212. Has Reeves Been Unlucky Or Unwise?

0:11Hello and welcome to The Rest is Money with me, Steph McGovern. and with me Robert Peston I'm up in Liverpool at the Labour conference it's just coming to an end thank goodness these things are a marathon they're grueling um uh and it's been it's been quite a big conference yeah big stuff what's the is it been a positive vibe Robert is it are you getting the sense that Labour Party are happy with how it's gone so members were gloomy when they arrived because look it's only 15 months since they won that extraordinary majority in parliament but But their poll ratings have slumped. Keir Starmer, according to an Ipsos poll, the least popular prime minister in recorded history.

0:50I mean, it's just sort of amusement by how, you know, why it's gone so badly. And, you know, even speculation about whether or not Keir Starmer could survive very much longer with the mayor of Greater Manchester, Andy Burnham, on manoeuvres. Now, today, after Starmer's passionate attack on Farage and calling Farage's immigration or clampdown proposed abolition of the so-called indefinite rights to remain for people who come to live and work in this country, calling that policy, that Farage policy racist. Actually, the mood here is a lot better. This is a group of people who hate reform and they are thrilled that the prime minister is taking the attack in such a passionate way to reform.

1:44Questions around how this will play actually in the country, because if you're a reform supporter, what you probably hear is Starmer thinks you're racist, even though he claims he's not saying that about them. and so I'm not sure actually how effectively that will play in terms of improving the popularity of the government in the wider country but so much was announced that actually does have significance for prosperity for growth in this country. Yeah and on that we thought it would be worth getting Paul Johnson back to go through all of this of course we last spoke to Paul as he was leaving the IFS, which he was in charge of for many years before that at the Treasury.

2:25So he's a free agent in the sense of talking about the economy to us now, but he does have a day job. He is a provost of the Queen's College at Oxford. Here's our interview, Paul Johnson. It's the kind of institution you love, isn't it, Stan? Yeah, it is. Yeah, yeah. Fucking Oxford wouldn't let me in. So they said I wasn't there. I was the right candidate on paper, but not in real life. Well, that was their loss. That was their massive loss. One of the things that the Chancellor said on the eve of conference was that she was keen to agree a so-called European mobility scheme, which would allow flows of young people between the UK and EU in both directions.

3:11she said in an interview with the times that she wanted the OBR to factor in the economic benefits of you know young eu people coming to the uk i think both you and i agreed that this was a slightly eccentric thing for the chancellor to say given that the sums of money involved look to us to be sort of not very large, shall we say. Talk me through your thoughts on this. I think that Charles has been saying quite a lot of eccentric things about the OBR recently. We might also move on to her desire to stop them doing so many forecasts. But, yeah, I mean, a particularly peculiar thing to say. I mean, first of all, the OBR is certainly not going to score anything when it's not even a policy yet.

3:59It's kind of sort of something the Chancellor said that she might like to do at some point in the future. So the chance is that there is zero probability that the OBR would, could or should take account of that. But even if she were to announce this, I mean, this would be a two way scheme. So Brits could go abroad and Europeans could come to the UK. Well, supposing that did result in, I don't know, a net increase of 50 ,000 in the numbers coming in. And actually, I should just point out here, having talked to ministers who are involved in the negotiations with the EU, they say 50 ,000 is significantly more than they would allow the cap to be, certainly for the first.

4:39So we're not even talking about 50 ,000 people. So even if you were, so let's take 50 ,000 as a rough number. At the absolute most, and this is a wild overestimate, they might pay£10 ,000 in tax each. I mean, they wouldn't be paying that much as young people, probably be half that. So that would give you half a billion pounds at some point in the future. Actually, we've agreed that both those numbers are too big. So we're probably talking, you know, 200 million. I mean, these numbers are so trivial as to, I mean, I know, you know, a million here, a million there and all that. But these numbers are so trivial that there's no way anyone's going to make no difference to the public finances.

5:18They're going to make no difference to the OBR forecast. forecast but it's also worth saying it's a very peculiar thing to say from a government which is saying we want to get immigration down to say well if this kind of immigration if we were to get it up we should have more of that because that would be good for the public finances well um it's just it's just all over the place quite honestly that's part of the problem here with how this looks to people as well because it there's a sense of a kind of snobbery around immigration of only certain types of people are allowed in and even if that's in economic need it feels like It's like the working classes aren't valued here as being skilled and other people are more valuable than others.

5:57And that's part of the problem with all of this is how the optics of that, because it looks like working class people aren't as important. I mean, the other thing that's extraordinary about what's happened to immigration and different kinds of immigration is that since we've come out of the European Union, immigration levels have been of anything higher than they were. But they're no longer immigrants from the European Union. They're essentially from the old Commonwealth. So, I mean, whatever you think of this, I'm pretty sure that people voting for Brexit weren't thinking, well, we'll stop all this European immigration and we'll have lots more immigration from Nigeria and Indonesia and India and places like that.

6:31The IMF made a recommendation that there should be only one fiscal assessment a year, currently two a year under the system. You know, because she had to do a fiscal assessment at the spring statement, it caused some, shall we say, some political difficulties for the Chancellor because it encouraged her to rush through some welfare reforms, changes to the entitlement to disability benefits that her own MPs hated. and she got blocked on that and it caused one of the major headaches this government has endured. I think burned by that, the Chancellor has sort of come round to the IMF's view of only one fiscal assessment per year, which would be at the time of the budget in the autumn.

7:20What's your problem with what she's been saying about all this? Well, my problem to the extent that she's gone rather further than that. And she said this week, not just that there wouldn't be a fiscal assessment twice a year, but there wouldn't actually be an economic forecast twice a year. And she's claimed that the IMF recommended that, which they didn't. They were talking specifically about the fiscal assessment. And actually, we've had a forecast twice a year since the early 1970s, and pretty much every other major country has a forecast twice a year. So this comes very oddly from a chancellor whose very first action, actually, was to push through Parliament a largely performative bill saying essentially that we would never sideline the OBR.

8:07We'd never do anything without the OBR. Say so really as a way of sort of reminding people of the chaos around Liz Truss. Now, I've got some sympathy with the idea that she she doesn't want to and probably shouldn't be fine tuning the fiscal numbers twice a year. and there are two elements to that one is it's in large part our own fault for saying i've got this ironclad set of fiscal rules and then meet them by the absolute hair's breadth in her first um budget knowing that there was at least a 50 chance that you know that things would go in the wrong direction and therefore she'd have to do other things so part of that's her own fault um secondly it's quite possible to have economic forecasts twice a year and say, look, you know, our rules are to meet these fiscal rules, but we're only going to do that once a year unless something really dramatic happens in the meantime.

9:02So you don't need to stop the forecast. I really don't think the markets would be terribly worried if you made it very clear that you were just having that one fiscal event. You had the forecasts twice a year, but you do the fiscal fine tuning on one occasion. I don't think it helps anyone to just reduce the number of economic forecasts. Apart from anything else, that just increases the speculation. If you leave 12 months between forecasts, we've got all the speculation this time about what might the OBR do about the productivity assumptions and so on. Well, if it's 12 months since they did it before, then the chances are you're going to get bigger shocks each time isn't part of the problem that the forecasting is not always great and therefore that's part of the problem it kind of dictates things even though it's not necessarily correct it's always been reversioned and everything else and isn't that part of the problem well i mean forecasts are never right i mean they're by the by um by the nature of um of forecasts i think it's they're really difficult to do and i think one of the huge difficulties here is in the end these forecasts are based on human judgment i mean they i mean there's a degree of science behind them but there is a degree of judgment um and that is the judgment of honest people doing the best job that they can in a way that i think is completely independent but as the world changes as more information comes in it's inevitable that those will change.

10:32And I suppose the thing that worries me in a sense is that because these are human judgments, the people making them know that the political consequences of changing their views can be really quite significant, and that can't help but play on their minds. It's very striking, for example, that a year ago in the last autumn's budget, the OBR didn't change their judgment at all between the last Conservative budget and the first Labour budget. And, you know, I'm absolutely not saying that they weren't doing, you know, being fully, you know, right and dependent, but it can't have helped being at the back of their minds.

11:09Can we really make a big change to our judgments as we move from one government to another? It would have been a very difficult thing to do. But, you know, they've ended up being quite at the extremes of the distribution of forecasts in terms of their actual optimism. I mean, people say the OBR is always pessimistic. They're not. They've been historically very optimistic. And it looks like they're going to downgrade their judgment about our productivity growth into the future. And if they do that, that then will leave the Chancellor with a substantial problem in the budget in November. So they will downgrade their product.

11:52They have been looking at it, and they will downgrade their productivity judgment. And people at the Treasury, Treasury officials, believe that they will downgrade their assessment of future productivity growth by 0.2 of a percentage point per year. And that translates, according to internal Treasury calculations, into lost revenues of roughly$20 billion. and that therefore contributes to a hull, a 30 billion hull prior to the budget of 30 billion pounds, which is a lot of money to find in tax rises for the budget. So there are a number of questions here I want to ask you. One is, one of the reasons that the Chancellor I think has been sort of manifesting in the things she said quite a lot of frustration with the OBR is I think underlying all of this is a sort of sense in the Treasury that it's just not fair that the OBR has made this assessment this year, rather than in a sense clearing the decks for her last summer.

13:00You know, you just made the point that it almost certainly would have been better if they'd done a root and branch assessment of all their judgments when the government came in. They did remain more optimistic for the best part of a year or so than other forecasters about the outlook for growth and productivity. Do you have sympathy, I suppose, with the Chancellor that having thought that she'd fixed the finances a year ago, she's now been presented with another 20 billion hull because of the timing or because the OBR has decided to make this productivity assessment over the summer, this summer, rather than the previous summer?

13:40I've actually got very limited sympathy, if I'm honest, for two reasons. First, she should have known and she would have known because Treasury officials would have told her last autumn that there was a risk that this would happen, that the OBR was a bit of an outlier in its optimism, and that there was always a significant chance that they would reduce their optimism. And, you know, as I say, I think there's an honest judgment on their part. There were some reasons for being somewhat more optimistic and some things have changed. So so knowing that she nevertheless left herself with zero space against her rules.

14:19And then, astonishingly, I thought, came out and said, and I'm not going to have to come back for more. I mean, this is, you know, I've done my tax rises. I've left myself with no room for manoeuvre. Even in normal times, there was a 50 % chance you would have to come back for more. And actually, in a world in which she knew the OBR was being optimistic, she left herself with no space. So she had that option of basically doing more last autumn, either reducing the spending or increasing the taxes in order to give herself more space. And she didn't do that. I would add one thing, though. I think there might be some movement in the other direction.

14:56So inflation is higher than the OBR expected back in March. And I suspect they'll think it's higher into the future. Now, that has a positive effect in the sense it means more cash tax revenue into the future, particularly given that tax thresholds and so on are frozen for a while. And one place you can look for more money is by freezing them for longer. One of the things to look out for very carefully in the budget, though, is if that pushes to a better fiscal outlook, it will only do so because the cash plans for public spending will become less generous in real terms than they were intended to be in the spending review.

15:38So that will give her some room for manoeuvre. So if that gives her a few billion and she, for example, extends the freezers for tax allowances and so on, the hole she may need to fill. So she'll fill part of the hole by an explicit tax rise by extending those freezers and allowances and thresholds. She gets a bit more money by effectively having a less generous real spending plan. Do those two things, and the hole she needs to fill might look much less daunting than the 30 billion that you're talking about. Might. If the inflation outlook is higher, won't they also increase their forecast of future interest costs for the government?

16:25Yes, but net. If they stick to their cash spending plans for public services, net that helps. But they then have to admit that their real spending plans, which were already, you know, after this year, not very generous, become even less generous. And I haven't looked at whether this will actually result in some of them going into negative territory, but they were already at pretty low levels. And that, you know, that's a big political choice in itself, particularly for this government. You know, when the OBR says inflation is higher and therefore implies that real resources for already under pressure government services are going to fall, in your experience of these things, I mean, do chancellors just tend to skate over it and ignore it?

17:14Yeah, if you look at the last government, when, of course, inflation turned out much higher than expected, most of the consequence of that was lower than intended real increases in spending. Now, because inflation was so high, they gave some top ups. But if you look at the spending reviews from the beginning of the last government, they were quite generous in terms of real increases in many areas of public spending. and they turned out to be less generous in real terms than was initially intended because they didn't fully account of that higher inflation. But it's one of these things where, as I say, we're going to have to look very, very carefully at what the Chancellor says on November the 26th because there's lots of opportunities for obfuscation there, shall we say.

17:59We've talked a lot on this podcast about the skills in the civil service and not necessarily knowing enough about different areas they're making decisions on. Similarly, we've talked a lot about central banks, independence, and can you be truly independent given you're, you know, coming with a certain amount of bias? What's the makeup of an organisation like the OBR? Is it all people who went to university? Because, you know, if you look at the chair, it's Richard Hughes, he went to Harvard, he went to Oxford, worked at the Treasury. So when the government make an announcement like they did this week about putting more funding into further education and the you know trying to reduce the skills gap on that front and giving a parity of esteem to technical education in the same way that they do higher education so university level stuff how is that valued by someone like the OBR?

18:55Well I think when it comes to policy decisions I think you're right to be sceptical about that I I mean, there are very few people in the Department for Education, for example, who went through the vocational system. And in my book, which I should advertise again on this program, I talk about the way in which further education policy has been made over a long period of time and the way that heads of further education colleges have had to repeat and repeat and repeat again to people in the Department for Education, how the system works and what's changed over time and so on. in a way that people in universities don't have to repeat time and time and time again how things have changed because that is part of the sort of intellectual framework and furniture of senior civil servants in a way that the further education system isn't and one of the consequences of that and actually it's not just in civil service it's in in the media as well because this gets far less attention than universities what you've had is just an immense amount of volatility in policy in this area.

20:03Now, to some extent, that reflects the fact, actually, that intellectually, people know that this matters, and they know that something has to be done, but they can also get away with constant policy change. And so we have had an enormous amount of policy change in this area, which is in itself damaging, because then employers have got no idea what all of these myriad of different qualifications which change every few years actually mean. So it's positive, I think, to see a prime minister talk about a target which is about both higher education and further education. You mentioned the terms parity of esteem there, Steph.

20:43I mean, I have to say my head sort of drops because I've had every prime minister and every charter, every Secretary of State for Education talk about parity of esteem ever since I was a child. And it's because it becomes a kind of completely meaningless statement. Now, I think what I heard the prime minister say is he wants two thirds of people to either do go to university or do what he calls a gold standard apprenticeship, which I think is the level four, which is the one above A levels. Well, that ain't going to happen. Not in the next five years and not in the next 10 years, because at the moment there are bugger all to use a technical term, people doing the level four apprenticeship.

21:19One of my sons did that. When he started that, there were more people, more young, more 18-year-olds were entering Oxford and Cambridge than were starting level four apprenticeships. I mean, that is how extraordinarily poorly provisioned we are for those. Now, there are more people at older ages doing that, and the numbers are growing, but the numbers are still absolutely tiny compared with the numbers who are going through university. So actually to get to two thirds of either going to university or doing a level four qualification, it'd be fantastic to get there, but we ain't going to get there, at least not over this parliament and probably not over the one after.

21:58But just to sort of follow up on what I thought Steph was saying, which is, you know, brainy Richard Hughes isn't going to attach enough weight in his forecast to these sorts of, I mean, do you want to defend Richard? Well, he's not going to, quite correctly, not going to put any weight on a speech to the Labour Party conference. As and when there is a bill that is passed which tells him some details about what this will do, he'll do the right thing. He'll look at that and he'll make an appropriate economic assessment. And I don't think the fact that he went to university as opposed to anywhere else or any of his other colleagues will bias the forecast.

22:46Hang on a minute, hang on a minute. I just want to jump in on that because this is not a personal thing to Richard, by the way, or even the OPR. But my point being is you've just said that in the Department for Education, the lack of diversity of education and similarly in the media, because I've fought this at the BBC, it took me years to get them to take seriously vocational education as a thing we should be reporting on on the news. there is a danger that because of that lack of diversity that there won't be as much work given to to the importance of it though isn't there because as you say that's the lip service we've heard from department of education for years and we're going to get parity of esteem and in here there is parity of esteem but actually there's subconscious bias which means there isn't because they've never done it themselves i think there's two elements here i think the when it comes to policy making i think it does make it does make policy making in that area worse and more volatile and and less effective i think when it comes to forecasting the obr and everyone else who use the best evidence that they have now there is i mean there's a problem here i mean part of the problem is it's actually much harder to kind of work out what the economic returns to some of these qualifications are partly what i was saying earlier there are so many of them They're so very different and they've been changing so much over time that actually making those judgments is really hard.

24:10But I think most economists, you look at the data and you look at what happens in the UK and what happens in other countries. You look at what we know about the returns to a particular technical level for qualifications. That's the apprenticeships, one above A level. And they all look very positive. So if they believe that this will make a significant difference to the number of young people doing those courses, then they will appropriately put those into their forecast in a positive sense. I think the challenge is it's not easy to move from where we are to getting a lot more young people on level four apprenticeships.

24:48So this is going off on a tangent and a very personal thing. So my son who did his apprenticeship, he says his firm has stopped offering them. Now, why have they stopped offering them? And this is kind of, I think, something that a lot of employers will recognise is they have a graduate intake and they've had an apprenticeship intake and they've historically done internships as well. They've stopped the last two of those because with AI and the labour market, they're now getting so many applications that they simply don't have the resource to manage anything other than the graduate intake. So they've essentially just given up on any other source of recruitment because it's become too difficult to manage.

25:31Now, that is a very particular example of a very particular firm, and I don't know whether that is extended beyond that. But I think it's a sort of indication of just how dysfunctional the sort of graduate and out-of-school-leaver job market has become. Paul, it's probably time we went to a quick break, and then we'll be picking more of your thoughts.

26:12After it, we'll see you in a couple of minutes.

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27:13In further education you can teach students aged 16 and up in workshops, classrooms, on-site or anywhere students can get hands-on experience. You don't always need a degree or prior teaching qualifications to start teaching in FE either. With many employers offering funded on the job training so you can start sharing your skills making a real impact and earning right away visit gov.uk slash teaching further education to find out more the other announcement in this area that was made was that for young people who are not in education training or or work or employment so-called needs there are about a million of them they will i think they have to have been inactive for something like 18 months, but all of those people will be offered paid employment.

28:06It's a sort of, you know, resurrection, you'll remember it, of Gordon Brown's New Deal for Young People in 97. I mean, both you and I are old enough to remember the New Deal. It attracted a lot of publicity. What kind of an economic impact do those sorts of schemes have? Well, I mean, you and I, Robert, frankly, are old enough to remember the youth training scheme back in the 1980s it's um we've had these sorts of schemes for for a very you know on and off for a very long time now it's worth saying that um that this is a fairly limited scheme it was announced a quite big fanfare but it's quite a limited scheme because these young people have to have been on universal credit for 18 months without being in education um or employment they have to be 16 to 24 so we're looking at about a hundred thousand um or so uh you have to get engagement from employers to make this work and we know that getting engagement from employers is difficult um so will the you know will this have a sort of macro level um economic effect probably not um will it be good for a fraction of those young people who are engaged in this way yes so previous an analysis of hundreds of previous employment programs of this type suggests that for those who go through the program employment can be around five percentage points higher a couple of years after completion so that might get you 5 000 additional young people in work now for them that's fantastic but that is in economy-wide terms an extraordinarily small number.

29:46Now, this might be a bit more effective than average. So you might be looking at 10 ,000 additional rather than 5 ,000 additional. But these things are very hard to make work very effectively. They are net positive, but they are small, small scale. You started your career or a chunk of your career working in the Treasury. You then ran the Institute of Fiscal Studies for quite some time, trying to hold the Treasury to account. Steph made this point, which I think is slightly unfair on the OBR, because actually, I think his forecasting record has not been too bad, frankly. But I mean, my view has always been that, you know, it's far better to have somebody outside marking a government's homework than having the government itself mark its homework.

30:35And I have to say, it does seem to me that there is the wrong kind of bias built into Treasury forecasts when they are marking their own homework as it were. But just when you were working at the Treasury, what was the culture? Do you remember the Treasury trying to make policies look more effective economically than they really were? And how important is having a referee that's not essentially on the payroll? I think it's incredibly important. I think it's incredibly important for the government. And I think the thing is that once you get into office, you forget how important it was. So no one believes, frankly, Treasury forecasts, whenever they look even a smidgen more optimistic than sort of the outside or consensus forecast, no one's going to believe them because they know that there is – However honestly and however appropriately they're put together, you know, everyone knows that there's an incentive to up the numbers.

31:43and when I was there there was there were frequently just difficult conversations between officials and special advisors and ministers for the very reason that small changes in the forecast could mean that you were missing or not missing your fiscal rules or to change the story that you were putting out there and that's why actually across the world I mean bodies like the OBR which were kind of unheard of 20 years ago are now springing up pretty much everywhere when uh when the OBR has said positive things i mean when it has said here we think that the planning reforms will add 0.2 percent to national income or the child care policy will be positive for national income um or that um productivity growth will be higher than most other people think that has come with might have been right might have been wrong but it's come with credibility because it is independently created.