214. Are Tory Cuts Credible?

0:11Hello and welcome to The Rest is Money with me Robert Peston. and Steph's away today, but I'm delighted to be joined on the last day of Conservative Party Conference here in Manchester by Mel Stride, the Shadow Chancellor. and I'm Mel. Very good to see you. Today, your colleague, your leader, Kimmy Baden-Ock, is announcing a new rule that would apply to a new conservative government, which is that when you make public spending savings, 50 % would automatically be applied to reducing the national debt with the other 50 % going towards tax cuts. Just talk me through how this would work in slightly more practical terms.

1:02Are you talking about there'd be a new Act of Parliament that would make this absolutely sort of mandatory? Is it just a rule of thumb that you would follow? What's your thinking? Well, I think it could have a legislative vehicle. Of course, it is the chancellor of the day that sets the fiscal rules and the fiscal framework but it could have an underpinning of going through parliament but the the main point it's only that it's only that obviously we know that germany has legislated not quite the same kind of rule but they yeah they've got a debt rule and i'm just wondering if this would be a british debt rule that would be as binding quite possibly well it will be absolutely set in stone that's the point So the OBR will be tasked with ensuring, amongst other things, that we meet all our fiscal targets and our fiscal rules.

1:51And one of those rules, as you say, Robert, would be that, just to slightly correct you, that at least half, I mean, it's not bang on half, but at least half of the savings would be used to bring down the debt. But just to be clear, though, because obviously, you know, there may be years where you want to actually increase public spending. So what the rule is about is where savings are made. So by definition, it's only sort of binding in the situation where we're making savings, which, of course, we've really demonstrated a plan for doing some of that. We'll come back and talk more about other possibilities in the future.

2:26that what we're saying is that, you know, that money shouldn't just all be reallocated for spending or pile into tax cuts. We will get tax cuts in there. But the, you know, the primary thing we've got to do is get off this ever higher debt trajectory that we're on, which ultimately is going to be entirely unsustainable. And, you know, all parties need to recognise that. And we're the only ones that seem to be recognising it at the current time. So on this commitment of the sort of 50-50 split, I mean, I was in the hall when I heard your speech on Monday. I thought that you said initially, at least, the overwhelming priority was to drive down debt.

3:06Is that your position? Yeah, there was nothing I said that in any way contradicted the golden rule, which is what Kemi will be. Well, by the time this podcast has gone out, she will have explained that in her speech on the final day of conference. But I guess the question I was asking is, do you think there's any any world in which you would go into a general election, say, you know, promising that in year one you'll cut taxes or is that inconceivable? we'll have to see what the fiscal terrain and outlook is at that point Robert you know and if history is a guide to the future you know the economy has gone through a very bad patch and it could be pretty bad between now and the election so we'll just have to see what kind of a mess we're going to have to clean up but I'm very conscious of the fact that when it comes to cutting taxes we have to do it at the right moment when it's affordable when the public finances are the right position for it.

4:00At the same time, of course, recognizing that cutting taxes is part of the solution to growth and strengthening our public services as well. So it will really depend on what we find in four years' time. But obviously, implicitly, in saying that getting down debt is the priority, you are acknowledging that quite a lot of what the last Conservative government did at budgets. And I'm not just talking about the massive increase in borrowing and debt that happened during COVID. And we might want to come back to the quasi-quoting list trust mini budget. But really, I'm thinking about the 20 billion of national insurance cuts that Jeremy Hunt, your predecessor, made.

4:49Your argument is that the national debt is too high. Frankly, the national debt you know is not significantly higher than it was under jeremy han we didn't you know you didn't really have the money for those national insurance cuts they were reckless weren't they i know i don't accept that um but and i think what you've overlooked there is a big thing which was covid and the support that we had provide i haven't overlooked i've mentioned i've i've mentioned it mel but i'm talking about the fact that that that towards the end of the parliament the national debt genuinely i mean you know you know this the national debt was you know more or less where it is today and many people including you say it was too high so it was reckless it was an electoral bribe it was a mistake to cut national insurance so that was 20 billion that we couldn't afford in tax cuts you know i i would say that at that time uh getting taxes down particularly uh around jobs was really important because that is a key driver of growth and in fact if you look at uh what this government's done and one of the reasons why the economy's unraveled is they've done quite the reverse they put a 25 billion pound uh tax bill on business uh the jobs tax and look what's happened unemployment uh is high at its highest level in four years and we've got anemic growth and uh and so on and so forth and some of it's fed fed through to higher inflation which is now a problem too we can talk about the current government's economic record and obviously you know we've got this very relevant coming out but Honestly, you cannot argue that the debt issue is significantly different now from what it was at the end of your time in office.

6:28And if you're saying that tax, you know, that essentially the priority is to get the debt down now, it should have been then and you didn't. So, well, this is where I do get back to my initial response to your question, which is to raise the issue of Covid, for example. Now, that was a£400 billion spending commitment that happened then. And that was to support jobs. And it was the right thing to do. And there was hardly anybody in the political landscape. One question there. I mean, I think, as you say, there is broad acceptance that, you know, people had to be supported through COVID. And that cost money.

7:04And it cost an enormous amount of money. But even so, you know, lessons have to be learned. I mean, we hope we're not going to have to live through that kind of crisis again. But I would ask, I would make two points. And, you know, one is there was an enormous amount of fraud. And so presumably you would accept that, you know, were we to be back here again, you know, you would have to put in place way better controls to make sure that money isn't being wasted. you know and certainly billions and billions was wasted you know given to people and businesses that shouldn't have taken the money or shouldn't have been given the money and then secondly I think there's a fair amount of evidence that the Bank of England's decision to buy an enormous amount of the debt that was issued by the government in quantitative easing that was excessive at that stage and inflationary and that was a mistake too wasn't it?

7:59So two points there I think that one is your fraud and error point around the intervention to support the labour market in particular, in the absence of which... And businesses. I mean, I'm talking, I mean, let's just think about the whole, you know, VIP lane for equipment for the NHS. And just one example, the Michelle Moan scandal. I mean, it just shows that, you know, essentially the controls on who got the money were not rigorous enough. I mean, that's surely as if somebody wants to be chancellor, you can't have any doubts about that, can you? You don't want to make those mistakes again. If I can answer the question, Robert.

8:32Yeah, please. On the issue of the spending and fraud and error around that, there was always a balance. And we knew that when we went in and did that, that the faster you moved, the more widespread you provided the support. And bear in mind, every political party, in fact, every commentator at the time was saying we should have been doing even more and even faster. There was always going to be a balance between accepting that. um i don't think i don't think who was saying we should do more and faster it was enormous no it was enormous no robert robert hold on there were there were a number of um groups that we were uh not necessarily getting support to because it was difficult to do so including initially at least the self-employed say for example there there were many voices out there um some with some justification saying look what about this group they've been overlooked what about this group they need support as well you know it's more and quicker and it was a moment of crisis and we had to do that and it has to be accepted that of course when you move at great speed uh with a big intervention like that there will be um some elements of it that are unsatisfactory and i think we all recognize that um on the question of qe i mean we did have um incredibly low interest rates because but and uh the debate then was well if we wanted to go even lower you know we'd get into negative interest rate territory and so on.

9:50And that was why QE occurred. You know, we could have debates about the extent of that and so on. But I think the economy broadly was in a position where it needed support. I think all the evidence shows that the scale of the Bank of England's purchase of your debt made the inflationary problem worse. You've got to accept that. So I think two things are that. One was that the biggest surge of inflation, of course, with cost push inflation coming as a consequence of the Ukraine-Russia war and energy price rising. That was a huge contributor. Of course it was. But as you know, the evidence shows that even before Putin's invasion, underlying inflation was rising.

10:26Well, it got up to 11.1 cent at the back end of 2022. And that was as a direct consequence of that war on energy prices. And it wasn't just our country. It wasn't just our country that was affecting many countries. You are letting the Bank of England off the hook here, are you? No, I'm not necessarily – look, I think there's scope for, you know, looking at these things closely and coming to opinions as whether you could have done more or less in a different way. But I'm making the observation – and I was going to come on to make another observation – but the observation I was making was that, you know, at moments like this, we had very low interest rates, QE.

10:58I think it is a toll in the monetary policy box. There were challenges around supporting the economy, big fears about the economy tipping into a very dark place. And I think levers were pulled at that time, which would have felt right. We can retrospectively look back and opine as to whether with perfect hindsight, it was all done as it might have been. But that's my second point, which is, as you know, as an economist, when it comes to monetary policy, for example, putting up interest rates or whatever, there's a transmission mechanism and it takes time for that. Those changes to feed through to the real economy, typically about 18 months.

11:34You're constantly trying to look through the near term in order to pull the levers that will actually bite some way further down the line. And so that's a very difficult thing to pull off perfectly. And so I think those are things that people often overlook when they think about those particular issues. Now, let's go through the detail of what you spelled out in terms of the cuts that you want to make. I think there is broad acceptance that the welfare bill is rising at a rate that is unsustainably fast. fast. Now, you say that you found 23 billion, which is a lot of money, 23 billion pounds of savings that would be made from the withdrawal of disability benefits from those with what you describe as milder mental illnesses.

12:37And you've talked about ADHD, you've talked about anxiety, you've talked about mild depression. Those with those conditions do find them completely debilitating. How did you decide that those were the areas where support, you know, essentially financial support had to be withdrawn? So I do think that, well, the first point I think is, and you've made this point, that the welfare bill is spiralling out of control and set in the context of where debt is going. And if you look at the OBR's fiscal sustainability report, which sort of projects out many years ahead as to what the trajectory of that debt is, it is just going further and further out of control and it has to be arrested.

13:24So, I think the first point is that there is no option if you're serious about creating a sustainable, stable economy, other than getting the burgeoning welfare bill down. It just has to be done. I think the second point, though, is it has to be done in a fair way. And what that means is that where people, of course, have severe mental health conditions and so on, they require support. And in some cases across the welfare system, there's a case for providing more support to people who might be in those kind of circumstances. But when it comes to milder conditions, so milder anxiety, depression, ADHD and so on, often work actually is part of the solution to helping people in those circumstances.

14:11differences and that's not just an economic argument there is an economic argument which is that paying benefits to people for many years year in year out in that situation of course costs a lot of money and if people are in work of course they're earning and paying taxes so that's a huge benefit to society more generally but it's also good for the individual concern so going into work the discipline of work the pride of work you know the social interactions you have when you're at work are really important particularly for those kind of conditions you ought to have done the sums to come up with 23 billion how many people would that affect so if you look at uh those who are on health and disability benefits there's an overlap between those that are on the pit benefit which is there to compensate people work for the additional uh costs of disability is a very blunt benefit and is not particularly good at actually doing that but nonetheless that's what that one does um and the health element of of you see you're looking broadly uh at uh around three and a half million people who are currently on those health benefits.

15:10And you're looking at a broadly similar number, so a smaller number, but a significant number on the PIP. And of course, some overlap between the two. But the most important thing here, Robert, is just to recognise that, you know, helping people into work and seeing people going into work. And in some cases, I'm afraid far too many cases, there will be people who are on those benefits who, for example, will pay six fluences on TikTok,£20, whatever it is, to be coached as to how to get through these work capability assessments and onto those benefits. And of course, in the case of those people, they most certainly should be off benefits and into work.

15:47And we think that's right. Sorry, but I'm still, sorry, because I just want to understand, in the 23, because obviously some disability benefits are paid to people who are already in work, as it were. I mean, I'm interested to know of your 23 billion um how many of those people are not in work so um i i've explained that um for example uh with those that are in a group called the um uh lcwra group uh who are in that three million that i mentioned with the uh incapacity benefits uh for whom there is no conditionality attached so there's no requirement for those people to go even into a job center for an interview even that but but where but where are these three and a half million jobs i suppose is the point i'm trying to okay i was just going to say that the surveys when i was a secretary of state at work and pension the surveys actually showed that the 20 plus of those people on those benefits actually wanted to work so you know there is real i'm making a slightly different point it's not whether they want to work is where are the jobs yeah where are the jobs well um we have run an economy in the past uh people say we made mistakes in office and indeed we did and we've been shown contrition about many of those things.

17:00But one thing I think we should claim credit for is having created jobs since 2010, when we were in government, 4 million more jobs. And you do that by having an economy that has a flexible labour market, an economy in which you are trying to get taxes down, particularly on work and employment and wealth creation. So those jobs will come. There are areas of our labour market still today where, you know, labour is tight. Okay, but do you not accept that jobs don't just magically appear overnight and that, you know, your proposal certainly, as currently presented, will generate potentially quite a lot of hardship for very large numbers of people unless and until they find a job.

17:44So unemployment, even now, even with what this government has done, and it is at a four-year high, is nonetheless relatively historically at a low-ish level. I mean, it's much higher than it should be or could have been if the government had run the economy properly. But nonetheless, there are jobs out there, and there'll be many additional opportunities. We all know of businesses where you talk to them and they say, we can't find the staff. But there are two issues here. One is whether you are imposing too much hardship and anxiety on some vulnerable people. And then there is a separate issue, though, because at the heart of everything you are doing at the moment at this conference is you are trying to restore the Conservative Party's reputation for financial competence.

18:36Your leader, Kipi Badenoch, has explicitly criticised Liz Chasin-Kwasi-Kwarteng for the mini-budget that most of you accept did enormous damage to probably the most important aspect of what the Conservative Party stood for over generations, which is that you were able to claim that you were responsible stewards of the economy. And that was blown up and you're trying to reclaim that reputation. Now, this is a big sum of money, this 23 billion you are saying you're going to make from welfare savings. The reason I'm sort of slightly harping on where are the jobs is because I have looked at proposals like this hitherto.

19:19I remember the sort of welfare to work proposals of the Gordon Brown Tony Blair government. Right now, this government has got a proposal to try and help young people who are not in education, training or work, the so-called NEETs. it's got a proposal to try and get those people into apprenticeships or proper work. It says it has to spend money on that. It has to help them with advice. It may have to subsidize the jobs initially. And I think there is a lot of evidence from around the world that if you want to create jobs for people who are on welfare, initially, as a government, you have to spend money to help those people into work.

20:04And you have made, you've taken all the savings from getting people off welfare, but you are making no allowance for the upfront costs of doing that, which makes me feel these are not going to turn into real savings. No, they will. And one thing we haven't allowed any fiscal credit for, and we should do, is a recognition of the labour market impacts of these measures. So there's nothing in the, what we presented that says or takes account of the fact that, of course, people were coming off benefits at great expense and into jobs and becoming taxpayers that become net contributors to the system.

20:42Another point I think is important here, Robert, is when we were in office, actually, we launched something called Universal Support. And that was alongside the work capability assessment reforms that I took through. Well, the government, one of the first things they did, actually was to scrap all those savings that I was making, seeing about 450 ,000 fewer people going on to those benefits. So we've got a scheme sitting there, which is able to provide that kind of support. But the other point I would make is that, you know, people will need different levels of support. There are many people who are on those benefits who actually with just, you know, an engagement with the job centre, getting plugged into employers, getting into employment can get up and going relatively quickly.

21:28And certainly that applies to people who really should not be on those benefits. And sadly, there is fraud in our system and there are people who are claiming who should not be. Now, there's much more to talk about with you, but we're going to go to a small break. After that, I'm going to be talking with Steph about the benefits of artificial intelligence for small business. And then we'll return to the issue of whether or not the Tories can recover their reputation for economic competence.

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23:19Welcome back to The Rest is Money. We'll be returning to our interview with the Shadow Chancellor, Mel Stride, in a minute or two. Because this episode is brought to you by Google. We're in a partnership with them at the moment because we love talking about small businesses and AI. And so we want to look at how they can complement each other. Small businesses are a key part of the economy. They're a real backbone, providing millions of jobs and contributing a lot to the UK economy. And at the same time, you know, it can be tough for them and AI can make a big difference in terms of how they can increase their productivity or how they can market their business or deal with customer services.

23:58So that's what we want to focus on today. And in particular, those businesses that have been around for yonks that have got like these incredible histories and time and how they are using AI to stay relevant and keep going in the future. Because this type of stuff really fascinates us, doesn't it, Robert? I was struck actually by some research that Google has done, which I have to say is replicated by other analysts. Google estimates that businesses that adopt artificial intelligence can increase the productivity of their people by, you know, more than 20%. I think what can be sometimes tricky for businesses and particularly small businesses is understanding how AI can fit into their company.

24:45So, for example, the world's oldest brush manufacturer was founded in Britain back in 1777 called Kent Brushes. They kind of handcraft these premium hair brushes, shaving brushes and other grooming tools. They've had nine successive royal warrants from various British monarchs. So they are a business, you know, steeped in history. I am a great Kent fan, actually. funny enough i bought a new kent comb only the other day i i they bizarrely i'm not trying to do an advert for kent but weirdly they have been a brand that's been in my life pretty much my entire life yeah well do you know what i mean the history is quite incredible because they made brushes for the military as well in the world wars and some of them had like secret compartments in them as well and you know they they just steeped in history this company but But what's interesting is how they're using AI now to, you know, I guess still the times and the sense of how understanding their customers.

25:51So, for example, they use Gemini, which is Google's AI assistant and Google Workspace to handle their admin and manage their orders and their customer query. So even though they're still doing these handcrafted historic brushes, they're using AI to be more productive and, you know, giving them more time to focus on innovation or, you know, continuing the family legacy, but with less paperwork. So you can see how AI can really help in that sense. Funnily enough, one of the things I was talking about to very senior members of the government at the Labour conference was how do you get small businesses to really understand the opportunities that AI create?

26:36I mean, one of the things that I was actually suggesting to the government is they ought to have some kind of public information campaign to essentially to persuade businesses of all sizes to evaluate where AI can and should massively boost their efficiency and potentially their revenues. Well, let me give you another example, though, because we've got Jet Adventures as well, which runs boat trips off the Suffolk coast. And unsurprisingly, they tend to be busy in the summer and then leaner in the winter. And through free Google Digital Garage training, the owner of Jet Adventures has been able to learn how to market smarter with AI tools.

27:21So in other words, they can now target customers better and then spread the demand across the year so they don't have as many peaks and troughs. And it gives them that stability. So, yes, it's efficiency, it's productivity gains, but also stability for businesses, too, which is key in such an uncertain time that we have at the moment. And I think the other thing which is really important is you've got to take away the fear from people when it comes to, well, certainly business owners and business managers. Because, of course, there are lots of people running businesses who don't feel particularly confident when it comes to anything digital.

28:02Training, obviously, is vitally important. Yeah. So from a 1777 brushmaker to a boat company, Google's AI is giving people more time to build great products, deliver outstanding customer service and then blend innovation with their rich history, fueling the UK's transformation and growth. And you can find out more about free Google tools and training at grow.google. now you referred uh to the debt sustainability report that the office of budget responsibility does once a year and you rightly pointed out that one of the things they do talk about is the sustainability of the rising welfare bill i assume you are aware however that the big point that the office for budget responsibility makes year after year and it made it very very powerfully in its last debt sustainability report is that the biggest problem facing any chancellor over the long term is the rising cost of helping older people.

29:07There is the pensions triple lock, but then there are all the other age-related costs, you know, the ballooning costs of the health service that is also, you know, related to demographics and the ageing of the population. Again, if you want to be seen to be a prudent steward of finances, why are you not even having a debate about whether the way that we support older people is affordable? You want, as I say, to regain this reputation. But if you're not prepared to go into that territory of how to limit the costs of an aging population, you can't be taken seriously. Well, I think on older people, we too readily forget where we were under the last Labour government, which is that pensioner poverty in our country was the fourth highest in Europe.

30:05And so I think looking after older people is really important. And the second point I'd make on that... I'm not making the point you shouldn't look after older people. It's just whether the way we do it is affordable. And the OBR says it's not. You know that. so the second point i was going to make was i think it's important to recognize that older people can't readily change their economic circumstances so it's not like the working age population where you can do more hours or get a different job or so on um it's much more difficult for them and i think to have taken 200 000 uh pensioners out of absolute poverty after housing costs as we did in government uh was something we should be very proud of and the triple lock has paid uh played a really important role in that but to your broader point about the sustainability of the public finances and you refer to the fiscal sustainability report now if you look at that uh that horrendous graph that shows uh debt to gdp just spiraling off into the stratosphere way beyond even where it was in the second world war at its peak um the answer to flattening that line is actually around growth and productivity and in fact if you could uh get get towards doubling the uh productivity and growth assumptions that underpin that line that line would become dead flat.

31:11We all agree with that, Mel, but there is an element of tooth fairy economics here. And, you know, you will be making from now till the budget, you will be attacking this government for being reckless in its management of stewardship. And I'm simply making the point, if you want to be taken seriously, you cannot, you know, you cannot ignore the demographic time bomb of an aging population. So the route to, I didn't see it quite as a zero-sum game in the way that you're presenting it, I think, because I think on the one hand, we need to look after our elderly and I've explained why and how the triple lock is important in that context.

31:49But if you can get growth and productivity rising the way that it should be, and I believe our plan will deliver, then you can start to face into those kind of challenges. So you're right about headwinds. You know, an aging population is one of them. There are also challenges around spending more on defense in a more uncertain world and having to stand up for ourselves more than rely on the Americans in the European context. And also intergenerational challenges, making sure that we have an economy that's fairer to younger people. All of those things typically come with cost, but the way through is actually to turbocharge growth.