147. What’s Wrong With Labour’s Welfare Reforms?

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1:14Hello and welcome to The Rest Is Money with me, Robert Peston. Annoyingly, Steph's still away. But the good news is that Andy Haldane is still with me. Goodness only knows how he puts up with me. But anyway, there we go. Lovely to see you again, Andy. And just to remind those of you who weirdly don't know, he was for years chief economist at the Bank of England, actually spent pretty much all your career at the Bank of England. Man and boy, Robert, man and boy. Until he became head of the Royal Society of Arps, which you're stepping down from in the summer, isn't that right? Actually, before we get on to why we're here, why have you had enough of the RSA?

1:53Well, it's not that. RSA's got great guns, actually. I wouldn't have left if it weren't. So it's in great shape. But I thought it was high time for a lie down, to be honest, Robert, for at least six months. Have you ever had a lie down in your life? No, first lie down. And I thought, if not now, then when? So I shall be watching a little too much cricket here in Australia. That sounds quite fun. Yeah. We're hoping that while you're watching cricket, you might have time to come back on the show. But now let's take advantage of the fact that you're here. And I want to start by talking about the, God, I hate these phrases, the fiscal event that is coming up at the end of March, March 26th.

2:37Actually, are we allowed to call it a fiscal event? I can't even remember what Rachel Reeves has currently sort of said is the sort of nomenclature for this thing. But anyway, what's happening on March the 26th is we're getting the latest Office for Budget Responsibility assessment of the medium term fiscal health of the UK, of the government. not the terrifying long-term stuff they do. And it includes the forecast of whether in five years' time the government is meeting its fiscal target of reducing debt in five years' time. We already know that this will be, despite the fact it is not supposed to be a budget, It will still be a significant policy event because it will set the framework for these incredibly important negotiations on the resources available to public services in the so-called spending review.

3:51Next week, we will get what will be very controversial proposals to reform welfare. And in particular, we will get proposals to cut the amount of money that goes to disabled people. We're going to come back and talk about that in some detail. But I just want to start by asking you whether it makes any rational sense to have a government massively change what appears to be coarse when it comes to things like public spending on the basis of one institute's forecast about what will be happening to government debt in five years time. when we all know that that forecast, in practice, will turn out to be wrong, because forecasts always are.

4:50So what the hell's going on here? This is basically like Alice in Wonderland. It is rather. We don't just know with certainty they'll be wrong, but they'll almost certainly be very wrong, and therefore whatever's done now will almost certainly not age well. I mean, just to bring home the Alice in Wonderland point, I mean, it cannot be the case that you reconsider all your spending and all your tax plans on the basis of a forecast. Imagine the OBR was producing weekly forecasts. We wouldn't be updating the tax and spending plans on a weekly basis. And having pre-committed the Chancellor to one fiscal event.

5:27That's one budget. One budget in the autumn. This appends that very notion. I mean, there haven't been big perturbations in the economy particularly. particularly. But even small ones require a rethink of the taxes. And that is locking yourself into that system. I think that way madness lies. And in fact, we'll end up probably with three fiscal events this year. CART rather underlines the point there. So I think... I mean, well, it could be, you could call it more because in itself, the welfare paper will be a sort of fiscal event. And we've got the comprehensive spending review. And then we've got the strategic defence review, which will be published.

6:04These are all fiscal events, right? Your fiscal events, and all come with some cost. Otherwise, kind of, what's the point? So I think recommitting to the once-a-year budget... That was a good thing, wasn't it? Good thing. And building in tolerance around that, a degree of tolerance around that. But just to be clear, why do you think... I still can't really get my head around it. Having said that it was really important only to have one budget a year, why couldn't somebody at the Treasury just say to her, if the OBR is producing this forecast in March, you're at risk of this turning into another fiscal event and it's going to undermine everything you say that you want to do.

6:50I personally think the OBR should not have been asked to produce a half yearly assessment. I think if they were committing to one budget a year, they should have simply said one OBR forecast a year. Why the blooming hell isn't anybody bright enough round there to realise that they're creating this ridiculous rod for their own back? Well, I think when push comes to shove, what shows through are true Treasury instincts. And when this arose earlier in the year, and speaking to Treasury officials, remain nameless, pret the innocent, the point was made, we need to make clear that the fiscal rules apply at every moment.

7:28At every moment. But of course, the logic of that takes you into a totally balmy place where you have a bad day on the bond markets, you're having to tighten fiscal policy in response to it. I mean, this is like sort of mad fundamentalist religion. I mean, the fiscal rules. I'm sitting here now for the first time in my life, absolutely terrified on a personal level that I may personally be breaching the fiscal rules. This is just off the charts bonkers. It certainly needs to rethink both the point at which you form an assessment, a long-term assessment of what is needed to allow some tolerance around that during the course of a year for understandable deviations.

8:13When there is, for example, a radical shift, and you could argue, I mean, the charitable case would be as follows. Not the little bounciness in bond markets in January, but look. Look, if you have a financial crisis like 2008. A financial crisis. Or you could argue the defence pact we thought we had has been breached. And this is a brave new world that needs a complete rethink of both the composition and the quantum of spending with defence and security, much as Germany has done. So that would be making a virtue of a global shock. Don't waste a crisis. Actually use the crisis to say we need more flexibility to invest and spend more.

8:57But they are doing precisely the opposite of that. They are saying these fiscal rules are sacrosanct in all circumstances and therefore we can't borrow more. We have to borrow less. We can't spend more. We have to spend less, which is precisely the opposite of what these circumstances require. They are cutting aid spending from 0.5 % of GDP to 0.3 % of GDP. And, you know, this is help for some of the most vulnerable people in the world. It's also, some would say, massively in the British interest to continue to, not only for humanitarian reasons, but because when you spend on development in developing countries, these are countries who will be better disposed towards you in the long term.

9:42And, you know, there will probably be economic benefits to the UK from, you know, having partnerships with these countries of an economic sort down the road. And it's sort of worse than that, this cut in the aid budget, because, of course, a big chunk of aid spending is actually devoted to the UK and housing asylum seekers. And the numbers of asylum seekers coming to this country is increasing. So the actual amount of money available now to spend on places like Sudan, Gaza, our ability to do important humanitarian stuff is being hugely limited. But anyway, the point is, Keir Starmer took the view not that he would adopt your very sensible approach, which is to say, actually, you know, the insecurity of the world creates the imperative that we've got to essentially look at our fiscal constraints.

10:34Instead, what he and Rachel Reeves have said is the fiscal constraints are our religion. We're never going to change those. So if we need to spend more on defense, we're going to cut spending elsewhere, which feels like madness. If we're living in an economy where demand was booming and inflation was getting away from us, then the case would be easier to make. But actually, this is an economy that is being treading water at best for three years, Robert, where confidence is low and the risks to growth fairly and squarely tilted to the downside. I think most would say it is hard to make sense of that if there were a moment, if cover were needed for doing something differently on the fiscal front, then it's there.

11:21It's ready made in the form of Donald Trump. Others have already taken that different path. Germany, as we've said. Germany, as we've said. Yes, it caused what seemed like a fairly temporary blip in debt markets. But they absorbed the medicine. They understood what the consequences were. You wrap this around a growth story. And that solves the senses of bond market investors, I would say. Everyone saves face because you can say force majeure. You know, something big has happened. We need to rethink and rewrite. But so far, the instincts haven't been in that direction. Look, I think it's impossible to argue, however, that reform in the public services may well be necessary.

12:12I mean, you only have to look at the productivity stats for the public sector, certainly true of health and true more widely. You know, particularly since Covid, many, many, many more people employed for apparently no increase in output. And so, you know, simply to argue that fiscal rules shouldn't be sacrosanct is not to say that any sensible government wouldn't be taking steps to reorganize public service so that we get more bang for our buck. I mean, you've seen the kind of things that the government has been saying about rolling out artificial intelligence and about making savings. What's your current assessment of whether they have a coherent plan in that sense?

13:08We're beginning to find out a bit more about what's planned on this front. What I've heard so far, one sounds quite familiar from every government, every who I've heard over many decades. I mean, the truth is, I think eight in every 10 jobs created over the past two, three years have been in the public sector. Is that true? And there's talk about thousands of civil service jobs going, but I think there's 15 ,000 new ones being created over the past two years. And if you look to headwinds to the UK's productivity problem, something much discussed on this podcast over many years, the fact that public sector productivity, as best we can tell, has been in negative territory since the global financial crisis, it's been a significant headwind to getting things done.

13:48So is there a strong case on both macroeconomic grounds and in terms of individual departments in looking at this afresh? Yes, that would say is an imperative and does not cut across the general point about as needing to ease up the brakes fiscally to provide a stimulus to the economy. But equally, in my experience, when you want to improve the productivity of any kind of institution, public or private, you need to invest. Yes, another step. And so the notion that you can get big savings immediately is just wrong. I mean, look, if they wanted to, which I don't believe they will do, you could just sack a load of people and see what happens.

14:31But that may be the Elon Musk way. I don't think it's going to be the British government's way. But what they could do, and this in itself also will upset some people, is you could really boldly start to roll out new technology platforms, which will have big implications for how people work that will be difficult to manage. But broadly, it is the only way to modernize. I mean, we know across a bunch of sectors, health being a case in point, that we have under-invested in kit, in scanners and the like. And that needs making good on. And we need to accompany that with the skilling up of the workforce to make best use of that.

15:15That will come at some short-term cost, albeit with some longer-term productivity gain. So these things aren't necessarily cost-saving short-term, but are productivity and cost-saving longer-term. And I hope that is the direction of travel this government takes when it comes to civil service reform. And it remains to be seen. But you're right. The simple bloodletting of staff by itself rarely turns the dial on productivity and cost. Andy, loads more I need to talk to you about, but let's go to a quick break.

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16:54One of the ways in which they're hoping to save a ton of money is through welfare reform. There appear to be, actually my TV colleague Anoushka Asana has done some very good work on this, and she says there are two big strands to what they're proposing. One is to freeze the personal independence payment. this is a sum of money that goes to disabled people whether they're in work or or out of work and i think from memory the annual cost of personal independence payments is currently 25 billion on current rates of growth forecasts are that it would rise to something like 41 billion in a very short number of years.

17:46And they are looking, as I understand it, to save up to 7 billion just from freezing the personal independence payment and changing the conditions for determining whether somebody is eligible, making it harder for people to get this. That would not just apply to new claimants, they've got a big backlog of people who are supposed to be reassessed for whether their entitlement to the PIP, personal independence payment, has changed. If they could clear the backlog, if they could reassess these people, then in theory, quite a lot of these people who currently get it wouldn't be able to get it anymore or wouldn't be able to get as much.

18:32That would be another contribution to the savings. And then separate from all of that, and in a way, it's this second part of the reforms that raises the more interesting economic questions. They're doing two things. They are cutting the health related element of universal credit. So if you are disabled physically or mentally, you get quite a big top up to your universal credit. that saving that they're making in cutting the health-related element, they are recycling into the basic level of universal credit so that all recipients of the basic amount of universal credit will get more money. And that's a cost-neutral reform, right?

19:20And so there are, simplifying, there are two elements to this. There is a straightforward cut to the personal independence payment. And then there is an attempt to increase the incentives for disabled people to work because signing yourself off work will no longer deliver quite so much money because of this cut in the health related element of universal credit. And so I'm just interested to know what you think as an economist of this attempt to, in a sense, reduce the disincentive to sign yourself off work if you're disabled. A couple of things. One, we have seen a significant increase in the number of people claiming these benefits and choosing to actually not be in work or training, so-called economically inactive.

20:30And that's now, what, nine and a half million people have been picked up by over a million over the past few years. So there's something on there. There are underlying health issues that have got worse over time. But there's something about the configuration of benefits that's encouraging people at the margin to step out rather than step into the workforce, which is not as we would wish. So reconfiguration of that in the language you used to reduce the disincentive from being in work is the right direction, I would say. Much will hinge, I think, on two things. One would be, is there the work available for these people when so incentivised?

21:10It's one thing to provide incentives, but it's quite another for there to be work available for those people to do if they have some underlying health condition of various types. And this is where the work of Charlie Mayfield is in a review for the government of the role of business and taking in people, you know, who would previously be on the benefits bill, I think is very important. And I want to talk to you about the Mayfield thing because I do think it's highly relevant to this debate. And one of the things that I find actually depressing about the fact that we're getting the welfare cuts announced before Mayfield is that the government's claim that this is actually about helping people into work rather than in a slightly brutal way saving money, I think is less credible because what Mayfield was asked to do was look at how employers could be helped to retain people on staff who may, while in work, suffer disabilities, whether from mental or physical ill health?

22:32And then secondly, how do you encourage employers to be more enthusiastic about employing people with disabilities? But we're some way from having his recommendations. And I think if we had his recommendations, I think people would be a bit more persuaded that this was actually about creating an economy where more people got both the emotional as well as financial benefits of being in a job. It gets back to the point we're making earlier about the madness of being dictated to by the fiscal rules, right? The only reason they're doing these welfare cups before we've got Mayfield is because they sort of feel they have to do it so that they're not in breach of their own fiscal rules.

23:15Now, that is just no way to make policy. And it's no way to grow an economy. So it makes perfect sense that if we have people, and we think we have, who are capable of holding down work, and in many cases keen to do work, but the benefit system makes it less likely they do enter work, then changing the benefit system makes perfect sense and longer term will be growth friendly. But unless you accompany the stick of benefit reform with the carrot of improved employment prospects, this does risk both optically, the reasons you've said, and substantively not boosting employment, actually, and just leaving people with less money in their pockets than would otherwise be the case, which is growth negative rather than growth positive.

24:08So we do need both blades of those scissors to be working. We do need an increased willingness by employers to provide the jobs that would work for someone perhaps with an underlying health condition, flexibility, retraining, occupational health, all the things we know people say they want before they consider re-entering, alongside this retilting of the benefit scales to make it financially sensible to move in that direction anyway. And it is a worry if we're front loading the stick and back loading the carrot that that both comes at a short term cost to the economy and two is being done for fiscal first rather than growth friendly reasons.

24:51So there's another aspect of this, which in my view is just not debated enough, which is how much of this problem is to do with the fact that we're a low wage economy. One of the things that is very striking to me is, and this is something that, for example, the government says repeatedly without, in my view, thinking through the implications, they keep saying, as did the last government, the problem is, and the reason it's, you know, we've obviously got to fix the welfare system, they say, is because compared to other countries, we still have way more people signing themselves off work for ill health reasons.

25:35Whereas if you look at pretty much every other country where this happened as a result of COVID pretty much everywhere, pretty much every other country, they say, has got back to more normal patterns of employment and the numbers signing themselves off work for ill health reasons is back to where it was before COVID. And they say this obviously shows that the problem is our benefit system. Well, actually, it might not be that. It might be that the incentives for working in this country are just not great enough because we have too many really low paid, very unfulfilling jobs. And that what this really points to is the imperative of moving as fast as we can to reconfigure the British economy so that there are more higher paid, more fulfilling jobs.

26:27It's the precarity of income as well as its level that often matters here. It may well be worthwhile switching from benefits into work if you could be assured of that wage, you know, for the next several years. But often you can't be assured of that because what you're entering is precarious work that can't really guarantee that level of wage. And the risk is if you slip back onto benefits, it's on worse terms. So I think that is right. I think the resolution of that does come from a stronger commitment to reskilling our workforce. Ultimately, higher pay will only follow from higher productivity.

27:07And that, in turn, requires us to invest at a much bigger scale than we have, both public and private, in the skills of our workforce. That's the way to make work pay. and we've seemingly failed to invest as much as we could and should on that front. And if the welfare benefits announcements next week are not accompanied with a skill strategy, you know, for me, they're preordained to pain and probably failure. And indeed, the skill strategy of this government so far has been sadly absent. We've heard almost nothing on that. We're promised, you know, in the summer that Jackie Smith and Skills England will ride to the rescue.

27:50But without that, I mean, how can you even have an industrial strategy without a people strategy and a skill strategy? And we are starting from a bad place on that front. And I think we need to, you know, of all the things policy wise we need to do, the people bit of it is the great missing link so far, whether it's benefits reform or a growth strategy more generally. Just to put this in the more brutal terms, I mean, if you are somebody who's disabled in some shape or form and you've broadly got a choice between, you know, being in work but knowing you're still going to be dependent on food banks and being out of work and being dependent on food banks, what are you going to choose?

28:33Right. I mean, it is the greatest economic scandal in this country. It's just the number of people who can't pay the bills, even if they're working full time. Right. And so your point about the urgency of skills is just so important. The other bit of British exceptionalism, which is depressing, is, of course, the backlog in the health service. And, you know, another reason why there are so many of these people who currently signed off work is because they cannot get the mental health or physical health support that they need from the health service. So another part of all of this that would be so important, you mentioned actually in the context we were talking about the Mayfield review of what we can reasonably expect of employers when it comes to taking more disabled people, either retaining them on their own books or recruiting more.

29:36Occupational health is so important to all of this. And half the workforce doesn't have it. You actually think half the workforce does have it, do you? Best we can tell is 50-50. Right. But that doesn't mean half don't. Yeah. Looping back to our earlier conversation, there's a natural temptation when you're in government to gravitate towards the shiniest sectors and the shiniest scales. And in some ways, that Industrial Strategy Green Paper did just that. It was eight superstar sectors. And nothing wrong with that. You should win your winners. But what is the offering to the, you know, in many regions, 80, 85, 90 percent of the workforce that is not covered by those eight?

30:20You know, what is the opportunity escalator for someone in hospitality, someone in retail, someone in construction, someone in distribution, someone in social care? That is the bulk of our workforce right now. And how do we enable those people to rise and shine, to put them on a skills and therefore opportunity escalator? That is what would lift the lives as well as the incomes of those people. We have no strategy currently for that. They're explicitly out of our industrial strategy. And all we are saying is short term, we'll be cutting your income, for at least some of them, to encourage you to engage with jobs that probably won't pay any more than what you currently have.