180. What Are The Numbers Rachel Reeves Hid?

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1:38Hello, welcome to The Rest is Money with me, Steph McGovern. I'm with me, Robert Peirston, here on Spending Review Day. So, Robert, go on, tell us about the day. There was something slightly depressing about the day. The reason for it was that when Rachel Reeves gave her, I don't know, 45, 50 minute speech, there was almost nothing that she said that didn't require further interrogation. It was incredibly sort of political in the broadest sense, but didn't really have the kind of detailed information that not just, you know, a sort of nerd like me wants, but actually the British people would want.

2:26So she didn't actually spell out in the kind of detail we needed what kind of money was actually going to most departments. I mean, there were lots of departments like, you know, DCMS, right, which is an important department, right? Culture, media and sports. I don't think DCMS got a single mention. You know, I had to literally wait for her to sit down. I then rushed downstairs to this sort of publications office. This is called the Vote Office in the House of Commons, where they handed me literally all of these documents. That's the main document. And then there are one, two, three, four, five, six, seven others.

3:08You know, this is supposed to be terribly important. It's the spending department efficiency plans. That's how they're supposedly saving money. This is stuff about the governments of Scotland, Wales, Northern Ireland. This is a really important document about how the Treasury is changing its approach to assessing whether investments go ahead. It's called the Green Book. We've talked about it more before on the programme. The problem with the previous Green Book rules is it was almost impossible to get investment into the Midlands and North because the returns on investing in London were always higher.

3:46So they've changed the Green Book to make it easier now for the government to invest in the rest of the country, which most of us would think is a good thing. So mountains of paper and so much of what was important, she didn't actually say. So, I mean, so, for example, you know, she tries to present all of this as incredibly good news, you know, a lot more investment, a department like health getting an absolute ton of money. But until the end, okay, you know, I had to turn to page, what is it? 120. Oh, hang on, I'm going to find it for you. Yeah, it's page 122, resource departmental expenditure limits, excluding depreciation.

4:34In layman's terms, That is what is the day to day spending of different departments. And it's only there that you actually get the numbers like, you know, for the home office, there is going to be an inflation adjusted cut every single year for the next three years of 1.7 percent. You know, although money in real terms is going up a bit for the police, in general, resources for the Home Office are being reduced. And, you know, the police say even their increase is simply not enough to, you know, for example, deliver on the government's pledges to reduce crime in assorted ways. You know, and then you look at other departments, Foreign Office.

5:20It's nearly 7 % down, isn't it, Foreign Office? Nearly 7 % transport day-to-day spending down 5 % a year. You know, a lot of this stuff is also you don't even know, because obviously they need these savings to fund the 3 % a year increase in by far the biggest department, the NHS. But if you look at something like the transport savings, it's not even clear how real they are, because the transport savings are basically predicated on the idea that lots more people will take the train. And if more people use the railways, the railways require less subsidy. Right. But that may or may not happen. You know, obviously, more people are using the railways than they were during COVID.

6:09So there's a rising trend. But is it actually going to rise enough so that these forecasts of falling subsidy are going to be met? There was another number like this, which is like it's like sort of basically relying on the tooth fairy, which was, you know, she simply said that by the end of the parliament, no asylum seekers would be housed in hotels. Well, OK, I think there are lots of British people who think that's a good idea. But there are an enormous number of people of these asylum seekers in hotels. There are very large numbers still crossing the channel in that very dangerous way. I mean, it requires an enormous amount more of processing of asylum seekers.

6:46It requires, you know, presumably more of them to be expelled than the government is currently actually doing. And for the rest, they've got to be housed somewhere else. And where are they going to be housed? So there are just lots of numbers in this stuff which don't feel very robust. And, you know, we've talked about this near 16 billion pounds that's going into improve transport in the English regions. But from what I can see, and, you know, I've said this before, it feels like it's just sticking plasters. Great. The Manchester to Liverpool line feels like that's something concrete. And, you know, Andy Burnham's talked about the difference it can make there.

7:29But then the other projects are just little things. They're not things that are going to, I think, provide genuine connectivity in terms of allowing people to have easier journeys around the country from Newcastle to Leeds is a nightmare journey, in all honesty. And so, yes, this money is going in to try and improve things, but it's not changing the fundamental problem, which is that our railway system is an old system and all that's happening is we're upgrading it in little bits. But it's an old creaking Victorian system that can't cope with the capacity which it needs to be able to then allow all of these regional increases in capacity and connectivity.

8:16You know, and the other issue I have with it is, first of all, yes, OK, the Northern Powerhouse Rail sounds really ambitious and we've heard Jim O 'Neill talking about it. But it doesn't feel like it's going to provide a massive increase in connectivity in the north. And I'm happy to be proven wrong on that. But you know what? I'll probably be dead before it happens. Because the other big thing is that it just feels like we keep talking about it, but nothing's actually happening. You know, and it feels like years and years away and we need it now. There are two other sort of odd number of other sort of big things that are worth thinking about.

8:49I mean, one is the sums of money in absolute terms going into health are literally mind boggling. So, you know, by 2029, when you put together day-to-day spending and capital spending, you've got£240 billion just for NHS England and Wales. And to sort of put that into some kind of a context, that is more or less the size of the entire Portuguese economy. and I made a slightly flippant remark earlier on today that on the basis of the kind of growth that we're seeing in the NHS which will be on day-to-day spending it'll be something like half of all public sector spending in three years time. The UK increasingly looks like a health service that happens to have an economy attached to it.

9:47I mean it is just off the charts how big our health service is becoming and I mean obviously it's a catastrophe that waiting this is so long and you can't get a GP and all the rest of it but the sums of money that we are spending for such poor outcomes is absolutely terrifying and I mean the national emergency has to be not to put more money in which they are putting in, they're putting in, you know, it is getting, by the sands of other departments, relatively generous funding, 3 % above inflation every year for the next three years. But the priority has got to be to spend the money better. Because it just, it can't go on, you know, the NHS will end up, I mean, I don't want to overstate it.

10:39But, you know, growth at that level, when you've got an economy that's growing hardly at all, it's not affordable. Yeah. And, you know, my my mom worked in the NHS for 40 years. You know, she only recently left and she, you know, talks about inefficiency all the time and nothing ever improving, constantly letting patients down because appointments were cancelled because machines would stop working. And, you know, she has worked as a radiographer and it was really frustrating to work in that system, which feels like it needs an overhaul rather than just constantly having more money pumped into it.

11:14and they're not resolving the root cause of problems. And also it comes back to all the other areas where your money isn't being invested in terms of the public health crisis is also a lot to do with people's living standards and to do with job security. And we've had employment figures out, haven't we, in this week as well, which have shown a kind of softening in what's happening in terms of the jobs market. although I was pleased to see the money for community projects you know one of the places that was flagged by Rachel Reeves and mentioned in these 350 areas that are going to get this additional money for she talked about parks and facilities and you know swimming pools and libraries and things like that and one of the areas she mentions is Wall's End which is literally around the corner from where I live it's less than a mile away there's hardly anything there for the families who haven't got the money to like get the metro into the city centre or who haven't got the money to pay for all these expensive kids experiences or whatever there's nothing really there that's free that could help to you know engage kids more and keep them off the streets and so that's why I think this kind of community investment is really really important so yeah I was pleased to hear about that whether it's enough money and all of this you know you but that felt like it was a good thing that that money's been focused on areas of deprivation because I can see the impact it has in a place that walls end.

12:52Yeah, no, absolutely right. You know, obviously investing in community facilities, which they say they're doing is obviously a very good thing. Should we go for a quick break? Yes. Because there are a couple of other sort of biggish points that I wanted to focus on to do with whether they are doing enough to give some momentum to the economy, whether they are being ambitious enough with their research spending and their investment spending. Let's have a quick break and we'll come back to that.

13:25Welcome back to The Rest is Money with me, Steph McGovern. And with me, Robert Paxton. So before the break, I was talking about whether they're doing enough to honour their pledge to get living standards up and get the growth of the economy accelerating again after these 15 years of stagnation. And there's no question that the£113 billion of additional capital spending in energy projects like nuclear, in the kind of transport projects that you think are not enough, but still 15 billion in the North and Midlands, which is not completely trivial. Significant sums into housing, particularly so-called affordable housing.

14:17But all of these sorts of initiatives are definitely the kind of initiatives that help with the productivity of the economy. And productivity is so important when it comes not only to overall growth, but more importantly, what we could afford to be paid. It's directly related to living standards. But it is really striking to me if I again turn to the vital blue book that was published today, and you look at where the capital spending is going, by a wide margin, the biggest investments are being made by the Ministry of Defence and the military. So capital spending in defence in 2029-30 is£33.2 billion pounds forecast, compared to less than half that for health and social care.

15:20I mean, the growth in defence, because of the threats from Putin and other dangerous states, is absolutely massive, particularly when it comes to investment in munitions, in upgrading our nuclear weapons capability in submarines. Now, there are spinoffs to the wider economy, because, you know, there are British jobs associated with all of this. I still find it slightly depressing that we now live in a world where our leaders are all about the only way we can prevent war is to terrify the opposition. So it's all about deterrence now. And, you know, one of the reasons why other departments are facing the squeeze is simply because this investment in defence is going up very significantly.

16:11Yeah, and it's really depressing, that point about us celebrating the growth that's going to come from us basically preparing for wars or to not have wars. It just feels like that's not where you want growth to come from, is it? Although the point you make about the spin-off for the economy is there are a lot of jobs in defence which are outside of that bubble we always talk about in terms of where investment tends to go you know that they are there are quite a lot of these businesses that are outside of the south eastern london and so that's a positive but it is depressing that it's coming from essentially arming ourselves for wars yeah i mean just on this uh investment point though i mean one of my concerns is actually in some ways they're not being ambitious enough.

16:57So back in October at the budget, the Chancellor did something that many economists welcomed, which is she changed her fiscal rules. And the one that many economists, people like Jim O 'Neill and Andy Haldane, who are regulars on this show, particularly welcomed, was that when she targets a fall in the national debt for five years time, she moved from a measure of debt that is not quite gross debt, but it's quite close to gross debt, to a measure called Public Sector Net Financial Liabilities, or per snuffle. is a measure that allows her to, in a sense, ignore borrowing that is matched by the creation of a financial asset.

17:57It's borrowing where there's been a financial transaction. So one of the reasons why the per snuffle measure of debt is lower than the previous measure of debt we had is because student loans technically can be paid back and they are the kind of financial asset that you can package up and sell to investors in the form of bonds, they are netted off the debt figures. So the idea of moving to per snuffle was you would engage in financial transactions when you are lending for growth projects. And therefore, the debt that you're borrowing from international investors, it's still real debt, you still have to pay interest on it, but it's matched by an asset.

18:48It's matched by the financial asset, which is the credit you're providing. And therefore, it doesn't add to the target for debt under the new fiscal rules. One of the things, therefore, that slightly shocked me a couple of days ago when we heard about the huge new£14 billion of investment in the new Sizewell nuclear plant, Sizewell C, was I'd assumed that when they made this investment, it would be a financial transaction and therefore it wouldn't add£14 billion to the fiscal rule measure of debt. but actually they did not structure it in that way. So it is a constraint on her ability to borrow elsewhere.

19:37It is not a financial transaction in that way. And again, at the back of this wonderful blue book that has all the numbers, there's a table which says capital expenditure limits, colon financial transactions. And this is essentially the chart which shows how much they are using this new ability to borrow and invest without adding to the measure of the national debt that they use for the fiscal rule. So it's a sense, it's in a sense, the guide to how much additional investment she can do without being trapped by her fiscal rules. Okay. And, and the numbers are tiny, because I, you know, we'd all, we'd all hoped and assumed that she would use the change in the fiscal rules to be a bit more bold with her investments to get the economy moving.

20:27But actually, you know, for all departments in the current year, it's 2 billion, then it goes 3.7 billion, then it goes 4.6 billion, then it goes 7.1 billion, and then it goes 8.8 billion at the end of the decade, which is nothing. These are almost rounding errors in terms of scale of investment. So she's really not being very bold. And the only areas really where there's any real attempt to engage in, you know, you either call it sensible financial engineering, or you call it creative accounting. Either way, there are only two areas where it's happening at all in any useful way. There are small amounts of money, you know, one, one and a half billion per year raised in this way for housing.

21:15And there are little bit more than that, actually, by the end of the decades, three and four billion of loans to help us insulate our homes, the so-called warm homes plans. Again, because both of these categories, you can package up the debt and sell it to investors. But I slightly feel that the conservatism of a risk averse treasury is still in play. This is not redolent of a treasury which is more confident in investing for growth. Yeah, and they're leaving themselves with massive problems because of that, I think. So, for example, if you look at this announcement about training and upskilling, I'm sure that£1.2 billion extra every year to get these millions of kids who are 16 to 19 year olds so that they can get access to high quality training and things.

22:13You know, that's good news for the FE sector. I've talked a lot about how further education has been woefully underfunded for a long, long time. And, you know, hopefully this will mean that they can expand the programmes, their apprenticeship programmes and vocational stuff. But there was no mention whatsoever about what happens post-19 in terms of upskilling and reskilling. And that's a huge problem. We've talked loads about how many... In an AI world, when everybody's going to be losing their jobs, if they don't sort out lifelong learning properly, make it meaningful rather than just some awful cliche phrase, we're going to be in trouble.

22:49The only mention of lifelong learning was to crack a gag about Kemi Badenok. It wasn't, there was, and I was kind of thinking, oh, this must be coming. There must be something here about reskilling people. And also on top of that, I think we're just really behind the curve. So we've talked a bit about the kind of physical infrastructure in terms of transport and things. But we've got a massive digital infrastructure problem. We are falling further and further behind with our digital infrastructure. You know, the UK is the last in the G7 for mobile data speeds. We are at the bottom of the table.

23:24We are 22nd out of 25 countries in Europe for 5G availability. And then what did we hear today about it? It was a tiny announcement of working with industry to deliver the shared rural network so the most remote areas have 4G coverage. We are well past that. You know, I was talking to people in the telecoms industry today. They're not even looking at about, you know, coverage in terms of your 4Gs and your 5Gs. In rural areas now, it's actually going to come from satellite technology because it's really difficult to put up masts in remote places. that's where it feels like we this talk of ai and you know there was a fair bit mentioned about ai today and money for it and everything else it's not going to happen if you haven't got the digital infrastructure too yeah and there's on that point obviously you'll have noticed that the boss and founder of or effective founder of nvidia jensen huang uh said earlier this week at london tech week about his concerns something we've talked about a lot of this program that we don't have enough compute capacity for AI in this country, enough supercomputers and data centers.

24:34There is one final point, though, which is related to providing essentially the fuel for growth. You talked about essentially the infrastructure for growth, but there's also fundamental fuel that any economy that wants to be a modern, fast-growing economy needs, and it is growth in research and innovation. But one of the things that really, really, really pissed me off a few days ago was in the run-up, and essentially a part of this spending review process, they put out a press release that said, yippee, we've got£86 billion of government money going into research and innovation. And this was a press release put out, I assume written by the Treasury, but under the name of the Department of Science and Innovation and Technology, Peter Kyle's department, who's been on the show.

25:29And I looked at this press release, and there were a number of things that, sort of fairly basic bits of information that one would have wanted to make a judgment about the meaningfulness of this number. One was£86 billion, but over what kind of time period? Didn't say at all, right? Is it a year? Is it 100 years? Just didn't say, right? How did you get away with that? So they put that out, right? And then it doesn't say anything about the underlying growth. It did say, which was a sort of clue to how misleading it was, that towards the end of the period, I think in 29, there would be just over 22 billion of this spending.

26:14Anyway, I sort of rang up some officials and I said, I'd quite like to know what, you know, over what, you know, just how many years does this cover and what's the underlying growth rate? And so they went away and they came back and they said, this is four years of money. Right. I mean, it's a completely it's a completely meaningless number on that basis. So they just added together four years of money and they actually they claim. but I suspect this is overstating it, but they claim that compared to the year we're in now, four years from now, OK, the growth will be 3 % above inflation. That's not 3 % every year.

26:52That's 3 % in total. Right. Now, even if they're right, and I suspect that's slightly over-egging it, that would mean that research and innovation as a share of the economy would be falling. OK, which is the last thing you want. If you want, you know, if you want cutting edge life sciences, if you want to be world leading in digital businesses, in artificial intelligence, you've actually got to ramp up this spending faster than the growth of the economy. Because these are, this is the basic research which generates the businesses that then pay taxes and pay all our wages and make us successful.

27:33So there were two things that really, as I say, technical term, massively pissed me off. One was they tried to pretend that this was some amazingly generous funding. It wasn't. But secondly, which is the more fundamental point, if the government was serious, really serious about turning us into a technology powerhouse, you know, frankly, there should be there should have been at least another 10 billion over that period put into research and innovation, possibly even more than that. so you know we've all you know we're all patriotic we all want Britain to succeed and you know I'm afraid to say there is nothing more important in my view because they can learn research and innovation and the other thing which is weird about it there aren't many levers that any government can actually pull to get growth up you've talked about skills that's one of them right another one is the investment we've been talking about but investing in research and innovation through our universities through our research institutes it's absolutely vital um and i you know to pretend to pretend that they're spending more than they are it was shocking in my view i mean thank god you were able to pull them up about it though and and get to the change are they and the other thing which is just weird and the other thing which is weird and I don't want to sort of criticise my friends in the media.

29:03But the problem is I'm slightly obsessed about this stuff. Quite a lot of people who comment or write or broadcast about this stuff just see, oh, it's a big number and they just repeat it without actually sort of saying, you know, what's underneath all this? So the government does to an extent get away with it. Yeah, because that was your point right at the start of all this was there were a lot of things kind of announced but no substance. there was no way of working out whether it's a good value or whether it's how it's going to work how the money's going to be allocated what it's going to mean in practical terms you know there's a lot of guesswork to do which kind of lets them off from accountability in some respects Well except they're not going to be let off because people like you and me are going to be asking these questions day in day out until they lose the will to live Yeah which I have just done now so should we end the podcast?

29:54No I'm kidding I'm kidding I'm kidding Probably the right moment alright darling ok right thanks for listening everyone bye bye that's it from us on the rest of this money see you soon goodbye