Transcription
The budget's exactly one month away. Last year, the Carter announced a huge increase in taxes, especially on employers. She said she wouldn't need to come back for more. The problem is that it looks uh like that's exactly what she's going to have to do.
This week, there were more grim public finance figures, and they laid bare just how difficult things are for Rachel Reeves. Inflation's almost twice what it should be and we're spending 100 billion pounds a year and more just on debt interest. So what's gone wrong and what should she do?
Well, let's ask the former Bank of England government Lord King who whom I've already said good morning. Um look uh how just how much economic trouble is the country in?
>> Well, it's not a disaster but it is a serious problem and it's been the same for a long while which is we all want to invest more. We can all come up with good ideas, but we can't invest more without saving more to finance that. We're already borrowing a lot from abroad. So, as a country, we need to save more as a share of our national income. And what that means is that we have to consume less.
Now, there are two ways of doing that. One is to encourage households, families to save more through uh savings and uh contributing to pension schemes. So the last thing you want to do is to tax or discriminate against those form of savings. But the most immediate way in which you can ensure that the country's saving as a whole goes up is to reduce the government's budget deficit. And that is the big challenge.
>> Just to get that that clear what so one of the first messages you would like to send as a s chancellor is leave the ISIS alone.
>> Well, there are technical issues about whether you want to give the same tax incentives to just cash investments or equity investments. Leave that to one side. The principle has to be to encourage savings. But I think the, you know, the one piece of advice I would give is she should start the budget with a very clear and honest statement about the state of the nation, state of the economy. Don't blame what's h people for what's happened in the past. It may get cheers on the floor of the House of Commons, but what people want to hear is what is the actual state of the nation and then not to pretend that there is one set of measures you can announce and within a few weeks or months it all comes right. It doesn't. It takes a long time. Any measure to improve the economic performance of this country would take years before it really comes through.
I don't think we should be pessimistic about it because since the financial crisis, every advanced country in the world has seen a slowing of productivity growth, not just here, in every country. And now I think it's beginning to come back. So I think the the medium to long-term outlook for growth is actually quite optimistic. But it won't happen next year or the next two years. And that is a challenge. But the fundamental problem is that just coming up with gimmicks or tinkering with the tax system, you know, the OBR comes up with one number which tells you by how much you have to raise taxes or cut spending. The only way to describe that is madness. This is based on an assessment of whether the ratio of our national debt to national income is going to be falling four years from now. Well, we have no idea. The idea that oh if only you do you know 8.3 billion this year that's it is nonsense. It has to be something set in the looking at a strategy for the parliament as a whole. You can't determine public spending sensibly by having a change every six months when the OBR reports saying you better cut spending or raise taxes by this one number.
The um the chancellor has been rather more forthcoming about what's in her mind than chancellors usually are in in the old days. Chancellors used to go away into a darkened room for however long 6 months before a budget and you couldn't get them interviewed, couldn't talk to them and so on. This one this chancellor has been talking a lot. So you will have heard some sense of what she has been saying.
>> Um can you discern a plan?
>> No, I can't. And that's what worries me. And this is true across a wide range of government policies. There's plenty of scope for reforming the tax system. It hasn't we haven't seen a chancellor take a strategic look at the tax system for almost 40 years. It's been one kind of tinkering after another and that's created a mess and excessively complex. So you know take property taxation. So we read in the papers this morning that maybe they were wealth tax on uh high value properties but
>> the so-called mansion tax.
>> Yeah. But property taxes are an interaction between stamp duty, council tax, capital gains tax, inheritance tax. You don't solve that problem by just adding another wealth tax to it. So what it needs and what I would advise her to do is to set up a group of people who in 12 months look deeply at all aspects of the tax treatment not just on property but all kinds of other sorts of savings and wealth to come up with a coherent view as to what it should look like and that doesn't seem to happen. What happens is the OBR produces just before the budget a number one number and then they look around for you know what ideas almost written on the back of a fact packet about how you can raise an extra few billion here or few billion there that is not coherent tax strategy and you could do a great deal by thinking it through first.
Well, you can't see an overall strategy, but um just here and now, is she going to have to raise taxes? Um there's some signs that actually the tax revenues that uh she expected haven't actually been coming through.
>> Well, I think she probably will find a way of trying to raise tax revenues, though I have no means of knowing what she wants to do or not. But it doesn't make sense to think of that in terms of here's one number I've got to raise this year and then my problems are over. It needs to be seen in the context of the entire parliament. And that is one of the problems that we've had for several years now. This rolling four-year horizon allows governments to say, well, towards the end of that period, we're going to cut government spending a lot. So the OB are then forced to say the plans seem to fit the fiscal rules. But the government doesn't spell out what kinds of cuts in spending are implied by that. So you you have to have a coherent plan for both taxes and spending. Um and it's not something that you can just do in a in a month or two. It has to be something based on a coherent plan.
Um social care for example is a big issue in terms of not just care but also the financing of it that's been postponed and pushed down to towards the end of this parliament. Same issue about financing you know the health service. There are whole series of areas of policy where a serious plan for how you want to reform how the public sector works is needed.
>> I I guess of course she might say yeah it's great that we that we might have a plan but we are faced with current pressures and one of those of course is inflation. We have higher inflation than I think any large economy. Do do you think that the chanters bears any responsibility for that level of inflation or is this as she would always put it inherited?
>> Well, I don't think it's a question. I think central banks around the world allowed inflation to rise in this case to over 11% in this country. That's now been tackled and it's I think that problem is not serious one at present.
That's >> for we're what 3.8% 8% twice target >> but I think the bank will try and bring it down to 2% and I see no reason why they can't do that. Depends on their willingness to be tough and do that but I think they can achieve that. So I don't think that's a big biggest issue facing us or the government. The big issue facing us is how on earth we're going to save more as a country to finance investment. And that means I think changing the balance between taxes and spending. That may need adjustments on both sides of that. But the way to do that is not to have an instinctive reaction to just one number that the OBR plucks out of the air, but actually to have a coherent strategy for both tax and spending. You would hope that an opposition party would have done that before being elected, but there doesn't seem to be a great deal of sign of that.
I >> I want to come back to the issue of spending in a second, but um you've mentioned the OBR a couple of times now. Had the OBR become too powerful, too much of a straight jacket on Chancellor?
>> Well, it's not the OBR that's creating the straight jacket. It's politicians response to it. I do think the OBR should not try and present its forecasts in terms of one number. I think that's a terrible mistake. Who knows where we're going to be in four years time. This number they may come up with plus or minus 20 or 30 billion in either direction. What matters is is it likely that the plans the government has for the rest of this parliament means that by the end of the parliament the ratio of debt to to national income will be falling because that's the key objective. We are you know as individuals you and I we can't leave to our children a negative inheritance >> but as a country we are doing that to our children and grandchildren by building up the level of national debt.
>> They're going to have to pay the debt. Uh you um you've mentioned spending. Well, look, the government's made attempt to cut for example welfare spending, the winter fuel allowance reversed. Uh talked a lot about different kinds of possibilities. Um the triple lock on pensions, which is the biggest single um item in that column, seems to be untouchable. What what are the prospects of if you like re as you say rebalancing spending which implies cutting it when it seems there's nothing that can be cut?
>> Well, what the chancellor has to do is to make sure that taxes and spending are balanced. Now, if it's a political judgment to spend more on welfare and government spending overall, then uh taxes will have to go up by a lot more. And indeed, one of the things I think is slightly strange at present is the government has committed to spending a lot more on defense. We have no idea how that's going to be paid for. Surely that's going to have to require either much bigger cuts in public spending or significant rises in taxation. I think being honest about this would actually attract a good deal of support from the public because people don't want to be sold something that clearly doesn't make sense. You know, if you go back to the Second World War, after the evacuation at Dunkirk, a lot of people said, "Oh, this is a tremendously successful operation." And of course, it was to evacuate the bulk of the British army back to the UK. But Churchill stood up in the House of Commons and pointed out, you don't win wars through evacuations. And we're going to have to stand up and say, you know, we don't have a successful economy without having a reduction in the ratio of national debt to national income. And we have to confront what that means. And it will take time. I don't think we should rush into this, but we need a plan that ideally both sides of the if if we have two parties left in the center will adopt and and believe in.
Well, that that's quite a big if about as we were discussing earlier, two parties in the center. But I what I'm hearing is get a plan, cut the debt. Um Patrick, you've come back and talk to us when we hear what's happened uh on November the 26th. Lord King, thank you so much for your time this morning.
>> Thank you, Trevor.