Rachel Reeves delivered her second Budget last week after months of preparation. Throughout this period she tested, trialled, and floated numerous policy options, meaning few taxpayers, MPs or investors were surprised by the final result. For many, the Budget landed with a sigh of relief: thank goodness that’s over.
Yet, behind the scenes, the Treasury and the OBR have been locked in “model wars” – a clash over flawed data inputs, unrepresentative assumptions and models that fail to reflect the real economy. This conflict has spilled into public view, raising questions about the roles of both the OBR’s leadership and the Chancellor herself. And still, the consequences fall on citizens navigating a world increasingly distant from the theoretical models used to govern it.
Instead of relying on abstract, Keynesian-style modelling that tries to force the real world into simplistic frameworks, Rachel Reeves should study the world as it actually operates – something she has said she intends to do. A good place to start is with two countries highlighted half a century ago by Simon Kuznets, the intellectual forefather of modern national accounting.
Simon Kuznets was a Russian statistician and economist born in 1901. While at Columbia University in the 1930s, he developed the concept of Gross Domestic Product (GDP), a single measure intended to capture all economic activity within a nation.
This innovation laid the groundwork for the Keynesian national accounting framework that dominates policy to this day. Without Kuznets, Rachel Reeves and her Treasury colleagues might experience far less pressure to model and quantify every aspect of fiscal policy.
Even Keynes admitted the limits of this approach: it is better to be roughly right than precisely wrong.
Kuznets’ legacy unintentionally encouraged economics to mimic the physical sciences. After the success of the physicists in the Manhattan Project, economists craved the same precision. But economics lacks controlled conditions, repeatable experiments and the ability to test hypotheses with scientific rigour.
John Kenneth Galbraith, one of the most prominent post-Keynesians, captured the problem succinctly: “The primary function of economic forecasting has been to make astrology look respectable.”
Still, Kuznets left a powerful insight that remains deeply relevant to governments today.
In the 1960s, Kuznets famously categorised the world’s economies:
Both remain instructive case studies for Rachel Reeves.
Japan’s debt-to-GDP ratio stands at a staggering 236%*, the highest in the developed world. New Prime Minister Sanae Takaichi plans to raise debt even further in an attempt to overcome the country’s deeply embedded structural problems.
Her plans make Liz Truss look almost fiscally cautious.
Unsurprisingly, markets have reacted badly:
These are behaviour patterns associated with emerging-market crises, not with the world’s fourth-largest economy.
Some on the UK’s political left may ask why this matters. Doesn’t Japan prove advanced economies can borrow endlessly?
Not quite.
Japan spent 30 years battling debt-driven deflation. Its “lost decades” transformed it from the dynamic global powerhouse of the 1980s into a stagnant, low-growth society. In 1990, 32 of the world’s 50 largest companies were Japanese. Today, only Toyota remains in the top 50.
As inflation finally normalises, so too will interest rates – and at those rates, Japan cannot afford to service its debt. Japan avoided collapse only through repressive policies enforced on a uniquely compliant population. A Western democracy could not survive such measures without severe unrest.
While Japan avoided default, Argentina embraced it. The country has defaulted seven times in eighty years, ultimately losing access to global capital markets. With borrowing impossible, the state resorted to currency debasement, turning the peso into a global punchline.
For ordinary Argentinians, financial survival became a matter of escaping their own currency.
When Javier Milei became President in 2023, he promised radical change. He delivered:
By Q1 2024, Argentina recorded its first fiscal surplus in a generation.
Inflation followed**:
Although the currency has since become overvalued, foreign investment has surged and Milei won a powerful political mandate last month, securing a blocking position in Congress.
Argentina now offers a rare global example of voters rewarding a leader for difficult, painful but necessary reforms.
Japan and Argentina offer opposite but complementary warnings:
Rather than debating Treasury–OBR models with no predictive value, Rachel Reeves would benefit from studying real-world outcomes with real-world consequences.
A final lesson comes from John Cowperthwaite, Hong Kong’s 1970s financial architect. He refused to collect GDP data, arguing it would tempt officials into policies designed merely to improve the metric, not the underlying reality.
When asked what nations should do to enhance growth, he replied: “Abolish their office of national statistics.”
A provocative message – and one likely to be dismissed by Rachel Reeves as little more than mansplaining. But it offers an uncomfortable truth: governing requires understanding the world as it is, not as models imagine it to be.
Jeremy McKeown, 1 Dec 2025
A version of this article was published last week by Dowgate Wealth’s Curious Investor.
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* Ministry of Finance, Japan (FY 2024)
** Instituto Nacional de Estadística y Censos, Argentina (2023 & 2024)
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