Selecting the Next Chancellor

What Andy Burnham should be doing if he becomes the next prime Minister? I think the manifesto will make it almost impossible for him to do the kind of stuff we need to do to regenerate the economy. The chance is really important. You probably don't want someone who's got their eye on your job. That makes me think N where' streeting This episode is brought to you by Octopus Energy. Greg Jackson, the CEO is with us now. Greg, I want you to look into your crystal ball and tell me what's your vision in terms of let's say ten years for how the average UK house will be powered As we build up more and more renewables on the grid the underlying electricity systems much more volatile And that means that people who have got their own solar panels and their own batteries can help balance the grid And cars are going to be doing that as well. So you're going to end up with a system that looks a lot more like the internet where everything is automatically improving just like in the internet improves your bandwidth. Here it'll be improving your energy cost and prices are going to come down. And by the way, it brings prices down even for those people who don't have the solar panels and the batteries or the electric cars because it makes the whole system more efficient for everybody. Let' all that right then, Greg, thank you. Now on with today's episode So good so good so good. New summer arrivals are at Nordstrom Rack stores now. Get ready to save big with up to sixty percent off brands like Rag and Bone, Levi's, Adidas, and Free People. Join the Nordy Club to unlock exclusive discounts, shop new arrivals first, and more Plus, buy online and pick up at your favorite rack store for free. Great brands, great prices. That's why you rack This episode is brought to you by Google Chrome. You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a fifty page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online makes sense? There's no place like Chrome. Check responssees setup required compatibility and availability varies eighteen plus Hello and welcome to the Rest is Money with me, Robert Peston. And'm me Steph McGoor. today we want to focus on what Andy Burnham should be doing if he becomes the next prrime Minister and also what he is constrained by. He's saying he's going to stick with the current fiscal rules, not deviate from Labour's manifesto. So what does that all mean in reality? To talk about this, we've got Paul Johnson back with us, former director of the Institute for Fiscal Studies I mean, I'm going to be really interesting what he has to say. For the very simple reason that I think the manifesto will make it almost impossible for him to do the kind of stuff we need to do to regenerate the economy. but those around him Disagree with me. What does Paul think? Obviously everyone's talking about what Andy Burnham is going to do when he potentially very likely becomes Prime Minister. There is constraints around him, though aren't they? So one of the things everyone keeps talking about is fiscal rules and he has said now he's said that he's gonna to stick with these fiscal rules justust remind us what they are and what they mean. Broadly speaking, there are two rules. One is that we should years out so by twenty twenty nine thirty be borrowing only to invest. So that constrains the amount we can borrow in that year. And there's a second rule which says that overall debt in the way the government currently measures it should be falling as a fraction of national income in that year. Now we're currently meeting those rules, not by very much, but we're currently meeting those rules on OBR forecasts, though one of the reasons that we're meeting those rules is the government is saying I would say pretending that it's going to be cutting spending on a bunch of public services in that last year, in that election year. So that's how tight we are up against those particular rules. talk to you about the second. Wit Rachel Reeves changed, was probably her biggest change when it came to know the fiscal rules, and it allows her to net off certain categories of assets from debt when measuring whether the national debt is rising or falling. you know assets like for example, the student loan book one can be netted off Talking to those close to Andy Burnham They say that they believe that he could in inverted commas interpret that rule in a different way. which would somehow allow a lot more government investment. Do you think that's right? Well, I mean, the Rw, which has got this lovely name P snuffle public sector net funding liabilities, is designed really only to capture financial instruments. That's right. So the student loan book is a financial instrument It's not designed to capture the value of physical assets. Now you might think that's a bit Od But can I just ask you a question on that? Because one of the things I wondered about when they designed the rule is let's just say you are giving a lot of money, which they are in support of a new nuclear power station.? Now one of the things that I was quite struck by was when Ed Miliband announced a big chunk of money for I come which of the power stations it was, it was not deducted as an asset from the Pnuffle even though it was going into some kind of corporate structure. And I just wondered essentially whether it was possible to do putting it in a slightly derogatory way, some financial engineering with some of these things so that you could essentially do more of it and deduct it from the debt measure. I mean two things, I mean three things. Infrastructure investment is already treated differently from day to day because it doesn't count against the borrowing rule. So it's already treated relatively generously. It's not J today, but it' it's's not net. But just say in any infrastructure investment more it's more generously treated of course Secondly, there is a reason for treating financial stuff differently from other stuff, which is it's actual cash that you're borrowing. So the markets, you know, it doesn't matter how you define it if you're borrow money, you're borrowingoney, you're browing money. And the question is how much can you actually borrow from the markets you might be able to persuade the markets that you're going to get such a good return on this they're happier to do it. So the question is not really in the end, what is your specific structure of your rules? It's how well your economic policy is defined and how much you can convince people that you're doing a good thing. But the last thing I'd say is that we hear a lot about people saying governments don't borrow enough, they don't invest enough, and you might argue they don't invest enough This country has seen its debt rise by more than Almost any other major economy over the last twenty five years. We have run a loose fiscal policy, a looser fiscal policy than almost any other major country over the last, certainly since the financial crisis, arguably since turn of the century. So what we're not in is a world in which you know we have really tightened down Relative for everybody else. we haven't. We've been incredibly loose, relative for everyone else in our fiscal policy. And that has come back to bite us really, really hard in the backside. becausecause again, as we've discussed, we're spending well over a hundred billion pounds a year just on de interest This stuff is not free. You know you can treat your rules however you like and you can make a case for more investment But it's not a free lunch. But you yourself in your analysis of why we have a low growth economy, point out that relative to most of our competitors, and it is public sector and private sector, we invest less than other countries. and that is a direct contributor to low growth. So if we're not going to break this downward cycle, we've got to find a way in both both private sector and public sector to invest more, surely? Absolutely. And actually the bigger gap is in the private sector. nowadays we're actually nearer the average on the public sector. But of course, we're still suffering from actually particularly you look at the nineteen nineties where invested nothing. I mean that government in the nineteen nineties Ken Clark got a very good reputation way as a Chancellor, but he was disastrous in terms of the total lack of investment over that period. So I'm not arguing against investment. but I am saying A it's not free and B, we might want to cut fare to fund the investment, we might want to increase taxes, or we might say we're going to ask the next generation to pay for it You ask the next generation to pay for it only if you can persuade people to lend you the money in the short term. And isn't the point as well, no matter what the rules are, it will be the markets and the bond markets who judge whether they are being followed or not and will decide whether. Well they'll judge whether they think we're a good bet. and don't forget at the moment they don't think we're a good bet. They they charge us more than almost any other country Now there's all sort of reasons for that. I mean, one reason is actually our Our inflation has run ahead of other, particularly G seven economies over the last fifteen years. I mean, embarrassing, I haven't realised this until relatively recently, but our inflation rate is on average being one percentage point above that of other major economies. Because of our reliance on energy and things like that. Well partly because we've actually been running relatively loose fiscal policies, partly because the the way our labour market works partly because we were you know, so generous with energy subsidies and so on that it then pushes up And actually we're very dependent in energy on imported gas. There's all sorts of reasons for this. But again, if you're going to splash more cash You do need to worry about inflation and the impact that then hasn ont b. And other big thing here is obviously that Andy Burnham saying he will stick to the Labour manifesto, which they obviously came into power with, although he wasn't an MP. then he didn't come and get elected on that, which would mean not taxing working people. But of course they've already driven a huge horse and coaches through that. the idea that this government isn't taxing working people is for the birds. I mean the biggest tax rise in history arguably under both the last goovernment and this is a decade's worth of freezes to income tax allowances and thresholds. That's an enormous increase in tax on working people. as by the way, is the increase in empl national insurance contributions. That is an increase in tax on working people Now, I'm not saying that was a bad thing to do because you if you want to do the things that the government wants to do on public services and indeed on investment, then you need to find some way of raising it. Certainly the spirit of the Labour manifest has been chopped in the W waste paper basket a long time ago. Now in terms of the precise letter which says they're not going to raise rates of income tax and so on. then maybe that's still being kept to. But you know don't forget the Labour Mifesto said, we have a fully costed manifesto and here are six billion pounds worth of tax rises and spending rises what have they done? somethingomething like sixty billion of tertorises an eighty or something billion of spending increases. Now y, I'm not saying that was the wrong thing to do as you all know wanged on for hours before the election about how that was the most likely outcome and how everyone's manifesto wasn't honest. They were all lies. I mean, we talked about this for good year before the election, you and know. Well, Paul, I'm going to puse you there. Lads more still to ask you, but we're just gonna go through a quick break This episode is brought to you by Vang Gard. 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Get the unreal college deal, everything you need to study and play with select Windows eleven PCs. Eligible students get a year of Microsoft three hundred sixty five premium, and a year of Xbox GamePass ultimate with a custom color Xbox wireless controller. Learn more at windows d. com slash student offer Law supppplies last ends june thirtieth turns at aka. ms slash collllege PC. It is striking to me that Burnham implied, I mean, I don't think he's going to be able to find the relevant twenty four billion as it were, but he implied that he disapproves actually of the increase in employers national insurance. One of the reforms that I think is highly likely that he will do would be to equalize the rates of capital gains and income tax. Now I assume he would couple that with you know essentially reintroducing generous inflation allowances so that you do get protected you know, the value of your initial investment is protected as it were I can't remember what your view is on that kind of reform because obviously there is quite a lot of tax planning by people to convert income into capital, which essentially does reduce esssentially the tax rate of wealthier Pul Is that kind of reform sensible? What kind of money could it raise? Yeah I think there are mean there are definitely sensible things you can do with capital gains tax. One of them is to increase the rates, but at least give an allowance for inflation and actually you need to give an allowance for inflation plus a bit in my view. So the other thing you also need to do is stop forgiving capital gain de So if you increase rates, you just give people an even bigger incentive to hold on to things until they can pass it on to the next generation because it's just completely forgiven. Would it raise lots of money? I don't know. It certainly wouldn't raise very large amounts of money. Remember, capital Gainsax is a relatively small tax. We're talking a few billionably not more than ten billion you wouldn't get more than ten. I mean even ten billionars will be something like a fifty percent increase in the revenue from capital gains tax not You know, you're not going to get that without some really dramatic change and the impact on economic growth is you know you do need to You concern yourself a bit about that. I'm having a senior moment now and I can't remember the name of the Fed chief who just died. Greenspan. Greenspan. Yeah rightly or wrongly, his stick was the Capital Gains tax is the worst tax in the world for the point ofiew of economic growth. I'm not sure if that's true, but there's certainly some evidence that you need to worry about it talking to entrepreneurs about that. it can sometimes stop people selling their businesses though and then holding ono them for longer because they don't want to pay a capital gainst tax. And then that can stop the growth of that business by new eyes coming in and making it better. Yeah. Now Id say I think if you If you give a decent allowance for inflation plus a bit, that mitigates a lot of those concerns. And don't forget what we had under Nigel Lawson. I mean, you know we had capital gains tax rates which were equalized to income tax rates, but with an allowance for inflation. and we messing around with it for the last thirty years. It wouldn't be a bad outcome if we got back to capital gains tax rates, at income tax rates, but with an allowance for inflation. but don't think that's going to change the fiscal numbers any dramatically. Well that is my concern. I think there's a bit of naivety in the Burnham camp about this because I think they think it's somehere going to raise some colossal some m, which you just won't I mean, it's just, you know, just simple arithmetic. You know, you'd be an economist to see that. Everyone's talking about Andy Byern and becoming a Prime Minister. How important is the Chancellor of all? Does it matter who they are? The Chancell is really important, but My sense is that they're going to get their lead from Andy Burnham because he's I think one of the issues sometimes is that prime ministers don't really take enough notice of what's going on in the treasury. Equally It's a huge job and obviously the Chancellor is going to be really important in helping set that direction. It's always the most important decision that I think any new Prime Minister makes when they're setting their top team. One of the reasons why there are those close to Burnham who favour Ed Milliband as Chancellor, putting to one side whether you know the bond markets love him or hate him or you know North Sea investors love him or hate him. just put that over there. The one thing that he does have is experience for years of working in the treasury. And if I'm honest with you, one of the things that I felt in the end was a problem for Rachel Reeves is I just felt, particularly at the outset the officials just ran rings around her because she just had no experience of working in that institution. I think if you want to govern, you've got to have somebody at the treasury Wh knows how to manage the institution? you also need someone who knows what they want to do. So obviously Gordon Brown had no experience of the institution when he came in, but he stamped his authority for good or bad very, very fast with the help of a couple of very, very ab special advisors. And of course Ed Milleraband was one of those. and it was very striking that Lord Nick McPerson, who was perman seecret of Treasury has made quite strong interventions, saying he thinks Edm Miliban would be perfectly good as a Chancellor because he's got that experience and he understands the treasury in all those sorts of things. mean The are two things that I think the Prime Minister needs to think about when appointing a Chancellor One is they need to be broadly on the same page. I mean you don't want them to be dramatically going in different directions. more fighting. You probably don't want someone who' you know you think has got their eye on your job. but you also We want someone who is going to be reasonably acceptable as it were to the people who we need to borrow money from. So you need to balance those things out against one another. And I'm sure those are the sorts of things that he'll be taking cognizance of. That makes me think not where' straight in. Well doesn' he doesn't fit the first two of them Exactly. Yeah. Maybe not Ed though, on the basis of the market reaction mayaybe the current home secretary Well I don't want to say that A apparently's She said not going to do it.. But O other person I think is one hundred percent can't do it now is John Healy because he can't go to treasury unless he's going to you find a huge amount of money for defence, which I'd be very surprised if that's going to be. What does that mean?nder I think there is still a pretty good chance that it will be Ed Miliban, but I think you know they've got to find a way if it is metab band to reassure markets as it were. Yeah. Well, this is going to leave us lotads more to talk about, isn't it? There's lots and lot. Paul, we need to let you go. Thank very. Thank you E as ever for your time. The door's locked, though, so you're not getting out Ryan Reynolds here from MintMobile. I don't know if you knew this, but anyone can get the same premium wireless for fifteen dollars a month plan that I've been enjoying. It's not just for celebrities. so do like I did and have one of your assistant's assistants switch you to MintMobile today. I'm told it's super easy to do at mintmobile dot com slash switch