Not Budging on the Budget

[00:00:00] The Why Curve, with Phil Dobbie and Roger Hearing.

[00:00:04] Hard times, hard choices.

[00:00:06] Where do you find the money to plug a £40 billion hole in your budget?

[00:00:10] Rachel Reeves is about to reveal to the nation how she's going to balance the books.

[00:00:15] Taxes will rise for sure, but which ones?

[00:00:17] Will soaking the rich cause them to leave the country?

[00:00:20] Can the Chancellor redefine debt by including assets and investments, then borrow more?

[00:00:25] After a rocky beginning, could this budget be the way Labour defines the sort of government it's going to be?

[00:00:32] The Why Curve

[00:00:35] Well, I feel like, I sense this is going to be one of those budgets where we go,

[00:00:39] well, let's do all the nasty stuff now, and then all the sweet stuff later.

[00:00:43] I mean, it's textbook stuff, isn't it?

[00:00:44] Well, it is, but the thing is, she's, I mean, they've got a massive problem,

[00:00:48] and they can say, yes, you know, 14 years of Tory awfulness, so we can balance it all on that.

[00:00:53] But people don't seem that convinced by it, I think, that anymore.

[00:00:56] Well, I think it's because she's saying that she's going to do almost exactly the same thing that the last government did.

[00:01:01] So things like, and this would be just disaster for the Labour Party,

[00:01:04] they may as well say, well, let's give it to the Lib Dems now,

[00:01:08] by saying, well, OK, I tell you what, we're going to freeze the taxes where they are now,

[00:01:14] income tax, all the income tax brackets.

[00:01:16] Well, the thresholds, yeah, yeah.

[00:01:16] Yeah, yeah, we're going to keep the brackets exactly where they are.

[00:01:18] So everyone proportionally gets worse off year on year.

[00:01:20] Yeah, but it's subtle. People don't notice it.

[00:01:23] They will notice it as it gets on.

[00:01:25] Well, more to the point, they'll notice it in two ways.

[00:01:27] One, they'll go, I do feel worse off.

[00:01:29] But secondly, they'll notice, why is the economy tanking?

[00:01:32] Oh, it's because there's less money being spent.

[00:01:33] Why is that? Because people have less money to spend.

[00:01:36] You don't grow an economy by giving people less money.

[00:01:39] Well, no, but it's where the money is, I suppose, is the thing, isn't it?

[00:01:42] And if you're, I mean, one of their things is soaking the rich to some extent.

[00:01:45] Yeah.

[00:01:45] Whether it's inheritance tax or closing loopholes or this kind of stuff,

[00:01:49] the whole pitch is to say, yeah, we will make sure that the burden falls on those who can bear it most.

[00:01:55] Yeah.

[00:01:55] That's their thing.

[00:01:56] And that, if you like, is the blue water between them and the Tories.

[00:01:59] And that, you know, economically, that makes sense.

[00:02:02] I do wonder about Rachel Reeves, though, whether she is just, you know,

[00:02:05] a classical economist who just follows textbook economics

[00:02:09] and is going into this without very much experience with the real world.

[00:02:12] I mean, she's ex-Bank of England.

[00:02:14] She knows how that system works.

[00:02:16] Could be the problem.

[00:02:16] Well, she knows how that system works, for sure.

[00:02:18] But, I mean, in terms of taxing the rich, I mean, one of the problems we've got,

[00:02:23] and it's not just a UK problem, money goes to the rich.

[00:02:26] They don't spend it very quickly.

[00:02:28] So that money circulates.

[00:02:29] There's only two ways you can grow an economy.

[00:02:32] More money or the money you've got moves faster.

[00:02:34] And what's happening is the speed of money is slowing.

[00:02:37] And during the austerity years, because governments were trying to balance their budgets,

[00:02:41] the amount of money in circulation reduced as well or didn't grow very much.

[00:02:45] But it's that money that's moving slowly that rich people are sitting on

[00:02:50] that isn't circulating in the broader economy, which slows the economy down.

[00:02:53] So you've got to get it away from the rich people and give it to the people who are going to spend it and buy it.

[00:02:56] But you've also got to keep confidence in the economy with the people who have money

[00:02:59] to lend the government money to do this in the first place.

[00:03:01] Well, right now, if you're going to invest money in Europe anywhere, you'd pick the UK.

[00:03:05] Because the mainland Europe is a disaster.

[00:03:07] We've got, you know, the UK is falling up relatively well.

[00:03:11] Germany has got structural problems that it's not going to get out of in a hurry.

[00:03:16] We've got to, you know, we're still shopping, for example.

[00:03:20] You know, the UK economy...

[00:03:21] So you think it's print lots of money, basically?

[00:03:22] Well, I don't think print lots of money.

[00:03:24] But I think the idea of going through austerity version two is not good.

[00:03:28] You do not grow an economy by shrinking the amount of money that's available.

[00:03:31] But you've got to be able to balance the books in some sense in order to make sure that the confidence is there and it works.

[00:03:37] Over time, for sure.

[00:03:38] But we are not out of the crisis.

[00:03:40] You're not out of the pandemic crisis.

[00:03:43] And, you know, we're behaving like we are.

[00:03:46] This is like a one-in-100-year event.

[00:03:48] Yeah.

[00:03:49] And we're going to fix it in four years.

[00:03:51] You know, we could say, well, OK, maybe it's going to take 20 years.

[00:03:54] Maybe we should be balancing the books in 20 years' time and let's work towards that.

[00:03:57] Spend, spend, spend, says Phil Dobby.

[00:03:59] Well, let's talk to someone who's been involved in this.

[00:04:01] He's actually a friend of the programme.

[00:04:02] He's been on talking about this on many occasions.

[00:04:05] Let's see what he thinks Rachel Reeves is going to come up with.

[00:04:07] He's Simon French, chief economist and head of research at Panmure Liberum.

[00:04:11] And he joins us now.

[00:04:12] So, Simon, if Milton Friedman was around now and John Maynard Keynes and they were in a room talking about what Rachel Reeves should do.

[00:04:20] I mean, Friedman would obviously be saying, well, she's doing the right thing.

[00:04:23] She's trying to cap back on spending.

[00:04:25] And came to me there going, no, you've got to spend your way out of a crisis.

[00:04:28] And we are in a crisis, aren't we?

[00:04:30] Well, are we?

[00:04:32] Fiscally, we're in a crisis insofar as the pathway for public spending,

[00:04:39] given commitments to things like triple lock pensions, given NHS free at the point of use, given the ageing population, the social care budget.

[00:04:47] The tax burden, which is already at a 75 year high, is not going to cover those liabilities going forward.

[00:04:54] So that is the crisis, albeit those austere economists you mentioned, will be debating.

[00:05:01] And I think quite aggressively where we are in the economic cycle.

[00:05:05] Because actually, the UK economy has been on an improving growth performance.

[00:05:10] There are signs, there certainly were signs before Rachel Reeves got to work with talking down the economy, that this we're on a cyclical upswing.

[00:05:19] And therefore, actually, the debating point would be whether this is the right time to address what both economists would argue and agree, I think,

[00:05:28] where there's a long term structural fiscal crisis.

[00:05:32] But actually, we'd probably debate the degree to which stimulus right now should be supporting the economy.

[00:05:38] Right. So whether or not, in essence, how much we need to push people to spend more and therefore can be taxed on that and also earn more,

[00:05:47] essentially moves towards growth. I mean, is that really what we're talking about?

[00:05:51] Well, it is the government's stated primary mission to get the UK to being the fastest growing economy in the G7 by the end of the parliament.

[00:05:59] On a sustainable basis, they're leaving the definition relatively loose.

[00:06:05] But undoubtedly, growth is their priority because all the challenges that they face, be it political challenges, fiscal challenges, societal challenges,

[00:06:16] they're all made easier if the overall size of the pie that they can tax and that can generate jobs and productivity is larger than it otherwise would be.

[00:06:28] So, yes, the framing device for this upcoming budget really should be to try and get the UK economy on a more sustained growth footing.

[00:06:37] Right. But there's two things, isn't there? One is growth and undeniable.

[00:06:41] Everybody wants that unless, you know, you're concerned about climate change and you put a question mark over that.

[00:06:47] But, you know, that's a conversation for another day.

[00:06:49] The other one is fixing stuff that just is not growth related, but just, you know, we need to survive.

[00:06:54] So, I mean, I guess it's sort of second tier has growth impacts.

[00:06:58] So that the health of the nation, for example, are crumbling NHS roads that are crumbling.

[00:07:04] I got my tyres fixed the other day and the guy at the tyre place was saying, yeah, we're doing twice as many now because everyone's tyres are getting ruined by the roads.

[00:07:11] So we're all paying that.

[00:07:12] We may as well pay the tax to get the roads fixed rather than paying for it in repairs for our tyres.

[00:07:18] It's getting the infrastructure sorted.

[00:07:19] All the infrastructure is falling apart.

[00:07:22] So money needs to be spent on that.

[00:07:24] And surely the only way you can pay for that is by the government spending more, whether that means they tax more, whether they tax a certain proportion of the population, like trying to get some money out of the rich, whether, you know, it's not doing as much as perhaps it is amongst, you know, the government or lower income earners.

[00:07:41] But it's how do we fix the country rather than how do we get the country to grow?

[00:07:45] I know the long term view is, well, if we grow it, we'll have more money, therefore we can fix stuff.

[00:07:49] But you need to fix stuff before we can get the growth, don't you?

[00:07:51] Absolutely.

[00:07:52] And the challenge here is the UK wants or the electorate want European style public services with US levels of taxation.

[00:08:05] And the choices therein are very, very difficult.

[00:08:11] And what you have is a situation where having locked herself into what the Labour Party have called the tax lock, which is a commitment not to raise income tax, VAT, and depending on which side of the aisle you are, all NICs or just employee national insurance contributions.

[00:08:32] Then that rules out about two thirds of UK tax base.

[00:08:38] So the heightened debate has been around relatively small taxes on capital, on wealth.

[00:08:47] And what the government is finding and why it's got itself in a bit of a pickle is that capital is increasingly mobile.

[00:08:57] And therefore, the challenge with, in the prime minister's words, putting the tax burden on those with the broader shoulders is you might find out that those broader shoulders choose not to domicile themselves in the UK and move their broad shoulders to another jurisdiction.

[00:09:13] How true do you think that is?

[00:09:14] This whole, it's been spun for a long time and very much in the last few weeks.

[00:09:18] Oh, yes, the rich will leave, essentially.

[00:09:21] And haven't those who, you know, got that much money that can do that?

[00:09:24] Haven't they already done that?

[00:09:25] And several think tanks have come up with evidence suggesting the opposite is the case, that there isn't any great appetite to leave.

[00:09:30] Look, it's very, very difficult one to answer with absolute certainty.

[00:09:37] But anecdotally, at least, we are seeing signs that there is something of a competitive market now emerging across Europe and particularly the Middle East in terms of perhaps not necessarily your what you describe as your hyper wealthy.

[00:09:57] Who you're right, if they've made that decision, they may have if that decision they're considering, they may have already made it.

[00:10:02] But actually, we're talking about something of a brain drain now of the reasonably affluent where, you know, if you're talking about higher or additional rate taxpayers for whom, actually, they're looking at the price of cost of housing.

[00:10:20] They're looking at the marginal rate of tax on their additional earnings and now looking at jobs in other countries.

[00:10:29] And I think that's a big challenge for one of the UK's most competitive and most profitable sectors, professional services, financial services, where there is real competition now for talent.

[00:10:41] Right. But if they go to, I mean, that's only a small slice of the entire population in terms of people, of course, maybe not in terms of wealth.

[00:10:48] But if they go to the Middle East, if that's what you're suggesting, I mean, that's not the same lifestyle, is it?

[00:10:53] And they would find house prices shut up in value.

[00:10:56] And if they left, maybe our house prices would go down.

[00:10:58] So I'm not saying good riddance, but is it that bad?

[00:11:01] Look, these are often subjective assessments.

[00:11:06] But the problem, let's look there for the objective data, which is 60% of income tax is paid by just 10% of the population.

[00:11:16] The reality is the tax burden on people of average earnings is the lowest it has been in 50 years.

[00:11:25] And actually, the tax burden on the top end of the income distribution has moved progressively higher over the last 15 years, certainly since the global financial crisis.

[00:11:35] And what happens is neither political party want to acknowledge this because the Labour Party don't want to acknowledge that actually the tax change in the last 15 years have been quite progressive.

[00:11:45] And the Conservatives don't want to acknowledge it because they don't particularly want to own that record, given their core base.

[00:11:52] Well, it's really interesting because that's, you know, it almost sounds like they're going back to Dennis Helium, you know, tax until the pips squeak.

[00:11:59] This whole thing of absolutely soak the rich, you know, pushing up the real rates of income tax to extraordinary positions.

[00:12:06] But that's almost been done by still thing.

[00:12:09] I mean, the IFS have talked very openly about this.

[00:12:12] And then you, I think I'm slightly sort of stealing the outgoing head of the IFS, Paul Johnson's comments on this.

[00:12:18] But he is right that the concentration risk that now emerges in UK tax makes the very fair point you say, which is how credible is that?

[00:12:28] We don't know for certain, but the risk factor has gone up because there has been a greater concentration in recent years on where the tax is levied in the UK onto a smaller group of more affluent individuals.

[00:12:44] So there's something going on here then, isn't there? If we've got, if we are paying more tax than ever before, if the rich are getting taxed more than they've ever been taxed, so we can't go after them.

[00:12:53] How did we get to this situation where we're getting, the government is bringing in so much money and services are so bad?

[00:12:59] And we've got a 40 billion, I mean, do you believe that 40 billion black hole? Is that real?

[00:13:05] Well, we're talking trillions when you talk about an economy though, aren't you?

[00:13:07] Yeah, but in terms of what she's actually got to fill this time.

[00:13:10] Yeah.

[00:13:10] Gosh, there's a lot of questions there. I mean, the first part of your question, which is, you know, how are we levying more than a trillion pounds worth of tax?

[00:13:18] And yet still by most objective measures, we have poor infrastructure, we have some big funding gaps and we'll come to the 25 or the 40 billion in a second.

[00:13:30] But part of the reason why, despite high levying of taxes and the tax burden being at a 75 year high, we still have these problems,

[00:13:38] is that an ageing population does become progressively more expensive to service.

[00:13:43] If you are going to retain NHS free at the point of use, triple lock pensions, social care where you're not prepared to address some of the recommendations in the Dilnot report.

[00:13:55] So there are, you know, and that trend is only going to continue.

[00:14:00] And by the way, there's another one about to arrive as a problem fiscally, which is, T, on internal combustion engines raises about 25 to 30 billion pounds a year.

[00:14:10] And on the pathway of moving to electric vehicles, that is going to crater pretty quickly.

[00:14:17] And there has to be a replacement part of the tax base if we're going to keep entitlements the same.

[00:14:22] So there's a structural gap that is emerging simply as a result of perhaps the decarbonisation economy, but mainly because of the ageing of the population.

[00:14:30] And then to your second question around how real is the 40 billion or the 25 billion, well, it really depends on how you want to interpret Rachel Reeves' comment that she doesn't want to return austerity to public sector departments or to the public sector.

[00:14:46] And that by at least the IFS's definition means keeping budgets, departmental budgets, the public sector share of the economy constant as national income grows.

[00:15:01] So not just a real terms increase, but as a share of national income.

[00:15:04] And that does take you up to the range of 25 billion pounds, what the IFS reckons, potentially up to 40 billion if you want to spend, augment your spend on areas like defence and NHS to go beyond just keeping it as a share of national income.

[00:15:22] So these are relatively big changes in the context of the two other political budgets that were made at the start of an administration.

[00:15:33] So in 1997, Gordon Brown levied an additional 13 billion pounds in today's money of taxation.

[00:15:40] And George Osborne in 2010 raised an additional 12 billion pounds in additional taxation.

[00:15:46] So to go to between two and three times that would be taking into, at least in modern UK economics, into pretty unprecedented territory.

[00:15:56] So you've got three things you can do then.

[00:15:58] You can either tax a lot more, which you're saying is going to be very difficult.

[00:16:02] You can spend less or you borrow more.

[00:16:05] Because that's one of the big things, isn't it?

[00:16:07] I mean, this notion that actually we redefine how we count debt as a way of saying we can borrow more and therefore we can fill this up.

[00:16:16] So let's look at that one first of all, then, because I also want to talk about the whole thing about population as well.

[00:16:19] Do we have more migrants?

[00:16:21] This is often seen as like it's a short term fix those and you can't do that forever because the island will sink at some point.

[00:16:27] But the idea that we borrow more, I mean, part of the argument would be, well, we've been through a crisis.

[00:16:33] We went through, you know, the pandemic.

[00:16:36] We've got an infrastructure that needs fixing.

[00:16:38] You can't turn all that around.

[00:16:39] You can't have a once in 100 year event and turn it around in a few years.

[00:16:43] So maybe we are in a recovery phase and the government does need to spend more.

[00:16:47] Perhaps we need to be saying, well, OK, let's balance the books, but let's do it in 10 years.

[00:16:52] Let's not try and do it in this term of government.

[00:16:53] Let's, you know, if we indeed need to ever balance the books because the United States seems to avoid doing that.

[00:17:00] But, you know, should it be a longer term plan and, you know, and spend our way to growth?

[00:17:05] Getting back to John Maynard Keynes.

[00:17:07] Right.

[00:17:07] So certainly on the capital side is the strong evidence to suggest that a deepening of capital spending on the UK public sector is in our long term economic interest.

[00:17:20] Absolutely.

[00:17:21] So a few data points.

[00:17:23] So over the last 30 years, public sector net investment has averaged less than 2% of GDP compared to about 4% in the, between the sort of second world, end of the Second World War and about 19, mid 1980s.

[00:17:44] Wow.

[00:17:44] So you have.

[00:17:45] I mean, that's good.

[00:17:46] That's very telling.

[00:17:47] Yes.

[00:17:47] And then you could put all this, all investment together, both the public sector and the private sector.

[00:17:53] And that's about 17% of UK GDP over the last 30 years.

[00:17:57] Whereas across the G7, including the US, Japan, Canada, and most of the big countries in the Eurozone, that's about 20%.

[00:18:05] Now, that 3% delta doesn't sound like much year on year, but compound that over 30 years.

[00:18:10] And you're talking about the UK running a pretty capital investment light model on both the public sector and the private sector.

[00:18:17] So there are reasons why the likes of Mark Carney, Jim O'Neill, Andy Haldane have been in the press, slightly because they've been teed up by Rachel Reeves, but partly because they look at this data as well.

[00:18:29] And they recognize the UK economy as an entity has been underallocating to its capital stock, which for investors listening to this who are familiar with companies, public companies and private companies, they can cut their capital expenditure budget in the short term.

[00:18:47] And that can be accretive to earnings, but long term it does damage to their earnings and growth potential.

[00:18:52] And that's kind of how you should look at the UK economy.

[00:18:54] So flexing the budget rules to move from public sector net debt, X, the banks, to either public sector net debt, including the banks, or more likely public sector net financial liabilities, which will add between 30 to 50 billion pounds of additional headroom, crucially to spend on capital, is a very, very sensible reform.

[00:19:17] But it does not get Rachel Reeves out of her current spending or resource spending bind, because she's promised, and I think very sensibly, to balance the current budget using general taxation.

[00:19:30] And that's the secondary fiscal rule, which will bite, which is why she has to either cut departmental spending, which is hard to do, given her commitment not to reintroduce austerity, or to raise general taxation.

[00:19:41] But why is it so prudent to do that thing that you're talking about there?

[00:19:45] Because in this sort of situation, in effect, she's tying her hands.

[00:19:49] And there is certainly an argument that says maybe she doesn't need to.

[00:19:52] Is it just about confidence in the money market?

[00:19:55] Is that all that matters at that point?

[00:19:56] There's a couple of things.

[00:19:57] I mean, first of all, we have seen in the recent past a market event, the mini budget in September, October 2020.

[00:20:05] The trust experience.

[00:20:06] The trust experience, where an unanticipated fiscal expansion, which was on, well, it wasn't current spending.

[00:20:15] It was on disposable income, so through tax cuts, led to a gilt market dislocation.

[00:20:22] It was called the Moron Premium.

[00:20:26] I then dubbed it the dullness dividend as it unwound.

[00:20:30] But the reality was that the gilt market did not like an expansion of UK public sector borrowing to fuel consumption.

[00:20:46] And be it private consumption, which was the list trust model, or general government consumption.

[00:20:51] Right.

[00:20:51] But you think they'd be okay if it was for capital investment?

[00:20:54] I think while there are nervous signs on the gilt markets at the moment, I don't think it's anything like what we saw two years ago.

[00:21:03] And therefore, I think the reason why the aforementioned economists, Carney, O'Neill, Haldane, have been in the press making this case

[00:21:17] is because the government would quite like the market to fully anticipate this and to get some external validation.

[00:21:27] Because one of the big criticisms of the mini budget experience was part of this.

[00:21:30] Came out of nowhere.

[00:21:31] Well, it came out of nowhere.

[00:21:32] But also, I mean, I remember getting the call from US investors who said,

[00:21:37] well, who thinks that this mini budget is a good idea?

[00:21:41] Well, I sort of said, well, the Daily Mail says it's at last a true Tory budget.

[00:21:46] And the economists for Brexit are all thinking it's a great idea.

[00:21:50] And those US investors went, okay, so they're not exactly, you know, high quality external validation here.

[00:21:58] No OBR.

[00:21:59] Is that what the way investors wait?

[00:22:00] Do they look and see what the Daily Mail headline is?

[00:22:02] And if they think it's a good idea, then they start selling immediately.

[00:22:05] I don't think it's quite that simple.

[00:22:07] But look at who was advocating for that episode of UK economic governance.

[00:22:18] It was not a group of people.

[00:22:21] Whatever you think about Brexit, whatever you think about lowering the UK tax burden on a long-term view,

[00:22:26] it wasn't people who had great credibility in the economic sphere.

[00:22:32] And this time they've rolled the pitch rather better.

[00:22:34] So is the idea, just so we're all clear on what the approach is then,

[00:22:38] which is sort of moving numbers around a little bit.

[00:22:40] So I'm going to mention Australia again.

[00:22:42] I'm sorry about that.

[00:22:43] Roger keeps on going every single podcast.

[00:22:44] I spent 25 years of my life there.

[00:22:45] It's my main frame of reference.

[00:22:47] But over there, we talked about things being off budget.

[00:22:50] So major capex projects.

[00:22:51] We just talked about being off budget.

[00:22:52] In other words, they had their payback period.

[00:22:56] And so they weren't considered as part of the major, the main budget.

[00:23:00] It's that sort of thing that we're talking about, is it?

[00:23:02] It is.

[00:23:05] And the other part of UK public sector investment that does need real attention is value for money.

[00:23:14] And arguably, when you are looking at both capital and resource spending, the bigger challenge actually is to convince investors that this money is being spent better than the alternative, which is to leave that marginal pound with consumers or with businesses.

[00:23:33] So you are making a judgment that by taxing businesses or consumers to give it to the public sector.

[00:23:38] There is going to be a multiplier effect and a positive multiplier effect, which means that everyone is better off.

[00:23:43] But if you have the cost of building Hinkley Point or Sizewell Sea, you see examples of public sector, both capital and in some cases resource spending, which benchmarked against other global high speed rail or global nuclear power plants.

[00:24:09] You know, you know, plants makes the UK look very, very expensive and by extension poor value for money.

[00:24:17] And I think not only expensive, but actually not delivering on any of those things.

[00:24:21] Correct.

[00:24:23] Albeit, that doesn't, at the point of initiating that project, make it a bad project.

[00:24:30] But I do think there is significant concern if you benchmark a lot of the UK public sector, both on the capital side and on the resource side, that you are not getting much very good bang for your buck.

[00:24:46] So you need a laser focus on efficiency at the same time as you want to expand the balance sheet.

[00:24:52] So just on this point then, why wouldn't the government say, OK, major infrastructure projects, we are going to fund them through bonds, by issuing bonds, but get people to buy bonds for those particular projects rather than, you know, actually have them earmarked.

[00:25:09] So, you know, you're buying bonds in, I'm not sure anyone would do this, in HS2.

[00:25:13] But if they want to set up this new, this energy regime, for example.

[00:25:16] Or in the NHS.

[00:25:17] Or in the NHS, yeah, become bondholders in, you know, in major projects.

[00:25:21] So then there is that focus on efficiency.

[00:25:23] Yeah, I'm not a fan.

[00:25:25] This is called hypothecation.

[00:25:27] So this idea of hypothecated taxes or hypothecated bonds for specific projects.

[00:25:32] Look, just, I mean, the risk there is you end up having even more costly debt if it is somehow ring-fenced.

[00:25:40] Because, of course, you know, the great advantage that sovereigns have when they're going to the bond market is their sheer scale.

[00:25:49] And if you are ring-fencing this stuff, then you are, in theory, if you're going to be true to what you're saying, you're ring-fencing to some extent the call that bondholders would have.

[00:26:03] And therefore, they would demand a higher…

[00:26:05] Premium.

[00:26:06] A higher premium.

[00:26:07] Yeah, exactly.

[00:26:07] So I'm not a big fan of that as an idea.

[00:26:12] I've gone off that as well.

[00:26:13] I thought it was a great idea a minute ago, but I can see your point.

[00:26:15] But Simon, let's just, I mean, we've kind of been through what are the main, you know, the problems that Rita faces as she looks towards what she's going to do.

[00:26:22] You know, the fact that we are evidently highly taxed already.

[00:26:25] There's got to be more tax.

[00:26:26] They've boxed themselves in on what they can tax.

[00:26:29] And there's a whole issue about future capital spending and how you deal with that and indeed what you call it.

[00:26:35] What should she do?

[00:26:36] What are the ways open to her?

[00:26:38] It sounds like you're supporting the idea, though, that the government spends more so long as it's got this capital focus.

[00:26:43] Is that right?

[00:26:43] Yes.

[00:26:45] Yes.

[00:26:46] I am very supportive of it because, and I've been writing about this for as long as I've been in the role, which is more than a decade, which is the UK, when you benchmark its economy, you can argue over all sorts of data points.

[00:27:00] But one thing you almost cannot argue about is the fact that it's run a capital light economic model on its public sector.

[00:27:07] And probably there's been a spillover into the private sector.

[00:27:12] And anything within reason, anything that resets that balance, I think, is good news for the UK economy.

[00:27:21] Which, as you said, that's long term, isn't it?

[00:27:23] Well, it could start tomorrow, presumably.

[00:27:25] It could, but the effect is going to be long.

[00:27:27] Yeah.

[00:27:27] It takes a while for the capital to be deployed.

[00:27:29] And this is one of the arguments why it won't be particularly inflationary in the short term and why the gilt market should be relatively relaxed.

[00:27:35] Because even if you expanded the balance sheet by 30 to 50 billion pounds on the capital side, the idea that there are projects or indeed that there is capacity in the construction sector to take up these projects quickly is nobody who's been involved in capital projects.

[00:27:52] So what could or should she be doing next week?

[00:27:55] Before that, just one more question.

[00:27:57] Just following through.

[00:27:58] So if you have all these big projects, you know, maybe big engineering projects, building the infrastructure that we need, we're going to have teams of old age pensioners working on the roads because we've got this aging population.

[00:28:08] So do we need migration?

[00:28:10] Do we need migration?

[00:28:12] Gosh, there is a whole other world.

[00:28:16] Do we, if you speak to private sector employers who, of course, you know, probably have the best feel better, certainly better than economists sat in the city of what the demand is out there.

[00:28:29] Demand for skills in the construction sector.

[00:28:34] They have tried very hard to pull in the domestic population through a combination of training, reskilling, et cetera.

[00:28:43] But actually, if we want to move from the current rate of, let's take house building, constructing between 200,000, 250,000 units per year to what Angela Rayner would like, which is about 350,000 units per year.

[00:28:59] And you probably do need inward migration to do that over any reasonable time horizon, particularly skilled migration.

[00:29:10] And similarly, in the other big area of inward migration, which is into the health and social care sector.

[00:29:18] If you want to keep the social care model as it is with the current rates of pay, that it doesn't appear like the domestic population is particularly keen to come in and do those roles.

[00:29:29] And therefore, you will have a huge problem of fulfilling the requirements in that sector if the current funding model remains the same without inward migration to fill those gaps.

[00:29:41] And if you don't do that, if you find that you can automate a lot of tasks and you don't need as many people, then we're stuck with an ageing population and less taxable income.

[00:29:50] The thing about people doing jobs is you can tax them.

[00:29:53] You can't tax machines.

[00:29:55] So you'd have to find a whole new structure long term.

[00:29:58] I mean, that's a conversation for another day.

[00:30:00] But that seems like something that needs to be faced.

[00:30:03] I don't think it is a conversation for another day.

[00:30:05] I'll be apologies for slightly stealing the agenda.

[00:30:08] But you brought it up.

[00:30:10] So I blame you.

[00:30:11] So I did write a column two weeks ago on the idea of a royal commission on UK tax.

[00:30:17] And this is the idea that 14 years ago, Sir James Murley's and the Murley's review for the Institute of Fiscal Studies laid out a lot of these tax reform proposals.

[00:30:32] And I mentioned one earlier in the podcast, which is the removal from carbon taxing of petrol and combustion engines towards road pricing.

[00:30:44] But there are similar changes afoot in the labour market, probably a simplification of a payroll tax from income tax and NI into a single payroll tax.

[00:30:53] But also the degree to which we do tax robotics and automation going forward and move the burden of taxation.

[00:31:01] There's some big structural changes in the UK tax system.

[00:31:05] Even if I still think it should remain a party political debating point, the level of taxation.

[00:31:11] But the structure, how you go about doing it.

[00:31:15] I think there's some areas where lots and lots of economists on both sides of the political aisle would agree that, you know, for example, property in the UK is taxed horrendously badly.

[00:31:27] You know, a combination of capital gains tax, stamp duty.

[00:31:30] Yeah, bring on land tax, I say.

[00:31:32] Oh, let's not go down that way.

[00:31:32] Well, no, no.

[00:31:33] No, no.

[00:31:34] Be absolutely right.

[00:31:36] Everybody agrees that a land value tax is a much more cent and rolling way.

[00:31:40] Those other three taxes on land would be a very sensible reform.

[00:31:44] Very hard to hide your money if you get it, you know, if it's in the full land.

[00:31:47] Correct.

[00:31:49] But therein reminds me of a quote by Jean-Claude Juncker, which is, we know what we need to do, but we don't know how to do it and get re-elected.

[00:32:01] Which rather brings me around, I'm going to drag this in the final moments of our discussion back to what we actually have to say, what is retro?

[00:32:06] Who's going to do?

[00:32:07] I mean, land tax is not going to be there for the moment.

[00:32:09] No.

[00:32:09] But she's going to go down this capital.

[00:32:11] Well, she's got to go down some route when she makes her speech in Parliament.

[00:32:15] And we've said that the areas she can work in are very limited in fiscal terms because of what she's already self-restricted herself to.

[00:32:23] So what could briefly she do?

[00:32:25] Employer national insurance will raise £9 billion, so she will probably put a penny on that.

[00:32:31] The residual amount of tax probably comes from a combination of inheritance tax, capital gains tax, and I suspect a high property value tax, which is extra bans on council tax.

[00:32:42] Those are the type of things she could do.

[00:32:44] She would be crazy to, which I've sort of read about, the idea that she'll freeze the tax brackets for several years more.

[00:32:51] I mean, that's just nuts.

[00:32:53] That just stops people spending.

[00:32:54] It might be crazy.

[00:32:55] It might be nuts.

[00:32:56] But the thing is, it's already, from memory, legislated out to 27, 28.

[00:33:03] So if you freeze it for two more years, I mean, by the time you get to those moments in time, you know, the political picture will look very, very different.

[00:33:13] So I suspect she might do it, mindful of the near-term economic impact.

[00:33:17] Nobody, nobody really is that forward-looking or that forward-looking in terms of things.

[00:33:22] Well, it's fantastic.

[00:33:23] Isn't it fantastic for people in your game?

[00:33:25] Because the finance sector will just reap all the money from those people who say, right, okay, I'm not going to go into that top tax bracket.

[00:33:31] I'm going to cut my spending to fit my cloth and all the rest I'm going to put into my pension.

[00:33:37] I mean, it just delays spending.

[00:33:39] I mean, I'm giving that as a sample of one, but that is precisely what I'm doing.

[00:33:42] And I'm planning it for the next few years.

[00:33:44] Every year I'm going to spend that little bit less because I know that I don't want to nudge into the top tax bracket.

[00:33:49] You'll begin to look more ragged even than he does now.

[00:33:53] I'm going to wear the same wardrobe.

[00:33:56] And I'm just thinking, when she said, if it's another two years, some of these clothes aren't going to last.

[00:34:01] Which is maybe why another one of the tax levying changes she'll make has reduced the tax-free lump sum that you can take down to £100,000.

[00:34:11] Well, anyway, so the choices are there.

[00:34:13] I suppose the final point in all this, Simon, is what she's going to do the right thing to do at this stage?

[00:34:19] Is it perhaps the only thing she can do, as you say, effectively kind of tinkering rather than being more fundamental?

[00:34:24] So, please don't accuse me of dodging the question.

[00:34:29] And you know the next word is but.

[00:34:33] And it is but.

[00:34:35] To some extent, what she does on the 30th of October should be seen as something of a market-clearing event.

[00:34:42] It should be to get what she feels she needs to govern for five years out of the Treasury.

[00:34:50] It needs to levy the taxes, make the spending proposals, lay out the spending review pathway, the budget rules.

[00:34:56] And then on the morning of the 31st of October and relentlessly thereafter, talk about the primary mission, which is growth.

[00:35:06] And perhaps be true to what Keir Starmer said on the steps of Downing Street, which is to tread more lightly on people's lives.

[00:35:14] And be that some of the governing principles that they go back to, which is simultaneously having got all the fiscal bad news or changes out of the way, start to reinvigorate those animal spirits, which were on an upward trajectory ahead of the election and have been rather disrupted, albeit, I would argue, not totally curtailed by the narrative in the run up to this budget.

[00:35:41] But if the focus is saying, you know, we are going to invest, we are going to increase our capital investment.

[00:35:48] So we're going to invest in Britain.

[00:35:49] Why don't you?

[00:35:50] There we are.

[00:35:51] There's your poster right there.

[00:35:53] I'll mock it up in Photoshop and set it off to you.

[00:35:54] It's a great soundbite.

[00:35:56] But I do think, I mean, joking aside, that is exactly the type of agenda that they've tried to push at last week's investment summit.

[00:36:07] And they want to be talking about more and more, which is crowding in private investment.

[00:36:12] We're going to hear more on pension reforms at the Mansion House speech in three weeks time on the 14th of November.

[00:36:19] And then also into the pensions review into early next year.

[00:36:24] So there is going to be an attempt to get capital deployed into the UK economy on the private balance sheet to be crowding in the efforts on the public sector balance sheet.

[00:36:34] Sounds good.

[00:36:35] And also, you know, invest in Britain because where else?

[00:36:38] I mean, Germany?

[00:36:39] Trump's America?

[00:36:40] I mean, actually, you know.

[00:36:41] That's making an assumption there, but yeah.

[00:36:43] Yeah.

[00:36:43] But, you know, there's some, you know, some positives by looking at everyone else's downfall.

[00:36:47] But anyway, we'll see.

[00:36:49] Yeah.

[00:36:49] I mean, I know you're trying to wrap things up.

[00:36:52] So I'll just say to that point, which is, I would just say this on that relative UK assessment is a lot of the challenges that we've spoken about in this podcast are not unique to the UK.

[00:37:09] Certainly the ageing population one is actually, if you benchmark the UK's ageing population versus almost every other developed country,

[00:37:16] bar perhaps the United States, we are in a slightly better position, still on a difficult trajectory, but not as bad, let's say, for example, as Germany, as Italy, as Korea, as Japan.

[00:37:27] Some of the developed countries whose demographic profile, China included.

[00:37:31] China is another one, isn't it?

[00:37:32] Correct.

[00:37:33] Correct.

[00:37:33] It's very, very difficult.

[00:37:34] So sometimes the danger sat in the UK looking at UK specific economic challenges is we think we are alone in these challenges.

[00:37:44] And you mentioned earlier in the podcast about US fiscal position and some of the precarious fiscal paths that they now find and solves under either President Trump or indeed President Harris.

[00:37:59] And so I think that is an important, if you like, element to look at the way international investors view the UK.

[00:38:06] The idea that we are facing these challenges uniquely is just not true.

[00:38:10] It's a question for all of us.

[00:38:11] Shall we wrap up at this point?

[00:38:13] I think we might have to.

[00:38:14] Simon, thank you very much indeed.

[00:38:16] We will see what Rachel Reeves comes up with.

[00:38:19] Good to talk as always.

[00:38:19] Thanks for being with us again.

[00:38:20] Huge pleasure.

[00:38:20] And talking about, you know, the American fiscal policy.

[00:38:23] Well.

[00:38:24] It's interesting, isn't it?

[00:38:25] Because both of them, whoever wins, are going to carry America into greater debt.

[00:38:29] Yes.

[00:38:30] It's just Trump is going to take it into even more debt than Kamala Harris.

[00:38:33] Yes, indeed.

[00:38:33] And all sorts of other things, including in heightened tariffs on China and God knows what.

[00:38:37] Yeah.

[00:38:38] But we'll see where it all goes.

[00:38:39] And it's scary.

[00:38:40] The other day he was saying there will not be a single Chinese car sold in America.

[00:38:44] So our tariffs will be 100%, 200%, 1,000% if it needs to be.

[00:38:50] We will never have a Chinese car sold in this country.

[00:38:52] And every other country as well.

[00:38:54] He's basically saying you don't get by with 10% tariffs.

[00:38:57] This is full-on protectionism.

[00:38:59] He says 10% is not enough.

[00:39:01] You need to have tariff levels that are high enough for companies to say, well, we need to stop producing and exporting to America.

[00:39:07] We need to produce within America and open up factories.

[00:39:09] And that level is probably somewhere around 50%.

[00:39:11] So imagine a blanket 50% tax on everything that comes into America.

[00:39:15] America is stuffed if they do that.

[00:39:16] If, but if he gets in.

[00:39:18] And we still don't know.

[00:39:19] This is the thing.

[00:39:19] We're a few days away now, really, from what I think is the most consequential election in the US in, well, I don't know, the whole of the 21st century pretty much.

[00:39:28] It's implied, anyway, at least by some of the things that are being said by the Trump campaign if he gets through.

[00:39:33] We'll find out what the latest is in terms of, I mean, it's so close.

[00:39:39] So close.

[00:39:39] Which is incredible.

[00:39:41] I'm not hiding my disbelief.

[00:39:44] No, I mean, you haven't in any point, really.

[00:39:46] When you have a man who in a rally at the weekend was saying, you know, get your fat pig husbands off the couch and get them to vote, talking to Jill Biden about Joe Biden as well.

[00:39:57] Joe Biden, that fat pig husband, says Donald Trump, clearly he's got one of those convex mirrors and he's convinced he's felt like.

[00:40:05] Well, weight will be the last issue, I think, probably on most voters' minds.

[00:40:08] But anyway, they will be making up their mind.

[00:40:10] And it does matter for us in many ways.

[00:40:14] Matters for the world.

[00:40:14] So we'll be talking about that next week on The Y Curve.

[00:40:17] We'll see you then.

[00:40:17] Thanks for listening today.

[00:40:18] Bye.

[00:40:18] The Y Curve.