246. Why we need more businesses to go bust

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1:22We'll be right back. and more terms apply. One time only offer. Unemployment data is real and it's 5.1 % and that is really, really worrying. You know, the economy is more like a garden than a construction project. There isn't a magic growth lever. There's just too much pessimism in the West.

1:40Hello and welcome to The Rest is Money with me, Steph McGovern. And with me, Robert Peston. Also with us today is Ruth Curtis, Chief Executive of the Resolution Foundation. You'll remember We last spoke to her just before the budget in November. Really interesting stuff that came out of that, wasn't there, Robert? There was. And the Resolution Foundation came up with this idea that the government should simultaneously cut the basic rate of income tax, but raise some of the money back by putting up the rate of national insurance for employees. This was something that the Chancellor was planning to do.

2:16But right at the last minute, Downing Street forced the Chancellor to abandon those plans. It was part of the extraordinary chaos in the run up to the budget. And the reason we're talking to her, however, is because they have recently been, in a sense, marking the Chancellor's homework. They've looked at how well the Chancellor has been doing over the last year and a half. And just to remind you, Ruth has a long history in public policy. She worked at the Treasury, didn't she, for a long time. Served under nine chancellors. You can't really believe somebody as young as Ruth. She can't have worked under nine chancellors, but it just shows you how unbelievably chaotic government has been over the past decade.

2:57And a fun fact about Ruth, she's also the daughter of John Curtis, who you will know is the man we all go to every election because he knows everything on public opinion, doesn't he? He's the political polling super brain, and we're about to talk to his super brain daughter. Here's our interview with Ruth Curtis. Ruth, great to see you. You've done a sort of stock take or a report card on how well the government is doing in respect of its pledge to make us all richer, to get the economy growing faster. But take us back to that, to begin with, that enormous piece of work that you did at the Resolution Foundation a couple of years ago.

3:37One of the things that's sort of significant about it It was overseen by your predecessor, Torsten Ballou, who's now got a pretty influential role as a Treasury Minister and as a pensions minister, double-hatted. What were you hoping the government would do? As I say, take us back to that initial analysis. Yeah. So as you say, Resolution Foundation did what we called the Economy 2030 Inquiry two years ago. And quite a lot of the diagnosis in that report and the things that we thought needed to do are things that are on the government's agenda. So one of the reasons that the UK has languished behind other countries is its low levels of investment over at least 20 years.

4:19That is something that the government has said it wants to address. We talked in that report about need for greater stability. That is another part of the government's ambition. We'll come on to whether they've achieved it, I'm sure. And then we also talked about the reform and the dynamism that we need in the economy, playing to the UK's strengths and things like reforming the tax system to support young, vibrant businesses. So that was some of our diagnosis. They're quite similar to some of the pillars that the government's pursuing. What we published this week was looking two years on from that report, 18 months into this government.

4:55How's it going? And how's it going? So broadly, what we're saying is they need to double down on the growth plan. So they have ambitions in the right direction, but we need to be much bolder. And I think that's quite stark when you just look at what's happened to the UK since the pandemic. So we've talked for a long time and the Economy 2030 inquiry was motivated by since the financial crisis, the UK has had weak growth and productivity. And that's a story that I'm sure we're all familiar with. But I wonder if we've talked enough about just how terrible it's been since the pandemic. So we've grown 0.8 % in GDP per person since the pandemic.

5:37Which is basically a rounding error. So that means we've waited six years for the sort of growth we used to see in seven months before the pandemic, not in the kind of... Not even in the good years of the Blair government, as it were. Exactly. So I think when you understand the scale of the challenge, it does point to just needing to be much, much bolder in each of these areas and to face up to some of the difficult trade-offs involved. We're going to get into some of the kind of specifics you talk about as well. And one of the things I know Robert and I are interested in is what you talk about called creative destruction.

6:10So the sense that you need companies that are not really growing, that have got low productivity to go in order for you as a country, as an economy to grow. And that would sound to some people like, hang on a minute, what? Close a business down, lose jobs? Like counterintuitive. Absolutely. And it's worth actually, I think, in some ways, going back to some of the origins of this British problem, which is pretty different from America, which is we have this very low level of productivity. And one of the reasons we have this very low level of average productivity across the economy is that we have very, very large numbers of poor performing businesses that somehow managed to stay alive.

7:04Yeah, zombie companies. In America, more of those businesses routinely go bust and then the capital that is freed up goes into more productive enterprises who then take on people who are more productive and get higher wages. I mean, I remember, you know, when we were at the BBC reporting on the aftermath of the financial crisis. I mean, one of the things that was really striking was it was a political priority to keep the unemployment rate low. There were enormous numbers of measures to keep these businesses afloat, including putting enormous pressure on banks not to pull the rug on these businesses.

7:49And that seemed, I think, rational politically at the time. But then when that was combined with quantitative easing and this era where interest rates were more or less zero, it just meant that in Britain, even if the employment rate remained high, a lot of the jobs that were preserved were in really inefficient businesses where wages were terrible. And so there was sort of short term gain for long term misery. Is that a reasonable way of putting it? Yeah, and I think we need to be honest about what the process of growing an economy and making it more productive means. It means the businesses that are doing well growing.

8:32It means more people moving into those businesses and others shrinking and closing. And that is what economic change and dynamism means. And that is how we get richer and more productive. And absolutely, one of the things that feels hard to say this week is actually in Britain, we need more change and not less change. and actually we haven't seen enough of this dynamism in the UK. As you say, we had this period of low interest rates after the financial crisis where there were what were known as these zombie firms that were unproductive but kind of just about surviving. And they could borrow cheaply in order to survive.

9:09Exactly. And one of the things we had been pondering was... Can I just ask you on that though? Because again, one of the things that is... very striking about the difference between Britain and America, is again, during COVID, we had a government, Boris Johnson's government, Rishi Sudak's government, which literally threw every available, you know, billion pounds and turned into hundreds of billions of pounds, keeping people in paid employment, furlough, right? Incredibly expensive schemes to keep businesses afloat and also keep people in jobs, effectively paying the wages of vast numbers of employees.

9:57Do you think in terms of therefore post-COVID, you know, that undermined the dynamism of the British economy? Because it is interesting that there was less support in America of that sort. And yet subsequently they've had a way more dynamic economy. So I think those probably are more coincidence than cause because the UK was undynamic before the pandemic. This is a problem we already had. And in theory, there's lots of advantages to keeping people's attachment to businesses that are only temporarily in trouble because of COVID and actually not having to have the friction of those people finding a job post-COVID.

10:42I'm sure, you know, when we look back, there are things about levels of generosity and the length for which it went on where you might learn lessons. But those seem like good principles to me and probably not underlying where we are today. But just to come back to. So this is a, I mean, we agree about this. This is a much longer running problem for the UK. It's a longer running problem, but one where in the most recent data, it looks like in some senses it might be changing. Because interest rates are going up and therefore these businesses can't cope. Exactly. So it's what you would expect. But for a while, it had been a bit of a mystery why it wasn't happening.

11:16It is now the case that people losing jobs because of firms closing is at high levels. Insolvencies are at high levels. Now, that absolutely doesn't sound like good news. And for the people affected, it's not. At the moment, we've got the destruction part. It looks like some of these zombies are dying, but we need the creative part of creative destruction and new jobs being created. Otherwise, we'll have unemployment. Before we move on, I've talked about higher interest rates. To what extent, I mean, certainly, you know, I think the data proves this. I mean, the destruction bit is also related, of course, to the increase in employers' national insurance, isn't it?

11:55Yeah, I think when you look at where the sectors, where the jobs have been lost, they are particularly concentrated in sectors that have high numbers of low paid jobs. And those were particularly affected by the employer national insurance changes because of the way that they were structured. And this rates increase is also going to lead to significant amounts. Business rates is absolutely crucifying loads of... Will affect the hospitality industry, which is also one of the sectors where jobs have been lost. What were you going to say when you said one of the things we were pondering is? So we were actually thinking about whether this mystery of interest rates have been high for quite a while now.

12:29Why haven't we seen more of this kind of creative destruction? What's the answer? Well, the answer is it looks like we're starting to see it. So we sort of thought we were going to say, what's this mystery? And actually, we are starting to see a zombie apocalypse, as we're calling it. So how do we get more creation then, if that's what we're calling it? So we're seeing the zombie apocalypse. Where are these angels? Unicorns. We're going to get lost in this metaphor, aren't we? Colts, thoroughbreds, unicorns. And it's worth saying that that means for the kind of how is the UK doing right now in terms of productivity?

13:07We've got this whole confusion about what is going on in the labour market. We shouldn't believe what the ONS tell us from the Labour Force survey from a few years ago. We think they're right now, but that means that the sort of... Do you think they are right now? So you think we can trust their data at last? Yeah, so we've been tracking for a while alternative measures of the labour market. and they now match pretty closely again. But what that means is the trend is wrong. So whereas it looks like employment has been rising, according to the ONS, it's been falling, we think, since 2023. And just when you think about what that means for productivity, it's a very different story.

13:44So it's not a story of rising employment and very low productivity, which is what the official data tells us. It's a story of falling employment, but actually starting to see healthy productivity. So over 3 % productivity growth in the UK in the last sort of 18 months, if you believe the story we're telling about employment. Yeah, I just got a born to pick with, Robert. Do you remember in the last episode you said to me, you've got to believe the data. No, I didn't. Yes, you did. Not on unemployment. I didn't. No, but you said you've got to believe the data. Every bloody episode where we talk about the unemployment data.

14:19Anyway, sorry, Ruth. I just needed to get that out of my system. The unemployment data is real and it's 5.1%. And that is really, really worrying when we think about just the state of the UK economy. Yeah. So then how do you, you know, we're talking about trying to get more of these companies. And you've mentioned investment. It's something we go on about all the time. We have a real problem with that. Yeah. So where's the solutions here? And let's just pick up on that. So you pointed out absolutely correctly in that huge report that you did a couple of years ago that, you know, we are not going to return to anything like previous levels of prosperity if we don't increase both public and private sector investment.

15:01And they have both for, I mean, frankly, my entire conscious life been way lower than most of our competitor nations. Yeah. Right. We have seen, so two questions, we have seen the Chancellor increase public sector investment and stabilize it, not resort to, you know, in times of current times of financial pressure, not resorting to cutting it. Has she done enough in that sense? And then secondly, unfortunately, when this government came in, we did see a big rise in private sector investment plans. That has now collapsed. So how worried should we be that private sector investment is back at really, I mean, seriously low levels?

15:57Yeah. So on absolutely investment is really key. And on public sector investment, as you say, what the Chancellor should be given credit for is she hasn't cut capital spending through a period where we know it's been really hard to make things add up. And the previous government had plans to cut them. But that means that we're keeping investment steady. And that's a good thing. But whether that will lead to a dramatically different growth rate. And just on that. Yeah. Right. I mean, most economists would say that the big drivers of productivity when it comes to public sector investment are transport.

16:42Yeah. Where actually there hasn't. In fact, there's been a cut in transport investment. investment um and and so i mean again it's great that they're maintaining and increasing investment a bit but are they investing in those areas enough you know housing being another one yeah and r &d being another one and r &d being another one where actually it's flatlining which is really worrying yeah um are they i mean i suppose the question is great that it's investment but they're not really investing in the productivity enhancing parts of the economy are they? Exactly those parts are not growing and that is mainly because the bit that is growing is defence and I think lots of us would support the need to spend more on defence at the moment but if you do that without changing the total amount of investment that you're making then inevitably other things suffer.

17:35And also energy let's be clear is a substitution thing it doesn't tend to lead to dramatically increased productivity. So they are investing quite a lot in energy, but it's just a substitution for one kind of generator to another. Unless it were to lead to falls in energy prices in the long run, where I think you could argue that the kind of level of energy prices in the UK is causing a problem. One of the things you talk about in the report is something we often discuss, which is about using pension funds for investment and having... Sorry, before we get on to that, can I just check? What is happening to private sector investment, though?

18:08Yeah, so on private sector investment, investment intentions are still very weak. And as you say, investment growth was quite high around the time of election, about 5%, but is now back to about 1%. And I think when we talk to other economists and businesses about why that might be, I would highlight two things. One is the kind of reputation of the UK on the world stage and increasing investment from abroad and what we might do to turn that around. And the other is this issue of policy certainty and stability. So the run up to the budget was very undermining of the confidence of businesses, wasn't it?

18:46Because it was such an unstable period. Yeah, and we try and measure policy uncertainty. We have indices that look at, you know, through newspapers and search terms, what's the level of policy uncertainty? And we were really struck that that is higher in this parliament than any of the last seven parliaments. And when you think about what's happened in the last seven parliaments, that is really striking. Why is that? It's really terrifying. So this week, maybe it's not so surprising, right? Because there is a lot going on in the world. So what we tried to do was look at the UK specific component of uncertainty.

19:20It's still the second highest. So it's still only after the Brexit parliament, one of the most kind of uncertain policy environments in the UK. And that isn't good for investment. I was with a lot of businesses this week. do and one of the things you know we did one of those things where you ask everyone in the room like how do you feel about what the pressures are in in your jobs at the moment and in business and you know obviously they're asked about skills and sustainability and everything else supply chain and without doubt the majority said economic uncertainty which they can do nothing about and is very hard for the government to control as well with all the geopolitics but do you think there are ways around it then because you know we're talking about encouraging more private investment one of the things you talk about in the report is pension funds linking them to more UK equities.

20:08Yeah, and the government is taking action in that space. I think we should applaud the greater kind of room for manoeuvre that the Chancellor gave herself in the autumn and when you look at what's happened to guilt markets for UK borrowing since then, there are signs that that has started to deliver this greater certainty. Just to remind everyone, this is how the government borrow money. So gilts are what the government sell in order to be able to borrow money. And we talk about how much that cost has been going up for the government over a number of years. So what else is it you think that we need to do?

20:46So, look, there's lots of things. And one thing we say in the report is, you know, the economy is more like a garden than a construction project. So there isn't a magic growth lever that Keir Starmer has just failed to find. It is about tending a garden and hoping for the right weather. But three areas where we have said, in particular, we think the government should go further. One is trade. It's very hard to talk about the relationship with our politically, the relationship with our largest kind of trading partner in Europe. But if we want to get serious about growth, we have to think about that relationship very seriously.

21:22housing where good steps on planning but at the moment the indicators a bit like investment are not good kind of housing starts a week so need for bolder action there and then employment which has been a good story in the UK for you know between the financial crisis and and the pandemic but less good since and actually if we could increase those employment rates that's a an improvement to growth that also feeds very directly through to living stands. Can I ask you on a very specific question so you know we've got the government very worried about the roughly a million young people yeah 1824s not in education or employment or training yeah and all the data shows if you can't get those people into the habit yeah uh of work relatively young these people may be lost forever i mean the social damage is is really quite extreme quite And apart from how good it would be for the economy if we could just get these people into productive work.

22:29Where do you stand? Because one of the things that has been for many people very frustrating about this government is you set a target of getting, you know, sorry, you say growth is your number one priority. And then you do a ton of stuff that undermines that ambition, whether it's putting up employers' national insurance, whether it's the instability and the run up to the last budget. Where are you on this issue of the way that they have put up the minimum wage for young people? Because if I talk to employers, they say, you know, we're always taking a risk when we employ a young person. If you put up the price that we have to pay, we're going to think twice about it.

23:13And so there are quite a lot of people who are just saying, look, if reducing that million young people, you know, not in educational training is your priority, don't at this juncture put up the minimum wage. But also on top of that, you know, we said right at the start about business rates and that hits retail and hospitality. That is often where young people start. So they're being hit from both sides, aren't they? Yeah. And look, I think this is a really important issue. I think it is important to be really clear and distinguished between, you know, the minimum wage in general and the minimum wage for young people.

23:45I'm talking about young people here. Yeah. So but for the minimum wage in general, we do hear businesses talk about it. The government is basically sticking that at the same level relative to earnings as it has been in the past. That seems like a reasonable thing to do at the moment. And I hope we wouldn't want it to kind of fall on young people. What they're doing is trying to catch up the rate for young people with the main right. And that's why we're seeing these big increases. And for me, even though the Resolution Foundation is an organisation that advocates for minimum wage and was quite instrumental in the creation of the living wage, I don't think now is the right time to be more ambitious on youth minimum wage rates because we are seeing high youth unemployment.

24:28And, you know, we had a lot of discussion in the last year about young people not in education or training, you know, due to mental health issues. That is a big issue. But there are a lot of young people who want to work and cannot find a job. But what we've seen when you look at the percentage increase of how much 18 to 20 year olds appeared on minimum wage, it went up by 16 percent in 2025. And it's gone up going up now by eight and a half percent. That is a hell of a jump for employing an 18 to 20 year old. So lots of businesses will think, well, hang on, we'll just try and do more with the people we've got rather than take that risk and take on someone young and inexperienced.

25:08Yeah. And that is why I think now is not the time to look at further increases. The government's policy is to align these two rates. So we would continue to see higher raises in the youth rates than the main rate. I think given the levels of youth unemployment, pausing at where we are would be a good thing to do. And also, I don't know whether you're looking at this in your own business, but there is a lot of evidence out of America that, you know, in this phase of the introduction of artificial intelligence across vast numbers of businesses and services, you can do a lot by empowering your older workers with AI.

25:45If you look at America, the data shows, again, that young people are not being employed in the way that they were before AI was being rolled out. So if you have this situation where the sheer cost in the UK of employing a young person is going up really very significantly, and you can make your older workers more productive by essentially empowering them with artificial intelligence agents and other forms of AI service, then, you know, you could lose a generation. Yeah, and just on the impact of youth minimum wages, it does vary between different businesses. So there are larger businesses that will tend to pay the same rate regardless of age, where the impact is smaller because they're tending to pay the main rate anyway, whereas there are businesses, perhaps those that might, you know, used to hire a young person for a Saturday job where I think the impact is potentially bigger.

26:33Or you've got to do a lot of training. Yeah, to make it kind of worthwhile. Just on young people and AI, you know, I think the kind of consequences of AI in the long run will be quite profound. I think we shouldn't get too distracted, if you like, by AI when we're thinking about the million young people in the UK right now, because it's still the case that they are disproportionately people who have GCSEs or below in terms of qualifications. And, you know, one of the other things I'm really struck by is we increase the mandatory participation age, the age at which you have to stay in school in the UK from 16 to 18, that has had precisely no effect on the number of 17 and 18 year olds, 18 year olds, not in education or employment or training.