Transcription
I'm afraid this looks a little bit like a government which is flailing around, um, and causing damage by flailing around in terms of some of the tax things that are being suggested.
Hello and welcome to Spectator TV. Let's talk about our cover piece this week, which is by the brilliant Michael Simmons, our economics editor, and it's called, uh, the next, the coming crash, I should say. We've been talking about coming crashes for some time. It's still coming. Uh, so I'm delighted we're joined by Michael and Paul Johnson, who is Provost of Queen's College, Oxford. And, um, Michael, I think before you wrote this piece, or after you wrote this piece, Labour have they wrongfooted you because they're going to charge national insurance to landlords, which is going to solve all of Britain's economic problems.
>> Exactly.
>> And address the coming crash.
>> Well, I wouldn't say they've wrongfooted me. Um, I think I address, uh, exactly this in the piece. I mean, fundamentally, um, the the reason why some people think that, you know, a crash is coming is because our fiscal position is totally, um, unsustainable, as, um, you know, Paul has outlined in his, in his former role as head of the Institute for Fiscal Studies.
Essentially, we just do not bring in enough revenue for all the things we spend. Hence why we've, we've got into this, this debt problem. And one of the people I interviewed for the piece is somebody that used to be a Treasury official. And they said that, um, they thought Rachel Reeves would muddle through this next, um, budget because Torsten Bell, who she's sort of appointed to kind of help put together the economic side of that budget, would be able to find her some revenue raisers. And as you point out, you know, the story today that apparently she's going to go for this national insurance on, um, you know, the, the rent income from landlords. But as I sort of go on to describe in the piece, there's problems with that. I mean, not least because, you know, um, our viewers will easily be able to guess who, who is going to end up paying that cost, and it won't be landlords. But secondly, and the, the person I spoke to from the Treasury made this point that she's only going to be able to come for all these revenue grabs once, unless she's prepared to do something major on tax. So on, you know, on the basic rate of income tax. Or if she's, she's never going to do this, but unless she was to, you know, seriously cut the size of the state, then she might delay the crash or the fiscal crisis for another year or so. But she's not going to be able to pull these wheezes time and time again. And even if she does buy more time by raising, you know, tax on landlords here or tax on businesses there, she's going to make it, you know, it's going to be harder and harder because each of these taxes are going to slow down growth in the economy. Um, and then eventually you may get to a point where you're putting taxes up so much, but you're actually not bringing in any more revenue. So, I'm, I'm not sure really that that they've wrongfooted me.
>> Paul, what do you think about this? Because it, it seems to me as though every time, every budget, every time there's a, a major economic announcement from any Chancellor, uh, if it's successful, it feels like pulling a rabbit out of a hat or sort of patching something together, putting a sticking plaster on a gaping wound, whatever cliché you want to use. Um, and the reason is because, as Michael suggests, there is something very structurally wrong with the British economy that no Chancellor, no government is willing to address.
>> Yeah. Well, we've got a long-term problem which is that since the financial crisis, which is now 15 years ago, the economy has barely grown and certainly people's incomes have barely grown. Uh, meanwhile, spending has increased. Um, uh, particularly post-COVID, we had a sharp increase in spending which has not gone back down. So the state, uh, today is about 150 billion pounds bigger in real terms than it was back in 2019. And that looks like it's here to stay. Certainly, there's nothing in the plans which suggests that spending is going to fall as a fraction of national income. Uh, meanwhile, um, taxes, despite the fact that they're at their highest level ever, are nowhere near covering all of that spending. You've got a government that came in, um, promising not to increase any of the major taxes, um, and a fiscal situation in which we are currently barely meeting the very loose fiscal rules that this government has set. Now, the question for the budget in the short run, the tactical question, will be what does the Office for Budget Responsibility say about what's going to happen over the next four or five years? And we don't know the answer to that question. And they may say, actually, to meet your fiscal rules, you need to do a little bit, or they may say, to meet your fiscal rules, you need to do really quite a lot. Now, in that first case, you know, you can always find 10 or 20 billion quid behind the sofa. Um, if, on the other hand, you're, um, looking for 30, 40, 50 billion to meet those rules, then you're going to have to start doing something really very serious, uh, with tax. And probably, I mean, frankly, I think it's quite hard to see how you would raise 40 or 50 billion without breaking some of those manifesto promises on income tax, um, national insurance, uh, and so on. But even if we do muddle through this year without having to do very much, then because we are sailing so close to the wind on those fiscal rules, the speculation will be here next year before the budget in 2026 because, you know, what will the OBR do now? Will we need to get an extra 10 or 20 billion to meet the fiscal rules? It's, we're in a very difficult position, both in the long run because of, um, low growth and demographic change, but in the short run because back in the, uh, budget last autumn, uh, the Chancellor deliberately gave herself almost no room for manoeuvre, and she knew then that if things went even slightly awry in the public finances and the economy, then she would have to come back again.
>> Michael, you start your piece by referring to Denis Healey in 1976, cap in hand, going cap in hand to the IMF. Is this just a bit of a Tory sort of agitprop because, um, the Tories want it to be the 1970s again? They want to come out of their own crisis, political crisis, by establishing that Labour can't be trusted with the economy. And yes, the Tories are the people you need to trust with the economy.
>> Well, it, it's certainly, I think you correctly identified what the Tory strategy is, right? I mean, nobody's listening to the Conservatives on almost any other policy issue right now. Um, and they want to present themselves as the party that's prepared to tell fiscal hard truths, um, you know, as their only strategy sort of for survival. Um, I think on the IMF point, though, it's fair to say, you know, the, the people that have made these comments suggesting we might be, um, in a bailout, um, are not people that are, you know, signed card-carrying members of, um, the Tory party. I mean, I think the person that initially made the comments was the director of the National Institute of Economic and Social Research, which is very much is not a Tory think tank. Um, so serious people, you know, have been suggesting that, and obviously the, the Tories have jumped on the bandwagon with that. I think there are problems with that as a, you know, conservative strategy going into the next election, not least because one of the main problems why we're in such an unaffordable position is the triple lock on pensions, which of course is a Conservative policy. Um, and the point I keep putting to, you know, Conservative shadow ministers is how can you really, if you know, if you ask them if they're serious about cutting the state so that we can get into, you know, a healthier fiscal position as they say they are, surely that means going after the pensioners as well. Um, and the answer comes back from the leader, Keir Starmer, that our focus is on working-age benefits. Now, that's obviously a huge problem as well, and I, I would welcome, um, working-age benefit bill being cut, but if you're not going to touch pensioners at all, then I don't think you're going to get anywhere near close to solving this problem. So, I feel like if the Tories really are going to take this as their strategy, they should do it fully and properly and go all in, or not bother at all.
>> Are you suggesting that Keir Starmer doesn't have a very firm grasp of economics?
>> Uh, you, you might want to put it like that. I think I, I think she's, it's perhaps more cynical than that in that,
>> um, they, they're trying to, they're trying to do two things at once, right? They're, they're following that electoral rule of never take anything away from the pensioners because they're the only ones that bother to vote, but also we'll try and be, um, fiscally responsible. Well, they're going to find out that that's not possible. They're not going to be able to do both.
>> Paul, and as, uh, as Michael says in his piece, one of the big stories of, of recent days has been that British, uh, gilt yields are now higher. 30, is it the 30-year,
>> gilt year is now, it's the US one is more attractive to investors now. And I find what I find surprising about that is how long it's taken for, uh, buyers of debt to think that the US is a, is a safer bet than Britain because, as we've been discussing, Britain's had structural deficit debt problems for a long time.
>> Well, well, the US has got serious structural deficit debt problems and a lot of, uh, uh, should we say uncertainty, incoherence over its economic, um, policy, but it's obviously a continental-sized economy and the world's, um, uh, world's central bank effectively. So, it's a very different kind of economy. Um, the, I mean, I mean, the reason I think that the, the rate in the UK has, is, is at high levels at the moment is for exactly the reasons that we've been talking about. We have a persistently high deficit. We've got a very high debt, and it has become evident that this government, like the last one, um, just can't cut some of the things that we've been talking about. If you can't make a small cut to pensioner, um, fuel allowances, and you can't make, you can't, um, you know, slightly slow the increase in the rate of growth of disability benefit payments, then it looks like you can't do very much. Um, we've had a spending review which has fixed spending for the next, um, two or three years, and, um, we're coming up to a budget where the government is really hemmed in in terms of the tax changes it can make, and the tax changes it can make if it wants money. I mean, a lot of the things that we've seen, all these kites that are being flown, um, lots of things on housing taxation. Well, we do need to change housing taxation, but my goodness, you sort of, um, let's, let's, let's put capital gains tax on, on big properties. Let's, uh, let's, let's slam landlords some more. I mean, this isn't a way to think about it. Let's think about what we should be doing to stamp duty. Let's think about what we should be doing to council tax. Let's think about how we can change the relationship between renting and, um, owner occupation, which is currently vastly favourable to owner occupation relative to renting, rather than sticking an additional tax, um, on that. That's just one example. Um, and, and we've had yet again, uh, speculation about changing the taxation of pensions, which caused all sorts of damage in the run-up to the last budget and will cause all sorts of damage in the run-up to this budget. So, I'm afraid this looks a little bit like a government which is flailing around, um, and causing damage by flailing around in terms of some of the tax things that are being suggested, um, because it doesn't have a clear view of where it wants to go or how it wants to get there.
>> And it looks a little bit to me, anyway, as though, um, sticking with you, Paul, that when Labour are feeling panicked about the economy, Rachel Reeves and Keir Starmer will will discuss something. They'll have a meeting and they'll come out and they will double down. I think this is what's going on with the landlords this week. They will double down on what Tories would call the politics of envy. Uh, they would double down on this idea that we're going to be bold enough to go after people that we regard as privileged or comfortable. And that's not necessarily a sensible economic strategy.
>> Yeah, as I say, the taxation of housing is a, is a complicated, um, beast. It's really important we get it right. We currently got it disastrously wrong. Um, uh, we massively undertax people who live in big houses, and we massively overtax people who buy big houses, which is, um, just, you know, the worst of all possible worlds in many, uh, in many ways. So it certainly needs sorting out, but simply pouring more tax on landlords, as actually happened in the last budget when stamp duty unbelievably on landlords was, um, increased, um, as you suggested earlier on, um, will have the, the result of increasing rents because there'll be a reduced supply in the end of, um, of housing for, for, for rent. So you, it's really important to get these right now. It's also worth saying in terms of, um, uh, getting tax from better-off people, that the last Conservative government was the most socialist government we've seen in decades in terms of how it changed, uh, that it really massively increased taxes on high earners, and actually cut taxes on direct taxes on people on average kinds of earnings. Now, you won't hear either the Conservatives or the Labour Party saying that because it's clearly not in their interest to do so, but that's what's happened. Um, and again, I think this is, this is related to the political difficulty of actually increasing taxes on people on average earnings for very obvious reasons, given they haven't had a pay rise for, um, 15 or 20, uh, for 15 or 20 years. So you can see where the politics of this are going. Um, but the economics, uh, it's really quite hard, I think, to argue you could get very significant additional, uh, revenues in an economically undamaging way from, um, from high earners, certainly.
>> Well, Michael, you suggest that in your piece that actually perhaps the most sensible thing for Labour to do would be to break their pledge not to raise income tax and and raise it on, in, even just a small amount on middle earners, which would very, which would bring a very substantial amount of revenue. But as Paul suggests, that is very politically difficult, particularly, and not just politically difficult, I mean, economically difficult for the middle classes who have seen a lot of their earnings income eaten away by inflation in recent years, who are not feeling as though they are well off.
>> Yeah. I think the problem is, my view is, um, a serious tax rise and, you know, proper austerity to the state is inevitable when, when the crash comes. And I guess the gamble is, if you think that the, you know, markets will keep lending to us at rates that we can just about afford for a few more years, then obviously you don't do that before the election because you've promised not to. But if you think that potentially it's going to blow up next year or even in 2027, 2028, and then you're forced to go, um, you know, to do something on those major free taxes that you've ruled out touching. Surely it's better to do that, or, you know, earlier, um, rather than later, because if you do it now, maybe you start to get things back on track. Some of your other policies on house building, etcetera, maybe get you, if you're lucky, a bit of economic growth, and then when you get closer to the election, you can do some giveaways potentially, and then if you're lucky, you've got a chance of surviving in 2029. I think if we just tinker around the edges with these smaller taxes that, you know, we've been discussing, then things get worse and worse, and, you know, it's not unimaginable that a year in a year out from the election, things are so bad that whoever's the Chancellor then, whether it's Rachel Reeves or whether she's been reshuffled out, is putting income tax up within 12 months of an election, and, you know, good luck getting reelected after you've done that. So I, I think politically it would make sense to do it now, but I mean, they're not going to.
>> Paul, finally, is the situation so bad? We've been reading a lot this year about, uh, the highest earners and millionaires and so on fleeing Britain, which of course is disastrous for tax intake. Um, is, is that just going to keep spiraling as Britain tries to address its crisis? We are going to become less and less attractive for well-off people and people who are able to contribute large amounts to the exchequer.
>> Yeah, I mean, I, I think I think we shouldn't overdo the immediate doom. I mean, I don't think we are, we're going to get some kind of vast crash or, um, an inability to sell our debt, or indeed, and I thought the, this idea that we're going to have to go to the IMF and we're repeating 1976, we're, that's not where we are at the moment. I mean, that's not, I mean, apart from anything else, I mean, you know, I mean, who the hell, where the hell's the IMF going to get money from? But that, that's, that's not the world we're in. Um, what we, the, the world that we're in is a, is a, is a sort of longer-term stagnation where we will, I think, stagger from pillar to post, um, you know, paying more than we should, more than virtually any other country on our, uh, in, in terms of debt, um, interest, which is making it very difficult to manage the public finances because we're, uh, that leaves little money left for, um, things we actually want to spend on. We've got political stagnation. I don't think we've got one big crash. Uh, what I, we're going to have is a, is a, is a, you know, a period of, you know, you, you, more, more stagnation and more political difficulty. In terms of the millionaires leaving, I think the most recent official figures show that whilst there certainly are some leaving, it's not, it's no, it isn't more than was projected as a result of, for example, the changes to, um, uh, to, to the non-dom, the non-dom rules, and it was always projected that some people would leave as a result that, and indeed they have, but that was pretty much factored into the decisions when they were taken, both by the last Conservative government and by, uh, the current, um, the current government.
>> Your argument, Michael, to that is that perhaps we're not going to have a coming crash, but that we, we maybe need one.
>> Yeah. Well, for, yeah, for exactly the point that that Paul's made there. I mean, I think nobody would say that, um, Britain is, you know, a happy place if you're a young person, um, thinking about your future, about coming on in life in terms of your chances to get serious pay growth, your chances to get on, um, the housing ladder. Now, there's many reasons why our economy is stagnating, but I think our unsustainable, um, fiscal position is a big part of that. It's certainly why the government can't really do, you know, serious investments in parts of the economy. And I think the worst-case scenario is that that you outline is that a crash never comes. Politicians are not, um, forced to confront, um, the, the fact that Britain just doesn't really add up, and then we just continue like this, and 20 years of stagnant wages turns into 30, turns into 40, turns into 50. And I mean, you know, maybe that's okay, but wouldn't you rather be in a, in a country where things are, you know, seriously getting better decade after decade? And I think, uh, some kind of crash where the government had to take, have a serious conversation with the public, because this is not just on, on, um, politicians, is also on what voters want from their state, to force us all to have a conversation about what the state does for us and what we have to do for ourselves, to then realign things so that we can, you know, restart the economy, get growth properly going, would be better than just avoiding it and stagnating for decades.
>> The risk of sounding horribly ignorant, isn't that what Liz Truss would have done for us? I mean, yes, if it had worked, but I mean, Liz Truss, whilst trying to do the kind of opposite policies to the current government, was still, still had the exact same problem, right? That you, you are trying to, um, you've got so much you're doing on spending,
>> um, without the revenue to pay for it, and you say, oh, fine, well, I'm going to these debt markets that, that increasingly, um, are going to charge you a heck of a premium to pay for it. Now, maybe if Liz Truss had had got through it, and by the way, it wasn't just down to the way Liz Truss did her budget, there was issues with the Bank of England and the LDI crisis, etcetera, that we've talked about on Spectator TV before. Now, maybe if she had got through that, she would have, she would have then done some serious shrinking of the state, um, and realigned things. But that, the, the fact is, you know, that that wasn't allowed to happen because of how powerless things are, which I think is why you have to have a serious conversation with the public about this. But that's not going to happen unless the crash forces basically all parties to align, because I think ultimately the Tory strategy that we started the show by talking about won't work because who's going to vote for the party that says we can't afford to do things anymore, so we're going to have a ton of austerity, while Nigel Farage and Keir Starmer are saying, oh, but don't worry, we'll pay for XYZ.
>> That's a very good point, and I'm sorry to both of you for bringing up Liz Truss. I think we've discussed the mini-budget far too much on Spectator TV over the years. But, uh, thank you, uh, very much indeed, Paul, and thank you very much, Michael.