282. Are politicians living in a tax-and-spend dream world?

0:01Subsidising trips to theme parks and free bus travel for kids. Does this look to you like the best way to protect people on low incomes from a cost of living surge? In a word, no. We're dealing with symptoms rather than underlying causes. Everything around Andy Burnham's rhetoric is, look what I've done in Manchester. You're also cautious about it happening too quickly, aren't you? Surely the government has to do loads and loads of support. people through an energy crisis are dealing with these short-term issues, even though some of them are potentially contrary to any idea of long-term growth.

0:36This government is only the latest in a long line of governments who talk the talk of wanting to do something about growth and productivity and in the end, using a very technical phrase, bugger all. We're delighted to say that this year the rest is money is powered by Octopus Energy and we've got Greg here. Greg, good to see you. so oil prices are very volatile if they steer like that what can we do to protect the uk economy in the long run electrification is the answer ever since i was a kid we've had periodic fossil fuel shocks and more fossil fuels aren't the long-term answer because the reality is that industry will never have spare capacity they wouldn't invest in stuff if unless you're using every day which means that whenever there's a constraint on supply prices go up we never used have an alternative but now with electrification we do nice one greg thanks for explaining that right we're gonna go to the episode for adults with crohn's disease or ulcerative colitis symptoms every choice matters trimphaya offers self-injection or intravenous infusion from the start trimphaya is administered as injections under the skin or infusions through a vein every four weeks followed by injections under the skin every four or eight weeks.

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3:05Hello and welcome to The Rest is Money with me, Robert Paston. And me, Steph McGovern. And also alongside us, we have podcast friend Paul Johnson, who was, of course, director of the IFS for about 15 years. He's known for his clear-eyed analysis of tax and public spending, pensions and inequality. So we've got him back to get his take on things, haven't we, Robert? We have. And I know nobody who understands the detail of the interaction between the tax and spending decisions that governments make and the impact that that then has on all of us. And this is a government that is currently saying that its big priority is to help us with the cost of living.

3:50So certainly the initial thing I want to find out from Paul is whether in that hope of helping particularly lower income families with the cost of living is what they're doing remotely sensible and rational. Here's our interview with Paul Johnson. Paul, great to see you. I thought we'd just kick off with the government's plans to reduce the cost of living. It says its number one priority is to protect particularly those on low incomes from the surge in energy prices that are the result of Trump's war in Iran. And we've had a number of initiatives. One of them, yet again, not to increase fuel duty.

4:37But also there are other initiatives like subsidising trips to theme parks and free bus travel for kids. I just wondered in the round, does this look to you like the best way to protect people on low incomes from a cost of living surge? In a word, no. I think there are two problems with this. One is that we're dealing with symptoms rather than underlying causes. We've got underlying causes of the cost of all of these things. They're related to the cost of energy. That's down to government policy. The cost of housing, that's down to government policy. So one issue for me is that we're treating symptoms, not causes.

5:16But more generally, this is not particularly helping low-income people. The biggest gainers from reducing planned petrol duties will be relatively well-off. People who drive a long way, reducing VAT is not particularly well targeted. I think if they wanted to actually do something specific here, as Rachel Rees has said she might, we probably should be looking at some targeted help through the winter when fuel bills really do go up. But the fundamental problem is that we've had poor economic policy for such a long time that people are suffering in ways they really shouldn't do from what's happening to world prices.

5:56We're treating the problems after they happened, and we've partly created the problems. So on that, Paul, it's hard for them to treat the causes, though, when the causes are to do with a huge geopolitical situation happening and the problems there. So surely they can only treat the symptoms. Well, I mean, not entirely. The reason that people are fed up and feeling this cost of living squeeze, when remember inflation at the moment is really not very higher and it's going to increase is because we've got, I mean, the reason our energy prices are among the highest in the world is not really to do with geopolitical problems, it's to do with the UK government energy policy.

6:38The reason our housing prices are so high is UK policy. So I think the reason that incomes haven't grown for the last 20 years is not entirely down to what's gone in the world. It's partly down to that. It's down to failed policy in this country. Yeah, I take your point that this is to do with the kind of long-term policy problems, but you can't solve those issues overnight, can you? Like with energy, you can't suddenly make us able to produce all the energy we need. So that's what I mean about as things stand in the short term, you need to help people. So isn't it the right thing to try and do something that helps the symptoms of it while you in the longer term look to change energy policy and housing policy?

7:21Well, I think if energy prices do go up a lot further and are remaining high over the winter, then yes, I think we need to help people with their energy costs specifically. Although I have to say, not everybody, not like Liz Truss tried to do with tens and tens of billions of pounds for you and me and Robert, but actually focused, as Rachel Rees has said she wants to, on people who really are on relatively low incomes or have, for reasons outside their control, maybe very high energy costs. If governments continually, every time something goes wrong in the world, try to spend billions and billions supporting everybody, then, I mean, frankly, that way lies economic ruin for the country.

8:03They have to be, first of all, have and keep to a long-term strategy that is good for all of us all of the time. And then when things go wrong, be really very careful and targeted about what they're doing. I mean, some of these policies are pretty gimmicky. I mean, you're reducing VAT on theme parks, on children's meals. I mean, for one thing, it's incredibly complicated to work out what is a children's meal and what isn't a child's meal. But these things aren't going to make a great deal of difference. I'm glad that they've reduced tariffs or cut tariffs on a whole bunch of foodstuffs. They made a big deal of this.

8:42It's going to save the average household 10 pence a week. Some of these things are really small and expensive things like not increasing fuel duty is very poorly targeted. And as you say, it is the highest earning households that get the biggest benefit by some margin. Why is it that successive governments find it so difficult to target help in a granular way? Well, targeting has its own problems, of course. I mean, we do lots of targeting in the sense that we have about£100 billion of working age welfare, most of which is targeted at people who are either on low incomes or who have health problems.

9:23That's a very big targeted amount of spending. And that has its issues in terms of work incentives and other behavioural effects. But when you're looking at energy use, one of the problems government has or has had up till now, and they've been explicit they still have this problem, is we don't know the link between people spending on energy and their income. So we know people's incomes through the tax and welfare system. And we know how much people are spending on energy through their energy bills. But the two are not connected. and one of the reasons why we spent such a vast amount last time around because government frankly could think of no way of making this more targeted than it was.

10:08And there are some indications that maybe five years on, they've just about worked out how to do it, but also very explicitly the Treasury was saying earlier in the year that they were not yet able to make that connection. Now, one of the things I have to say without sort of saying I told you so, one of the things I did say back in 2022 was, OK, maybe there's nothing better we can do this time, but it's worth spending like a billion pounds trying to work out how to do this better so that next time it happens, we can save tens of billions. Is it a sort of GDPR privacy issue that makes it very difficult to match up these two buckets of data, HMRC's data and energy companies' data?

10:48Or is there something else going on? I don't really know the answer to that. I mean, there's a huge bureaucracy. You're really getting me into nerd mode here. There's a huge bureaucracy around using data effectively within government and outside it. I mean, in my last job as head of the Institute for Fiscal Studies, people used to ask me quite often, you know, what's the hardest thing? What's the most frustrating thing? And they normally expect me to say raising funds, which is fair enough. But actually, the most frustrating thing was the number of person years spent trying to extract data and to manage data and to connect data, not because it's technically difficult, but because of the immense legal bureaucracy around it.

11:28Now, I'm not a lawyer. My guess is that this is massively overengineered and that there's many more barriers put in place than needs to be. But I don't know that. I don't know that for sure. But it's incredibly badly managed, in my view, across government in ways that just make it very hard to achieve. Paul, one of the other difficult things is obviously trying to predict what impact everything that's happening with the US and the Iran war will have on us. And, you know, there's lots of analysis being done now about whether the Bank of England should be thinking about putting up rates, you know, to try and control inflation.

12:05But then on the other hand, one of the things Robert and I have been talking about is whether actually inflation longer term might go down because the demand will fall. People won't have as much money and perhaps wages won't be able to keep up with it either. And so therefore, the effect might be not, yes, okay, inflation in the short term, but not a massive rise in the longer term. And by doing anything with rates, by not cutting them or by putting them up, that might make things worse. What's your take on what the fallout is going to be from all of this? Well, it's a really, I mean, it's a genuinely hard decision for the bank, I think, but they will probably feel burnt by their previous decisions.

12:50And if you look back to 2021, 2022, they were relatively slow to put up rates, partly because they thought, look, this is, and I quite understandably thought, this is a one-off shock. And once that shock's gone, then it'll all kind of come out of the system. So we don't need to do very much to deal with a one-off shock. And it does seem odd, doesn't it, that you have, as you say, an increase in prices created by something happening thousands of miles away. Hopefully, it will be temporary. Putting up interest rates isn't going to reduce the price of energy. So, why would you even think about it?

13:25And the answer, of course, is this flows through into all sorts of other things over a period of time. Not least, if prices go up this year, it feeds through into people's expectations of where prices will be next year and into wage settlements. And as energy prices go up now, that results in higher prices in services and so on down the line. So the bank will be thinking about how to balance off those two things. Yes, this hopefully will be in the first round a temporary increase in inflation, but it may actually, this temporary effect, may well result in a longer term and more permanent increase in inflation.

14:02And that will push them towards increasing interest rates. So genuinely, I think a hard decision. I think the most likely outcome at the moment seems to be they'll stick where they were. But of course, that's compared with a pre-Iran situation where everyone is expecting to cut them two or three times this year. So on that then, Paul, we've got an interview we've done with Jeremy Hunt that's coming out in our next episode, of course, former Chancellor. Excellent. And one of the things he was saying happens when something geopolitical like this occurs is the UK often gets the hardest deal from the commentators.

14:39So they will often be harder on us in terms of our forecast for things like growth and inflation. And actually, he's saying that's often unfair that that happens because we've seen the headlines already about where the country most likely to face the biggest impact from what's happening with the Iran war and everything in the Middle East. What's your take on that? Do you think that's fair that the commentators are too quick to throw us under the bus? He's specifically talking about the IMF. He says he has a lot of sympathy with Rachel Reeves, because when he was chancellor, the IMF was consistently negative, then revised up.

15:15But by the time they revised up, the negative publicity has already happened to the UK. And again, it's happened to Reeves, exactly the same thing. And so, you know, Steph's question, just, Why does the IMF single us out in this way? Well, I think there are several things going on here. I mean, I do have sympathy with both Reeves and Hunt because, of course, these are only forecasts, and they do get an awful lot of coverage as if it already happened, when, of course, it hasn't already happened. I think there are two or three things going on here. One is that if you look at our inflation record over the last 15 years, we are just worse than most other countries.

15:51Our inflation has been about one percentage point a year higher than the G7 average for 15 years. So, you know, commentators look and think, well, you know, this is a country that's struggled to control inflation. Our interest rates on our – it's not just the forecasters, it's also the markets. The interest rates, as you know, on our debt are higher than those in almost all other countries. And that reflects also partly concern about inflation and partly concern about the stability, I suppose, of economic policy. In this particular instance, we are particularly exposed to international gas and oil prices.

16:30Unlike most other countries, we don't use coal at all. We have very little domestic supply. We've got very little nuclear compared with somewhere like France. So we're still quite dependent on fossil fuels. So all of those things, I think, go into those judgments. It's worth saying this year, in particular, one of the reasons there was a big reduction in the IMF forecast in their first forecast of the year, that partly just reflected the fact that our economy had slowed particularly sharply at the second half of last year. And the IMF actually slightly upgraded relatively recently, I think, off the back of what looks like a relatively strong first quarter.

17:11So some of these are also lagging indicators as well as genuine forecasts. But when these indicators come out, it then becomes a vicious cycle, doesn't it? Because then the markets react to those indicators. And then, you know, you mentioned the cost of borrowing. That will often go up for the government. The pound might fall against the other currency. So then, you know, whether it's right or not, it instantly has an impact and becomes like a self-fulfilling prophecy in a way. Well, up to a point. I mean, obviously, if the economy did grow, then better. I mean, let's be honest. I mean, the British economy has done, on measures of national income ahead, it's done really, really, really badly over the last 15 years.

17:49So this isn't just about external people saying it's going to do badly. They also look back at what's happened and they say, look, it has done badly. Now, obviously, I mean, it wasn't there sort of a couple of years ago when this government came in and they were being accused of talking down the economy because they were being a bit miserable about it. And I think they sort of learned their lesson from that and started telling a bit of a different story. I think that can have some effect, but I think in the end, people see what's really happening and they take that much notice of what's being said.

18:20I mean, people like us, all three of us, have been talking about this as effectively as a national emergency for years. One of the things that tells you all you need to know about the crisis of politics is even though it is a national emergency, arguably the only prime minister of recent times who took it seriously as a national emergency was Liz Truss. And we saw where that got us. Why is it that governments find it so difficult to make the structural changes, the long term reforms that are necessary to actually improve our competitiveness and our growth? Because this government is only the latest in a long line of governments who talk the talk of wanting to do something about growth and productivity and in the end, using a very technical phrase, bugger all.

19:13Partly it is difficult, but partly it's difficult because a lot of the answers are, first of all, long term, and secondly, politically tough. So I'm quite optimistic, actually, about how much government can do to make the economy grow, but only over a significant period of time. And, of course, pressures on government are always short term. So we started off this podcast by talking about, well, surely the government has to do loads and loads to support people on people through an energy crisis and so on. So all of their energy, as it were, goes into dealing with these short term issues, even though some of them are potentially contrary to any idea of long term growth.

19:55So part of it is I think the cycle of that has got a lot quicker over the last 20 or 30 years because of online stuff and 24-hour media and so on. So it becomes harder to stick to a long-term policy. And then I think the other half is that some of the things that you need to do are particularly hard. And they're particularly hard when you haven't got any growth because everything becomes a zero-sum game. So if you want to reform taxes, for example, in a way which supports competitive industry, which maybe supports the housing market, you might cut some taxes here and there. And you'll cut taxes on the whole that don't help sort of middle income people directly.

20:39They will in the long run. So you have to raise taxes somewhere else. Or you, because it's less politically difficult, you increase employer, national insurance contributions, knowing. I mean, the chancellor knew that was a bad way of raising taxes. But politically, it was the most palatable way of raising taxes. Just on that as well, because I've talked before in this podcast about how I'm quite optimistic about fiscal devolution in a way that I haven't been before. And obviously, everything around Andy Burnham's rhetoric is, look what I've done in Manchester and this devolution can happen on a much larger scale.

21:18And this will be great for the inequality we've seen in the regions, the north, south divide and everything else. But you're also cautious about it happening too quickly, aren't you? You don't think that we should just give out this money and let them run things themselves too quickly. Why is that? Why are you cautious about it, Paul? Well, I wouldn't say I'm good. I mean, I think people in the Treasury think I'm absolutely madcap keen on it. I'm not super cautious about it. I basically agree with you that I think that a movement to more fiscal devolution would be good from all sorts of ways. But you do need to be a little bit careful because, of course, if you suddenly give areas or mayoral authorities or what have you lots of additional power and responsibility for raising taxes or what have you, when for 100 years they haven't had that responsibility, it's going to take them a while to work out how to do it properly, to build up the appropriate infrastructure, to do it and so on.

22:20So, you know, you need to do it at a sensible pace and make sure that it doesn't go belly up straight away. That's all, really. So on that point, Paul, what's the worst thing that can happen if they do get this money too quickly? Because as you've rightly pointed out, now there isn't much room for politicians before voters push back, before markets push back on things. And yes, you're right. Long-term strategy is the key here. But for me, it feels like if people don't start to feel better off soon, or at least that there's some type of momentum in terms of that, and that they're going to lose people even more.

23:00And part of this whole problem we have, I think, in the country, this division is just about people feeling like their lives haven't got any better at all. And they just want to feel like someone's going to do that for them. So isn't it better to take that risk and give people that power quickly and then let them do something rather than worry about a lack of infrastructure? Because if we start doing that, we're going to end up with like an HS2 situation where it just takes forever and then gets water down and water down and water down and it doesn't happen. Yeah, I mean, I completely agree with you about the problem.

23:31People do feel quite rightly they haven't got better off in a generation and nothing's going well. As I say, my point is, I mean, what could go wrong? Well, I mean, at one level, look at what's happening in Birmingham. It's not going well. You've got a combination of one of the biggest council in Western Europe is going bust, terrible issues with strikes. They've now got sort of almost unmanageable sort of non-coalition of parties. If you suddenly were to give them massive additional responsibility for running the health service or what have you, well, you know, what could go wrong? Quite a lot could go wrong.

24:15But is it the problem in the UK that we basically infantilised, you know, whether it's local authorities or mayors? And when you infantilise them, they are much more likely to get into difficulties because at the same time, you're not giving them responsibility. And secondly, they're massively squeezed by all these surging costs, particularly things like social care. So what do they do? They find creative ways to raise money. And, you know, we've seen a succession in recent years of local authorities effectively going bust because they've abused borrowing powers for, you know, for example. So, I mean, in the end, you know, it's the halfway house that has caused so much trouble.

24:59Surely what we've got to have, I would argue, is a big bang where we decide these are the areas of policy where local authorities or mayors should know the requirements of their area better than central government. And they seem to me the obvious ones are things like housing. They are, you know, business construction. They are infrastructure construction and they are skills. And so you, in my view, you would want radical devolution in those areas. And you would also want them, you know, you'd want the connection with local people through tax raising powers and you would therefore give them much more ability to raise money locally.

25:45one of the things, another thing we talked to Jeremy Hunt about was one of the reasons why planning and building is so much more efficient in France is because local authorities keep the revenue gain from the buildings that go up in their areas. What you just described is a very small bank, actually, in any case. So in terms of housing and skills and so on, the Merrill, I mean, the local areas have already got Merrill combined authorities. No, no, but I'm talking about the funding. I'm talking about the ability to raise more locally. You're then talking about, so one example is keeping the additional taxes from additional building.

26:22Well, there's already a business rates retention scheme and we could certainly extend that and improve the incentives. I mean, absolutely. But that's step one. I mean, that's not a big bang. That's a fiddling little bang. You know, in general, we need a wholesale reform of the whole rates and transfer system. And broadly, money should be raised locally and deployed locally. Well, yes, up to a point. Of course, you then have inevitably all sorts of movement of money around the system so that London doesn't keep it all and no one else has any. But yeah, so I'm in favour, for example, of a system for regions or big regional authorities like we have in Scotland, where you can control a significant part of your income tax base.

27:08We know that's possible because they can do it in Scotland. Wales has those powers, although they haven't used them, or they've got more limited powers, but they've decided not to use them. And, you know, the English region, I mean, actually even places like the Manchester Combined Authority, West Midlands Authority, are on a similar scale, certainly to Wales. And, I mean, Yorkshire's got the same population as Scotland. I mean, these are areas which are economically big enough to do this. of Scotland. The only issue is that Scotland has clearly got that identity and quite an empty border area between Scotland, between the populated bits of Scotland and the populated bits of England, which makes life a bit easier.