112. What Trump’s Economics Means For Us

0:11Hello and welcome to The Rest is Money with me Robert Peston and me Steph McGovern. Now I'm going to start with a very straightforward question I'm going to ask you, right? I don't know if you noticed, but a Fox News presenter, Pete Hegseth, has just been appointed Defence Secretary or will be the next Defence Secretary by Trump. Now, as an ITV presenter and you're a presenter, what jobs do you think Keir Starmer should give us in his cabinet? Because it's pretty obvious that we are now the qualified people to run the country. Yeah, I mean, I have got to do the levelling up stuff. So I've basically got to have Angela Rayner's job.

0:44Oh, she's Deputy Prime Minister. I mean, listen, I want you as Prime Minister, not Deputy. There's no deputy about you. You've got to be the Prime Minister. Yeah. And what, are you going to be Chancellor? The nation's not quite ready for me. So what are you going to do? Are you going to be behind the scenes then? Are you going to be like... Oh, yeah. OK, we'll be the Emanonscaries, just pulling all, you know, just pulling all the strings. Yeah, you're absolutely right. That's got to be that. There's a lot of people who think you already do that, don't you? Oh, yeah. You've read those conspiracy theories, have you?

1:10And he's also, as you'll be aware, confirmed that Elon Musk will be in charge of making government more efficient. And he's working in partnership with somebody you and I have talked about in the past, Vivek Ramaswamy. What do we reckon about those appointments? Yeah, it's really interesting. Obviously, Elon Musk was going to get in there, wasn't he? But the fact that he's going to be what he's tasked with things like, you know, getting rid of the bureaucracy, all the excess regulations, wasteful expenditures, and he's going to restructure federal agencies, that type of thing. And between them, they're going to do all this.

1:43Does he know anything about this? I mean, maybe he does because to run as many businesses as he does, and let's face it, they're pretty diverse. You've got everything from Neuralink that's putting chips in your brain to obviously sending rockets to space and cars and everything, you know, a social media platform. He knows how to run big businesses successfully. If he can bring that to the bureaucratic federal agencies and everything else, maybe he's on to a bit of a winner here. I mean, it sounds a bit scary, but I don't know. I've always been a great advocate of get your skills from business in government.

2:20If you've got as many people in there who know how to run businesses, that will inevitably help the economy, won't it? I guess so. I mean, what I would say is if you look at the kind of people who have been appointed from business to roles in British government, there's normally a massive culture clash. It's quite hard actually to identify that many people who crossed from business to politics who've made a really positive contribution in the UK. And I think the other thing I would say about Musk, actually, if you look at his track record, whether it's SpaceX, whether it's Tesla, he's very, very good at raising colossal sums of money and then spending that money.

3:01I mean, you wouldn't argue. I mean, many people think he's got amazing engineering skills, but I'm not 100 % certain that his track record is necessarily in doing more with less money. I mean, the key thing about him is he makes these huge bets with enormous sums of money that he raises. And if you look at Twitter, what he now calls X, he did sack loads of people, questioned whether it's actually a better, more rounded, more efficient service. I mean, there've been quite a lot of breakdowns of X since he took charge. So we'll see. I mean, the answer is it's a bold experiment. and the only other aspect of it, which I'm struck by, I'm sure you were as well, is they're calling this new operation DOGE, the Department of Government Efficiency.

3:50We've both been remarking on how totally obsessed the United States is with crypto. And as you'll remember, the great sort of saga of the Dogecoin, everything about America seems to be sort of crypto these days, including the Department of Government Efficiency. It's very weird, all this. Yeah, you've become obsessed with crypto, you know. I have become obsessed. I have become obsessed. We'll have to do a special on it. But the other thing is, you know, if it was here, there would be a million cries about the conflict of interest. Because, for example, you know, Musk's Tesla company, the shares in that have jumped like 50 percent, haven't they, over the past month?

4:28Just off the back of, you know, his support for Trump. And you wonder as well about all the things he wants to do. You know, he wants to colonize Mars, doesn't he? Are we letting a madman have free reign to be able – because the only thing essentially stopping Elon from doing whatever he wants is regulation, isn't it? So if he's now in charge of regulation, isn't there a massive conflict of interest? Is this not what could lead to some type of – I actually sound really alarmist, so I'm not going to say the next part I was going to say. But it's dangerous, Shulie, to have – as successful as he is, and he's a man worth, what,$300 billion or something, to now be in charge of regulation as well.

5:12It's really, you know, if he's on a one-man mission, that is quite scary. Yeah, I think that is a very apt synopsis. And there are just sort of weirdnesses also in terms of some of Trump's big positions. You know, Tesla has rode the wave incredibly successfully of trying to reduce carbon emissions. The whole electric car thing is all based on the notion that climate change is not only real, but a threat to our existence. Donald Trump constantly raises, well, he constantly says he doesn't really believe in climate change. And we do expect him to pull out the Paris Agreement. We expect him to row back on America's climate commitments.

5:59And yet the whole success of Tesla is predicated on the idea that we're all going to have to have electric vehicles to combat climate change. So there is a sort of contradiction there. And it is interesting that the Tesla shares have risen quite so much against the backdrop of the election of a climate skeptic president. So obviously the markets think Elon Musk is more important than Donald Trump in terms of driving that policy. I mean, I also slightly assume that one of the reasons the shares have gone up is because Trump has promised to slap all these tariffs on Chinese exports. So plainly, the challenge from Chinese electric vehicles, if he puts the 60 % tariffs on Chinese imports, and I think there will be significant tariffs on Chinese imports, and indeed on electric cars built in Mexico, then obviously that's brilliant for Tesla in the sense that obviously there'll be far less competition within the United States or price competition for Teslas within the United States.

7:00I mean, these things are complicated, though, because I would assume that in Teslas, there are tons of Chinese made components. And so actually, the cost of manufacturing a Tesla will go up significantly if he slaps these tariffs on. So it's not as though, you know, Musk gets a total win from tariffs. So many American-based manufacturers rely on overseas made parts, particularly Chinese made parts. So there is going to be a massive squeeze on their margins. Yeah, the supply chain is a big part of this because no product these days is made from just one country. It's so many things coming from different parts of the world.

7:41I'm quite interested in what's happening with steel and aluminium. I think this is going to be like the first test of the tariffs. So obviously, given I'm from Teesside, which is a real heritage with steel, I've been quite interested about what's going on in that market. And you remember when Trump came in the first time, he put tariffs on steel, 25 % on steel. I think it was about 10 % on aluminium. And then in retaliation, the EU brought in tariffs for US imports. Then when Biden came in, he was like, we can't have this. So he then kind of reached a truce with the EU to bring in a quarter system if they got rid of the tariff on the US imports into the EU.

8:22But that runs out next year and it's looking like there's a bit of debate going on behind the scenes over what the EU are going to do. It's going to be just after Trump's inauguration. And if he imposes again these tariffs on steel, for example, what will everyone do to retaliate? And I think this will be a testing case. And well, what's going on in his head is probably too much of a big question. But what he's going to do on tariffs, this might be the first big test of it, I think. No, it's a huge test. There's also a huge challenge here for the UK. I mean, we're a very open economy, one of the most open economies in the world.

9:00We are massively dependent on trade in both goods, but more importantly, in services. and there's lots of talk that somehow the British government, because of the so-called special relationship, might be able to get a carve out from these tariffs that maybe if he imposed, I don't know, up to 20 % tariffs on EU exports, the EU trade, maybe the UK could be exempt from that. But that would be complicated in terms of our relationship with the EU. Just to remind listeners, as a nation, our single most important trading partner is America. But as a trading area, our single most important trading area is the European Union's single market, even though we're not members of the single market.

9:51Now, there is talk that if we got, let's say, some kind of a free trade deal with Trump, a carve out from the tariffs, the EU would then punish us. They would in some sense say that we've got an unfair competitive advantage and they might then start selectively imposing tariffs on our trade with them. So it is messy. It is messy. And the other thing as well that worries me is what we have to commit to if we do any type of deal with the US. Because, you know, do you remember chlorinated chicken was a big thing, wasn't it? This chicken that's washed in chlorine, which the majority of chicken made in the US and exported is produced that way.

10:31And we banned it back in the 90s. So might we have to accept a deal where we have to allow chlorinated chicken to be imported into our country in return for, I don't know, not getting a tariff on other things that we sell there that we rely on? So there's a lot that's at stake here, I think. Massive. And I mean, quite apart from, we talked about this before, the likelihood that there'll be a global slowdown. If he does impose these tariffs and we move to an era of protectionism, that will undoubtedly lead to lower global growth. It'll also certainly lead in the short term, but probably longer than that, to higher levels of inflation.

11:10There'll obviously be a one-off impact of putting tariffs on in terms of prices. But more than that, the more friction there is introduced into global trade. Truthfully, we've seen this and we saw this with the supply chain shocker after COVID. it is likely to ripple through into semi-permanently higher levels of both inflation and interest rates. So I think we do have to be conscious that this is potentially a hugely significant moment for the global economy and indeed our prosperity. And obviously, everything that's going on in terms of all this will have a big impact, as you say, on the UK.

11:51And for Rachel Reeves' plans, we've had the budget, but how is it going to be impacted by what Trump does and what agreements are made or not made and what happens with inflation and that type of thing? But there's still a lot of fallout from the budget, isn't there? There's still everyone trying to work out what it means for them, businesses trying to get themselves ready for tax changes and the like. And I know, Robert, you've been getting what you described as bellyaching from business. What have they been saying to you? Well, there's just a lot of gloom around the place for business. I mean, they were wooed rather successfully before the election by Reeves and Starmer.

12:31They bought into Starmer and Reeves' promise of economic stability, but also into the promises that they would create the conditions for a faster growing economy. And there's just quite a lot of disappointment around the place about what the budget has done, in their view, to undermine the growth prospects. We pointed out that despite a budget that was, to use the technical term, a massive fiscal loosening, that's a stimulus for the economy, nonetheless, the combination of measures left the Office for Budget Responsibility saying that the UK economy, after four to five years, would be no bigger than it otherwise would have been.

13:19i.e. you get a sort of sugar rush of growth in the short term and then a flattening. And that is actually a forecast that most businesses see as a recognition of reality. You know, they are very many of them anxious about the impact of this national insurance increase. Yeah. And this is really pretty much across the board. On a kind of, I guess, local level, my mates who've got businesses around in the area I'm in or, you know, the various people I know who've got businesses, particularly in retail and leisure and hospitality, are really stressed about the business rate change. That's the thing that's worrying them the most.

14:02And do you remember when we said this to the Chancellor? So as things stand, you get a 75 % discount on business rates if you're in one of those three areas. I said retail, hospitality or leisure. and that was off the back of COVID and it was to try and help them having had such a hard time during the pandemic when of course lots of people couldn't do any of those things. So it was to help them on that. It's been at 75 % for a couple of years. It was going to end, the Tory plan was for it to end next April. Then obviously Rachel Reeves announced that they're not going to completely end it, it's going to go to 40%.

14:34So you get a 40 % discount on your business rate in those areas, not a 75 % one, which she argued, well, it would have been nothing if it wasn't for us. And I think that's a bit disingenuous because you could have extended the 75%. But irrelevant of that, the point is that's quite a lot of money for a lot of businesses that are not necessarily making loads of money at the moment because of the cost of living crisis and people not spending as much in those areas. And I mentioned many podcasts ago about this fitness business that I'm working on at the moment. We were due to open about a year ago, oh, but because of negotiations with the council, don't get me started on them.

15:12It's taken ages and ages and ages. And in that time, our costs to start have rocketed. And then on top of this, you've got the business rates and on top of it, a million other things. And it's like, it stifles startups and it stifles people who are in businesses which are not necessarily super profit making, but are ones that are providing local employment and are providing services and things to people. But yeah, that's what everyone's talking to me about here is I don't know how I'm going to pay this increase in business rates. Given how Labour massively reached out to business before the election, and actually they're still having meetings with business leaders.

15:53I am surprised by how many business leaders say to me, they're just not listening to us. Fair. Right. They're slightly of the view it's become a PR thing that they want to be seen to be talking to business. But I was talking to rather an innovative business leader only yesterday who just said, I'm trying to get messages through to them about what works and what doesn't work. And they just won't listen at the moment, which is slightly redolent of a government that is feeling a bit insecure and a bit defensive, which is a concern. And then there's a second point, which is, do you remember when we interviewed Rachel Reeves only the other day?

16:31She said to us, well, I'm going to do all these other things to get the growth rate up. One of the things that she pointed to was she would put in place new arrangements that she felt would encourage long-term investors, pension funds in particular, to invest far more in the UK. Okay. So tonight, just a few hours after this podcast has been published, the Chancellor will give her Mansion House speech. This is a speech that chancellors give once a year in the autumn where they set out their big plans for the economy. One of the things that she will be talking about to these grandees from finance will be her proposals to encourage pension funds to invest more in the UK.

17:20And just by way of background, we talked about this before. 25 years ago, pension funds had half their assets in the UK. Now, on average, UK pension funds have about 4 % of their assets in the UK. She will talk about stuff we already know, which is she wants local government pension schemes. I think there are several hundred of them in total. She wants them to consolidate and become much bigger. She thinks on the Canadian model, that will encourage them to take more risks. If they take more risks, maybe they'll invest more in the UK. But in general, my sense is a bit like Jeremy Hunt. They are being incredibly timid in terms of the measures that they want to take to encourage pension funds to invest more.

18:11And I have to tell you, from what I understand about where they are, I think on the margin, it will have a very small impact on our growth rate. I mean, I think it's a good idea to encourage UK investors to invest more in the UK. But unless you are bold in terms of your reform, truthfully, it's not going to make very much difference to the UK growth rate. I don't think they are being bold enough. And actually, there's a chicken and egg thing here, which is in the end, UK pension funds will invest in the UK if they think that the growth prospects of the UK are improving. And actually the reasons why they'll invest in the UK are exactly the reasons why overseas investors will put their money in the UK.

19:00So they've got to be more imaginative in terms of how they improve Britain's prospects. Yeah. Where we're seeing a lot of, I guess, imagination is the plans for clean power. So So should we have a chat about that after the break?

19:38Welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Heston. Now, I think we wanted to talk a bit about the more ambitious plans for reducing CO2 emissions and what that means for clean power. Yes, we are. Of course, it's the COP29 summit at the minute in Baku, isn't it? Interesting, there's hardly any big hitters there, are there? Because obviously you've got Kia Starmas there, but there's no German chancellor, no EU president, no French president. Only other G7 person there is the Italian leader. Someone is there from the Taliban, though, which is a bit of a shock. Their thoughts on how we solve climate change.

20:20I think there's a few other things I need to work on before that. I think their plan is to take us back to the Industrial Stone Age. But in terms of what's happening, as you say, we've got this plan to have clean power by 2030, haven't we? and there's been this report out from the National Energy System Operator, which is this kind of independent body whose job is to kind of advise the government on clean power and how they get there. And they're saying clean power by 2030 is achievable, aren't they? They're saying like the pipeline of projects already exists, the necessary kind of expansions already begun, but it's not going to be easy.

20:58So they're saying the foundations are in place, but it's not going to be easy. And I guess the question is, is it really achievable? I mean, it would be, and is it something we should be doing? Is this the right thing to focus on? What do you think, Robert? I mean, the backdrop is that Keir Starmer said that he wants the UK's emissions to fall by 81 % compared to 1990 emissions by 2035. And that's a more ambitious target based on the recommendations of the Climate Change Committee. It was at 78%. It's not a massive increase in reducing emissions, but it's significant. And the lion's share of that reduction in emissions would come from the government's commitment, as you say, for all power to be generated in a clean way by 2030.

21:51And having now read in detail the NESO plan for this. So the National Energy System Operator. That's right. What I'm struck by is how many really ambitious things have to go right to achieve that target and achieve that target without massively putting up the cost of power to all of us. Because one of the other things that the prime minister has said is he wants clean power to be achieved without our bills going up significantly. And if you read the report, what it says is it is doable to become a clean energy generator by 2030. But my goodness, a number of things have to go right. So, for example, in terms of network development, I think they say something like they would have to, in the course of five years, put in place power connections that are double the amount they achieved over the previous 10 years.

23:05right? And that's against a backdrop where as yet there are still massive planning restrictions on all of this. Then there's a whole raft of things they want to do. Massive expansion of offshore power. They want offshore power to be the biggest generator, but they also want in order that we are not too dependent on a small amount of gas fired generation. They also want investment in hydrogen. They want investment in carbon capture and storage so that when you generate using gas, the CO2 that's emitted is sequestered and buried and is not emitted into the atmosphere. Obviously, they want a lot more onshore.

23:51They want a lot more solar. And the magnitude of the investment that we're looking at is off the charts. They want this achieved on the basis that the cost of all the equipment that they're going to need to buy doesn't go through the roof. The problem with having to do so much in so short a time, and it's sort of basic economics, is you drive up the price not only of the equipment that you have to buy, but you also, given that we haven't really got the skills in this country, you're probably going to drive up the cost of employing the people to install all this stuff. So that in itself is a major challenge if you want to keep the price of this down to levels that are no higher than the kind of power we're paying for at the moment.

24:41I mean, at the end of this, there are some fantastically attractive potential prizes. One of them is if we reduce our dependence on imported kit, if for example, we can manufacture more of this stuff onshore rather than importing it all from China, then we might have a world-leading industry, an export industry, which would allow us, for example, to export, you know, whether it's turbines or new hydrogen kit, or at the moment, we're nowhere in the whole solar panels business. China dominates it. But, you know, there's the potential for developing a whole new important manufacturing industry. And equally, at the end of it.

25:23It's obviously a good, if we can reduce our CO2 emissions, although compared to, for example, America and China, in terms of making a big impact on global warming, our role is very much as an influencer rather than as an industrial country that can actually make a significant impact on global warming, because our economy is just too small. And then there's the final benefit, if we can get it right, which is we would be less vulnerable to the kind of oil and gas shock that we saw when Putin invaded Ukraine, that if the vast majority of our power is in the form of renewables, then whatever happens to the price of oil and gas, we are to an extent protected.

26:05The price of energy will simply be whatever the marginal cost is of generating stuff in the North Sea. All of that is definitely good for the economy. But the idea, in my view, that we're going to hit this target by 2030, it's just for the birds. There's no way all of this is going to go right by 2030. So the question I put to you really is this, do you think that it is better to be ambitious and fail? And I think there is an argument for that than not to try at all. I think, yeah, it depends what that failure looks like though. Is it giving up? Is that what failure is? Or is it we've genuinely tried our hardest and external factors have stopped it from happening?

26:48For example, just on the point of cost, so you'll see it's just been announced that they've given the green light now for these five, what they call subsea power cables. So these are these high voltage power cables, which allow them to get the electricity from these offshore wind farms to lots of different places. with the idea being if we have this network under the sea, we'll be able to get power that we produce from our wind farms, not just to our country, but to other countries as well. And with the hope being that we'll be a green power exporter. But if you look at this project, yes, it's ambitious, but it is going to add money to people's bills in the short term because I've already said in order to fund it, we're going to have to whack on a couple of extra quid on everyone's energy bills.

27:42That's one project. So is it going to be us facing the short-term pain of bills going up for long-term gain or is it short-term pain which becomes long-term pain? And that's the other element to all of this. How much do we, the people who are here now, have to sacrifice for the next generation. And maybe it's right that we do. Maybe we should all be paying more for our bills and then let's get the system to the best it possibly can be, which will then help us all in the long term. So two or three points I just wanted to pick up on there. One is, one wants to see a bit more joined up thinking in government.

28:19So I was talking to an executive who runs one of the biggest power companies in the UK, who pointed out that the so-called contracts for differences, which is basically the price that is agreed with producers of new clean power, and in this case, these are wind farms, the contract for differences prices that the government has agreed is above the current energy price, right? So on the one hand, the government is saying price isn't going to go up, but they've just agreed with the suppliers of this power, prices that are above the current price. So there is a contradiction there. The second point, which was very interesting in this incredibly ambitious report on how you get to clean power, is that it says that it needs the government to really take more action to change consumer behavior.