Why blaming Brexit won’t save Rachel Reeves

0:14This is Political Coen Scene with Ed Balls and George Osborne.

0:27So we are here. I say here. We're in two entirely separate places and in very different time zones. I'm recording in London, Wednesday early evening. George is in San Francisco on a Silicon Valley trip. So he's recording Wednesday morning. And because we're doing this late in the day in Britain. It's going to land on Thursday in the UK. Polling will be just open in the Carefully by-election, which, as we said last week, could be a bit of an earthquake in British politics. And it will also be the last day of voting in the Labour deputy leadership contest. Less of an earthquake, but, you know, with significance.

1:04So this podcast is landing on an important day. Yeah, it's morning in America here again. Although I guess we're a bit nervous of talks of earthquakes given I'm right in the middle of San Francisco. I'm looking outside of my hotel bedroom at this absolutely iconic building, the Transamerica Pyramid, which is that kind of triangular building in downtown San Francisco, which has got a sort of strange kind of reverse pyramid at the top to protect it in an earthquake. Anyway, it's just been redone by Norman Foster, and it's got a spectacular interior, which is totally open to the public, and this whole area of San Francisco.

1:43I know people will tend to hear stories about how downtown San Francisco is a bit of a war zone and there's a lot of terrible situations with people with drug problems on the streets. I have to say I've noticed it's got quite a lot better since I last was here. It feels like a kind of cleanup is underway and there's quite a tough Democrat mayor of San Francisco who is leading all of that. Every time I come to America, I think you probably have the same feeling when you come, you're sort of re-energised and I've got lots of interesting things that I've got to do here before I fly home. What we'll need is a photo for our kitchen cabinet members.

2:19They can see your building and the fancy earthquake proofing. And of course, being here in San Francisco, we'd be remiss not to talk about the other earthquake and technology which is happening around AI. But before we get to that, we are going to talk about Prince Andrew. Of course, he's been dominating the headlines in the UK. We're not just going to get into the kind of who did what when of the Prince Andrew story. But we're going to ask the sort of bigger question for the government is how do you solve a problem like Andrew? Is there a role for government? Is this entirely a matter for the royal family?

2:53Clue, I think there is a role for government. And is actually number 10 focused on this? Because there's been some pretty extraordinary briefing overnight that there has been a loss of confidence in the brand new cabinet secretary. I say brand new, he's only been appointed a few months ago by Keir Starmer, Chris Wormald. Some pretty vicious briefing coming out of number 10. So what on earth is going on in number 10 Downing Street? Then we're going to talk about Brexit. Brexit has been rather a lot in the news in the last few days. And it's because the budget is coming. And we've had from Rachel Reeves at the International Monetary Fund meetings, but then also in a conference in Birmingham this week, a lot of talk about the impact that Brexit is having on the UK economy.

3:35a bigger impact than, she says, people previously thought. The Governor of the Bank of England, Andrew Bailey, has been echoing those sentiments. And this is the emerging narrative, or at least a part of the emerging narrative for the budget. So we're going to talk about, is Brexit to blame? And what is the government's budget narrative? And here in San Francisco, as I say, all the talk is about AI. And I can see out of my window right now, sort of driverless cars going down the street and all the billboards are about how you can save money with your workforce with AI. We're going to focus on a very specific question, which is the valuation of some of these AI companies, many of whom are only a few years old.

4:18These are not the big old tech companies. I say old. They were created 20 years ago that we're familiar with. These are the Anthropics, the Open AIs. They've got eye-watering valuations. Many of them are still private companies, but they're fast becoming the biggest, most valuable companies in the world. And it's led to a question about whether there is a boom in all things AI. The governor of the Bank of England was raising this question a few days ago. So we're going to have a look at the money behind AI. But let's start with someone who would dearly love to have some of the money behind AI, and that is Prince Andrew, who finds himself in a pretty desperate situation.

4:56I think most people would say entirely of his own making. And he finds himself now essentially sort of trapped in this house in Windsor. which he has on literally a peppercorn rent. I didn't know such a thing. In fact, it meant you only had to pay physical peppercorn a year, but that apparently is what the royal lodge in the Great Windsor Park that he lives in, that's the payment he has to make every year to the Crown Estate. He's holed up there. He has long had his various royal duties taken away from him by the late Queen, and now his brother's the monarch, and in the last couple of days he has volunteered, I imagine in heavy inverted commas, volunteered, to get rid of his various titles, including the Dukedom of York and his position as a member of the Order of the Garter.

5:45But is that enough? There are calls in Parliament from the SNP, from some Labour MPs, from some Tory MPs, for him to be sort of formally stripped of these roles, which would require Parliament to act and to be kicked out of this royal dwelling where he's got what looks like an ironclad lease. So it's not as straightforward as all that. And we should just say all of this has been kicked off, this little latest round of scrutiny of Andrew has been kicked off by the posthumous publication of Virginia Jeffries' book. She, of course, was the young lady who says that she was preyed upon by Epstein and by Epstein's guests, including Prince Andrew.

6:27She committed suicide tragically earlier this year and her book comes out and makes very specific allegations about Andrew. So obviously there's like, we could talk about a lot of things. Should we just start with what should the royal family do about Andrew? And indeed, if Andrew was trying to help the royal family, what should he do now? I think it is the end of the road for Prince Andrew now. And I think the king was generous in allowing him voluntarily give up his titles. But you know, the allegation in this posthumous memoir that he had sex three times with Virginia Dufresne, allegations which of course he denies, but the weight of evidence about his contacts with Epstein is so terrible.

7:13He was always the playboy prince. I had a lot of dealings with him when I was at the Treasury. He was the trade envoy and he was effective at going around the world, especially in the Middle East, making contact with kings and princes and doing the government's work. And that was a source of income for him. But at that time, you know, the Playboy Prince was up to the pranks of a young man. I mean, this is materially, materially different. It's so morally reprehensible. Although it was actually, these things were happening at the same time. They were. While he had this role, which he had the trade role under the Cameron government as well.

7:49You know, a lot of these offences, well, first of all, the actual alleged encounters with the kind of Epstein girls and then the kind of meeting Epstein after he'd been convicted, going to see him in America, staying in his house. I mean, this was all happening while he had these official government positions, right? That is right. And as the evidence has emerged about what was actually happening and what Epstein had been doing. And his position has become untenable. As you said, there would have to be a piece of legislation to remove his title. But another revelation now about his contact with Epstein, and there's so much, I think, still to come out in the American congressional and wider inquiries would mean.

8:36I think that will happen now. But it feels as though the king and Prince William have said, this is the end of the line. But I think they were generous to him last Friday. But, you know, you do feel as though the monarchy is clearing the decks. Prince William, who will become the king in due course, does not want to deal with his royal uncle. And I think, you know, it's pretty clear he's not going to have to now. He's made it clear that Andrew will not be going to his coronation. but I don't think he will be Prince Andrew by that point. It feels to me as though there's one more step to go in this story and in a sort of generous way because in the end for King Charles, it is his brother.

9:21He's made it clear that this is it. It's over. You cannot behave and then be revealed to have behaved in this way and carry on being a member of the royal family. The only reason why Prince Andrew is a royal, The only reason we have a royal family is to advance the public interest in the UK. It's not a private sign of cure. He's not advancing the public interest, and that's why I think it's over. But when you say it's over or it's the end of the line, I mean, I guess I agree with you, but I also feel like, haven't we heard that before? Weren't we told it was the end of the line when he was kind of stripped of his royal duties and his HRH?

9:58If you remember at the Queen's funeral, he wasn't able to wear a military outfit like Prince Harry. You know, he'd already been sort of banished from the working royals. He was still walking behind the coffin. He was still attending Balmol for Christmas. He was still going to the church services. You know, we had the embarrassing moment of William essentially snubbing him at the funeral. So they have tried to avoid a humiliation, but I think that's out of road. Yeah, but okay, but how do you actually draw the line on this? I mean, you know, he's still very much alive, right? He's got to live somewhere and he's got to live on something.

10:37Obviously, it's a privately wealthy family, the Windsors. The Queen, the late Queen, spent a lot of money actually trying to settle the case with these victims of abuse, alleged in the case of Andrew, but I don't think anyone tells they were victims of Epstein's abuse. And that's been proven in court. So what would they do now? Now, and I was thinking, my sort of two thoughts is, you've got to actually get him out of the country. While he remains in the country, this story is just going to go on and on and on and on. And having edited a newspaper, I can tell you, every media outlet will just be pursuing this story.

11:13Because the public are interested. And as you say, you know, it's not just a soap opera, this family is elevated and gets lots of privilege. And the head of the family is our head of state. And so there is a legitimate public interest. And I just wonder, you know, with the late king of Spain, not late, he's still alive, but the former king of Spain, you know, he got caught up in various scandals. And in the end, he not only abdicated, but he went and took himself off to live in Abu Dhabi. And I was just thinking maybe there needs to be some way to get Andrew out of the country. And that, of course, means him giving up this house.

11:45And my advice to him, I can see why the last thing he wants to do is give up this kind of tenure he's got. But it is untenable. all. And ultimately, if you kind of push parliament, our parliament will react and find ways to get at it. And then second, I thought, isn't there a kind of role for the prime minister in being the kind of chief royal advisor? I know this is sort of an aspect of a premiership that I don't think most people are really aware of. In the most extreme case, Stanley Baldwin, prime minister in the 1930s, instructed the king at the time, Edward VIII, that he had to abdicate if he wanted to marry Wallis Simpson.

12:23And there were lots of senior politicians at the time like Winston Churchill who disagreed, but Baldwin as prime minister insisted, reminding everyone that ultimately Parliament is sovereign in the UK. And then if you look at the 1990s, you have John Major stepping in and essentially strongly advising the Queen to pay income tax, which she had not previously done, and handling the divorce of Charles and Diana. And then famously, it's been in all those movies and shows and the like. There's Tony Blair with a supporting role from Alistair Campbell when Diana dies and getting the royal family to understand how the nation feels about it.

12:59So in other words, the prime minister is the king's chief advisor, including on matters to do with the royal family. And I just wonder whether Keir Starmer should just step in here, supported by the team at Number 10 and the team at Buckingham Palace, the official team, and just say, look, you need to do these things. We need to do these things. We need to pass a law to strip him of these titles. That can be done easily. It will fly through the House of Commons and the House of Lords. We need to get him out of this house in the middle of Windsor. And we need to find a place for him to go abroad and get this person off our front pages and out of our national life.

13:37The other example you could have used, which in some ways is even more pertinent, is Anthony Eden in the 1950s, essentially telling the Queen that when her sister, Princess Margaret, wanted to marry a divorcee, Group Captain Peter Townsend, that she couldn't do so and remain Princess Margaret. And she would have to renounce her titles and her income to marry this man now that may seem kind of old-fashioned now because he was a divorcee but that was i mean that wasn't advice that was the government essentially on behalf of parliament and the law telling the queen where things stood the government line at the moment it's interesting is to resist being drawn into responsibility this is bridget phillipson a couple of days ago explaining keir starmer's role in this i want to talk to you about prince andrew um you'll know there are calls from people within your own party for his title of prince to be stripped this is something the king would have to do or it could take an act of parliament is that something the government's minded to give time to i mean he is he holds that title by virtue of being the son of a monarch that is the position that we have i think we agree and support the decision that the royal family and prince andrew have taken in the recent announcement that they've made when you also hear the victims of Epstein and hear about the abuse that they endured.

15:05It's incredibly powerful to hear that. And I think first and foremost in our minds ought to be those who suffered at the hands of Jeffrey Epstein and making sure that we never forget about putting victims front and centre. But I think in the specific case here about what the Royal Family have done, we believe that's the right course of action. So you won't be given parliamentary time to remove that title despite the pressure that's coming? Because there are going to be more revelations. You know that's actually a state. I don't think the Royal Family would want to detract from wider parliamentary business.

15:33Don't parliamentarians have a right to do something? There are always routes for parliamentarians to put forward debates, to find time for debates, if that's what backbench MPs would wish to do. But I think we've seen the right course of action in terms of what the Royal Family have done so far. This is not a matter of a government business, but of course it's always been the case in Parliament that individual members of parliament are able to bring forward debates, discussion on any topic that they choose. But of course, this is not the Queen's decision or the King's decision. This is about parliament.

16:04And it is perfectly appropriate for the government of the day to decide in consultation with the King whether or not a member of the royal family should or shouldn't have a title. And I mean, to go to your question, I think it depends very much on the personal relationship. So I don't know about Eden, but in the case of John Major, he clearly had established a personal relationship. By the way, I'm just looking up, Eden was himself divorced when he gave that advice. But he was undoubtedly reflecting the view of the cabinet. John Major was, I believe, in a personal way advising the Queen. Tony Blair probably had not a deep relationship at that point with the monarch.

16:45This was only a few months after he'd become prime minister. But, you know, he saw the opportunity and decided, I think, to give good advice to the Queen in 1997 about returning from Balmold to Buckingham Palace. I don't know if Keir Starmer has the kind of personal relationship with the king at this stage, which allows him to have that kind of candid conversation. But what we do know is that those conversations will be being had between Keir Starmer's advisers, the civil servants around him, and the king's advisers, the civil servants around him. I mean, they will have been conversations and it is perfectly appropriate for the prime minister through that kind of route to make it clear what the government thinks.

17:27And so if the government thinks it's bringing the monarchy into disrepute and the law needs to change, they should change the law and they should tell the monarch that's what's going to happen. So I completely agree. I don't think Bridget Phillipson's answer is good enough, frankly. The responsibility for legislation in Parliament is the government's responsibility. There is a clear precedent for Acts of Parliament stripping royals of royal titles. Some of the German princes who were related to the royal family were stripped of their titles during the First World War by act of parliament. In the absence of kind of government leadership on this, you've got all sorts of parliamentarians tabling their own legislation.

18:05You've got the SNP, Stephen Flynn, their pretty effective leader in the House of Commons, getting involved. You've got Robert Jenrick, who's got an eye for the opportunity here, saying pretty strong language. You know, why is a Tory shadow cabinet member saying what a Labour cabinet minister can't at the moment? He says, it's about time Prince Andrew took himself off to live in private, make his own life. He's disgraced himself. He's embarrassed the royal family time and again. I don't see why the taxpayer, frankly, should continue to fit the bill at all. The public are sick of him. That's what the Labour government should be saying, leading on the legislation.

18:42By the way, here's a prediction. The legislation is bound to happen now, isn't there? There's going to be this momentum down. So get on top of that. There'll be another catalytic moment. That's what I mean by the end of the road. There's no, I mean, something else is going to happen and that will now be the moment. That is, you know, it may not be the main thing that Number 10 wants to be focused on at the moment. They've got the budget, they've got, obviously all the challenges in domestic public services, international relations, but, you know, that is part of the job in a monarchy. And it just reminds me that I remember there was a kind of curious moment in British history in 1974 where Ted Heath had sort of semi-won the 74 election, or won the most votes but not the most seats, and sort of wanted to stay and see if he could form a government.

19:24And three people went for a walk in the park, St. James's Park, to decide whether Heath could remain or whether Harold Wilson should be invited to be the prime minister by the then queen. And the three people were the prime minister's principal private secretary, the queen's principal private Secretary and the Cabinet Secretary. And these three men at the time basically were the British Constitution, the official sort of guardians of the British Constitution. And so it does also then draw into the conversation who coordinates these things in number 10 right now. So we've got a new PPS coming in who is very effective.

20:04We have the team in Buckingham Palace, who's also, you know, I know them and they're pretty effective. And then you have the cabinet secretary, Chris Wormald, who is a very decent person, man of real integrity and lifelong public service. But when he was appointed cabinet secretary 10 months ago on this show, we discussed it and we said he was an odd choice because there were three other candidates, Ollie Robbins, now at the foreign office, head of the foreign office, Antonio Romeo, who's now gone to the Home Office as permanent secretary, and Tamara Finkelstein, who's just retired from the civil service.

20:41Three people personally known to me and you, all of whom would have been excellent candidates, all dynamic in their different ways. They chose Chris, and we said that's a pretty conservative choice. And now, sure enough, 10 months later, just 10 months, by the way, think of all the kind of churn we've had in Downing Street. 10 months later, we have overnight, don't we, in the Times newspaper, people clearly in Number 10 briefing against their choice of Cabinet Secretary. And it sort of begs the question, how do you expect anything to get done in Number 10 if you can't settle on your core team that is going to deliver the Starmer agenda?

21:19The truth is, it's absolutely staggering. It's not on the front page of the Times, it's on the inside of the paper. Great scoop by Patrick Maguire, Gabriel Pogren, but lots of number 10 sourcing. This is clearly a very well-sourced story. And as you say, I mean, what are the public, if they read about this, or civil servants, senior civil servants, former civil servants to make of this? You had a number 10, which has had a pretty rocky first 15 months. Chris Wellmold was brought in to sort this out. And a sense of the public thinking, do they really know what their strategy is, the expenses problems, U-turns on the winter allowance on welfare reform, a lot of relaunches, a reshuffle which was a bit messy.

22:03And then suddenly you have a story appears which is that it's the cabinet secretary's fault. The guy they appointed just a few months ago is now to be the fall guy and get the blame for everything which has gone wrong. And I mean it's astounding really. I mean it's so immature and ill-disciplined and And it just feels kind of people who are out of their depth. I mean, you can't talk to the newspapers about the cabinet secretary and say he's going to be replaced imminently in a few months time and blame him for everything which has gone wrong and think that people are going to respect that or even kind of believe it.

22:40If you're a former cabinet secretary talking to another former cabinet secretary, what would you say about this operation at the moment? I was asking around some former senior civil servants. I got this. I went, obviously, I'll keep it anonymous. but this is what was said to me. A consistent pattern has now emerged from the Starmer operation. Starmer appoints someone like Sue Gray, his former PPS, Liz Lloyd, the endless comms directors, and he promises radical change or grown-up government. Within months, other people in the operation start briefing against him. A few months later, Starmer fires them.

23:12The cycle begins all over again, and that tells us several things. One is, Starmer has terrible judgment about who to appoint. Two, he allows a culture of briefing against each other, and three, he has no loyalty to anyone. It's appalling, disgraceful behaviour from a Prime Minister Who turns out to be alarmingly like Boris When it comes to his treatment of people So that is from a very senior former official And, you know, look I actually have been trying to give the very best interpretation Of how Keir Starmer conducts himself as Prime Minister I think he's brought, you know Some stability to British governments After all the Prime Ministers came and go in the previous period I like what he's been doing on the international stage But this is now his third or fourth attempt at trying to fix a kind of home team in Downing Street to get things done.

24:01So he's appointed a PPS, fired that PPS. Now there's a new PPS. He appointed a chief staff. Now he's got Morgan McSweeney as his chief of staff. He's got several iterations of comms directors. He had his new cabinet secretary. Now, just months later, they're briefing against his cabinet secretary. You know, that is actually no way to get things done in government. You know, when you talk about the delivery phase of the government, you can't deliver anything if the core operation at the centre of number 10 is so chaotic and so unsettled and the dirty linen is all being washed in public. It feels like the student union elected executives appointed the bar manager four months ago and now decided he's a bit of a square and they want to throw him out.

24:46I mean, is that juvenile a way to behave about the cabinet secretary who, as you said, is the most senior civil servant and needs to be the person who's holding the ring in Whitehall and with Parliament and also with the crown at crucial moments? You can't behave like this. I'm sure Keir Starmer is appalled to read this in the newspapers. I mean, it's not the first time, but he'll be appalled to read it in the newspapers. It was Louise Casey who crops up in the story. Louise Casey, who is the non-executive in Number 10. And she's also now doing the grooming gangs. And she's also sorting out the reshuffle.

25:18And she's also, by the way, supposed to be doing a review of social care, which as far as I can see hasn't really got going yet. She's also in the story. She'll be appalled at her name being dragged into this. But what a way to try and inspire and lead and give your government direction. Keir Starmer doesn't just need to read the right act. He needs to look closely on the inside and say, things keep happening like this. What is it? What is it about that operation? But they're ultimately his responsibility. I mean, it's the ultimate responsibility of the prime minister to put together a team. If you look at the team you work with around Gordon Brown, if you look at the team that Tony Blair assembled, you look at the Cameron team or the Thatcher team.

26:01I mean, that is the, you know, when it was at its best in all those administrations or in the Brown chancellorship, you know, it was the power of the politician was massively amplified by having a strong, consistent, loyal team around him. Anyway, these are early straws in the wind of yet more trouble at number 10. And of course, number 10 should really be all engaged at the moment in something completely different, not Prince Andrew. That's something they've got to deal with. I would get on and deal with it quickly, as we've discussed. Not in musical chairs inside Downing Street, but in the budget.

26:36and the budget narrative, which is looming. And we're going to turn to that next.

26:51So we're now about five weeks until the budget, the final week of November. We've been saying for a few weeks that the government needs to establish its narrative. And I think that's been happening over the last few days. We talked last week about welfare reform and whether that would be a source of savings. The Institute of Fiscal Studies produced the huge volume, the Green Budget, just a few days ago, in which they said that they thought that the tax gap was£22 billion and discussed lots of different ways in which the taxes could be raised. The IFS said they didn't think it was possible to close this gap through spending cuts.

27:28But we'll come back to talk about the tax and spending decisions in the coming weeks as we get towards the budget. But the narrative, this week we've had Rachel Reeves echoing what she also said to the IMF last week. In the words of the Telegraph front page, Reeves blames Brexit for budget black hole. The Chancellor will use Britain's exit from Europe to justify higher taxes. The Chancellor and her aides telling the newspapers that the impact of Brexit on the British economy has been worse than expected. They're obviously hoping the OBR will echo that sentiment when they downgrade the growth forecast this autumn, which is at the heart of the Rachel Reeves fiscal challenge for that budget, and that they will be blaming a worse Brexit than they previously anticipated.

28:15Andrew Bailey, the governor of the Bank of England, has also said that Brexit is having a lingering impact upon the British economy. This is Rachel Reeves talking about Brexit just earlier in the week. The Office of Budget Responsibility, who provide the independent forecasts for government, they have consistently overestimated our productivity performance. Because of Brexit? So, look, it would be up to them to set that out. But austerity, Brexit and the ongoing impact of Liz Truss's mini budget, all of those things have weighed heavily on the UK economy. Already, people have thought that the UK economy would be 4 % smaller because of Brexit.

28:51Now, of course, we are undoing some of that damage by the deal that we did with the EU earlier this year. But there is no doubting that the impact of Brexit is severe and long lasting. So you can see the narrative that they are now trying to establish, which is there's going to have to be more tax rises this autumn than they expected. It's because the economy has done less well than they expected that it is Brexit dragging the economy down, which is importantly to blame. As a consequence, taxes are going to have to go up, even though a year ago, the Chancellor had said that was the end of tax rises for the Parliament.

29:28And if they don't do that, they won't be back on track to meet Rachel Reeves' fiscal rules. So that is a story they are now trying to tell. And the question is, is it going to work as a budget narrative? Well, Brexit is back because there's a fundamental truth, which is accepted by pretty much everyone outside of the UK, which is it has been very damaging for the British economy. Brexit was very damaging for trade. You can see that in the trade numbers with the European Union. And it's been very damaging for productivity. Because of all the bitterness of the Brexit wars afterwards and, you know, the developments inside the Conservative Party, I remember a majority of Tory MPs voted remain, but lots So those people had to end up around like kind of forced confessions in the cultural revolution, had to say, look, knowing what I'd know now, I wish I'd voted leave.

30:18And because the Labour Party under Corbyn didn't want to talk about it and never suspected that Corbyn was a Brexiteer. And because Labour, to get elected, didn't want to reopen wounds with its own supporters around Brexit and expose a kind of gap between, you know, ardent pro-Europeans and amongst sort of millennial support for Labour in the cities and former industrial areas, they're trying to win back. No one wanted to talk about Brexit. It was the kind of word that did not speak its name at the general election. And it's gone more kind of more pervasive than that. You know, the business organisations don't dare talk about it.

30:54The trade unions don't dare talk about it. The newspapers won't really talk about it. The civil service can't offer up advice on the impact of Brexit because ministers don't want to receive it. And yet it is the single biggest economic event that has happened to Britain in the last 15 years. But the one person who did want to talk about it was you. Well, yes. At the time of the election, I remember on this podcast, you saying that they should point to Brexit as a drag on economic growth. And they should be pointing to a Brexit orientated solution. You said they should seize the moment and rejoin the customs union.

31:30And I said I didn't think they were going to do that. But that would have been the right time to blame Brexit coming into government with some kind of prospective move. I mean, the question is, can you wait 18 months and then say, actually, we've now realised Brexit is to blame without it looking like an excuse? And when people say, well, if Brexit is to blame, what are you doing about it? I mean, the government is doing some stuff to renegotiate the relationship, but it's not going to have a big impact upon economic growth in the next five years. Okay, but let's unpack those things. So often people will say, oh, well, Georgia's just trying to refight the Remain campaign.

32:06But it's a bit like tractor production figures in the Soviet Union. The factory says, we're making these tractors. The tractors don't work, and they're not being produced in the numbers that everyone says. They get reported up to the regional commissar who reports them up to the Politburo. And the Politburo says the Soviet Union is doing well because we're producing all these tractors. But everyone in the world knows they don't work. And this is the same with Brexit. You have to kind of confront the issue which every international investor every other country can see, and a lot of people inside Britain know, but won't talk about, a new Labour government was an opportunity to do that, to kind of clear the air without all of the internal baggage that the Conservative Party was carrying at that point, such that you had to have leading Tory politicians say, I'm now a big fan of Brexit, but I used to be against, you know, it was ridiculous, right?

32:56And everyone could see it was ridiculous. And there was an opportunity for the Labour government to do something, which was to pick a real narrative. We discussed this many times. You have to have an intellectual analysis of what has gone wrong that you are trying to fix. And it's not enough just to say the Tories are in charge. They've tried that and it doesn't wash because people don't care whether there's a Labour or a Tory health secretary. They want to know what's your analysis of what's gone wrong in the health system and how you're going to fix it. Titto on the economy. And there was no proper analysis of what had gone wrong.

33:24And therefore there was no proper solution. and I'm not saying Brexit is the only thing that Britain has struggled with in recent years, but it is a big thing and it's led to a much bigger state, much more bureaucracy, much more red tape, less trade, far from being the act of free trade that it's presented as. It's an act of protectionism. And the government could have adopted that narrative. It didn't have to relitigate the referendum itself. It said, we're not going back on that decision, but the way we left was driven by Tory politics, which it was. It was driven by factions within the Tory party.

33:57There were many decent, serious Tory politicians trying to resist it and have a softer Brexit. They were overridden by the kind of combination of the hardline Brexiteers aligned to Boris Johnson's political ambition. And the Labour government could have said, that's the truth. Most people who were independent minded would have gone, yes, we can see that. There's certainly a very strong kernel of truth to it. And then they could have had a solution. And they did have a partial solution, which was to open up trade negotiations with the EU again. But they could have really doubled down on it. I, as I said, why not rejoin the customs union back then?

34:34Can you imagine if we had? Now the Tory party and indeed reform would be an impossible situation of saying to British business, put us in power and we're going to come out of the customs union again. But they haven't done that. But it's still not too late. It's only a year or so into this Labour government, you could go back and make the kind of key foreign policy objective or economic policy objective of the next year a much, much more comprehensive EU negotiation. And I actually think if you look at Nick Thomas-Simons, he's been doing a quite good job. He's the cabinet office minister responsible for this.

35:09He's been doing a good job going around giving these speeches, including in kind of iconic places like Bruges, where Margaret Thatcher gave a speech, and on issues like the ECHR, which are not directly related, but sort of saying, you know, we can use our international diplomacy to get a better economic deal for Britain. If, because of what's happening now, the OBR are saying, calling it out, saying, this is even worse than we thought Brexit, and the Government Bank of England is saying it, and the Chancellor is latching onto it as a reason for why things are worse, then you've got to have a plan to do something about it.

35:44and there are things you can do. I think you have to separate the content of what's being said and whether it works politically as a budget narrative. In terms of the content of what's being said, of course it's the case that Brexit has come out badly, and that's why Andrew Bailey is saying it, and that's why the Chancellor is saying it, and the OBR may be able to say that they were too optimistic about productivity and they've now downgraded their productivity forecasts, although interline with other forecasters. to say Brexit has caused the downgrade is not going to wash. Because, you know, if you look in 2025, it's quite hard for Brexit to be the reason why the UK is doing badly and all at the same time say that we've got the fastest growth in the G7 other than America compared to France, Germany, Italy, who are still all in the European Union.

36:31And there's no doubt that Brexit has had an impact upon our economy, but so has the pandemic. And so has underinvestment in innovation and in capital spending, other things as well. I mean, Rachel mentioned the overhang of austerity. We could debate that. But it's not only a Brexit story. I think for the public... The only thing I'd challenge you on that, Ed, is I think it's wrong to elide the performance of all European countries with the fact that Brexit has been particularly damaging to the UK. You know, the Britain leaving has had a particular impact on British trade. And yes, you know, it was always actually a bit more of a dynamic economy than France or Germany.

37:09and we weren't necessarily sort of tied to their performance whilst in the EU. And certainly leaving the EU has not improved our performance. The thing is, I'm not disagreeing. The reality is since the financial crisis, all big developed economies have grown much less strongly and that included countries like us who left the European Union and countries who stayed in and included America. And America more recently has bucked the trend. The rest of Europe has continued to do badly. there is undoubtedly an important Brexit element in our deterioration of performance. All I'm saying to you is there's going to be lots of economists popping up and saying they've been doing it all week, saying it's not only about Brexit.

37:49That is one point. The second thing is, if you're going to do it, then you need to do it early. I mean, you were from 2010 blaming the Labour government and the financial crisis and Labour spending for what you inherited. Jeremy Hunt, when he took over from Quasi Quarting and Liz Truss, immediately was taking action because he was blaming what they had done. And it is quite hard to have said last autumn, we've done the tax rises we needed. And for Keir Starmer to say phase one is over, we fixed the foundations. And then to claim now to have discovered something, which actually everybody knew all along, which was Brexit was part of the reason why our economy was doing less well.

38:29But there were lots of other reasons. And, you know, it is going to be seen by lots of voters as, well, that is what they would say now because they're having to raise our taxes again. So looking like an excuse is a problem for them. But I think the biggest problem is if you're going to win these arguments, it has to be about the future. You have to have a budget which says we are doing stuff to secure the future. You can say the economy has been weak for these reasons. and you can say public services have been underinvested in for years and you can say we've assessed how bad it is and here is our plan for the next five years the next 10 years stage expectations we have to raise taxes as part of that come with us on this journey and this is the way to people being better off and better public services and judge us at the next election as to whether we're on track and i think if that is the story they're going to tell a forward-looking story about where we're going, that starts to work more effectively.

39:28I think the danger with this narrative at the moment, it looks like blaming the past in order to justify some tax rises, which you hope have done the job. And I think it has to be less about what went wrong only and more about what is the future plan. That is the thing where I still feel when you say they needed an intellectual diagnosis, I think that's right. An intellectual diagnosis, which then drove a forward positive agenda, which was optimistic and ambitious, but staged, it would take time. That's the part of the story I'm still hankering after them telling because, you know, I'm not sure what the vision is and where the growth is going to come from and how we're going to compete in the world.

40:11I don't quite see the story yet. And saying, well, the problem is Brexit, but by the way, we're not going to reverse Brexit and it's not clear what we are going to do. It doesn't fill that gap when we raised taxes in 2001 2002 for the health service for national insurance there was a diagnosis but there was a big prospectus about the argument about the future and that's what they've got to win kirsten was got to have people saying i want that labor future and that is the thing which i still feel is not part of the narrative and i didn't feel in the last week that yet coming through yeah i agree i totally agree with you no it feels very much like they've seen the internal draft of the OBR forecast, haven't they, now?

40:52And the OBR have downgraded productivity. One of the reasons they've given for a downgrade in productivity is the lasting effects of Brexit on trade, which was worse than they had previously anticipated. And they've sort of taken that and said, right, that's our budget narrative. It's a line. It's a line. It reminds me a bit of when I got myself into trouble with an OBR forecast quite pretty early on, I think from memory in like 2011 when and i kind of ggp forecast where it like snowed badly and so we'd had a kind of bad quarter because of the weather and i said it's all down to the snow which you know was not very it wasn't like british economy isn't doing well because it's been snowing it was um the kind of thing that didn't last the morning as a line to take and here here in san francisco the mood is pretty glum about the uk right it's a very depressing sometimes coming as a brit abroad at the moment.

41:42You get people who are just sort of very down on us. And you could construct a narrative that would have credibility here about the UK. The impact of Brexit was much greater than they anticipated. It hit trade, maybe were too slow to come out of COVID. There hasn't been enough public service reform. It's very difficult to get things built. It's not as entrepreneurial economy as it once was. They're not making enough effort to attract or keep wealth creators. We We haven't doubled down on education. We haven't doubled down on science. There's a whole range of things you could construct as a critique of the last period of years, which, by the way, the Labour government could say, we weren't in charge of most of that.

42:23So here's our solution to it. But then you'd have something that people would nod their heads to. And by the way, it got a lot of conservatives. You know, there are a lot of conservatives who say a lot of things were put on hold once we voted for Brexit. we had political chaos endless changes of prime minister public service reform stopped the civil service doubled in size there was no grip on the size of the state taxes started to rise and we kind of lost you know our way and that there'll be a lot of conservatives who go yeah that i agree with that and if kia starmer says that kind of thing and links it to a plan of action which you know instead of like by the way there's now even more chaos because like what's going on number 10 and there's no plan.

43:07Then, you know, I think you would have a way forward, a narrative, which would then give you permission to do potentially difficult, unpopular things in the short term, whether they were tax rises or spending cuts, to kind of restore the public finances. But they have to lead to plus a plan for the future, doubling down on trade relations with the EU, backing enterprise and science, getting these planning reforms everyone's been talking about through and starting to work on the ground, etc. It might be the economy strengthening in three years' time. There's no doubt that for Margaret Thatcher, that helped.

43:37And it also helped for you in 2015, although whether people will be feeling it is another question. You take Jeremy Hunt, he did a good job of blaming the past, but I don't think Jeremy Hunt and Rishi Sienak ever had that compelling forward story. You had the long term economic plan, which, you know, used to make my teeth grind, but it was effective at throwing things forward. I'm not sure whether you won because of that or because there were kind of questions about Labour. But I do think if this looks like a backward-looking line, which is an excuse for tax rises in the hope that you can draw the line and we'll forget about it, I don't think that will work.

44:11I think that you have to get to a more forward-looking, intellectually compelling story about the future, which can be based around turning around problems and staging expectations. What they've done badly in the last year and a half is stage expectations. So it's done. We fixed the foundations. I mean, they were going to take 10 years to fix the foundation and you can't fix the foundations. And then suddenly, say, three months later, actually, they're not fixed. And it was all the fault of Boris Johnson and Michael Gove in 2016. That just doesn't wash and people won't buy it. Anyway, very interesting.

44:44There's so much more to talk about on this budget. And we're going to talk about tax decisions to come. That big question as to whether or not Labour does choose to stick to its manifesto commitments, not to raise income tax, national insurance and VAT, or whether this narrative is edging towards a shift in that manifesto position. Interestingly, a poll in Labour List, which is a sort of Labour internal newspaper earlier in the week, saying Labour Party members all want the manifesto to be broken, or at least two thirds of them do. We'll see whether that's actually where we're going. But we should take a break now, because we're going to come back to these budget issues plenty in the coming weeks.

45:19And then when we come back, we're going to have a quick word about Silicon Valley, You said, is there a boom in AI? The question I'm asking is, is this a bubble and is it about to burst?

45:40So welcome back. Lots of speculation that this is a tech bubble. This is the 2025 equivalent of the dot-com boom and bust, which we saw around the millennium, 99, 2000, 2001, where you had a lot of tech companies setting themselves up, not making money, big rise in the stock valuations, and then a collapse, a bunch of firms going bankrupt. And you've seen a huge rise in valuations, huge capital going into the stocks of, I think, about 10 American tech companies, mostly, not all, but mostly loss making, huge rise in the stock market. And there was a piece of The Economist by the former chief economist at the IMS called Gita Gopinath on the crash that could torch 35 trillion of wealth.

46:40The world has become dangerously dependent on American stocks, she says. And if the bubble bursts, this will be a catastrophe for the global economy in the next year. year. So is this a massive investment and a massive capitalization in rising valuations of loss-making companies powering the American, but let's be honest, international investors' apparent wealth? And is this bubble going to burst? So I think you have to sort of take one step back. So first of all, something remarkable is happening. Artificial intelligence, long talked about, talked about actually in theory over like several hundred years.

47:23And there's a famous thing called the Alan Turing test, which was, you know, which Alan Turing, the great code breaker in the Second World War, set up in the middle of the 20th century about how you could test whether genuine artificial intelligence had been created. So it's been long talked about. And there were, you know, there's been a lot of work on this over the recent decades. When I was chance the Checker, there is one company, only one company that I was contacted by who said, why don't you come in and do a whole day's work experience here? Come and spend time with this company. And this is not the same as going on a kind of factory visit in a hard hat or going to a bakery on a kind of TV visit.

48:01This was genuinely come in and just listen to what we do. And that company was DeepMind, the artificial intelligence company, which I spent a day with as chancellor. Before it was well known and is now part of Google and a big part of their efforts. And the two co-founders of that, Demis Hassabis and Mustafa Silliman, run the two big operations now at Google and Microsoft and Demis got the Nobel Prize last year. So artificial intelligence has been around as an idea for some time. And people have been talking about it as a sort of serious economic force for 20 years. But what has happened in the last three or four years, very recently, has been an absolute explosion in the valuation of some new AI companies.

48:43So you've got some original listed companies on the stock market, so-called Magnificent Seven, like Microsoft, Apple, Google, Meta, all very well known to people. More recently, NVIDIA, the company that provides the chips for these companies. And these companies all have over a trillion dollar valuations in the stock market. I mean, to put that in some context, that's basically each one of them, certainly when you get to the bigger ones, is bigger than the entire FTSE put together in Britain. All the British companies put together, and one of these companies can be bigger than all of them. And they are very profitable, and they are generating huge returns for their taxpayers, for their investors, but they're also plowing money into AI.

49:30And they're building these extremely expensive data centers, which require huge amounts of energy as well. So they're having to build nuclear power plants and other forms of energy to power them. But behind them, snapping at their heels, are these new private companies, of which two of the most famous are Anthropic, which actually we should note that Rishi Sunak in the last couple of weeks was announced as he's going to have a role advising them as well as his other advisory jobs at Goldman Sachs and Microsoft. And his new column in the Sunday Times. New column in the Sunday Times. And OpenAI is the other one.

50:05And these are private companies. You can't just sort of look at the stock market and say, well, how much are they worth? But the estimation is that OpenAI is now worth 500 billion pounds. That is the most expensive private company in history. And it was only created in 2015, and its valuation has rocketed in recent years. And so you then have this question of, like, is it worth it? You know, is that really the value of the company? And if it isn't, this is the kind of the argument about it being a bubble. It's all kind of supporting itself because NVIDIA is lending money to OpenAI to buy NVIDIA chips.

50:46OpenAI is a big part of the Microsoft valuation because Microsoft has a share in OpenAI. And, you know, if the kind of the emperor's got no clothes moment happens, then all of these valuations will collapse. And these are at the heart now of what is driving the American stock market and therefore all these pension funds and personal investors all around the world who have done pretty well in recent years. But I'm going to call it, I just don't think it is yet a bubble because I think if you look at the fundamentals, you know, the opportunity here for these companies is so enormous. The potential profits that lie out there are so huge.

51:24The new markets they might create are so vast. that you can absolutely justify why people think they are worth what they are worth. And it is a bit reminiscent to the conversations I used to have when I first became an MP with people saying, I don't know, this Facebook, this Google, they're not making any money. Aren't they ever going to be worth anything? And then there was a dot-com crash in 2000, and that was the end of tech. Now these companies are, as I say, bigger than all the rest of the companies put together kind of at the top of these stock markets. So I think that you can say the same about these new tech companies.

52:01And by the way, the fact they're new and the existing companies have been unable to sort of stop these insurgents also puts to bed the myth that there's now a monopoly at the top of American capitalism and new companies can't emerge. Well, I'm going to disagree with you and say that I think there is certainly bubble-like activity going on, although I'm very unconvinced by the former chief economist at the IMF that this is suddenly going to lead to some huge global destroying crash. Before I tell you what I think, we asked ChatGPT whether it thinks there is an AI bubble going on. And here's what it told us.

52:36A lot of people are debating that. On one side, the valuations of certain AI companies have skyrocketed, sometimes based on future potential rather than current earnings, which can definitely resemble a bubble. On the flip side, AI is also creating real groundbreaking changes in industries. So there's a strong foundation as well. It's kind of a complex landscape, and it'll be interesting to see how it all plays out over time. So I thought chat GPT there was agreeing with me, but I think it was simply saying, yeah, what a good question, and ended up sitting on the fence. By the way, isn't that amazing?

53:12I mean, that voice is computer-generated voice. Very naturalistic, very human. Didn't say much, though, did it? Here is my interpretation. As you say, this is more than simply new startups who aren't making money. This is massive investment from a number of companies who are already proven moneymakers with big track records, whether that's kind of Elon Musk and Tesla or Microsoft or Google or whatever. Secondly, the investment is real. It's having a real impact upon growth in America at the moment. And it may well be these huge investments in these data processing centers that they may turn out to have big productivity effects.

53:54I kind of think they will, and that many of them will turn out to be good investments. But I think the reason why it's a bubble is there's no doubt there's a whole bunch of people doing this in the hope of returns. And a bunch of them are going to get it wrong. And a bunch of them are not going to get the returns fast enough for the market. And at a certain point, there'll be write downs and losses and companies crashing. But the question is, what emerges at the end? if it's a bubble which bursts, then you end up with nothing. I think it's much more likely what will happen is there'll be a number of these companies go by the wall and some big falls in stock prices and people will lose quite a lot of money.

54:35But in the end, you emerge out of it, some big, powerful contenders who are dominating this industry. I think the right way to think about it is, you know, it's like musical chairs, and you want to be the person still in the game at the end, but you have to keep dancing. It's like there's a lake and I've got a coffee shop by the lake. And suddenly I realise this lake is about to become massively popular. And so what do I do? Do I just wait and see whether a whole bunch of other people come in and set up coffee shops? Actually, the rational thing to do is to myself build five more coffee shops in my name with my money all the way around the lake you know at different corners of the plot because I'm going to squeeze out the competition I'm going to make sure that when this lake becomes really popular it's my shops who get the custom and it may well be a bit loss making for me and it may be that I lose some money on two or three of them but if I'm still there standing when the music stops and others failed or came along and never made it I'm the one who dominates and we've discussed this before on this podcast about the AI companies and the big AI companies, they quite like government regulation.

55:45They don't like competition policy. They'll have been rather pleased to see the British government sounding very anti-competition policy earlier in the year, because what they want is to try to make sure that these small arriving upstarts are not the ones who prevail. The big guys want to prevail, and they're willing to spend quite a lot of money and maybe make some quite big losses along the way. Now, that may be wrong, what I said. It may be there's no productivity gains, in which case it will all be wiped out. It will be a bubble. But even if that doesn't happen, and even if you have some big guys who emerge at the end strong and powerful, there's going to be loads of casualties along the way and lots of wasted money.

56:22And I think the thing government has to remember is that you want to make sure that you aren't de facto, by listening to these big companies, making it easy for the strong and the powerful to dominate a market and stop the new guys having a chance. And so far, that has not been the way it's worked out with stock market valuations. As you said, lots of the new guys have been getting the run of the market. But unless they get a fair run at the opportunity when it comes to the actual business, you could have massive tech consolidation and massive tech power, which comes through this bursting of bubble-like behavior across this market.

56:58So that's why I think there's some bubble stuff going on. Yeah, I think I would draw a distinction between a bubble in, for example, tulips in Amsterdam, where suddenly everyone goes, fundamentally, like, these tulips are not worth what we're paying for, or the South Sea company stock is not worth what we're paying for, or even potentially in gold, right, which has just seen a big drop in this price, having gone up and up recently. You know, people call out the kind of intrinsic value of the gold. Well, I think you're talking about it is something different, which is there's clearly a massive transformation going on in industry created by AI.

57:31So, you know, it is disrupting legal services, accountancy, consultancy, banking, financial services, health care. You can imagine brand new legal firms emerging that put the other legal firms out of business because they're based on AI work and so on. And so there will be winners and losers. It's a period of massive creative destruction in which you might well back the loser, but there will be big winners as well. And even among the big tech companies, it's not really clear who the winners are going to be. They may be huge and they may feel like they've got moats, as you said, or felt like they've got moats.

58:03But if you're Google sitting on top of your search billions, suddenly you've got these other companies that, for example, OpenAI announced yesterday it's going to have a new search engine. If you're Microsoft, you've been dominating in software. Well, you know, who else is going to come along with new software provision? And you're very dependent now on your relationship with OpenAI. I mean, all of these things are really interesting. And at the moment, they're all benefiting. Where I agree with you is they can't all win and there will be losers. Not sure that's the same as a bubble. It's just a period of big churn in which there are going to be some spectacular winners and there are some spectacular losers as well.

58:42But I think it's more than that, because at the moment, nobody has information and nobody wants to be left out. So people are piling in, hoping they're backing the winners. And what that does is it pushes up valuations across the board. And the bubble is that sort of sense of kind of the exuberance pushing up everybody's prices. And at a certain point, there's going to be some setbacks. and when the setbacks happen, those companies will go to the wall and collapse and people will be bankrupted by the collapse of their share price, but everybody else will take a hit. And in the end, as that bubble-like behaviour unwinds, the question is, where are we left?

59:20I think most people would say these stock prices are currently inflated, but they don't think it's going to crash to nothing because it's real. But everybody at some point will take a hit, but who is going to be the guys who do well and the guys are going to lose? And nobody kind of nose. And so at the moment, it's all a bit bubbly, and it's all a bit exuberant. But it's not based upon nothing. It's not a Ponzi scheme. It's not made up. It's not like the dotcom bubble, which turned out to be kind of much more made up at the beginning of the millennium. I think it was later that you saw the real increases in valuation.

59:51So is it a bubble which is going to crash, which means there's going to be a 35 trillion wiped up the stock market? I don't think so. That's why I I don't think it is simply a bubble which will burst, but I think there is a lot of bubble-like behaviour going on here. And in the end, there will be a market correction which will reduce the stock prices across the piece. But within that, there'll be some big winners and some big losers. And I think what public policy has to do is to try to make sure that we want some of the big winners to be in Britain or employing people in Britain. But we also want to make sure that this is a global market where the best ideas win rather than simply the people with the best lobbying organizations who can afford to, I don't know, employ Nick Clegg or whatever.

1:00:36I threw that one in so that we can say, oh, God, he keeps going on about Nick Clegg. I'm sure Nick Clegg will do really well out of it. And, you know, good on him. Yes, he already has. But he'll be touched by your concern. And I agree with you. We could definitely do with some of this exuberance in the UK right now. We definitely could. I'm feeling it a bit here on my trip to San Francisco. But listen, that's all for our podcast this week. We'll be back on Monday for Ex-Minister's Questions. And don't forget, you can hear it earlier and ad-free if you become a member of our kitchen cabinet. You can find a link to subscribe in our show notes.

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1:01:32Thanks for listening to Political Currency. This has been a Persephoneca production.