244. Why Lord Frost wants a Thatcher revival

0:00And do you think it is possible to continue to make the case for Brexit? Absolutely it is. The problems Liz was facing, the problems Rishi was facing, the problems the current government's facing are the same problems. The state is too big, it's doing too much, we're running a massive deficit. But do you personally believe that climate change is real? David it's immensely good to see you why in a sense have you decided to take over the running of possibly the best known economic think tank in the country yeah well I'm glad you say that Robert I think it is and obviously we've been here for 70 years and have a strong reputation I think lots of well-known people have been through the IEA doors as as interns or writers or contributors at some point.

0:53And it's a really strong part of the scene. I mean, I wanted to do it really because we seem to be in a phase of British politics where, you know, we're in the middle of a government. There almost certainly isn't going to be an election for some time yet. what needs to be done is fight the battle of ideas. And one of the problems the country's had is that we have not, politicians have not, opinion formers have generally not made the case for free markets and freedom really as strongly as they ought to have over the last 20 years. We've seen the state grow and grow, government reach grow and grow, regulation expand, government spending expand.

1:38And we're running up against the buffers now on all this. And so what I want to do and why I'm here as opposed to politics is to fight that battle of ideas and get involved in the debate. So can I ask on that then, because I'm really interested by this idea of, you know, you're a free marketer. You think there should be low taxation, low regulation and things like that. I'm a business owner and, you know, I'm all for lower taxes to improve growth. But how do you start that process off without spooking the markets? How do you prove you can pay for them? Because as we saw with Liz Truss, who I know is kind of a close friend of the IEA, it caused carnage, didn't it?

2:25That sense of how are we going to pay for these low taxes? So I can understand the long-term argument of it in terms of bringing in, improving growth and productivity, and that brings in the tax revenues. But how did you start it off without causing market carnage? And can I just sort of slightly add to that? Because you did say that you think it's got a strong reputation, the IEA. I mean, I would slightly caveat that. I mean, when I was a cub reporter, I would see IEA people, particularly the absolutely lovely Ralph Harris, you know, quite often. And, you know, these were, you know, these were big economic figures because of the way they had helped Margaret Thatcher set that agenda of bringing the tax burden down, privatising.

3:16You know, they were a big intellectual force. um unfortunately in modern times the way you know the time we all noticed the iea was when it not only endorsed liz truss's disastrous mini budget but also claimed credit for the sort of intellectual underpinnings and so i i i do think it's not to say you can't do it but i do think that you have inherited an institution which has got a lot of work to do to prove that it is intellectually robust rather than just a bit wacky? Well, obviously, I wasn't at the IEA in 2022. I wasn't in Liz Truss's government. I think I'm on record as saying I thought she was trying to do the right kind of things and went about it in the wrong way and a slightly ham-fisted, a kind of over-rapid way.

4:11And I would still stand by that. And, you know, whatever the IEA said and now. I'm here now and it's three years later. And unfortunately, the problems the country has have only got worse since over those three years. And the country really needs people to kind of step up and get involved in the argument. And that's what we intend to do here. to answer the the the earlier question you know of course um we need to uh the next government which i hope will be of a free market persuasion needs to go about the necessary changes in a much more uh measured and sophisticated way and you know in particular it's important to keep um spending and taxation broadly in line of course they're not broadly in line at the moment we're spending much more than we bring in, unfortunately.

5:11What we really need, and I've argued for this before, is probably a 10-year program for reducing the role of the state to back to the early Blair era's levels, I would say, bringing spending down, bringing taxation down a bit each year, beginning to roll back regulation every year, beginning to reform some of the big problems we've got the health service universities planning we know about net zero it needs a serious program and and that has to be developed now in opposition can't be done casually but the direction of travel must be set and it must have credibility behind it so so that's what i would say about the you know what's needed going forward so what does that look like though in terms of if you're um because i appreciate your point you've you've got to put all these things in place but what does that look like if you're doing a budget like what would a budget look like for you and i don't mean all the minutiae of you know fuel duty and things like that but just the how how can you get across a budget that brings in low taxes lower spending or same spending whatever basically not increasing it what does it look like to you and how and how And maybe just to help with the framing, you know, you, as you say, said that as a sort of framework, you thought that Truss's approach was appropriate.

6:44It was just, I think what you were saying is she's just to try to do far too much too fast. So go back to her agenda. And if that agenda was going to work, how would you have done it? Well, I think I would have spent a lot more time explaining. And I think one of the problems is that because free markets and a kind of freedom agenda has been so muted for the last 20 years and all the political and economic problems have been framed around a state role, the value of free markets, the gains they can bring to human welfare and prosperity are not widely understood. and all the kind of pedagogical work that the Thatcher and major governments did on this has been forgotten and has to be done again.

7:34So, you know, ideally, Liz would have been starting from a different point. But I still think she should have done, you know, rather more kind of explaining of why she was doing what she was doing, why it was necessary to stop the rise in tax spending. But the unfunded tax cuts, David, were always going to be a markets catastrophe. be well i i i don't think this is the the moment to re-debate you know whether list trust did the right or the wrong thing what i'm trying to do is is set out what i think we should be now doing and the problems liz was facing the problems rishi was facing the problems the current government's facing are are the same problems the state is too big it's doing too much we're running a massive deficit.

8:19The tentacles of the government are in all kinds of economic activity and we need to roll that back. And that's the fundamental difficulty that we face and it will face whatever government comes in. To answer, Steph, your question, I think, I mean, obviously it depends where we are by 29, 30 and things could be quite a lot worse than they are now, I think, in terms of the public finances. Who knows? I think you have to, I suppose what I would be saying is you need to develop, you need to prepare the ground, you need to set out, rather as both the Tories and reform are beginning to, some initial spending cuts that show a commitment to credibility, ideally to be repeated year on year with taxation following it.

9:12And of course, you also need to roll back a lot of the regulation. You know, we need to get the supply side working again to counter any fiscal squeeze. That's going to be the difficulty. So, you know, the whole sort of disastrous policy of net zero, the anti-enterprise tax system, you know, ending the trying to get more for the money we spend on the NHS and so on. all those things got to be done as well if we're going to get the real economy moving again so it's really really complicated task uh given the uh the mess that we've pushed the country into it is complicated i mean i noted that you have resigned your membership of the tory party because uh you feel it's important the iea uh i mean what you said i think is not too seen as being too party political but is it also because you know broadly your expectation is that reform is most likely to form the next government and you want reform to give you a hearing i mean no is it the the i don't think anybody really knows what's going to happen in politics on the right in the next few years uh you know anything could happen and there's a lot of things we just just can't predict.

10:37You know, what I would really like to see is that we get back to a situation that we had in the 90s and, you know, perhaps the first half of the 2000s, which is that every political party pretty well had to acknowledge that there was going to be a big role for markets and the private sector in keeping the country prosperous. And of course, there was an argument about the scope, But nobody was really doubting the kind of intellectual backing for that. And that's no longer the case. I really want to get back to that. But can I ask you about that? I mean, do you think Nigel Farage does share your sort of economic libertarian views?

11:17Because, I mean, you know, he has argued for nationalisations. You know, he, you know, he has argued for the kind of welfare spending I think you would oppose. Do you think there's any chance that you can convert him to your way of thinking? I mean I'm not here to defend him he said you know certain things and he said other things and I think to be fair to reform it is still developing its economic agenda I think that's the best one can say at the moment I mean this is exactly why I think organizations like the IEA but not only us everybody's got an interest in it you know needs to um make the arguments about this so there is some political payoff for taking you know relatively strong free market positions that people you know enough people begin to understand as they did in the 70s that the old model the model of the last 20-25 years has reached its limits and something else needs to be tried and you know there's no reinventing the principles we know what the principles are that produce prosperity we just need to find a way to get back to them what are your thoughts then on things like the fact that you know we've had this announcement about the investment into connectivity in the north through this northern powerhouse rail and that involves spending I would argue as someone in you know in the regions in the north that connectivity is really important it does need investment do you agree and do you think that's about public investment or private investment or a mix of both and how how do we improve the situation for the places that are struggling with productivity uh and with high levels of deprivation and everything else which is very connected to access to services access to uh infrastructure and jobs and good good good homes and things like that how do you marry that up with lower spending yeah i mean of course it's difficult to to um pick on one particular spending program and say are you in favor of this or not you know what just look at the total but not then the specifics of that one but more the the the fact that in order to get the growth we need there are lots of places that need investment they need better businesses there and you know how you know we need to invest more in those areas before you're going to get the the growth and the access to better jobs and everything else yeah I I think well my view is is is the relatively kind of boring one I suppose that you know if you if you get the business climate right private sector capital will come in and the business climate has been getting worse in the country generally over the last few years you know we do need to mobilize private capital there's a lot of it sort of sitting around at the moment and people are kind of reluctant to to invest it um so that general question of improving the business climate is important i mean what i would like to see one of the the problems with the british economic model is is is that basically um it relies to a significant extent on you know very high productivity successful industries in london and the southeast and some of that money is then kind of recycled uh through the rest of the the economy through through various kinds of transfers and obviously that's a that's a relatively weak model we want more private sector driven growth the costs across the country.

15:03And to me, the way of getting that would have been, there's limits of fiscal space at the moment, but over time, to, you know, have something like the big sort of, you know, free trade zones that were talked about at one point where taxes are lower in parts of Britain, cost of employment is lower, business taxation is lower. Doesn't that just disperse, move businesses from one area to another? I mean, of course, that's the counter argument. And there is a risk of that. But I think, you know, the problem at the moment is that you've got the reverse effect that, you know, a lot of costs are the same, whether you're in Manchester or Newcastle or London.

15:51But the, you know, local skills and productivity are lower. So, you know, you need to find a way to kind of match that up. And I think we've got that a bit out of line in our very centralised economy at the moment. These things go with risks. You know, the changing model is a risk. And this is my personal view, obviously. But we need to find a way of stimulating actual investment and real private sector activity in much of the country. And at the moment, that's been a consistent problem in Britain since the war, really. David there's loads more we want to ask you net zero being one of them I know you've got a big problem with that we'll find out more about it after the break in a couple of minutes see you then

16:38hi everybody it is Dominic Sandbrook here from the rest is history now you have probably been watching the scenes on the streets of Iran you may be wondering where all this comes from so on the rest is history we have just recorded a four-part series on recent iranian history so it kicks off with the iranian revolution that brought down the shah muhammad rezar palavi in 1978 1979 and it's actually his son who is now leading opposition to the ayatollahs from exile in the united states so in this series we explore the history behind the islamic revolution in iran at the end of the 70s. Where did people like Ayatollah Khomeini come from?

17:20Where did their ideas come from? Why did they have so much support? Why was the Shah driven out of Iran in the first place? And what did it have to do with American intervention and indeed British intervention in the 1950s? And we look at the unfolding story of the revolution, and then the amazing story of the seizure of the US embassy in Tehran, the taking of initially 66 hostages by the Iranians. This is probably the story that I most enjoyed researching and writing. So please, if you're interested in Iranian history and what's going on, check it out. And if you want a taster, we have a clip for you at the end of this episode.

18:04another i would sort of argue presumably um challenge for the iea is how to continue to make the case for brexit against a sort of political uh background where uh much of the debate is moving against i mean opinion polls show that majority of british people uh i mean They either voted against it or now think it was a mistake. Every single economic analysis shows that we're somewhere between 4 % and 8 % poorer as a result of Brexit. If you can point me to a single economic analysis which shows we're richer, I would be very, very interested. I mean, so I suppose the two questions is, what do you think has gone wrong with, given that you were a great champion for leaving the European Union, What do you think has sort of gone wrong with the execution of that?

18:56And do you think it is possible to continue to make the case for Brexit? it? Absolutely it is and to answer your question about what's gone wrong is that we've paid the, in my view, very limited costs but we're not yet beginning to reap any of the benefits because we haven't done any of the reforms and changes that people wanted to see and the polling shows that you know a lot of brexit voters think that brexit was was kind of done badly and of course from my perspective i would kind of sympathize with with some of that um but people voted for change and you know there hasn't really been much change yet in the way we run the british economy there has been some uh but but it's been tentative and some of it has come from being outside things the eu has done rather than positive things that we have done.

19:58So that's my big picture. I don't think the reports, by the way, that you mentioned say what they say. You know, the famous 4%, what you say, the famous 4 % OBR figure is a figure for reduced productivity over 15 years. They're not saying that's what's happened now. Indeed, they're saying that what's happened so far is a cut of about one and a half percent in productivity and growth since the referendum now i might disagree with that i i think the figure is a bit smaller i wouldn't disagree where the economy is flatlining we could we can't afford any further blows to the economy well we should the the right answer to that is more reform and change and not doing you know some of the the the statist uh self-defeating policies that we are now doing.

20:54So I have never denied, and you find me on record quite often, saying there is a small cost to leaving the Single Marketing Customs Union. I would say it's under 1%. I wouldn't quite agree with the OBR on that. Or America's, I mean, you know, the NBER in America is an important, you know, collator and organiser of, you know, they are saying it's 8%. So, you know, it's it's you know, there are ranges of estimates around the place. It's a collator. It isn't a, you know, these are the views of a few economists. And, you know, frankly, I think it's a really bad piece of work that that particular piece, the doppelganger figures that it uses, the are heavily weighted to the US.

21:39They're two thirds the US. And if anybody thinks that if we'd stayed in the EU, we would have been growing at the same speed as the US, given all the damage that we've been inflicting on our economy since then. They're living in a fantasy world. I think there's a very, very poor paper based on some very weak analysis. And, you know, if I had to say, I would be closer to the OBR. But putting aside kind of the macro analysis of things, if you talk to the people who voted to leave the EU, you know, a lot of them where I'm from, they did it because they wanted their lives to be better they wanted to take control away from the EU so that there was more control over their lives and and to feel better off essentially if you ask them how they feel now I can guarantee everyone would say they don't feel better off so regardless of surveys of what the economic damage is in terms of you know personal feeling about how things are then they don't feel better off and also i don't think anyone would notice any change to their lives at all because of it other than it's just got worse so what would you say to them about why that is the case why now that they've we've left things haven't got better for them how would you explain it to people not talking macro figures and everything else but just what what in layman terms why is it worse well the i would say that um that our problems long predate brexit and i think uh you know everybody knows that that you know our real underlying problems probably come from the crash and um the the productivity uh weakness that's that's followed since then um i i think the answer you know the short answer as i said is that we haven't done the things that we should have done after Brexit.

23:28So what should we have done? What would you have done? What should be different? What should the changes have been? Stopped pursuing net zero, for one thing, and killing off our industries with super high energy costs. That's something we should definitely have been doing and no longer had to do once we were trapped, no longer trapped in the EU's climate legislation. That's one thing. I would say, you know, and this is where we get to things that are unpopular, perhaps, but necessary. Significant planning reform, building more houses in a way that we're just not yet doing. I know that's trade off, but that's something that absolutely has to be done.

24:13Health service productivity. That's a big source of problems. We need to experiment now. We need to look at a shift to, in my view, a shift to over a generation or so, a European style insurance system and get better value for money out of the health service. None of these things are going to pay off straight away, but we need to mark a different direction. Of course, I think what people are really responding to, to a very large extent, is that the 20-year declining productivity, the fact that GMP per head is now flatlining. And, you know, let's be honest, there's not as an ambiguous economic question.

24:55They're responding to high levels of migration and significant change in a lot of areas that the people are seeing and didn't really expect to see. Can I just on climate change, because obviously this is one of the things that you are most passionate about. And the IEA, this is obviously not a paper that you commissioned because you've only just arrived, but the IEA just published a report. I easily could have commissioned that, don't worry. But it's a report that says that the government's estimates of the cost of the transition to net zero are significantly understated. I mean, I suppose my two points about that report is one is actually there's there's there's no accounting in it for the actual costs of climate change.

25:43But secondly, it also takes no account of, you know, essentially protecting yourself from the volatility and, of course, the externalities of being so reliant on fossil fuels. So it seems to me, even if you accept the calculations, it is only half the picture. Well, the report is not a major report on every single aspect of climate change and the response to it. That particular report is just trying to make the point that estimates for what we're going to have to spend over the next 20 or 30 years on net zero vary massively. they're all very significant and that the government's government has not generally been kind of upfront and clear about what it's going to cost and that that is the point i think that particular report is trying to make and does it very effectively do you believe but do you personally believe that climate change is real i believe that global temperatures are going up and that human activity is part of the reason for that.

26:54I don't think many people would deny that. I think there is very legitimate debate about how fast and what the impact is. There's very legitimate debate about, given everything we've done in this country already, whether we are the right country to make further efforts, given the lack of efforts that's being made in other places around the world and there has been no serious attempt to look at the costs of adaptation compared to the costs of investing in a new energy system and that that is obviously the crux of the matter do you think we should stop bothering to try and because you you were saying there about how you know we have little impact compared to other countries who are not doing there bit.

27:44Should we just not bother doing our bit then? Do you think we should just stop trying to make a difference to global temperatures rising? Well, I think, you know, whatever we do makes almost no difference, given that our emissions are under 1 % of emissions. I think we've done our bit, it would be my view. We've reduced emissions very significantly already and inflicted significant damage on the economy by doing so. Others need to now pick that up, and we need to focus on maintaining some sort of industrial capacity and stopping people freezing to death in the winter because they can't afford to heat their homes.

28:22We're now on the verge of significant risks to the grid. Power cuts are a possibility in the next few years. Nobody has explained how we are going to deal with intermittency in renewables at satisfactory cost yet. the rush on this subject to inflict further damage and push-up costs is quite unconscionable in my view and it needs to pause and be much much better debated at an absolute minimum. I mean my concern is just straightforwardly that I mean I am persuaded by the scientific evidence that warming over a certain level would be absolutely catastrophic particularly for the poorest parts of the world.

29:10And actually, I think sort of leadership by countries like ours matter. Now, I'm not remotely saying that every aspect of the government's approach to this is properly prepared, costed, and as efficient as it ought to be. But, you know, I am deeply, I mean, you know, I am somebody who says most of my time worrying about how we protect not just ourselves, but the planet from absolutely catastrophic risks of which this is one. And, you know, I really worry whether the debate is going, because it seems to me there is, we're heading into a world, particularly with Trump in the White House, where we are potentially heading, you know, we are increasing the risk of a genuine climate catastrophe.

29:56Well, I mean, there's reasonable debate about that. I think, in my view, you know, I've looked at this quite a lot ever since I was ambassador in Denmark in the run-up to the first Copenhagen climate conference. It's not something I've come to recently. I would say that view is alarmist. I think the actual figures don't bear out the most catastrophic predictions so far. But in any case, I come back to we've done our bit. You know, it's for China, it's for India, it's for the industrialising countries of the developing world to do their bit. We have shown leadership. The trouble is there doesn't seem to be a lot of followership yet.

30:38And if we actually go and solve the global problem, that needs to change. Can I just come back to the point you were talking about earlier about the reputation of the Institute? because there's some there has been some criticism hasn't there about the fact that you don't declare who funds the institute for economic affairs and the potential conflict that might be there when you're arguing uh for net zero at the same time as you know money possibly coming from oil companies and things like that do you think do you see a day where you're going to say be more transparent about who funds the organization well i mean it's not so much our policy as as charity law Charity law does not require donors to make their identities public, and we respect that.

31:25I mean, quite a few of our donors are happy to make their identities public, and, you know, we facilitate that as well. Do you actually ask your donors, would you like your donation to be made public? Do you take? It's part of the discussion, yes, and that happens. But it's part of charity law. We're not the only charity that doesn't declare all its donors. And there's a mix of reasons why they don't. And, you know, for us, you know, it's a very real risk for donors that they're subject to, you know, potentially kinds of intimidation. And I totally understand why they might not want to. What is very clear is that, you know, you can't buy research from the research results from the IEA.

32:14All our research is academic research. It's peer-reviewed, double-blind peer-reviewed. you know, it's reputable. You can't buy an outcome from giving money to the IEA. That would destroy credibility overnight if that were the case. So I'm comfortable with the policy and, you know, charity law allows that policy. Charity law is framed around that policy. I talked earlier about the reputational problem that you face because of being, before your time associated with that disastrous trust mini budget. The other thing which sort of strikes me, though, about what you might call the absolute glory days of the IEA is you get Thatcher elected in 79.

33:03Not long after that, you get Ronald Reagan in the White House. And, you know, you get these two really important leaders sort of working together within this, Actually, in this case, Margaret Thatcher, very much the sort of intellectual leader in that partnership when it comes to economic reform. One of the things that's very striking to me is we now have a president in the White House who is telling banks what the appropriate interest rate for those who've got credit card debts should be. He's bossing oil companies around and telling them to drill where they don't really want to drill. and he's trying to take control of the independent central bank the federal reserve so you've got somebody in the white house who you know broadly has values that are the diametric opposite of the ieas so the sort of climate for you is is not exactly the appropriate one is it well we're not in the same situation as the uh the 1980s though of course i mean it's a debating points lightly but of course we didn't have independent central banks in the 80s and 90s either at least in in in britain and um you know it's possible to exaggerate the differences sometimes i'm not you know i'm not here to uh defend president trump i feel you can't approve you can't approve with almost any element of economic policy can you do you i mean is there any element of his economic policy you agree with well as i say i'm not i'm not really kind of here to express a view.

34:44I think, you know, we're a British think tank. You know, we're trying to provide ideas for the British political debate. And all we can do is affect the country that we are in and the country that we, you know, our government governs. And I really think it's best to kind of focus on what we can do to make ourselves more prosperous than kind of posturing around the world and telling other people that they're getting it wrong all the time. Sometimes they are getting it wrong, but it doesn't really help if you spend your time banging the table telling that, especially when the British economic record is hardly stellar itself.

35:21Yeah, but earlier on, you were all right slagging off how they analysed our economy when we were talking about the review on how Brexit impacted our economics. So you're all right to give an opinion on that? That's it. That's the kind of, those are independent economists. That's not the same thing. I mean, look, I'm not in favour of tariff policies, for example, in general. I don't think tariff policies are a good idea. I'm not saying they should never be used in certain circumstances, but I don't think they're great. But, you know, we in Britain have to accommodate ourselves to a world where there probably are going to be tariff policies, where there are going to be, you know, the kind of policies that Trump is pushing.

36:05and all we can do in Britain is live in that world and make ourselves as successful as possible. And that's really the agenda that, you know, that stands on its own two feet. And that's the agenda that I think we most usefully can spend our time pushing. But if you were to have, you know, let's just say you get into the UK the kind of government that shares your economic values, your approach to economic stewardship, and you were to look at income tax and you were going to look at corporation tax, where would you want to see both the basic and the top rate of income tax? And where would you want to see corporation tax?

36:59And you've got, let's say, you've got 10 years to bring this about. In your sort of ideal world, what would the tax rates for the UK be? Well, I mean, the rates should be lower. The important thing is the burden. And, you know, in the early Blair years, we raised 30 percent of taxation was 30 percent of GDP by and large. It's now 36 going to 38. I want to get back to 30. that's where we should be aiming to go a lot of people seem to think the early Blair years were quite a good time for this country why shouldn't we aspire so for you therefore it's the burden so Liz Trust was obsessed with the rate but for you it's just the mix of taxes you're not particularly focused on there's an optimal rate of income tax or there's an optimal rate of corporation tax I mean they should all be lower obviously there are you know some taxes are better than others economically.

37:57And I would think we should be focusing on the taxes on transactions and capital first, primarily, but all the taxes need to go down. And the kind of weird bits, the sort of Manhattan skyline of rates that we've got in income tax with the withdrawals of this and that benefit and the personal allowance and so on, all that really should be straightened out. So I'd see that as bigger priority because it's so damaging to incentives. Obviously, you've resigned the Tory whip and now at the IEA. Do you think you're going to be more effective in that role than you were in politics? I suppose it depends how effective you think I was in politics, really.