228. BUDGET SPECIAL: Where's The Growth?

0:11Hello and welcome to a budget night. Rest is money with me Robert Peston. And me, Steph McGovern. So you and I over the years have covered many budgets. You more than me because you're a bit older, only a little bit. But this was another biggie. You know, Rachel Reeves's second budget as Chancellor. Of course, this time last year, she was telling us about£40 billion worth of tax increases. this time not as many but still big tax rises 26 billion pounds worth we'll get into a bit more of it all uh in the show but first of all Robert I've got to ask you man what was all the crack to do with the OBR releasing the information before she'd even got up to deliver the budget I mean what she doesn't get a break does she Rachel Reeves I mean what an absolute nightmare for her What do you know about what went on, Robert?

1:06I mean, what we know is that somehow the Office of Budget Responsibility published the entire budget not far off an hour before she was set to announce it all. This is one of the most extraordinary. Leak isn't quite the right word, but sort of mess-ups. Actually, the word that describes it begins with F and ends in K. Ups. I was trying to work that out then. Really extraordinary. Hugely market-sensitive information. Everybody in the city had it. They were going through it. You know, you get gyrations in all the markets that are relevant when it comes to a British budget. So UK government bond prices, sterling.

2:01This was shockingly incompetent by the Office for Budget Responsibility. I'm told the Chancellor only found out about it as she was standing up to speak. I don't know, she must have felt absolutely devastated by this. And I mean, I was live on air from just after 12 today. And we were desperately trying to process, you know, we had a sort of a structure for the beginning of the show, which we had to rip up because we had to process the stuff that had accidentally been put out by the Office for Budget Responsibility. and then when she was talking, these documents, I've got it here. This is the document that was leaked online.

2:47It is just shy of 200 pages long. And I was constantly torn as the show was going on between listening to her and reading the document. It was just sort of madness. Yeah, undermining. Do you think it was a case of them trying to be diligent by getting everything set up, ready to go. And then someone, instead of pressing save, press send or something, it was one of those classics where they're trying to get it all ready. So as soon as she's done it, it can go. And accidentally they published it. I mean, we've all been there with accidentally sending an email before you finished it or, you know, uploading things before you're quite ready.

3:29So maybe it was just one of those press the wrong key moments. It probably was. And this isn't the, this is the worst pre-publication that I've ever encountered. When I was at the BBC doing a budget, and actually on that occasion, it was the Evening Standard, because it was a London newspaper, daytime newspaper, was always briefed on the contents of the budget so that they could get a front page out about the budget. But they were under strict instructions not to publish. online until the chancellor had sat down and some bright young trainee person just published the whole thing before she'd stood up.

4:18Now, they didn't have quite as much detail as was in the OBR, but something a little bit like this has had happened in the past. But in the case of the OBR, okay, apart from their analytical ability, they get sent so much confidential information. over many, many weeks in the run-up to a budget, that security has to be absolutely their priority. And on my show tonight, I was talking both to John McDonnell, a former shadow chancellor, Labour MP, and to Richard Tice, who's the deputy leader of reform. They were both saying that they feel the bosses have to take responsibility, which I guess means a very nice man, Richard Hughes, who runs it.

5:05But they're broadly saying Richard Hughes has to quit. Yeah, I've heard a few people saying that now to me, actually. It's interesting. I feel sorry for him because he's a really nice, decent bloke. And presumably we'll just have to wait and see precisely what happened. But it is the kind of failure where you slightly assume, even if the guy at the top isn't directly responsible, if there aren't systems in place to stop this kind of thing from happening, In the end, a boss has to take responsibility for that. God, it's happening everywhere, that, isn't it? Bosses having to fall on their sword.

5:41But should we talk a bit now just about the kind of crux of it all? Because obviously, you know, one of the things you and I have talked a lot about on this show is the cost of borrowing, how much it costs for the government to borrow money. And that has been alarmingly high for some time now. And I guess the Chancellor has probably been on tenterhooks to find out how the markets, what we call the bond yields, would react to all of this, how investors might see us off the back of it. And so should we talk a bit about that, the market reaction to it? Because that's been really interesting today, what's been happening with bond yields.

6:17It has been. I'd like to slightly preface this by saying one of the striking things about this budget. I don't want to oversimplify, but honestly, I think this captures the truth. I think this budget was basically a budget to save the job of the chancellor and save the job of the prime minister, because it was addressing the two groups, the two constituencies that are most important to whether or not they can survive. Now, you know, one group is, of course, Labour MPs. There's been an enormous amount of talk over recent weeks and months that both of them might have to be kicked out. And that's partly because the run up to this budget has been the biggest shambles that I've ever encountered with, you know, leaks, briefings, warnings about, you know, fiscal meltdown that turned out to be exaggerated, decisions to raise the basic rate of income tax that are then reversed, reversed because of, you know, wobbles in Downing Street, wobbles by the prime minister.

7:33I mean, honestly, it has been chaotic, like no budget process has ever been in, you know, my lifetime of covering these things. You know, so there was a lot riding on it for the Chancellor, how it went today, a lot riding on it personally for the Chancellor and indeed for the Prime Minister. and therefore it was really important that they bought off, for example, their critics in the Labour Party. One of the big things that they announced was this abolition of the two-child limit on universal credit, handing£3 billion to families on lower incomes with more than two children. This is something that Labour MPs have been desperate to see, which Reeves and Starmer have been resisting.

8:31They were under pressure to do it in the last budget. They refused. And, you know, honestly, I think the main reason they've done it is not because they desperately believe in it, although there is an enormous amount of evidence that it is a very efficient way to reduce poverty. I think they've mainly done it because it buys them a bit more time in office because quite a lot of MPs who would have wanted them out have got one of the big things that they were demanding. Now, the other risk for both of them was a budget that led to the kind of markets reaction that we saw after the Liz Trust quasi-quoting disastrous mini budget.

9:13And we have to remember that in recent months, the amount that the government was paying to borrow has exceeded the amounts that the trust government were forced to pay after markets turned against them after the mini budget. And, you know, one of the most embarrassing things for this government, as it happens, guilt markets have been steadier, a bit steadier in recent weeks. But actually, it's not that long ago where the amount that the British government was paying to borrow, I mean, it's still higher than the interest rate that it pays, higher than most of our competitor countries, which is in itself embarrassing.

9:56but the gap has narrowed a bit. The risk premium that lenders to the UK are demanding has come down a bit. It's still way too high. I mean, as Rachel Reeves herself points out, something like one in 10 of every pound she spends goes on paying the interest bill, which is appalling and really unsustainable over the long term. So she needed a positive markets reaction and to her relief, she got not a huge one, but actually bond prices did rise a bit today. The implicit interest rate she pays to borrow fell a bit. Now, it shows you how rarely you get massive market reactions on the day of budgets.

10:46Actually, Deutsche Bank did some work on this and believe it or not, even though the fall in the borrowing rate for the government isn't massive, It is a bigger fall, at least since 2006, right? So from that point of view, the markets did receive it well. I have to say that all my contacts, people I know very well in the city, they all say to me that if she'd had the courage of her convictions and put up the basic rate of income tax, actually guilt prices would have risen way more and interest rates would have fallen way more. because that would have demonstrated to the nation's creditors that this was a government prepared to take genuinely difficult decisions to manage the nation's debts.

11:33So there is an opportunity cost for her, for Keir Starmer, in the fact that at the last moment, a week ago, they bottled it. And they felt that the political backlash for putting up the basic rate of income tax was too great. But truthfully, if they had done that, I actually think they would be basking in the glory this evening of a really big fall in interest rates. Anyway, they've got a small fall in interest rates and it's a lot better than it could otherwise have been. I'm still not 100 % certain that they're secure for the long term. We might come back to why that is. But it's worked out a bit better for them today than they might have feared.

12:15Yes. And that's the point here is it's a little bit of good news in terms of how much it costs the government to borrow money. But it's still they're still not out of the woods. And also, you say, you know, they've got this. A lot of this has come from the fact she's increased this buffer. She has, you know, what we call the fiscal headroom. So this money that is kind of left to cover themselves after they've paid for everything, it's that bit left to cover for any kind of other things that might happen, which inevitably do. Yeah, these shocks, which always do. But the other thing, which I think you were just alluding to there, though, is a lot of these tax rises that we've had announced today are backloaded.

12:58So a lot of them are things that are going to come into effect towards the end of the Parliament and even after the next election. So there's a lot of questions, aren't there, from investors around whether they're credible or not? Like, are they actually going to happen, these tax rises? I mean, ask yourself the question, right? You know, we're going to see a general election in three and a half years, right? it might be slightly earlier than that, but it can't be more than three and a half years away. Are they really going to go into a general election on a promise to put up people's taxes by£23 billion?

13:39It doesn't seem plausible to me. So that's one area where, you know, if you look at the small print and you're a creditor, you think, are they really going to meet their fiscal rules? Is that money really going to come in? But there's a ton of other stuff that is flaky. I mean, you know, one of the things I discovered going through the small print is in four years time. But again, it's in exactly the same period around an election. But it's also in the crucial period where they've got to hit these fiscal targets. They've simply written into their spending calculations that they will save out of nowhere four billion pounds from efficiencies.

14:18It's like, you know, this is like this is tooth fairy stuff. It's magic stuff. Suddenly, with no efficiencies. in the preceding years, it says, nought, nought, nought. And then suddenly it goes £4 billion. They're suddenly miraculously going to find. That's not very compelling. You've talked a lot about the pain on businesses like yours of business rates. They are continuing with a load of the subsidies up until four, I think it's four years time when suddenly they go away. But business rates go up very significantly. Really? Are they really going to hit businesses with higher business rates as we go into an election.

14:55So again, if you're an investor, you look at that and you just say, this is nuts. This is not remotely plausible. That money is never going to come in. Yeah, yeah. And I know. And, you know, we've mentioned about the salary sacrifice as well, which is due to come in in 2029, isn't it? And that is that, you know, they're saying they're going to bring in 4.7 billion by the end of the decade from that cap. Yeah, but that is on the assumption. I know, isn't that on the assumption that people will still put money into pensions? They're not going to. I was talking to a guy today who's got a business in, a fintech business and basically helping people with clients working out salary, sacrificing things.

15:39And he was just saying to me that all his clients are literally saying to him, well, we're just not going to put in as much money in a pension. So behavior change is not being taken into account. You know, there's an assumption that people's behavior isn't going to change. And then on the flip side, you've got the contradictory thing of reducing the amount of money you can put into a cash ISA. And then on the assumption that, oh, well, hopefully they'll put it into investing in stocks and shares. That's not how it's going to work. people just won't save as much. Some of these numbers are just pulled out of thin air, quite frankly.

16:13Oh, I mean, one of the things that, you know, as I say, that very nice man, Richard Hughes, who may have to resign over the OBR publication debacle, but one of the things he's pointed out is so many of the tax reforms that she's announced carry an enormous amount of uncertainty because they're complicated, enormous amount of uncertainty about whether or not they will actually raise the money that the government hopes. I mean, one of the things that is quite striking is that even with this doubling of the cushion, the headroom, which you talked about, that's supposed to protect the Chancellor from future shocks, there is still, I think it's 58, 59 % probability only, according to Hughes, that she hits those targets.

17:03You know, it's not quite a coin toss, But there's still a fairly big chance that despite the enormous amounts of tax that she is raising, that she could still miss the fiscal targets and be back for more. There's one other thing, though. I said that this was a budget to save the jobs of Starmer and Reeves. And certainly maybe for a day or two, it'll have that effect. I mean, but two other things. One is, it is possible that as markets really look at the small print of what she's done, maybe they won't be quite so supportive. And maybe possible guilt prices will fall a bit again. But actually, more significant is I do think there could be quite a big political backlash for a number of reasons.

17:57I mean, one is, I mean, a number of Labour MPs on the right of the party have said to me the thing they're worried about is, you know, when you put up taxes on, you know, to use a phrase that you hate, but Keir Starmer loves, working people, right? And despite the fact they promised in the manifesto they wouldn't put up taxes on working people, this puts up taxes on working people. You know, actually, one statistic here, by the time these thresholds have been frozen for the extra three years, 24 % of British people will be paying the 40%. That's almost one in four working people will be paying the 40 % rate of tax.

18:43That'll include nurses, teachers. You know, that's a lot of extra tax that people will be paying. That's not going to be a very popular thing. This salary sacrifice, this way in which people save national insurance on their pension contributions, that's a lot of tax out of people's pockets, potentially, or indeed out of businesses' pockets. And one of the things historically many people hate doing is they hate paying tax that pays for other people's benefits. Yes. And I noticed that the headlines, I mean, I've looked at the front pages of many of the right wing newspapers and it all says your tax is up to fund benefit stream.

19:23Yeah, to fund large families on benefits, basically, isn't it? And that is the sort of slur that much of the right wing press will just repeat and repeat and repeat in terms of an attack on the government. It's what the Tory party will charge. It's what reform will make the charge against them. And actually, it is something that if you look at the history of British elections, a lot of British people, even those who are not on high incomes, hate the idea of their taxes. that they're fine for taxes to go to schools, they're fine for taxes to go to hospitals, they don't like their taxes being used for benefit payments.

20:01And I still stand by my point that people, more often than not, on benefits don't want to be on benefits. They just want to be able to, you know, whether it's help with childcare so they can go back to work or whether it's access to work in terms of jobs where they are and infrastructure where they are making it more accessible for them to be able to get a decent job and be able to get there and everything else. People would much more, on the whole, people would rather earn the money themselves to be able to fund their lives and be able to cope with the cost of living rather than take it off government.

20:39I totally stand by that. It's not about people on benefits wanting more benefits. They want more help to be able to go and do things themselves and earn money themselves, unless they can't, you know, obviously there's a cohort of people who physically cannot. But on the whole, most people do want to work. And I think it's just worth reminding everyone at this point before we move on of this stat that we occasionally tell everyone, which is that 1 % of rich people pay 30 % of all income tax. You know, the numbers speak for themselves in terms of where a lot of the income tax comes from. But again, my big beef with all of this is what I mentioned the other day.

21:21It was, you know, her big things are reduce NHS waiting lists, cut the cost of living, bring down the cost of living and cut the debt. None of that sounds pro-growth to me. And I have a big problem with that. Over the next five years, the OBR is showing that the welfare bill, what it describes as welfare, is going up by£73 billion. pounds, right? And, you know, that is just the increase in the welfare bill. And that is obviously way more than we spend on schools. It's way more than we spend on defence. It is unsustainable. 20 billion of that is something that all the opposition parties complain about, something that the government is anxious about, which is the increase in disability benefits.

22:10That's 20 billion of it, right? And it is true that the government has singularly failed to get a grip of the rise of that element of the rise in the benefits bill. But 35 billion pounds, right, the biggest chunk by far, is actually spending on older people. And a huge chunk of that is the so-called triple lock. The way that the pension increases, frankly, has risen way faster than people's earnings in recent years. Now, that£35 billion increase is just unsustainable. And there isn't a single political party actually prepared to come up with any proposal to get that under control. This budget has nothing to say about the triple lock and getting it under control, reforming it.

23:02and you know as the OBR we're back to them has pointed out we will be bust in a couple of decades if we don't get this spending under control and given I mean final point before we go to the break given how few older people currently support the Labour Party it's sort of amazing that even with their enormous majority they haven't got the guts to take on the lobby of older people amazing so I mean they're some of the measures what we definitely didn't see in this budget was anything about growth. We're going to talk about that after the break. And also something which I'm particularly interested in because we employ a lot of young people on minimum wage in our business is the fact that minimum wage is going up.

23:47Great if wages are going up for people, but at what cost? That's what I want to talk about. And we'll do that after the break. Can't wait. This episode is brought to you by Google. Now, if you ran a small business, what would you do with an extra three weeks a year? That's how much time the average small business could save with AI, according to Google's latest AI Works report. Three weeks isn't spare time, it's the ability to get the day-to-day done faster, giving you time to plan for the future. So why aren't more people using AI. Google's research found it's mainly a lack of training and confidence.

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25:08Welcome back to The Rest is Money doing our budget analysis. It's something we'll be doing over the next few episodes. We've got Dan Needle on next after this one, who obviously is a tax king when it comes to working out what it all means and how it might impact us and whether it's worth it or not. So we've got that coming up. But a big thing, Robert, you and I talk about a lot is growth and where that's going to come from. And there was nothing on it. Yeah, look, it's not just you and me who talk about growth and think it's important. This was a government that in his manifesto said growth was the most important priority, getting the growth rate up.

25:44Since then, you know, Keir Starmer, Rachel Reeves, you know, barely a day has gone by when they haven't insisted that they want to get the growth rate up. But, you know, she barely mentioned it in her budget speech. The Office of Budget Responsibility actually says that, you know, as you know, one of the bigger problems for her was that it downgraded its growth forecast because it thinks productivity. This is not the government's fault, by the way. This is, frankly, years and years and years of economic mismanagement, particularly by the last government. But the most shocking thing that the OBR said was there was nothing that the Chancellor announced today that meant that it should revise upwards its growth.

26:33So what it said in black and white is there is nothing in this budget to make the country richer. And that's shocking, appalling, terrible. Yeah, yeah, yeah. You know, I mean, for what it's worth, also a political disaster for this government if they can't get the growth rate up, because one of the other related Office of Budget Responsibility forecasts is that living standards over the course of this parliament are barely going to rise. I mean, it'll be the second worst parliament on record for rising living standards. And if this government can't get living standards up, I mean, at the moment, it doesn't look as though it's going to be re-elected given it's standing in the polls, but it's got no chance.

27:17Yeah, absolutely. So, as I say, this felt like a budget all about the survival of the prime minister and the chancellor, but not a lot about, you know, what the country needs. Yeah, if they don't make people feel like their lives are getting better, they're absolutely stuffed in the next election. And that's the truth of it. People need to think their lives are going to get better in some way. And, you know, when this budget came out, obviously, I look at it from a perspective of what does it mean for the economy? What's it mean for us? So we can talk about it. But I also think about what it means from a business perspective.

27:55As an employer, because you're an employer, aren't you? And as an employer, yeah. And we employ over 100 people in our retail business. And one of the big things, you know, we got hit last time, got totally hammered, as did all businesses with the national insurance contribution increase. Also, the changes to the business rate relief. And even though it's a relief in the sense of it's money off business rates, it got reduced from what it was, that relief. So therefore, business rates went up. for businesses like mine. And then on top of that, minimum wage went up higher than inflation, quite a bit higher than inflation.

28:33And then similarly, now we have had minimum wage go up again. Now, you might, there'll be people screaming now, listen to this going, that's right, that people are paid, you know, proper pay for their work to be able to afford the cost of living and everything else. And I'm not arguing that point. My point is, the cost is to business straight away. And if you look at how much it's gone up by, particularly where a business that employs lots of young people, so people aged between 18 and 20, if you look at how much that's gone up by the minimum wage, so it's gone up 26 % in the last two years. So two years ago, 2024, it was£8.60 to employ someone per hour between 18 and 20.

29:22By this calculation, by 2026, it's going to be£10.85 to employ an 18 to 20 year old. Now great that they're getting more money, but you have this at the same time as there being a million young people not in education, employment or training so one in eight people who are NEETs between 16 and 24 and you're making it more expensive for business to employ those people so you know that's a huge addition now to our employment bill is increasing the minimum wage and going to make it harder for businesses to employ younger people because they're going to go well hang on it's not that much more to employ someone who's 34 and done all of these things beforehand and got life experience and maturity and everything else so you're going to make things it make it harder for businesses to employ young people because the cost of it has gone up so much so that's my worry with the minimum wage increases that we've had now.