intervals. (Yes entirely out of character but I’ll give it a go). But in fact, this week I published an entirely fresh piece prompted by the death of Alan Greenspan. I’d noted that few obituaries failed to mention his long association with Ayn Rand. And I used the opportunity to muse that the question running through Rand’s work – what makes societies richer? – has largely disappeared from political debate.
The timing of my musings was uncanny. Almost simultaneously, Guernsey’s latest Household Expenditure Survey was published – ‘latest’ in this instance meaning that it covers 2023-24. It reported that the gross incomes of respondents had fallen by 12% in real terms since 2018-19. Their expenditure had risen by 19% in cash terms but, after adjusting for inflation, was 6% lower. In plain English, respondents may have had more pounds coming in, but those pounds bought considerably less. On average, the respondents had become poorer.
Now, there are qualifications. More than 2,000 people responded, but participation was voluntary, so the sample was self-selecting. Those feeling the greatest financial pressure may have been more inclined to take part. There will also be legitimate questions about the methodology and how confidently the findings can be applied to every Guernsey household. But we should not allow methodological caveats to obscure the obvious central message. The results are consistent with what we already know about the island’s economic performance in the 2020s and what many people plainly feel. Living standards have fallen.
Crikey, was it only last month that I reminded Guernsey Press readers of my 2023 column, entitled with characteristic subtlety, We need growth? My argument was hardly revolutionary. Economic growth is what allows household living standards and public services to improve together. Without it, increasing public expenditure ultimately means taking an ever-larger share from households and businesses whose own incomes are barely growing. As I wrote: ‘Economic growth is what pays for increased services. Without it, public spending growth is unsustainable.’ Oh dear. I have now reached the stage of quoting myself back in consecutive columns.
Truth be told, the problem goes back much further than 2023. Productivity growth – the fundamental driver of rising living standards – has been anaemic across much of Western Europe, and particularly the UK, since the global financial crisis. There are many explanations for this lamentable performance. A decade of quantitative easing and exceptionally loose monetary policy is one. But perhaps the deeper problem is complacency. We escaped the immediate economic hardship that might have followed the financial crisis and persuaded ourselves that the historic upward march in living standards would simply resume. It didn’t.
Yet politicians, economists and commentators continued largely as before. Indeed, over the past 15 years, much of the bureaucratic and political class has indulged itself in an ever-expanding preoccupation with regulating, redistributing and arguing about wealth, while devoting remarkably little attention to creating it. As for the vast amounts of bureaucratic energy expended policing language, navigating fashionable orthodoxies of identity and advertising symbolic virtue, I shall, uncharacteristically, restrain myself.
Falling living standards also provide the backdrop to the increasingly bad-tempered politics of recent years. When living standards are rising, politics can be comparatively generous. One person becoming richer does not necessarily make somebody else feel poorer. But when the economy stagnates, politics increasingly becomes a quarrel over shares of a fixed – or shrinking – cake. Every difference becomes evidence of injustice and every successful person a possible explanation for why somebody else is struggling.
That helps to explain the growing political preoccupation with inequality. As I argued several years ago in Convenient Untruths, it is not that our society has suddenly become dramatically more unequal. The evidence does not support that simple narrative. Rather, after a prolonged period in which many people have become poorer, people have become much more receptive to the message (one relentlessly broadcast). That distinction matters. Inequality and falling living standards are not the same thing. Redistributing the existing cake may change the relative size of everybody’s slice. It does nothing to make the cake larger.
Nor is this exclusively a Guernsey problem. According to the latest UBS Global Wealth Report, real average wealth per adult in the UK fell by approximately 23% between 2020 and 2025, one of the worst performances among the 56 countries examined. That matters directly to us.
The creation, preservation and administration of wealth are central to Guernsey’s economic model. If our largest client market is experiencing a prolonged erosion of wealth, we should hardly be surprised if the engine powering our own finance sector begins to falter.
But Guernsey also risks compounding the problem locally. Not content with doing little to mitigate our loss of competitiveness over the last decade, as growth has disappointed, our recurring political response has been to seek more revenue. We are taxing more and more of an economy that is not growing fast enough to sustain public expenditure that continues to rise. Worse, we appear to have developed a political culture that can barely conceptualise expenditure restraint. During the recent tax debate, I made what I thought was a modest and reasonable proposal. If the States was going to increase taxation, then, as a quid pro quo, it should promise the public that total expenditure would not increase by more than inflation for three years.
Hardly austerity. Hardly chainsaw-wielding attacks on public services. Merely a promise that, after years of substantial expenditure growth, government would exercise a modicum of control while asking households to pay still more. Even that has apparently proved too much. Since the amendment being passed, we have had an almost daily drip-feed of scare stories from various left-leaning politicians explaining why holding overall expenditure constant in real terms is all but impossible. Apparently, government can promise to raise more tax over three years, but cannot promise to control what it spends over the same period.
We have to wake up. We cannot continue taking an ever-larger slice of an economy that is failing to grow. Household incomes are not an inexhaustible public resource. Eventually something gives: investment, competitiveness, enterprise – or simply people’s capacity and willingness to pay. Economies have tipping points, even if governments rarely recognise them until they have passed.
Milton Friedman understood that governments find it very easy to spend somebody else’s money. Ayn Rand, beneath several thousand pages of rather uncompromising prose, understood that wealth must be created before it can be distributed. And, as somebody once wrote in February 2023, we need growth.
I forget who.
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