171. Will Trump’s Tax Cuts Cause Soaring US Debt?

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1:38Hello and welcome to The Rest is Money with me, Robert Paston. And I'm thrilled to say that Steph is here, but not the Steph that you're expecting, I think, to be with me today. It's Stephanie Flanders. And actually, like Steph McGovern, Steph and I are former colleagues at the BBC, where you were economics editor. I was business editor for a number of years. It's wonderful to have this online reunion. And Steph McGovern reminded me, literally only the other day, which I'd forgotten. She obviously had a central role in my life at the BBC because she was my producer, but she was also your producer, I understand.

2:23Yes, she was my producer when I was economics editor, but very quickly realised that she could do it much better than either of us. And now we've got full circle. I'm her understudy. I couldn't be happier. Thanks very much for joining us. It's an absolute treat to have you. And I just, the thing that when you said you'd come on the show that I, and this is more because I need a bit of therapy on this, because the thing I really wanted to talk to you about is how sort of unbelievably stressful doing my job, and I don't know whether you feel the same, doing your job has been since Donald Trump was inaugurated.

2:57And, you know, I sort of feel every morning when I wake up, I can actually feel my cortisol levels rising because overnight, while I've made the mistake of being asleep, he said and announced some other thing that I just didn't expect to see during my professional life and try to work out what's real, what's a negotiating ploy, what's going to stick, whether there's any reason behind it is just such a challenge. So share with me your experience of this. Yeah, I mean, welcome to my world. At least we're living in different parts of the same world and the same craziness. I mean, as you know, I'm now at Bloomberg and I'm running the economics and politics coverage.

3:38So that actually means, you know, there's all these reporters around the world, including a lot of them in Washington, D.C., the ones in the White House, are all part of my team and are obviously dealing with it in a much more kind of personal day-to-day level, trying to do all the things that you just said, but to get the news out. And then we also have this big team of economists who have actually, in part because of what Donald Trump has done to the global economy and to our understanding of it and politics, that team has expanded because we've just needed to have answers quicker on things like the impact of these different tariff deals and other things.

4:14And we've moved into geopolitics. We've got geoeconomics. What does that mean? It's everything we're living with. It's the interplay and the clashes of geopolitics and economics. I think when you and I were at the BBC, Robert, there was a lot of economics, but we were still in a world where economics kind of had the upper hand. Like, you know, it sort of was the end of a conversation often, even in Westminster, if you said, well, this is the economically beneficial thing for the economy. That was kind of what we'd grown up to say, okay, that's what you do. But I think with Donald Trump's election, with Brexit, we moved into a world where actually politics started to trump economics, where you had to understand those two things working together.

4:58And that's, you know, that's what we're living with every day. And you're right, it is a just a constant trouble, especially if you have, you know, a podcast, and you put things out, and then it immediately is blown out of the water overnight. And then there's a sort of another aspect of this, and I just wondered how you deal with it. So part of our jobs has always been not only to make sense of the world, but to tell people what we think is going to happen. And with somebody as capricious and unpredictable, but with so much power, you know, with somebody like Trump, making rational forecasts is hard.

5:37Now, you at Bloomberg, you actually make formal economic forecasts. How do you make a rational assumption, for example, about what kind of level of tariffs are going to stick? because at the end of the day, you know, for example, the 90-day temporary settlement with China has brought tariffs down significantly more than almost everybody thought. So how do you say something that's actually useful to your subscribers and viewers and readers and listeners given that at the end of the day, he is so unpredictable? But you know, the other thing that's even embedded in your question, Robert, is the way it changes our expectations.

6:17So our kind of base expectation of what is like a regular week in politics changes completely. You know, you have to have a big news story every day or several times a day and several U-turns and volt fasters. But our idea of like what constitutes an aggressive trade war and an increase in protectionism changes. I mean, we think of this after this, you know, 90, this ceasefire, if you like, between the US and China. we've still got tariff rates. The effective tariff rate that the US has against the rest of the world is still about the same as what it was in the 30s and certainly the highest it's been since then, the sort of smoot-hawly, that sort of infamous level.

6:56If you just kept the tariff rates at this rate between the US and China we reckon there'd be about a 70 % fall over time in the exports that China sends to the US. So we kind of think of this as, oh, peace is broken out But actually, we're still in a much more dramatic place, a much more closed world, or certainly the US is much more closed than we would have expected a year ago when we were listening to Donald Trump on the campaign trail. So I think even there it changes. But you're right. When you're trying to look at the future and provide a guide to people, let alone help people think about the future of markets, because obviously that's what a lot of people reading Bloomberg are interested in, you have to just talk about scenarios and talk about you know well if things stay as they are it'll be this but you know if you look at the past history of the first Trump administration our US chief economist was in the White House for a bit you know you try and get the insights from those people who've seen it before to some extent but none of us have seen it before so you're right at some level we just talk a lot about uncertainty and it's very unsatisfactory.

8:00But there is this weird, always a weird interplay between media and power. And one of the things that I think became incredibly unhealthy in that interplay in Britain was after we voted to leave the European Union, one of the consequences of that was just that government and politics became totally chaotic. There was an adrenaline rush every day of some new parliamentary crisis or some new stupid political decision. We had, you know, prime minister, we had a whole succession of different prime ministers. and everybody in our world, the media world, and in Westminster, just became addicted to chaos.

8:51And we're now getting a whole world. Because of the way that Trump operates, the whole world is now addicted to chaos. You know, one of the things that I slightly worry about, just on our side of the fence, is when you become hooked on the adrenaline rush, you know, you don't really know what to do with yourself when you've had a calm day. This is all so unhealthy in so many different ways. I don't just mean it on a personal level. I just mean this is not a way to rationally solve the world's problems. One of the things I know that you and I definitely felt during the global financial crisis, you know, at some level, this is why you went into journalism or into economics, that you wanted to be able to explain this stuff to people.

9:35And, you know, we both spent our lives doing a lot of that. I didn't think I was going to be spending time on the 10 o 'clock news talking about quantitative easing. You did even more talking about bank runs. But you're right, you were getting into the habit of not just explaining, but also expecting drama, expecting chaos. You know, we talk about our own kids having shorter attention spans and spending their lives on TikTok, but the political attention span has obviously got much shorter. What you associate with effective government, however much people, we might talk later about, you know, the people's desire to see competence and things, you know, tests of competence for governments.

10:14But, you know, even if people say they want a quiet, confident, competent government, actually, what they're kind of expecting and what they associate with politicians is saying dramatic things and doing shocking, exciting things. I think it is very corrosive. And you know what, probably the most corrosive thing, which I know you worry about, is what we're not thinking about when we're focusing on all the drama, we're focusing on everything on the stage, what we're not thinking about, and what politicians and policymakers are not thinking about that they really ought to be trying to grapple with, whether it's climate change, you know, without any of this, we would have said this was going to be a very challenging time for the world with AI, what's the impact going to be on the global economy, climate change, all of these things, rising conflicts.

10:57And yet, we're not focused on that. We're focused on, you know, Qatar giving Donald Trump a plane. You know, I was just going to say, just because we've got this microcosm of it on the day that we are recording, you know, in that both geopolitical and economic sense, what have we seen in the last few hours? We've seen an American president having talks with a new leader in Syria, the first time I think that, you know, an American president has spoken to a Syrian leader for something like 25 years, lifting sanctions on Syria, lifting sanctions at a time when Israel, supposed to be America's great ally, still regards Syria as essentially run by jihadists.

11:47You've got Trump saying he wants to do a deal with Iran, sort of deal with the nuclear threat, but broadly is using language of a much more constructive sort than one thought he could ever do about the possibility of some kind of entente with Iran. There seems to be friction between Trump and Netanyahu of a sort that we hadn't anticipated. And Saudi is saying it's going to invest a trillion dollars in America. I mean, this is just a few hours to try and put into some kind, you know, to try and give some shape to. And I'm really struggling. I'll be completely frank. Yeah. And I think, and even when it comes to the sort of fact checking element, I mean, that is, of course, exactly what people at ITV and Bloomberg, you know, we're struggling to sort of say, OK, seems to be it's a trillion dollars.

12:36They say it's a trillion dollars. We can really only find a few hundred billion. You know, even just that one chasing down that one fact, that one headline. And meantime, as you say, you know, the caravan has moved on and people are talking about, you know, the next thing. And of course, you know, it's been much talked about. That is part of the quote unquote, you know, strategy of this administration is to flood the zone and to make things extremely. But I do think it's interesting. I mean, you see at work, even here, and even though there's been criticism of Marco Rubio as the Secretary of State, there's the Donald Trump show.

13:09But underneath the surface, you've actually still got State Department officials. And I've had, you know, talked to people in Washington who say, you know, interestingly, there's been quite a lot of protection by Marco Rubio of the sort of core staff at State Department. We'll see whether it survives more cut. And they're sort of, you know, the underlying dynamics, I suspect they always wanted to reopen ties, diplomatic ties with Syria. They were quite keen to unlock quite a lot of policies that have been put on hold. You know, there is some of what I guess Donald Trump might have called the deep state is still operating in some of these countries, even as we see this, you know, this show.

13:49And I guess that's also part of the point. We're trying to join the dots, say, OK, if we step back from the press conference, you know, what is actually happening here? How are relations changing in the region? And, you know, the answer is it's pretty dramatic. Absolutely is. Can I just ask you, before we move on to a slightly more UK-focused issue, you will be a closer observer than I have been of Scott Besant. When he was appointed, I thought he would be able to hold Trump in check on some of his wilder policies. He didn't. But he does appear to have then been able to pull him back from some of the, for example, more extreme positions on tariffs.

14:38when the dollar fell, when dollar assets, when investors, rather than buying the dollar in a time of crisis, sold it, when the yield on US Treasuries rose to levels that began to look a bit worrying, Besant appeared to be able to pull Trump back from the brink. Do you think that he is a steadying force within the administration? He is. He's certainly a steadying force for the financial markets. In fact, there was a there's an economist, Dario Perkins, who did a fantastic chart, rather sort of mischievously working out looking at the days where Scott Besson was dominating the headlines, were very good days for the US stock market.

15:24And the days where they were all talk about Peter Navarro, as you know, is the kind of slight much more wilder kind of hard line, who most influenced those liberation day sort of very high level of tariffs. You know, those have been pretty bad days for the stock market. But I actually, I sort of witnessed it firsthand last week at the Milken, this massive kind of gathering of global money in Los Angeles. And Scott Besant was the first speaker. And he had also obviously done lots of kind of behind the scenes dinners and meetings with businesses. And I was told off the record that he had just told everyone, well, we spent 100 days breaking everything.

15:59And now we're going to put it all back together again. and that was kind of his line of reassurance. I guess it's reassuring that they're now trying to put things back together again. He's turning into a really critical figure because if you think about it, he's not just been unexpectedly put at the heart of doing all these trade deals and he was certainly right at the forefront of the US-China. It was not the Commerce Secretary, although he was kind of along for the ride. But he's also going to be in charge of getting this tax bill through, which has just been released by the Congress this week, that's got a lot of the goodies, the tax cuts that Donald Trump promised on the campaign trail.

16:40So he seems to have found a way, sort of just at the nick of time, to be the last person who talks to Donald Trump. And so he has blinked in these various ways, including with China. He's basically given in to China on a lot of the key things, or he's certainly backed down. But, you know, you have to ask yourself, how long is that going to last? Is he going to become more influential over time as others kind of fade away? Or is he going to kind of fall by the wayside like some people did in the first administration? You mentioned Trump slightly later than we might have expected, trying to push through these campaign trail promises on tax.

17:21Because obviously the American deficit is already very large. Is there anything credible that they are talking about in terms of funding these tax cuts that won't lead to a significant increase in the American deficit? So the estimate for the bill that was released on Monday is that it's going to lose$3.7 trillion in revenue over 10 years. And it's got some big cuts. It's sort of put a cap on quite a lot of the sort of Biden era, you know, those kind of big subsidies to build wind farms and all of those things. Actually, that's quite big money if you just put a cap on many of these tax breaks that have been brought in by the Biden administration.

18:03But no, it is going to add enormously to the deficit. And the only way they're making the numbers sort of somewhat add up is by actually going against the standard rules of counting these things and saying that making those tax cuts from the first Trump term, several trillion dollars worth of tax cuts, permanent, and they were due to just expire at the end of this year, that that's just continuing normal policy. So it doesn't actually cost the trillions of dollars that we thought it did. Now, that is just a sleight of hand. But it is looking quite likely that they will get away with that. But if you are someone who's in the markets thinking, wow, this country is not on a stable path when it comes to borrowing, and also, by the way, doesn't have a very stable government, well, I don't think you're going to be very reassured by that bill.

18:51Look, I think that's a good moment to go for a quick break. And when we come back, let's talk about this government's change of approach on immigration. See you in a minute. Welcome back to The Rest is Money with me, Robert Pairston, and another Steph. I wanted to move from the global to something a little bit more parochial. I started the week, I mean, what better way to start the week, Monday, breakfast time, at number nine, Downing Street, for the Prime Minister's unveiling of the government's new approach to immigration, a white paper that was published that brings in all sorts of new restrictions on flows of people to this country.

19:41But it wasn't just the content of the white paper that was important. It was also the language that he used in unveiling the new policy, language which upset quite a lot of his own supporters describing the risk that immigration was turning us into a country of strangers, where we're not connected enough, saying that mass immigration, his words had done incalculable damage, which is astonishingly inflammatory language. And also saying, actually in response to a question from me, that it was perfectly clear, given the economic stagnation of the last few years, that immigration does not generate economic growth.

20:27Now, all of this, in terms of certainly the language that he used, I found striking. In fact, in many ways, I found it quite shocking, because it's not what I would have expected a Labour prime minister to say. But Stephanie, what did you make of it all? I think both the switch, but actually also the reaction to it and what you've just said sort of is a reminder of something that's been quite sort of fundamental about the populism we've seen in recent years, not just in the UK, but across Europe, which is, you know, you might have asked the question, OK, the system has failed. You know, people feel that they've been left out of growth, that the economy is not working, that also the world has kind of moved in a way they don't like.

21:10Why has the populist reaction been so often from the right and not from the left? And I think that one of the key reasons is that if, you know, because a big driver of this populism has been concern around immigration, I say not just here, but, you know, certainly across Europe and in the US, that is not a place where parties of the left are comfortable. certainly in terms of the language they use. It's just not a natural area for even quite extreme left-wing parties that just sort of feel morally unable to really weigh into that debate in a way that responds to people's concerns. So I think the speech, I think the sort of awkwardness of the language, the fact that there was a conflict or tension between the language he was using now and language we've heard from Keir Starmer at various other times both in government and before that, you know, just the feeling we knew that some of what he was saying just was not coming from his heart at some level.

22:10I would say, though, the incalculable damage, definitely exaggerated. But what has done damage, and maybe is incalculable damage, is the incompetence of how immigration policies have been dealt with, not just rhetorically, but actually in practice. I mean, you know, I know you've talked about this in the past on the show, and it's something that comes up a lot. When you look at opinion polls, people care not so much about the immigration, or at least they don't say that they care about the immigration, they care about the loss of control. And the fact that governments have repeatedly not been able to demonstrate control and competence in their migration policies in the last few years, you know, that I think has done enormous damage.

22:51And I think it's something that this government had to respond to, you know, it becomes a sort of basic test for any government that you have to reduce immigration but also just show that you're in control of it and that you're being competent and yes it's a test that's been set by a party that you know by reform to some extent and you're responding to reform and you know probably Nigel Farage will never say that it's been passed but I don't think it's one that that the government conduct and you know there are elements of the system that's been in place in the last few years that have not been particularly good economically let alone politically.

23:25No look I completely me agree with everything you've just said. It seems to me that if you are a Labour prime minister, thinking in a sophisticated way about the economics and indeed your political interest, you would not have framed what you were doing in the way that he did. So, you know, one of the things that I was reminded of as I was sitting in this room is in 2016, after we voted to leave the European Union, I wrote a book called WTF. And one of the arguments I made in it was that we had become hooked as an economy on labour from abroad that was low wage. And that when you had businesses employing pretty much as many people they wanted on low wages, to an extent that was a substitute for investing.

24:25And I think there was an argument. This has never actually been definitively proven. Quite a lot of economists have looked at this, but there was an argument that said the problem with the low wage model is it built into the system stagnating living standards because it was good for businesses, it maximised their profits, but it was not good because you had this constant downward pressure on wages. And so if he'd said, actually, what we're going to do with immigration is make sure that the only people we bring in are individuals with a level of skills that will actually encourage businesses to invest more, And in the meantime, which is something they did actually say, we're going to try to invest much more in the skills of the British people.

25:14Then I think you have a sort of nuanced argument that is basically saying, actually, we are in a global market. There is some point to having people of talent coming into the rest of the world. And that could make us all a bit richer. But when you make blanket statements like incalculable damage and there's no link between immigration and growth, what you're, I think, doing is endorsing the sort of Nigel Farage reductivist position. You're basically saying the position of reform is net zero immigration. They are saying they want the numbers of people coming to the UK to be matched by the numbers of people leaving.

25:58And the population of the UK cannot rise in any circumstances. That is not, I think, almost maybe you disagree, but it's very difficult to build, particularly with an aging population, an economic model on that basis. that pays for our public services and makes us better off. And I agree with the last of what you said. And I do think just politically it's obviously really hazardous and there's just an open question about whether Labour will ever, it should be embarking on something that people will never in some sense kind of believe it's going to go as far as if they really care about it, if it's a really salient issue for them, they're always going to go with reform on this particular issue.

26:40So why make this the issue? I kind of get that. but going back to what I said before I think is this basic kind of test of competence and even on your point we have no evidence from the last few years that we can implement a skilled worker only system I mean you will have seen one of the reports I think that came out a few months ago from the National Order Office just saying you know the Home Office has no idea why three times as many skilled worker visas have been issued since 2020 than expected and it sounds you know It's in the same spirit as those enormous underestimates of how many Poles were going to come to, how many East Europeans were going to come to the UK.

27:18It's that same sense of loss of control. We don't know how many people are here. And even when we do know, we don't know why it's so many, why we've managed to grant this many visas when we actually thought we had various constraints. So I think there would be a loss of just a basic lack of credibility if they'd said, we're only going to do skilled workers and we're going to be more controlled. But hang on, they did say that they were going to restrict work visas to people of degree level. Now, that doesn't necessarily mean very high skilled people, but they did. They have raised the bar. But I'm saying I don't think it could have been part, that couldn't have been the only thing that they said, I guess, because you were suggesting that they should have just stepped to that and kind of kept away from some of the language.

28:01And I just think it's a bigger issue than that. And actually, I think the quality, the kind of immigration that we've had since Brexit, there's just economically, there's no getting around the fact that it looks like it's been less economically beneficial. So you laid out the challenge, the pressure on the fact that the unskilled migration, the heavy reliance on that had put downward pressure on wages before Brexit in those kind of years, broadly speaking. I think since Brexit, we have ended up with, you know, we know this, we've got sort of there's older, the average age of people coming in has been older.

28:38they're more likely to bring dependents, they're coming from different places, but that comes with the fact that they're bringing dependents and they're more likely to stay, which suggests that they may also ultimately cost the taxpayer more than some of these more short-term immigrants before. And we can just see it from the evidence. We haven't had a very good growth rate and we certainly haven't had. We have had a falling GDP per head in quite significant chunks of the last few years. And a lot of the countries around the world, we did a study on this last year, I think there was more than a dozen countries that had had a GDP per head recession in the last couple of years.