189. What Would The Outgoing Boss Of The IFS Do If He Was Chancellor?

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1:59from the IFS outgoing. He's now left the IFS as this episode's going out. But yeah, we want to look back, don't we, Robert, at his time being in charge of the Institute for Fiscal Studies since 2011. He worked there before that as well, but took over in 2011. So loads to ask him about what it's been like in his time. He has. And I think what we really want to do is get two kinds of assessments from him. One, why have the public finances deteriorated so much? You know, it was his job to keep an eye on them in 2011. Why has the national debt exploded? Did any government since 2011 get anything right?

2:38So that's one big question. And secondly, given that he is the critic of all these chancellors, and my goodness, he's had to work with a ton of them, what would he do if he was chancellor? How would he reform the tax system? What kind of fiscal rules would he want? So here is our second part of our interview with the outgoing head of the Institute for Fiscal Studies, Paul Johnson. Paul, it's lovely to have you back. And, you know, after such a long time at the IFS, you've been there, what, since 2011? How are you feeling about leaving? Yeah, it's not just I've been there since 2011. I actually did the first 10 years of my working life at the IFS back in the 80s and 90s.

3:17So it's been a really important part of my life. And I've absolutely loved being at the IFS. It's a wonderful institution. My colleagues are just extraordinary. So it's a huge wrench. It really is. To be honest, partly I'm leaving because I think it's the right thing for an organization not to have someone running it for too long. My colleague, Helen Miller, who's taking over is just fantastic. So I know that I'm leaving it in really good hands. But for me, it was finally time for a change. So it's really tough to leave. But I guess I think it was the right thing to do. At least I hope I still think that in a year's time.

3:54Did running the IFS feel like quite a heavy responsibility? The reason I ask is just because one of the really unusual things about the Institute for Fiscal Studies is the extent to which what you would say in the aftermath of a budget or a spending review really mattered. But newspapers would write lead stories on the basis of whether you were being critical or not critical of a budget. News organisations, TV stations like ITV, where I work and the BBC would also, you know, they'd lead the news on the pronouncements of the IFS. So if you got it wrong, that was quite serious. There was quite a lot of pressure associated with running it.

4:43Yes. But let me start by saying that there's two different sorts of pressure. I mean, one is that I think people don't understand that the IFS is, we are just literally a small charity that exists by happenstance. Which is why it's extraordinary that you have this influence. And so one of the pressures is just making sure that we're still here next year. Actually, I mean, literally, all of our work is funded by raising research grants and, again, by my amazing colleagues who do a fantastic job of doing that. So there's that responsibility of running the organisation and at least feeling responsible for it in that sense.

5:16But then the question you're getting at is the external impact. And that's something that took quite some time, I think, to get used to or appreciate. I think one finds it difficult to realise that one can have that impact, that what we say can be so important. But once you do get your head around that, then yes, it is a significant responsibility. But again, I think the way that we work collectively, where we are very careful to get the facts right, We're very careful about the way that we speak so that we're not chasing headlines with what we say. Do you train your colleagues to be measured in how they express stuff?

5:57Absolutely. I mean, that's, again, one of the fantastic things about the IFS. I mean, we hire people straight out of university at 21 or 22. We train them in economics, probably the best place in the country where you can be trained as a really good economist. but also you know they get a lot of practice in speaking and speaking to the media and and presenting and so on so that by the time they're in their mid late 20s they are polished performers and some of my colleagues are fantastic at that do you have to say to them like okay right that you delivered that beautifully but you were a bit too excited or it sounded a bit dramatic like when you say you know to get the measure right because i remember watching mark carney when it was the morning of Brexit and there was the you know him having to do this speech to kind of make sure the markets didn't take too much from how he said what he said like getting the tone right so is that part of it then just like how you deliver the tone of things you're saying to some extent it's just it's the whole culture of the place the whole culture of the place is to be independent and objective and careful and to communicate effectively we do it explicitly so whenever you know you see the presentations that my colleagues give after a budget even by 10 o 'clock the next morning they will have practiced that a couple of times with someone else so that we've kind of fed back to them and they know that and you know and you work all through the night after a budget don't you pretty much um and that's you know and that's just one example and we obviously most of what we do i mean the budgets are only once or twice a year but most of what we do is longer term more serious um research but we then present that in a way that we hope helps policymakers the media public understand what's there so again the way we present it is important as well as the quality of the work that we do and i say that that is the whole culture of the place and why it works in my view so well can i just ask on this issue of getting it right if you look back on the sort of 14 years you've been there is there any evaluation that you made of a fiscal event a budget or spending review um or something else where if you'd had your time again you might have had a different take oh gosh i'm sure there is but i they all sort of merge into one after all of this time which is maybe why it's time for me to move on i mean it's um there were times through covid for example where um we found it very difficult to make a judgment about what we should say about some of the policies that were implemented then both because of the complexities around COVID itself, but also was the generosity of the furlough scheme and how long it went on appropriate.

8:36And I think maybe we self-censored a bit too much during that period. Well, because you just didn't want to cause more anxiety for a nation that was already very anxious. And because we weren't sure, to be honest. And what do you think now? Because, I mean, there is a fair amount of evidence, certainly on the debt side, that, frankly, the borrowing was too much. Well, I think we were too generous. I mean, I think one thing that is very clear is that furlough went on for too long. And I can't remember how clearly we said that at the time, probably not very clearly. But I think I remember thinking it and thinking, oh, is that something that is, you know, are we sure enough about that?

9:12So, I think that's one example where, you know, maybe we, you know, occasionally too careful. That's so tricky, though, because hindsight is obviously a great thing. But at the time, we didn't know when it was going to end, you know, when it started. it was just like oh it might be just a couple of weeks of us having a lockdown or whatever so it's really it'd be very hard to have made that decision to stop furlough at the time any sooner wouldn't it well i mean remembering back remember it ended in september 2021 and that was quite a long time after the last lockdown had occurred and obviously the the vaccine was being rolled out and the and the extraordinary thing at expo was that that you know lots of people worrying i think there was still about a million and a half people on furlough something like that i mean this is from deep memory at the end of september 2021 and everyone's worried well there once fairly goes to me a huge spike in unemployment and there was nothing at all and which broadly told you that it had gone on too long yeah absolutely and i think there were lots of indications that that was the case before that and the i mean i also think and there's a different issue probably the bank of england got things wrong during covid with the scale of its money printing operations over that period as well so I think there were, you know, things there where at the time, that looks a bit iffy, but it was a moment of national crisis.

10:29So it's quite hard to know what the right response is. Can I take you back to 2011? You join right in the thick of the George Osborne David Cameron austerity programme. was the ifs concerned enough publicly critical enough of the fact that they were doing damage to the growth rate by the way that they were reducing investment so i think there were i mean you're right there were big cuts in investment there and i think that was always a problem i can't remember to the extent to which we refer to that as an issue i think there were always two competing sort of thoughts in our minds during that period.

11:10One was, this was an historically extraordinary set of cuts to public service spending, which we talked about a lot. And the other was, there is a big problem here with the level of borrowing and debt that we've got, and the fact the economy has got a lot smaller than we expected to be, and therefore, something's got to give. And we're very clear that there was a choice here between spending and tax. The government went on the spending side. So, if you look back, what looks to have happened is that I think you can make a pretty strong case that, you know, the first three years, say, of those spending cuts were, in a sense, fine.

11:51I'm not talking about investment spending at this point. Local government and various other bits of the public sector coped. But then the next sort of after, say, let's say after 2013, things started to really start to go wrong. And I think That's where it was really doing damage that we're still seeing in the justice system, in social care and so on. And you didn't get that level of focus in central government on, you know, it went well for two or three years. So we can do more of it, I think was the kind of view. Let's just look at health in particular. Although health increased fractionally in real terms relative to the demands on health and relative to the real increases health had seen since the creation of the NHS, this was really hard for hospitals and GPs and the health service in general.

12:39now looking at the big sums of money that are going in to health weirdly if austerity had been less biting on health would we also be net of everything spending less in the round now i think that that's a really interesting question and um if you look at sort of the health service over the last 25 years you you saw astonishingly fast increases in spending over the 2000s and there's some evidence that that wasn't all well used because it was coming in so fast that it sort of driving up costs there was it exactly it was causing inflation exactly so it was it was driving up costs in the service at the time and creating i think some inefficiencies and indeed if you look at productivity in the health service it looked terrible over that period and then you you have the 2010s when the taps are turned off actually you do see productivity increasing over that period but they're sort of forced to do more with, not with less, but with no more coming in.

13:38And again, I think some slowdown in the rate of growth was probably not a bad thing in terms of consolidating. But then again, things through 2015 and after started to get really tough again. And we've got this huge increases in waiting lists, which preceded COVID and actually not even now seem to be driven by COVID. certainly a much more rational thing would have been over this 25 years to have had a similar you know average rate of increase but to do it you know much more smoothly rather than the feast and famine that we've seen are there any examples anywhere in the world where austerity has worked where it has you know got people in the end have got back on track so it depends what you mean by work i mean in ireland and for example have a much much stronger deeper but shorter period of austerity to get itself back on track and Greece the same and they really have got themselves back on track in a really impressive way and it may well be that a shorter sharper dose would have been more effective rather than the sort of you know long-term boiling as it were it is a fascinating issue whether or not you know as you say long drawn-out boiling of the frog sort of meanness over a period of many, many years is more pernicious than a radical cut.

14:56Yeah. Lots of countries had austerity in the sense of raising taxes and cutting spending to get borrowing under control. Where the UK was different from a lot of those countries, particularly in Europe, is we did more on the spending side and less on the tax side over that period. And we're sort of reaping the rewards of that at the moment, where we're finding we're having to increase spending and taxes to undo some of those effects. What did austerity achieve in terms of getting the size of the state down? By 2019, the size of the state was almost exactly the same as it had been in 2008, after 10 years of new Labour government, which had significantly increased spending over that period.

15:35So what austerity did was get us back to where we'd been in 2008. It wasn't to shrink the state to where it had been in 1997 or some previous moment. And that's because there were continued pressures on health spending being the obvious one, but some other parts of the welfare state as well. And again, when growth is really poor, you've just got less scope for making public services better without increasing the size of the state. But broadly, because people need to understand this, it wasn't, let's be clear, that austerity was somehow more generous than is widely thought. It is simply that when you have an economy that is not growing, the problem you end up is a proportion of a relatively smaller economy.

16:20As you say, the state public services are as a proportion bigger. But in absolute terms, there's obviously been a lot of downward pressure. Yeah. So if you look at spending on things like the justice system, local government and so on, by 2019, they were well down on where they'd been in 2010 in real terms. But because spending on other things like health and so on had gone up, the overall effect was relative to the size of the economy. You were the same place in 2019 as you were in 2008. But part of the problem here is just that we hadn't had a growing economy. So had the economy grown as we would have expected from 2008 onwards, then we'd have had piles more money to invest in.

17:02Well, piles more money or as a share of GDP, the state would have been a lot smaller. Possibly that's what would have happened. I mean, most of history tells us we would have probably just maintained the size of the state and had a better health service. This is just a thought experiment. That's all. It's not that in practice, governments wouldn't have spent more if there hadn't been more tax revenue. It is more that the reason why austerity doesn't take us back to a sort of Thatcherite world is because there's no growth. Absolutely. As you'd expect, Paul, I've got tons more questions to put to you, as does Steph.

17:32So stay where you are. We'll be back in a minute or two.

17:39So the last time we spoke to you, Paul, in the previous episode, you talked about how, you know, we were talking about fiscal rules at the time. And if you look at the last kind of 25 years of them coming in, our deficit has risen faster than other countries. We're paying more interest on government debt than other OECD countries, apart from, I think you mentioned Iceland. So it's disappointing, isn't it? Have we got anything right in that time? because it feels like we've just had austerity. We've had various different, you know, governments now as well. I know they haven't been in long, but, you know, we've had a change of government.

18:14Things don't feel like they've got any better. It must be disappointing for you when you've been talking about, you know, fiscal stuff for the last over a decade and it hasn't, we haven't improved in any way. I mean, I think it genuinely is much too early to judge this government. I mean, we've only had a year and it takes a long time to make a difference. If you look at the period since 2010, you've got one period, which is the period up to 2016, where you've got, whatever you think of it, a government which had a sort of a strategy. And that strategy was to cut spending and get borrowing under control.

18:48And you could see what they were trying to achieve. And they got reelected in 2015 with a very clear manifesto saying we're going to keep cutting spending. And actually, if you look at the sort of earnings figures and so on, they're just beginning to turn around in 2015, early 2016. They are. And then they make this catastrophic strategic error of having a referendum on leaving the EU. And at just the point when the economy is taking off, we vote to leave the EU and everything collapses. Exactly. So you have the immediate sort of negative effect there. And then if you're kind of dividing this period up, you've got the period from 2016 really pretty much through to the last election.

19:28I mean, you could argue that a year or two before that of complete political chaos. Now, I think one of the questions in terms of what the impact of Brexit is, is you've got the impact on politics, which has the consequence that nothing else happens, that you don't get the reforms to local government finance. You don't get the focus on social care. You don't get the changes, the reforms you might need in the health service or indeed any kind of comprehensible tax policy because everyone's focused on this sort of getting out of the EU and the chaotic politics. but I think it's worth doing a thought experiment.

20:04Suppose the Brexit vote had gone 52-48 the other way. Now, you wouldn't have had the immediate fall in the pound and so on, but you are pretty sure have had at least another six years of political chaos afterwards because I don't think the Brexiteers would have said, OK, that's fine, let's get on with government as normal. I think we would have had a different form of chaos and therefore some of the negative consequences of that. But we've had a really extraordinary period since 2016. where fiscal policy has essentially taken very much a back seat until much more recently, as everybody's been focused on this whole issue of how you deal with Brexit.

20:44And the combination of the real economic effect, as it were, and the political effect has been to make sure that we've performed fairly poorly over that period. That's interesting that you're saying the problem was the question being asked in the first place, not the actual result of the question because either way chaos ensued well i mean who knows what would have happened if it had gone 52 48 the other way but my guess is as i say we wouldn't have just got back to um business uh as normal um now i'm gonna put i don't know whether you're going to regard these as fair or unfair questions but some i'm guessing unfair given that you've preface than with that question.

21:24You've had all these years holding chancellors to account, often causing them enormous difficulties. So I'm going to ask you two big questions. Given that you're the know-it-all on all this stuff, tell us what your ideal tax system would be. God, how long have you got? And tell us what your ideal set of fiscal rules would be. An ideal tax system. Well, I mean, that really is. You're going to have to invite me back for another six episodes to go through. Give us the framework. To go through that. I mean, the framework is that it's really important that tax systems treat similar things similarly.

22:05And our tax system fails on that in all sorts of ways. It treats different sorts of income differently. So if you're self-employed or a business owner or an employee, you get taxed really quite differently. And you're saying that has really negative, distorting effects. That has negative effects on the way that people behave. We tax cakes and biscuits differently. We tax different kinds of consumption differently, and that has a negative effect. We're pretty much the only country that doesn't have any VAT on food, for example. You see, I would never get re-elected if I was introducing my ideal tax system, which is part of the problem.

22:38We've got this absurd sort of difference between national insurance contributions and income tax. National insurance is just another tax on earnings. We undertax, therefore, pension income because there's no national insurance contributions on that, whereas there is on earned income. And is there any rationale for having this ceiling on national insurance? If you didn't have that ceiling on national insurance, you'd have another, what is it now, another 6 % on top of other taxes. So the top rate tax wouldn't be 47%, it would be 53%. And you'd have to then consider whether that was appropriate in that way.

23:15Because, again, you need to look at this together. we still have a progressive system overall if you add income tax and national insurance. There's a real problem in Scotland, by the way, where the higher rate of tax comes in well below the national insurance ceiling. So if you're between something like, I can't remember, 45 ,000 and 50 ,000 in Scotland, you're paying a really high rate of tax on that income. But the one bit of taxation that I would target immediately for change is the taxation of housing, which is an absolute catastrophe. We talked a bit about council tax in the last episode.

23:46It's absurd. It's regressive. It's out of date. It's distortionary. But what makes me even angrier is stamp duty, which is, I think, probably the worst tax that we have. And chances keep on increasing it. And remind us why it's the worst tax. It's a tax on transactions. And that means that one of the consequences of all these increases in stamp duty is the number of transactions in the housing market is much lower than it was 30 years ago. Much lower than it otherwise would have been. It locks people into houses that are inappropriate for them. So big family houses don't get sold and people don't trade down.

24:22At least one part of the reason for that, it's not the only reason, of course, is that there's a huge cost to be paid when you do that. If I want to swap my house with my next door neighbour because their house is more appropriate for me, we have to pay the government a huge amount of money for the privilege. And unbelievably, in the last October's budget, Rachel Reeve increased stamp duty on second properties. Now, you might think, well, I mean, who cares about people who own second properties? But these are often rental properties. And who's going to pay the cost of that? Well, it's renters.

24:53And if there's one thing that we really don't want to be doing, it's to be further increasing the costs of people in rented accommodation, which is one of the things which is a real problem nowadays for the London economy. And this gets into bigger issues. my god we need to be building more houses and so the tax system is only a part of the problem of lack of building is a bigger one uh but you know this is something we need to sort out so that's what you do in terms of tax but you're saying oh i wouldn't get you know elected i wouldn't get re-elected but you would have it all made us the world a better place if we were paying more tax but life felt better and businesses were growing more and we can employ more people then we would vote you in so thank you thank you steph i mean no hang on let's be clear what he's talking about is lifting the tax.

25:39I can't remember which one has the unfair advantage, cakes or biscuits, but either way, putting taxes up on cake or biscuit, you're never going to be re-elected. Well, you saw this and I think we're all old enough to remember Norman Lamont in 1992 or 1993 trying to put VAT on domestic energy. He only got halfway there despite a really quite generous compensation package for people on low incomes. And so we still only pay 5 % VAT. I mean, actually, the Labour government brought that down in 1997. We still only pay 5 % VAT on our gas and electricity in a world in which we're supposed to care about climate change.

26:17But actually, effectively, we subsidise the consumption of gas because we charge less tax on it than we charge on most other things. But again, it's worth a thought experiment here. Who are the big winners from this in cash terms? It's people who have very big houses. You spend an awful lot of money on heating those houses. If we put VAT on this, we could get easily enough money to more than compensate, on average, most people on lower incomes. But there would always be some people on lower incomes who would lose out. But if we always take the status quo today as the right thing, then we're never going to change.

26:53So you can't make any change, or it's very rarely, particularly when incomes aren't rising, without making someone worse off. But why should we be subsidising big users of gas? It just doesn't make any sense at all. So what about, that's your tax system, what are your fiscal rules then? Give us them. Again, this is really tough. But you're loving it, I can see you. I'm loving it, I'm loving it. You're in charge, you're a chancellor for three quarters of an hour. So no set of fiscal rules is perfect. And what we've had over a long period of time is these forward-looking rules, which actually look, I think the current set of fiscal rules, they're broadly sensible.

27:33or you can borrow to invest. You've got to get debt down over the medium term. The problem that we're facing is because the Chancellor has decided to set these rules, which are about as loose as they possibly could be, and then going right up against the verge of them, then you kind of have to adjust course every budget. I think the ideal thing would be to have something slightly more qualitative where you've got, I don't know, whether it's a traffic light system or something from the OBR which says, government says it's going to do this. Our assessment is on, I don't know, a scale of one to five, this is disastrous or this is fiscally sustainable alongside some more quantitative things.

28:10Now, again, maybe that doesn't quite do enough to hold governments to account. But one thing I would say is, you know, we are not in a world in which we can say, look, the problem here is the fiscal rules. They're constraining us from doing things. We could do a pile more stuff if it wasn't for these fiscal rules. We can't. We can't. can't our borrowing costs and so on are already absurdly absurdly high so what i'm not going to argue for is um much more any more fiscal looseness than we already have it seems to me though that there is an argument that says we should take the long-term trend of debt much more seriously and be much less fixated on year-to-year deficits and it's i mean my argument would probably be that we should have a simpler rule, which is much more constraining at the overall debt level, but give chancellors rather more flexibility year to year when it comes to the deficit.