172. Is The Treasury Striving For Mediocrity?

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1:27What did you make of it? Yeah, no, it was really fascinating. I like your analysis. I also love hearing Steph's plans as analysis of things. And I always have done, because as you say, she's like super smart. And you guys talking about immigration, it was really interesting because today, you know, I broke my arm and, you know, I had this whole carry on and I'm still doing physio for it because I can't quite lift my arm over my head yet. Anyway, I won't bore you with the details of the medical side of things. But what was really interesting was being in a hospital setting today, because, you know, as we've talked about before, a lot of the immigration has been to fill jobs in the health and social care sector.

2:06And while I was there today, apropos of nothing, I wasn't, you know, I wasn't there. I wasn't asking anyone about it, but I heard the staff talking about it in this hospital and they were quite scared. I could hear them talking and they were saying, I genuinely don't know whether this is going to mean we're going to be able to get the people we need to do the job. So we're like, I don't know where they think they're going to get these people from who are going to do all these jobs. It's hard enough recruiting as it is. And there was that. But there was also a couple of them who were saying, well, I'm worried I'm going to get sent back home.

2:39And so it really hit me that there's a serious communication problem here. And obviously, we're not talking about people being sent home, but the fact that they are genuinely talking about that on that kind of shop floor level, these are people doing the jobs that we need them to do in hospitals, is really, really quite unsettling, isn't it? There's a serious, and I think Steph alluded to it, that this delivery of these things is really problematic because in an attempt to try and win over the reform voters, you know, Starm has come out with this really strong language about, you know, suggesting that immigration is the biggest issue, which, as you pointed out, then legitimises what Nigel Farage and reform are saying.

3:26So A, why would you vote for the pay limitation? You're just going to vote for reform. It's not going to make you vote Labour, is it, if he says all this. But also he should be taking this argument on, not siding with it and getting the language right. Because this is real people in real jobs hearing the prime minister talk about them in a way which is frightening them in sectors that we need them to be motivated and empowered in, not worrying about how they're going to fill jobs and what the people who are there who have emigrated to our country are feeling. And it's also, I mean, you've said it, it's economically self-defeating, isn't it?

4:04Because we actually need some level of immigration for the jobs that we have gaps in and the sectors we have gaps in, don't we? Well, that's certainly true that if we did what reform is committed to, which is what they call net zero immigration. In other words, you would only allow people into the country equivalent to those leaving the country. Very large numbers of businesses would be in deep trouble. Very large numbers of public services would be in deep trouble. I was struck when going through the government's own analysis of what they're proposing about a sort of incoherence in their approach to social care.

4:54So on the Peston Show this week, we showed that vacancies in social care are more than 100 ,000. We know that this is a sector crying out for resource, both financial resource and indeed people. But one of the things that I was staggered by, actually, is that the government got a headline that it wanted by saying it was going to abolish the special visa for people coming into the country to work in social care. Because it is true that over the last few years, those people coming in have driven quite a lot of the increase in immigration numbers, you know, to hit that record 18 months ago of 930-odd thousand, which is an enormous number of people coming in.

5:47But by abolishing the social care visa, this is a very unfair question, but guess how many people, so in the round, they say their package will reduce immigration by about 100 ,000. The stuff that they've worked out, the more detailed and developed policies by about 100 ,000 a year. Guess how many of that, guess what percentage or share of that is smaller numbers coming in for social care? Is it not quite a lot of them? No, it's not. In their own estimate, it's around 10 ,000, right? Right, so it's 10%. And the reason it's so low is because actually, even before this latest reform, numbers coming into social care had fallen very significantly because the previous government said you couldn't bring your dependents in, you couldn't bring your partners or children in on the social care visa.

6:44And actually, once that happened, quite a lot of people in the rest of the world thought, well, I don't want to be separated from my family. So why should I come to the UK? OK, and so actually, I have to say that one part of their package looks to me, I hate this expression, but I'm going to use it anyway, looks performative. It doesn't look very fundamental. It looks like the government saying to the British people, look how tough we can be. We're even keeping people out of the country that you value. Because, of course, all the opinion polls show that actually when you ask people about immigration, it is true that a majority of British people would like immigration to fall.

7:25But then you ask them, do you think we should have fewer people coming into social care? And actually the British people, you know, a majority of them, significant majority, say, actually, people coming in to do social care is a good thing. We don't want cuts there. But the government is abolishing the visa. but it's not actually going to lead to that much of a difference. And it comes against a backdrop, frankly, of a big employment hole in a sector, which all of us, particularly those of us with elderly people in our family, we realise or infirm people, we realise how important social care is and what a parlour state it's in.

8:08And I hate it when people refer to jobs like this as low skilled. It's low paid, not low skilled, because care is not something everyone is capable of. Not everyone has got the ability to be able to have the patience and the skills needed to make someone feel safe and comfortable and to feel confident in the treatment they're getting and to be getting all of that. what people call soft skills, which really annoys me because there's nothing soft about it. Communication is one of the most important skills a person needs in life just to get by, not just in work, but in every sense. And it's so devalued.

8:53And I think that is a big problem here. All those headlines that came out on Monday, all the breaking news alerts and everything, we're all referring to it as low skilled. If you're someone who's starting out in your career, your ambition is not to work in a low skilled job is it the optics here are terrible the language they use it's like it's a rewarding job it's low paid but it's it is a job that is what we need and you can make an incredible difference to people's lives which you know some AI tech genius who's classed as high skilled probably couldn't do because they've got different skills and those skills are not more valuable than the care skills.

9:36So in Japan, as you know, they have a particularly ageing population. And one of the things that they developed in Japan are care robots. So I just wondered what you thought about, what do you think about care robots? Because I was quite struck that when we had Rachel Wolfe on the podcast, she was talking about how we become less dependent on immigration, she made the intelligent point that, of course, there are only really two ways to become less dependent on immigration. One is to improve the skills and the breadth and type of skills that your indigenous population has. But the other thing is to invest in technology that means you can have the same output with fewer people.

10:22Now, you might think social care is not an area where technology can help. But in Japan, they absolutely take the view that it does help. I just wondered, do you think British people, how do you think British people would react to, you know, essentially robots looking after them? Right. I think if it was presented as that, as how would you feel about a robot looking after you, people would say no. If it was presented in a way where how would you feel about getting the best care possible from a device that doesn't get tired, doesn't have to work a million shifts and look after 70 other 75 other people is solely focused on you will deliver all your medicines exactly to you when you need them will be on call 24 7 so if you wake up in the night and you need something they will be there it's how it's presented it's if you talk about robots you scare people because they suddenly think that and of course you it would be i'm sure lots of people would prefer the human touch but also there's lots of people who don't who are very very private who don't like the idea of being changed in bed by a person they might prefer it if it's a robot but the word robot I think is full of like we think of a mechanical machine talking to us like this and is you know all like square and moves funny and everything else we but actually that's not necessarily what this machine would look like or behave like so for example I was at and I'll come to this a little bit later on, but I was talking to a retailer who's got a big massive operation in Latin America.

11:57It's called Magalu. And the boss of this company was telling me that they've created, they had like a virtual assistant helping with the retail side of things. So just, you know, like someone on screen who was like a kind of, you know, a chatbot type thing. But this AI has become its own person in its own right in the sense of they have, they're now an influencer, so she's called Lou this virtual assistant who's now become in every sense like a real person so if Lou is using a product on Instagram then that product sells out so a certain type of form they they put her in different situations she's contributed to chat shows in Brazil she does these fancy holidays she's been in music videos with famous pop stars there and there's a there's loads of people who want to look like her but she's not real and actually it's funny because for businesses, then that gives you that control over your brand representative, because you can literally stop them from having dodgy boyfriends.

12:58You can stop them from saying anything that might get them cancelled. And so, you know, it's like you can personify, in a sense, give a human version of technology. Now, there might be people listening to this going, no, no, no, no, no, I don't want that. I just want someone human who I can trust, who understands me, blah, blah, blah. And there will always be that. But I just think it's about how it's presented to people. And, you know, we talk about the positives, not the negatives of it. Look, I completely agree with you. And we shouldn't forget, particularly since we have seen absolute scandals with humans in care homes being cruel and abusive to vulnerable people, that humans aren't always superior to machines.

13:44And, you know, you would assume that you can program a robotic carer to be kind and gentle. Now, I think there's another aspect of labour shortage or people shortages that you wanted to mention in the context of this immigration debate. Yeah, because obviously, as a lot of you know, I started in engineering and interestingly started in that sector because there were huge skills gaps there and grew up in Middlesbrough, heavy industry. Lots of the supply chain for manufacturing and everything was in Middlesbrough. And so I saw the real potential there. There was a lot of money thrown at trying to get more people into it.

14:24There was lots of brilliant training schemes. I was sent on all these amazing trips. I went to like Spain when I was a teenager because I was paid for by this engineering organization. And I did all these brilliant and wonderful things. And it made me see that actually that was a really tangible, brilliant career to have. So then went to work for a manufacturer. Now, that skills gap is still a massive problem in engineering. And if you actually look at the statistics in terms of the number of work visas for engineering professionals, that's actually gone up. So, you know, you were talking about the health and social care ones have been going down a bit because of those changes.

14:59The ones in engineering have gone up. And so there's a real concern in the engineering sector that we are not going to have enough people to carry out all of this increase in defence spending that we've talked about, that we want to get growth from. The trade deals we're doing now, which will inevitably lead, hopefully, to more jobs in things like manufacturing. and there is not the training, the groundwork being done to fulfil this. So if you're just closing the tap off, but you're not bringing in it from another area, you're cutting yourself off from being able to fulfil this increase in demand for the manufacturing stuff because we are not training enough people.

15:41There is a sort of broader point here about the government's approach to its big reforms. In fairness to Keir Starmer, you know, at the press conference where he announced these immigration changes, I was there. You know, he was talking about the importance of increasing and improving the skills of British people so that British people can fill these vacancies rather than businesses and other institutions relying on migrants to the UK. Okay. I mean, there are two things about it. One is, I've heard this from so many governments over so long, right? This is not new, this, we've got to improve the skills of British people.

16:25every government says it and every government till now has failed and I am going to be sceptical about whether this government will massively increase the skills of British people unless and until I start seeing measurable improvements and you know unless and until I see both companies training people up rather more effectively than they currently do and unless and until I see you know educational institutions doing better in that respect so what you see okay is the cuts to immigration which inevitably do cause anxiety to employers but they're not immediately matched by a coherent plan to you know replace migrants with skilled british people and it's very very similar to what we've seen when it comes to the welfare cuts to people with disabilities What you see, and we know is going to happen, is that people with disabilities are going to get less money from the state.

17:32The government says, but don't worry, because we will create conditions for these people to have paid, satisfying employment, which is a great ambition. But we still haven't got a coherent, properly worked out plan for that. And it doesn't surprise me that lots of voters do believe that this government is all about cuts, but not about improving the living standards of British people. Because in a sense, the government consistently puts the austerity cuts cut before the investment in job creation and skills horse. Right. And what you would want to see, I think, from any government, but it's particularly odd that this is not coming from a so-called left of centre government, is you would want to see the detailed plans to create jobs for those people with disabilities or to actually train young people who are currently not in work or education.

18:40you would want to see that before you see the cuts whether it's to immigration or to benefits it's so true what i would really love to happen would be for them to and this is basically what you're saying is like have a couple of years where you pump loads of money into reforming education so that it is much more about work and getting a job at the end of it so yes teach art but also teach artists how to have the business skills to be able to do their taxes and be able to sell their products and things like that. Teach maths, but also make it so that they know as well about accounting stuff or, you know, doing IT, but coding things and, you know, and doing more practical applied projects.

19:27And then from that, in a couple of, you know, construction, having that taught in mainstream under the age of 16 lessons rather than it being something you choose after you've done your GCSEs or whatever. It'd be so much better. And I know there are some places that do this because the UTCs, the university technical colleges, will be screaming at their headphones or whatever now going, we do that, but it's just not en masse and it's not enough. And there's not enough to incentivise young people to do it either because they're told the best route is academia, pure academia and all that. If we just did that reform, I can guarantee in a few years, you'd then have loads of people coming out of education establishments having the right kind of skills we need.

20:09I said to the other staff, Landers, how shocked I was that the Prime Minister said in an answer to the question that I put to him at the press conference when he announced these changes, that it was perfectly clear, given the very low growth that we've seen over the last few years, that there is, he said, no connection between migration. and economic growth. And I was actually shocked that he said that because the economics are just very, very straightforward. That if you bring people into a country and they take up employment and they spend money, the businesses that employ them are able to increase their profits.

20:50There is an argument about whether actually that massively increases living standards if these businesses are employing people on relatively low wages. And I would argue that too much of our migration has been focused on low wage employees. But the economics are absolutely straightforward. The immigration will generate incremental GDP and incremental national income. The more successful they are in getting down immigration numbers in the short term, the more they will, frankly, it just will be more of a drag on GDP. And the more of it, you know, there will be less tax flowing into the Treasury's coffers.

21:42Now, as I say, there may be perfectly good reasons why you want fewer people coming into the country. That's fine. Okay. And, you know, that's a very important debate to have. But we can't pretend that if numbers were to come down dramatically, that that isn't going to be a drag on GDP in the round and, for example, on tax revenues. Yeah, I totally agree. You mentioned growth there. We should talk about that because we've had some figures out this week. But let's go to a quick break. Hello, welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. Now, you've been meeting with some absolutely fascinating leaders from the retail industry.

22:28You mentioned it earlier in the first half. And I want to ask you a bit about that, get some more detail from you about their mood and their plans. But before we get into that, I just thought it was worth reflecting a little bit on those growth figures, those GDP figures that you published earlier this month. which were a bit better than analysts were expecting. In the first quarter of this year, there was growth of 0.7%. That's 0.7 % of a percentage point. It doesn't sound big, but it is significantly greater than the kind of bumping along at the bottom we had for the second half of last year.

23:10And it's a little bit more than analysts were expecting. they were actually expecting 0.6%. So to be clear, this wasn't the great positive surprise. But there are sort of two or three issues that spring to mind about this. One is, is it sustainable? Because if we were going to get back to those kind of rates of growth every quarter, that would be a return to much faster growth. It would be growth of more than 2 % a year, which is way more than the Bank of England or the Office for Budget Responsibility have been forecasting. And it's way more than we've experienced really since the financial crisis.

23:50Now, there are reasons, I'm afraid, to be sceptical that this is the great bounce back. One is because there's no actual rational reason for it that I can think of. But secondly, you know there are some other drags around the place this is the quarter before national insurance goes up before the national minimum wage goes up so it's the quarter before employers have these costs heaped on them it is also the quarter in which our exporters would have been and there's some evidence of this in the statistics would have been shipping as much as they could to america to avoid Trump's tariffs. So there will have been a bit of a...

24:35It doesn't account for all of it, but there will have been a bit of a positive boost from an increase in trade to avoid the tariffs. And of course, once the tariffs came in, that would have gone into significant reverse. And of course, it is just all before the great shock to global confidence of Trump's Liberation Day. So I think the rational thing to say is, thank you very much. It's great that the economy turns out to be in better shape than people feared, but things may get a bit worse again. I think it is important to say that, you know, the evidence of the first quarter is we're not in meltdown.

25:12And there's a very gloomy people out there who thought we were and we're obviously not. But I think things will slow down again. There is one other point, though, I just that I think is worth just making. Let's just say, I think it's very, very unlikely, but let's just say that we are lucky enough to be in a period where growth will be in that sort of 0.7 kind of territory, yeah, per quarter. If that were the case, it's inevitable that given the Bank of England's view of the capacity in the economy, which underpins its view about whether any level of demand is going to boost inflation or not, there's no question that if that is where growth and demand are going to settle, that the Bank of England would keep interest rates higher for longer.

26:06and market interest rates would be higher for longer. And that, I'm afraid, would mean, quite apart from anybody with a mortgage being a little bit upset, also means that poor old Rachel Reeves would still have a problem. Because, you know, on the one hand, very low growth is bad for her because it means tax revenues are lower than they would otherwise have been. That makes it harder for her to hit her fiscal targets. But equally, given how much the government has borrowed, interest rates being higher for longer is very bad for the government because it means they have to pay out more money in interest to their lenders.

26:47So she's sort of down both ways. She's sort of in her vice where very low growth is bad for her, but really good growth could be bad for her as well. And that leaves me feeling. depressed because we've got ourselves into this really terrible position where pretty much the best thing for the Treasury in the short term is mediocrity, is a mediocre performance, which is absolutely not what we want. And it's probably the best way of explaining why her fiscal rules are so utterly nuts. Which is deeply depressing, Robert. Now, you're going to cheer me up because you met some of the world's most important leaders of a very important sector.

27:34Give us more of an insight into the way the world of retail is changing. Yeah. So this was World Retail Congress. And basically, it's people from retailers across, I think there were like 47 different countries there. And we're talking executive level people. So from, you know, from the UK, we have people like the CEO of Greggs, of Tesco's, of Morrison's, of JD Sports, Curry's, Ocado, you know, every retailer you can think of, basically. Former CEOs as well, like Sir Terry Leahy, who, you know, you and I have both interviewed in the past. Then the international people like Carefor and Walgreens and Inditex that own Zara, H &M and all of them.

28:13Alibaba, Sheehan, people from places like that. luxury group owners like, you know, these billionaire luxury Middle Eastern men like Patrick Shalhoub and Mark Pooch, who owns Pooch Group, and they own lots of amazing, you know, luxury brands and things. Anyway, and then the ones you wouldn't necessarily think are retailers like Jaguar Land Rover, there were people from there and Disney and things as well, because obviously they sell stuff too. Why was Jaguar there? So they were there from the kind of car showroom perspective and about how they actually sell for the kind of business to consumer side of it.

28:46They were quite nervous about what I was going to ask them, actually, understandably. But no, so I think some of the take homes for me were everyone's stressed about tariffs. That's the big thing. Everyone's like, what are you doing? What are you doing? Some of them are talking about absorbing it. Others are saying we're going to cut our portfolio to try and account for this. You know, some of the luxury groups cutting the number of brands they have and things like that. And so there was a lot of concern around that, definitely. There were some, as we said before, some of the top American CEOs who weren't there because they were worried about talking about it and falling out of favor with Trump on it.

29:24So there was definitely that nervousness. So you say that some retailers in America are going to reduce the number of brands that they market and sell. I mean, is that basically because the impact of these tariffs means that there will be quite a lot of their brands that simply aren't profitable anymore? Because they'd have to absorb the tariff. And at that point, there's no profit left. Yeah, exactly that. And I think particularly the kind of luxury end, there are now so many different luxury brands and it's definitely a market that's concerned about what's going to happen next. So what was really interesting was how they are going to try and survive is you've got a lot of them who are doing collaborations now with that lower price bracket.

30:15So, for example, you're getting Lueva, you know, it's quite a posh Spanish brand who are now doing like collaborations with On, which is the trainer, you know, the running the leisure, athleisure company. And the woman from On was really interesting in all this about these kind of brands working with the luxury now to create these kind of price points now. because also Gen Z have got a bit more money than we're saying. So they've got more disposable income, but they need to have a product which is at a point that they can afford and want to spend this disposable income on. And then that will hopefully buy them loyalty to these luxury brands that will see them through forevermore.