BREAKINGVIEWS-Big state backlash may pay biggest dividends in UK

By Felix Martin

LONDON, March 20 (Reuters Breakingviews) - Big government is facing a big challenge – and the backlash is going global.

The assault on government started with Argentinian President Javier Milei, who was elected in November 2023 on the strength of his “chainsaw plan” to slash public spending and evict the South American country’s professional political caste. Then came U.S. President Donald Trump, who marked his return to the White House by establishing the Department of Government Efficiency (DOGE) under the guidance of billionaire donor Elon Musk, with a mandate of “modernizing Federal technology and software”, “workforce optimization”, and a wide-ranging “cost efficiency initiative”. Now the trend has jumped across the Atlantic, and the political aisle as well. Last week, UK Prime Minister Keir Starmer pledged to “hack back the thicket of red tape” suffocating the economy in a speech titled “on the fundamental reform of the British state.”

These rhetorical onslaughts span three broad themes. The first is fiscal: the drive to cut government outlays. The second is ideological: the rejection of political partisanship embedded in the machinery of the state. The third relates to governance: less bureaucracy, more accountability, and rolling back technocratic regulation. However, the priority given to these three themes differs in each case.

Milei’s focus is fiscal. The president rode to power promising swingeing austerity to end Argentina’s chronic dependence on budget deficits and inflationary finance. He has not disappointed. Public spending in 2024 shrunk to 32% of GDP, from 38% in the previous year. That has eliminated the budget deficit for the first time since 2008.

Investors have been quick to reward the success. The Argentinian peso’s official exchange rate with the U.S. dollar is now roughly the same as the black-market rate. The market price of hard-currency sovereign bonds has rallied from around 25% of face value in mid-2023 to around 60% today. The Merval stock market index returned around 70% in U.S. dollar terms last year.

Stabilising the public finances is a high priority in the U.S. and UK too. Indeed, with a budget deficit of 7.5% of GDP last year, the U.S. has a larger fiscal headache than Argentina. Yet cutting public spending in developed countries such as these is a truly daunting task. Welfare, healthcare, and pensions suck up more than half of all government spending in both countries and are set to keep rising as populations age.

Thus investors have rightly ignored Musk’s fanciful claims that he will save $1 trillion per year. They have grasped that the real focus of the U.S. assault on big government is ideological rather than fiscal. Prominent ideologues of the American right see the U.S. as stuck in a cycle of decline resulting from the capture of government and the law by a self-serving managerial elite and what they call the radical Left. In this interpretation, DOGE is the vanguard of a counter-revolution intended to disrupt the so-called “deep state”, purge the bureaucracy of officials sympathetic to the Democratic Party, and sever support for liberal patronage networks in the U.S. and abroad.

Viewed in this context, the Trump administration has achieved some of its aims. Though DOGE’s cost-cutting claims are dubious, officials have banned Diversity, Equity and Inclusion (DEI) programmes, reinstated powers to purge the civil service of allegedly obstructionist employees, and fired both Democratic commissioners from the traditionally non-partisan Federal Trade Commission.

Yet the prospective economic pay-off from this ideological crusade is not at all clear. The history of wholesale civil service purges on political grounds is not a happy one. Financial markets are certainly not convinced. The benchmark S&P 500 Index is down more than 7% from its all-time high last month, and the trade-weighted U.S. dollar has dropped by more than 5% since the inauguration.

That leaves the UK’s tilt at reforming the state. Its focus is different again. Starmer’s central complaint is that the delegation of power to what he last week styled “a vast array of quangos, arms-length bodies and regulators” has gone too far, leading to an unhealthy erosion of accountability and poor practical results. It is prompted by both chronic problems such as the woeful productivity performance of the National Health Service under NHS England, the independent body set up to manage Britain’s public health system in 2013, and acute crises such as the near-insolvency of the country’s largest water utility, Thames Water, on the watch of the independent sector regulator, Ofwat.

There’s not yet much evidence of overarching strategy. The UK government last week abolished NHS England, bringing the health service back under direct ministerial control. The fate of independent regulators like Ofwat remains in the balance. Even as the prime minister rails against the “cottage industry of checkers and blockers”, however, he’s pushing ahead with setting up a new independent soccer regulator initially proposed by the previous government.

Yet the problems of governance and accountability Starmer’s government is targeting are real and urgent – and stretch far beyond the UK. Britain pioneered the cocktail of privatisation, liberalisation, and independent regulation in the 1990s. Now it looks poised to lead a rethink of that recipe.

Of the three themes motivating the global backlash against big government, that has the greatest potential to unleash a new era of growth. Investors should hope the British variant is the one that proves the most enduring.

Follow @felixmwmartin on X