239. 2026 Predictions: a bubble bursts, Starmer’s only hope & Trump’s vulnerability

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0:41Robert Peston:Terms and conditions apply. Every soda's got something to say. Colas brag. Probiotics give TED Talks. Then there's Mr. Pibb. No pitch, no promises, just bold cherry bringing the flavor. Bold kick of cherry.

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1:08Steph McGovern:Happy New Year and welcome to The Rest Is Money with me, Steph McGovern.

1:13Robert Peston:And with me, Robert Peston. I hope you've had a wonderful Christmas. And now let's talk about the bloody awful year we've all had and what we can expect.

1:23Steph McGovern:It's going to get better, guys. We hope. But no, as we end 2025 and start 2026, we wanted to kind of take stock of what's been an incredibly dramatic year. I feel like you can definitely say that about 2025. It was really dramatic. There was lots of big developments, you know, new government in place, Trump, obviously, in his liberation day, the tariffs and things like that. Lots of stories connected to AI, to trade deals and all sorts. So we're going to talk a bit about what's been important in all of that and where does that take us next. So, Robert, do you want to kick things off for us? Because we were expecting, weren't we, when the new government came in, we'd had the big budget in autumn in 2024,£44 billion worth of tax rises.

2:17Steph McGovern:We were told at the time, you know, there wouldn't be any more need for tax rises because Reeves had it sorted and everything looked like, yes, OK, it was a big pressure on businesses, those tax rises. But hopefully with the view that things would get calmer and the economy would start to grow more. But I mean, that was just the start of a very tumultuous year. What are your thoughts?

2:41Robert Peston:So, look, we are currently living through quite an extended period of economic flatlining of zero growth. We've had months of it. And we're also seeing unemployment rising in a way that is worrying, particularly actually unemployment among young people. I don't know whether you call it the paradox or the contradiction in this government is that this is a government that has said that its number one priority is growth. We heard that in the run-up to the election.

3:22Robert Peston:We've heard it since in almost every utterance that the Prime Minister and the Chancellor have said. But they have taken a number of steps, imposed a number of costs on the economy that have undermined growth. And the most important one was that decision to put up employers' national insurance in the previous years, last year's autumn 2024 budget, which heaped a ton of costs, 24 billion on businesses. and undermine their appetite to recruit. And it's because it was implemented this year. The negative impact on growth and employment has been felt this year. They have, as sort of countermeasures, taken some steps to improve our growth prospects, but not been ambitious enough.

4:26Robert Peston:So, yes, there's been some planning reform, not ambitious enough. Yes, there's been some infrastructure investment, in my view, not quite growth focused enough. They've maintained something else which is terribly important for long term growth. They've maintained the R &D budget, but not increased it. Research and development, that is so important to our growth prospects, but not increased it enough. They have taken some steps to improve the flow of capital from pension funds to growing business and infrastructure, but not being ambitious enough. They've not yet solved the problem of the British companies, you know, inability to get the kind of growth finance that's necessary.

5:08Robert Peston:British Business Bank has got a slightly more ambitious mandate, not ambitious enough. Regulations have been, in terms of burdensome regulations on businesses' ability to grow, eased a bit. Not enough. So the scorecard is quite a lot of stuff moving in the right direction, but not enough focus, not enough ambition. And quite a lot of the stuff that is sort of pro-growth will take too long to materialize. They are moving closer to the European Union, easing some of the costs of trading with the European Union. But again, it's not happening fast enough, and it's not enough. So, you know, if you were going to give the government a sort of school report card on its growth project, I don't know, what is it?

5:53Robert Peston:It's a sort of B minus at best. And we are a country that has got such a serious growth problem. You know, they should have been aiming for, you know, an A++ from the word go. And sadly, they didn't have the ambition.

6:10Steph McGovern:I think the thing for me that really put the kind of, nailing the coffin feels like the wrong phrase, but really suggested to me that we weren't thinking about growth enough was when we heard Rachel Reeves towards the end of 2025, you know, just before the budget and then afterwards as well, actually, talking about the three priorities for her being to reduce the debt and the deficit. So trying to bring down how much money the government has to borrow to pay for things. That being one priority. The second being bringing down NHS waiting lists. And the third being to reduce the cost of living. And for me, all of those things, of course, are important.

6:58Steph McGovern:Of course, we need to reduce witness. Of course, we need to bring down the cost of living. Of course, we need to reduce the debt. But none of them are like optimistic, kind of, you know, they're more defensive than they are talking about, you know, we need to, you know, isn't a priority to grow the economy, isn't a priority to have better access to public services. it feels, it felt really negative. And, you know, as someone who is an optimist and as someone who's got, you know, businesses and you, you know, you, you have as well speakers for schools and things like that, you, you felt we employ people, we provide work.

7:35Steph McGovern:It felt like there wasn't that sense of things are going to get better. It felt like what we were hearing from Rachel Reeves is it's going to be less worse rather than getting better. And I think that's where, you know, we've seen reform and even Trump do well with their messaging around. They might not achieve it, but they make you think that life is going to get better. That's what they're going to try and do for you because it feels rubbish at the moment, but we are going to try and make things feel better for you. And that's not the kind of rhetoric we've had from the government. So I think if they do want to make us feel empowered as business people, as employees, as employers, is to just give us that sense of, you know, it's been tough.

8:21Steph McGovern:There is always global uncertainty, but we'll get you through it and things are going to feel better. They are going to be better. And I think that's what's missing at the moment in terms of, you know, we need to be more positive, even if it's going to be hard and you don't achieve it. You've got to make people think that they are going to so that they come along for the ride. And it's that kind of placebo effect, isn't it, as well, as much as anything else?

8:44Robert Peston:No, you're totally right. And to be clear, there was, for different kinds of communicators, a way for Rachel Reeves as Chancellor and Keir Starmer as Prime Minister to make those three ambitions, debt and deficit being brought under control, NHS waiting is being brought down, ruthless focus on the cost of living, right? Those things could have been presented, actually in a more ambitious way than how they're executing them, but they could have been presented as actually pillars of a really exciting growth plan. So I'll give you an example of how you can sell those as part of a really exciting, optimistic growth plan.

9:30Robert Peston:So debt and deficit, right? If they'd done something that you and I on this podcast had thought was the right way to go, which is to have modestly increased the rates of income tax, that would have given confidence to the nation's creditors that this was a government prepared to make tough decisions in the interests of economic fiscal stability. At that point, in my view, the rate of interest that this government would have been forced to pay by those creditors would have come down very, very significantly. Now, when the government, when the interest rate that the government pays on its debts, on its bonds comes down, that actually sets a lower benchmark for interest rates in the entire economy.

10:12Robert Peston:That is good for all of us, whether we are consumers or businesses. And, you know, for example, it would have had an impact on the mortgages that people pay. Right. But they weren't bold enough when it came to that budget in the steps that they took to encourage our creditors that they really did have a compelling plan to manage the debt. With the vast numbers of smaller tax rises and the sort of deceit of freezing tax allowances, this still looked like a government afraid of its own shadow, despite its enormous majority. So not bold enough there. Secondly, on NHS waiting lists, too many people are unable to work and are claiming benefits because they can't get treatment from the NHS.

10:58Robert Peston:Again, if you just present this in a more ambitious way as a work programme by helping people who currently are essentially not getting, for example, the mental health support that they need. Right. If you present a really ambitious mental health support program. Right. That is part of the, you know, gets people the confidence to come off benefits into work. That's a massive growth program. And then finally, right. Anything that you do. Look, you know, they have tried to do something on energy costs. Not enough. Not bold enough. And then, OK, it's great to freeze NHS prescription charges. But again, on the whole cost of living side of things, people on lower incomes, they basically can't save.

11:43Robert Peston:Right. They have to spend any money, any additional money they have. It is a growth plan because the more money you put in people's pockets on lower incomes, the more they spend, the more good, you know, the more good it does for the overall economy. So there was just a way, okay, being more, you know, my problem with this government in all respects, right, is it just somehow, it's slightly afraid of its own shadow. Just when you think it's going to do the right thing, it somehow isn't ambitious enough. I mean, there's one other thing going on at the moment, which gives me pause for hope. But I don't know whether my hope is going to be dashed, as it were.

12:21Robert Peston:But it does genuinely give me cause for hope, which is there was a really excellent report published on the nightmare, the morass of sort of regulations and regulatory bodies that prevent us from actually for being literally the most inefficient, the slowest in the world when it comes to building really important new nuclear power stations. Right. Whether it's the big ones, whether it's the small modular ones, we are because there's literally, you know, we're just caught in this sort of absolute sort of treacle. Anybody who's trying to work in this sector, caught this treacle of planning restrictions, health and safety restrictions, safety restrictions.

13:09Robert Peston:It's an absolute nightmare. And this bloke, John Fingleton, who actually has a very distinguished record as a regulator, and I got his own consultancy, asked by the government to do this report into how to strip away all the unnecessary layers of regulation. and it is a brilliant report. I'd recommend it, the John Tingleton report. It's coherent. It sort of makes you laugh and cry in certain parts. You've probably heard about the fish disco, this extraordinary proposal to force, you know, a multi-hundred million pound project on one of our more important nuclear developments to save the lives of, I think, a single fish.

13:51Robert Peston:I mean, you know, the money that we've, that's been wasted off the charts, He comes up with a set of proposals. And the point about these proposals for deregulating, cutting costs for the nuclear industry is it has massive read across, massive implications for other sectors where, you know, whether it's house building, whether it's, you know, transport development, all held back by this, you know, overlapping, duplicating regulation. You know, gold plating safety in a way that actually doesn't save a single life or protect people from serious injury. Now, when he publishes it, the Treasury, and I think I mentioned this on this podcast, you know, basically then said, oh, no, by God, it all looks a bit too radical.

14:43Robert Peston:And they were proposing to basically pause it. There was a bit of an outcry. Prime Minister a few days later then not only says it is all going to happen, let's hope he's right, which would be great for nuclear development, so important for our nuclear costs. He also said that he'd asked Peter Kyle to go away and basically impose its lessons on every other bit of important government infrastructure investment or any other bit of major investment in the economy which we need for our growth plans. Now, if the government now follows through on what I would regard as the Fingleton plan, then, yeah, we will have a much improved climate when it comes to investment and growth.

15:26Robert Peston:So let's just see if it happens. But that is my that is my one cause for optimism is that the prime minister has said to his to his business secretary, do this. Kyle is going to come on the programme quite soon. You and I are going to hold him to account.

15:39Steph McGovern:Yeah, it is really interesting, this, actually, because this is, as you say, really important for infrastructure across sectors, whether it's building new data centres, whether it's energy and all those other large projects that, as you say, often get held back. So I am glad there's a bit of hope there. I think my hope at the moment in terms of, you know, where I feel like hopefully things will make a difference is around devolution, actually. And the kind of Metro mayors having more power around transport in particular. and you know so you hear me moan a lot on this show about transport and skills and I think I really hope that the metro mayors and this kind of devolution of powers so that they have more control over what exactly skills are needed in different areas and how can we make sure people can get around that connectivity could make a big difference.

16:36Steph McGovern:I have been really impressed actually by how much I have seen, for example, where I am, Kim McGuinness constantly coming out to fight for things and really think about the needs for the area. And of course, the Metro mayors need to deliver on all of this. But what I think has really impressed me is the rhetoric around talking the area up, like, yeah, OK, there's loads to do. And, you know, Kim McGuinness has got to do it. And so have the other mayors. but it feels it's that sense of like, oh, things are going to get better around here. I am prioritizing the things that matter to people around here.

17:14Steph McGovern:And that is important too. It's that feeling of things getting better that we keep talking about that we're not hearing from the government, but I feel like I'm hearing locally. And that's what me and my mates are talking about. We're like, oh God, yeah, they're going to sort out the metro. They're going to do this and that. And I think that is what matters to people is how they feel as much as it is about the reality of what is going on. But of course, they need to follow through on all this. And actually, I had a really interesting discussion, which you can hear on another episode about what local employers are doing around skills.

17:48Steph McGovern:So, you know, there's one business owner I talked to who's got an engineering firm and he explains about how they get, they work with schools locally and speak to them from like the age of 11 and get them into the workplace. They offer careers advice for them and work experience. They do all kinds of different things within the community with parents and everything else to try and get that pipeline for themselves so that they don't have this skills gap. But the impact is it helps all employers in the area what they're doing. So if you want to hear more about that, that is on a previous episode about skills.

18:22Robert Peston:Now, the important background to our economic prospects is, of course, a very volatile global economy and a global economy that's become way more volatile for one reason and one reason only. And we can sum up that reason in two words. Donald Trump became officially president of the United States at the beginning of this year. So let's talk about what Trump has meant for the world and for us after a quick break.

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20:26Steph McGovern:Hello, welcome back to The Rest is Money, our New Year's special. So what we're doing in this episode is taking stock, essentially, of what's happened in the previous year, 2025, and then looking ahead to what we think is going to be important in this next year. So we've done a bit of UK-focused economics, talking about what's happening with or not happening enough with growth, but where we think there might be optimism. But obviously, we are massively impacted by what happens in the rest of the world and the powerhouse that is the American economy and Donald Trump. So, Robert, do you want to pick things up on where things stand there?

21:10Steph McGovern:Because it has been one hell of a year.

21:12Robert Peston:Yes. And, you know, I think the important point is that we didn't and haven't suffered the sort of economic Armageddon that many thought might flow from Trump's imposition of tariffs, you know, impose them on the entire world. inaugurated a new era of protectionism, of what economists call mercantilism. Yes, those tariffs have reduced global growth a bit. They have increased global inflation a bit. But actually, it has been really rather remarkable the extent to which the American economy and indeed the world economy has absorbed this shock. And I think the biggest reason that it's managed to absorb it in a growth sense is because we've had this artificial intelligence investment bubble, massive investment, particularly in America, in data centers and the infrastructure for this artificial intelligence industrial revolution.

22:21Robert Peston:And an enormous proportion of American growth this year has come from that AI related investment. And then the other big Trump-related factor was the way that he tried to undermine the independence of the US Central Bank, tried to bully the US Central Bank, the Federal Reserve, into cutting interest rates faster than the Federal Reserve thought was prudent when it comes to managing inflationary pressures. I would say that the Federal Reserve has withstood that assault on its independence rather better than many people had feared. But we are in now for a big year for the Federal Reserve's integrity because we are going to get in the next year the appointment of a new chairman of the Federal Reserve.

23:19Robert Peston:There are other appointments that are likely to be made across the year. My own view is that it's it's well, it's obviously too early to judge whether that precious independence, that independence that gives confidence to the creditors of the United States, that interest rates are going to be set at levels that are good for the economy rather than good for the, you know, the political needs of a president who's in charge. The more that the Federal Reserve becomes politicized, the more that those creditors lose confidence in the United States and the higher, therefore, frankly, the interest rate that the government has to pay in America to borrow, the higher that becomes.