181. What Are Kemi Badenoch’s Economics?

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1:18Hello and welcome to The Rest is Money with me, Robert Peston. Steph's otherwise engaged and Kemi Badenoch is with me, not as a Steph stand-in, but we're going to have a conversation not about detailed Tory policy because Kemi has very loudly said she hasn't got any. It's all in development. But I did really want to have a broad conversation about, I suppose, God, I hate the word philosophy in this context, but essentially your approach to economics and business and the sort of framework within which over coming months you'll develop policy. So, I mean, I just really wanted to start by asking you, you cannot escape as leader of a party having economic views.

2:03And therefore, when were yours set? Where was your economic education? It's been very much personal experience. And I think I've had a lot of economic education, most of it forced, not just read. But I don't know when I would say they set. I know when they started. But as a kid, were you interested in the economy? Were you in a household where people talked about economic ideas? Not ideas, but actual real life, what is going on, what is happening. And I often tell people about growing up in a different country, having my childhood in a country where all of the bad ideas were practiced. Run us through what they were.

2:48So I often tell people that I came to this country age 16 with no money, just my dad's last£100. So people assume that I was born into a poor family, but I was actually born into a wealthy family that lost all its money because of bad economic policies. I was born in the UK, but my family were sort of Nigerian oil boom, everything, people were buying houses in Knightsbridge. And then you have a government that is, it's military, but socialist. And money is no longer worth what it should be. It's hyperinflation, capital controls, trying to peg the naira to the dollar and effectively just washed away people's savings so it wasn't that the money was expropriated it was it just that its value was decimated by inflation i mean decimated you know literally does not explain what what happened and it's still going on now so did your family literally lose everything pretty much pretty much and it's inflation it's a lack of income coming in my mother went through about three years where she just didn't get paid She worked for a university, so that's public sector.

3:48And the government just didn't have money to pay people. So they add up all their savings. Yep, yep. Savings disappeared and then inflation. So I'm terrified of inflation. And I always have at the back of my mind that what you have today may be gone tomorrow. And you need a government that is looking after the day-to-day finances. And I think sometimes we end up in conversations about GDP and the macro. but we need to keep it as simple as possible. And you know, again, just... Sorry, do you want to hear about my... Oh, no, sorry. I wasn't trying to interrupt. I was trying to get you to expand, but no, you keep going.

4:25Sorry. Sometimes the conversations are often about the macro economy, but how can we make sure that we are living within our means, that we're not spending more than we earn and that we're actually creating, producing, growing? Those are the things that really concern me and also justifying what government is doing with our money. Because government can spend and say, we're spending this and they can call it investment. But what are they actually doing with the money? Is it bringing value? Is it helping to improve the country? Or is it just being spent on the day-to-day? And that's really, that's the focus.

4:56I want to drill down into this because obviously that leads on to all sorts of interesting questions. But you also obviously... That was the beginning of the education. No, totally. But you also obviously, given your history, had a highly developed work ethic. Where did that come from? Parents, family. I don't think I ever thought about it any other way. It's just what you do. I mean, today is a classic example, up at 5am, and I'm not going to be back home till midnight. You know, we're talking about a fundraiser this evening. And it's just been back to back, you know, today program at 7am, interviews, media, parliament.

5:31And it's just what you have to do. The work ethic has always just been what I had to do. I had to work when I was 16. I had to work throughout FE college and throughout university. Otherwise I wouldn't eat. So you didn't become, because you said you grew up in a wealthy household, but you weren't spoiled by that. Somehow you still retained a work ethic. Yes, yes. But when I say wealthy, I don't mean trillionaires. I mean wealthy within a third world country. That meant that we had lots of food to eat. We had a car. We lived in a very nice flat in the sense that everybody had a room. We were never hungry.

6:04That's what I mean. And when you're surrounded by a lot of poverty, there is also a mindset, this tiger mom mindset, which many people see with immigrants coming into the country, that if you're not working hard, you're going to end up like the person you can see across the road who's living on the streets or having to ply their trade. I grew up in a place where children, little children were out begging and selling things and working and so on. And when you ask questions, my parents would always say, well, that's what happens if you don't get a good education. So, of course, everybody then it's very competitive educational environment.

6:40They're not that many good schools, not very many universities. So the work ethic comes from knowing that if you don't do this, you won't survive. And the same thing happened when I was 16, moving back to London and just having to work to eat, having to work. It was either eating or going on the bus or just having to make those trade-offs day to day. So I understand what it's like when people say they don't have money. I understand when people are talking about the cost of living because I lived that life. I don't live it anymore, but I will never forget it because it keeps you awake at night.

7:14It keeps you thinking, how am I going to pay the bills? How am I going to get through each day? What's going to happen to my children? What's going to happen next week? I understand that anxiety. Now, your economics is not all about personal experience. So I've seen you refer, for example, to the conservative African-American economist Thomas Sowell. How did you come across him and what is it in his writing that you admire? So I came across him completely by accident. So I talked about personal experience of an economy that's not working. But how did I find out about Thomas Sowell? It's a very unusual story.

7:52So I was having an argument at work with some French guy who talked about some things. So this is before you're in Parliament? Yeah, well, long before I'm in Parliament. And I didn't understand what he was talking about. And I thought, I should go read up on this. So I went on to Amazon, and I just typed basic economics, you know, thinking I get like a Cliff's Notes thing. And the Thomas Sowell book came up and it had really good reviews. So I ordered it. And it was a revelation. And it wasn't for many years that I realized that Thomas Sowell was actually black, because he doesn't refer to his race or anything in the book.

8:23But it explains so much about what my sort of high school economics, I knew in theory, but I didn't really understand in practice, you know, supply and demand, price controls, rent controls, why rent controls don't work. And I saw so much of what he was writing in my life. You know, this is the mid or early 2000s. And, you know, then in the UK, comparing it to lots of different countries that I'd been in, the US, in Africa and so on. And I just thought, this is the truth. If you know when you see something and you have an epiphany, this is a revelation. So I love Thomas Al for that. Because he is a very small state, for example, very much in favour of free trade.

9:04He's been very critical of Trump's tariffs broadly, because I think many of our listeners will be coming to your ideas, new as it were. Is his framework your framework? I would say broadly, I never think that I'm wholesale, you know, an adoptee of anyone in particular. I often find people saying, so are you Margaret Thatcher, you know, Mark II? Are you Thomas Sowell? There are always things which you'll agree with, but we need to adapt things for the age that we're in, not necessarily for the age that theories were written. And also a lot of what he talks about is American and many of the concepts stay the same.

9:43But Britain is a totally different place. We are a trading nation. Trade means so much more to us than to the US. You know, we need those global trading rules to work. We need the system to be very functional. And my trade training after sort of like basic economic priming came from being trade secretary and just having to do those negotiations and see how everybody treats trade like a zero-sum game, which it shouldn't be. But if other people aren't playing by the rules, then you need to be very careful. The thing I hate most is when we play by the rules and nobody else plays by the rules. And it's why I use this phrase that Britain is being mugged.

10:20We're always playing by Queensbury rules and other people take us for a ride. And we've got to stop that. And when I see Labour going to negotiate, I see this mindset of assuming that everybody else is playing by the rules. And when they make complaints, they're all very valid. And, you know, reparations and so on. That's how we've ended up giving the Chagos away for 30 billion pounds. It terrifies me watching them negotiate because I think they're just in a very naive space. But on this issue of playing by the rules and trade, was the prime minister therefore wrong to assume he could do a tariff deal with Donald Trump, who doesn't care about free trade at all?

10:58No, he wasn't wrong to assume that he could do a tariff deal. What he did was oversell it. You know, he said it's a historic deal. It was not a historic deal. Liz Truss did a tariff deal. Tariff deals come and go, the Section 232. It was the right thing to go in and try and get a tariff deal. What he should really have gone for was a full fat free trade agreement, which we may have lost. That's what we were negotiating. Why do you think we've lost it? Well, because he stopped talking about it. This is Keir Starmer. That's what we were negotiating with Trump. We weren't negotiating a tariff deal when Trump was first in the White House.

11:33But I think they are still negotiating it. That's not my understanding. That's not my understanding. Maybe I should ask him that at the next PM. I think they're still negotiating here, but I think they may not get it. I think that's a different issue. But also what he negotiated on the tariff deal has already changed. So the things that he was congratulating himself for have been lost. And I feel sorry for him because trade negotiations aren't easy. But the one thing you don't do is rush out and say, look at this historic thing. You've got to wait until it lands. And what he really signed was an MOU, which has changed already.

12:05It wasn't signed in ink. Well, we'll see whether, you know, we've only got a couple of weeks to see whether it gets implemented at all. We're living, as you say, with Trump in somewhat unpredictable times. And whether you're a politician or business or trying to run a household, it's hard living through this degree of unpredictability. And we're talking the day after we had Rachel Reeves spending announcements. You started the conversation by saying for you, what really matters is a demonstration that any government department is actually delivering a service that works for this country. And so I just wanted, therefore, to sort of drill down what that means for individual public services.

12:52And I guess the thing that I thought we should start with is health for the simple reason that there is this sort of extraordinary paradox about health. You know, we got some numbers yesterday which show that by 2029, there will be£240 billion of taxpayers' money in the form of day-to-day spending and capital investment going into the NHS. Now, that is an astonishing amount of taxpayers' money, depending on how you measure it. Just the day-to-day bit of NHS spending is somewhere between 41%, 42 % and 49 % of all public spending. It's jaw-dropping how vast the NHS has become. The new head of the NHS said yesterday it's pretty much the same size as the entire economy of Portugal.

13:46I saw that. Which is, I mean, you know, the paradox is there are plenty of people who are saying the 3 % a year that's going in won't fix the problems, right? Despite the fact that it is a mind boggling amount of money. So I suppose the question for you is, what would you be doing about all that? I'm glad you asked about health because I think it is the best example of what it is I'm trying to explain. I remember coming in as a new MP and we, do you remember the 350 million on the side of the bus? We're going to invest 350 in all the Brexit money. I don't think anybody in this country has forgotten this.

14:20It caused a lot of pain for a lot of people. But we did that. We put in all that money and more. I was a bit sceptical that we were going to see returns. And I remember Jeremy Hunt was health secretary and we talked about record funding. That's what people want to see, investing in the NHS, investing in the NHS. And yet the more we put in, the less we were getting out. So that means that there is something going on that is not a function of how much money you're getting. And this is why what Rachel Reeves did in that first budget was so wrong. We should have been hearing about reform. How are we fixing the things that are going wrong?

14:53And there's no discussion of reform. It's just let's just keep giving more and more money and hopefully it'll all come good. This is not a realistic proposition anymore. So their approach is put in the money and then ask for reform. You're broadly saying what your broad... Did they ask for reform? Not yesterday. He's put out a survey. But we're streeting since, I mean, actually, even before the election, talked about the importance of reform. But the point is, they are putting in an enormous amount of money. And, you know, you either trust them that they're going to reform or not. I think what you're saying is money has to follow reform, not precede reform.

15:29Exactly. Exactly. And I'm not a health expert. But even when you speak to the staff at the, you know, in the NHS, and I use the NHS, they say that it's not working for them either. Some of them will say it's funding, but others will say the whole thing just doesn't quite work. Apart from the collapse in productivity in the health service, which is sort of huge and impossible to ignore, what are the things that don't work? How do you mean? Well, you're saying we've got to be honest about what's not working about the NHS. Well, you know, there is this big thing, which is they recruited a lot more people and they've got a lot more money and the output per person and per pound spent has fallen.

16:11Essentially, how do you fix that? But also you just made a general statement that there are things wrong with the NHS and we've got to be honest about them. So I'm just asking you, above the thing I've just described, what else is wrong? Well, well, but that is the thing that if you're putting more in and getting less out, there's clearly something that is not right. Even the people who work there will tell you that. And they will give their example. Sometimes it's procurement. Sometimes it's the fragmentation within the NHS and so on and so forth. We could go into all sorts of issues. As I said, I'm not an expert.

16:41There are many other people who could go into that detail better than me. But what I'm organising is a policy programme that's actually looking at these things and that we've got advisers, we've got staff working on that so that when the next election comes, we can say, here's how we're going to fix it. But simply saying we're going to put more and more money into it to the point where we're spending more on the NHS each year as Portugal earns, that's just not, it's not sustainable, is it? I think everybody knows that. I mean, I think that is right. But equally, it is a perfectly intellectually credible thing to say that if you look at other countries where they still have enormous state support, but the structure is different.

17:19It's an insurance based system rather than a command and control based system. Or you have other countries where you have health services that are more devolved, broken up. Nobody in this country wants to talk about that kind of radical restructuring because somehow the sort of post-war Attlee settlement of the NHS can't ever be tampered with. And so I suppose the question I'm asking you is, given the collapse in productivity, the fact that at the moment the bill just goes up and up, should you and indeed other political leaders just be braver in talking about structural reform? So I'm perfectly happy to talk about structural reform.

18:00What I'm not happy to do is just make announcements without a plan. Before you talk about structural reform, you need to know what you're reforming, how you're going to reform it, what the outcomes you want to see at the end of it. That's the work we're doing now. What I'm not going to do is rush out like Nigel Farage does and says, we need social insurance and not think about what that means. How to change our system to that will probably be, you know, many decades of work. It's not something you do overnight. My view is that the NHS should remain free at the point of views, but how it's funded, who does the work, whether companies get involved in terms of the payments and so on, an insurance system, all of that needs looking at.

18:37You can't just say we should just have this instead. It would take decades to change that system. What I want to see is us having an honest conversation about what is going on with the NHS. Let's get the people who are in there out and say, what do you do? How do you do it? Let them have debates amongst each other, which is one of the things that I want to see at our party conference. We often have medical professionals within the Conservative Party who have disagreements on how you should fix these things. But having an honest conversation in good faith is quite difficult in this country. One of the things that happens is if you start to speculate on what something might look like, people assume bad faith assumptions.

19:14So, of course, a lot of people are scared. I mean, look what happened in 2017 when Theresa May talked about social care. And, you know, it went down like a lead balloon and everybody's been too scared to talk about social care. But we did all we could over those 14 years. No one can say that we underfunded it. We spent more than ever before. Now it's Labour's turn. And we've told them that we'll support them with reform. Nothing has come. And, you know, if we go back to the thing that started this conversation, which was the spending review, my worry is that while they're wasting time, we have an economy that's not growing.

19:46We're not going to have an NHS the way Labour's going because we're not getting enough money to pay for it. OK, I should just point out because otherwise listeners will be throwing things for listening to it on their iPhones. they may be throwing their iPhones out of the window. To be clear, it is true. Well, because it is true that, as you said, at the end of your government's period in office, you then did put money in the 350 million. When I was a new MP, we're talking 2017, 2018. Cameron and Osborne, four years, put way less money into the NHS than it had historically received. And COVID was a massive strain on the NHS's ability to perform.

20:27And so the idea that your entire period in office was ample funding is just not right. Essentially, the latter period was an attempt to, Jeremy Hunt would say this, to correct the damage that was done by the austerity. So I disagree. What we do is balance the books. And when Cameron came in, he went in cutting the deficit and trying to make the finances work. And I will always give him credit for that. And let's face it, we cut the deficit every year until COVID. If we did not do that, there is no way we would have been able to pay for furlough and for lots of people to still earn money and stay at home.

21:03And I will always be proud of what we did during COVID to keep the economy going. We probably spent too much. And that's one of the things that caused inflation during those years. But we brought inflation down to 2 % despite COVID. It's doubled in the last year. We had COVID and a war in Ukraine. What's Labour's excuse? So just to be clear, I think you're talking about a slightly different point from the one I'm making, which is, you know, you want to do long term analysis of what's wrong with the NHS. You can't ignore essentially what many people would say was some structural damage done, whether it was justified or not, by the austerity years and then by the strain of COVID.

21:41But I do want to move the conversation on a bit. I will just say one point that austerity is reducing spending, not reducing increases in spending. And that's what we're talking about here. We reduced increases in spending, but we still increase spending. That is not austerity. And we have to be honest about that. Otherwise, we're just going to be in this situation where the NHS is 98 % of public spending and everyone keeps saying, oh, it's still austerity. You yourself made the very intelligent point that the demands on the health service because of an aging population and also because of changing expectations of users have been increasing.

22:19And if you want to make any kind of assessment in a rigorous way, you actually have to make an assessment of how much money is being spent by taxpayers relative to individuals and their needs. So austerity is not just some aggregate number of money going into a public service. It is what are the demands? But it's also what you're doing with that money. Spending and investment are not the same thing. That's the key thing. And there were reforms. You know, there were reforms. Now, you may disagree with the reforms and say they worked or didn't work. But what we're having now is a government that's acting like it's at the end of a 10-year term rather than at the beginning of a fresh one.

22:58It's just tweaking. We'll move a little bit from one department here to the NHS, take some tiny bits here for the police. But where is the great legislative program? When governments start, they have loads of bills going through. We're not seeing any of that. We just have general debates in parliament now. And that's what worries me, that we are now in an era of managed decline. I would have been very interested to see, fine, it's not my politics, but a radical labor agenda that wanted to deliver something. There's nothing radical happening. It's all piecemeal. So I think it slightly depends on whether you believe that in a sense, under the surface of the spending increases, they are going, for example, to roll out the kind of technology, artificial intelligence, for example, within the health service that could lead to a radical improvement, both in information sharing and in productivity.

23:50Are you helping them write policy, Robert, because they're not talking about these things. No, they are talking about these things. Yeah, but not seriously. Where's the paper? Where's the detail? Where's the meat? Well, I mean, they're just announcing, well, we might use AI or we might do this. That's not serious. Anybody can do that. Well, they are. I mean, you know, they are, for example, I mean, we can judge whether it's any good or not. They are, you know, allegedly going to launch. Well, it's what they tell me, you know, they are going to launch an app quite soon that is, you know, that has significantly more of all our records on it, as it were.

24:24if that were the case and if it meant that when you, you know, happen to be part of the country, you know, a long way from your GP or, you know, from your local hospital, that would be a good thing. I remember us talking about all of our NHS records being in the same place in 2004 when I worked on the project. Remember that NHS spine project and Tony Blair was going to put it all together? 21 years later, we still don't have it. That was, you know, that was a disaster. So let's see. That's all I'm saying. I'm just saying, let's see. That's all I'm saying. But I'm, you know, I like to define myself as a cynical optimist.

24:59I think this country can do amazing things. I think that we have the fundamentals to be truly radical and really revolutionize our economy. But where is the meat? So when people say, oh, we're going to use AI, everybody on the street is saying, oh, we can use AI. Saying we can use AI is not, in my view, you know, that's not thinking. Where is the meat? It's a year. They've been in power a year. And our agenda right now is making sure that we don't end up in the situation labour in, in government with no plans and just wanting to spend more and more money while squeezing the people who are creating the money, the people who are out there grafting, working hard, worried about how they're going to pay their staff, worried about if they're going to have a job.