290. Can Burnham’s ‘business friendly socialism’ grow the economy?

0:00Paul Johnson:Is Manchesterism a map for transformation?

0:03The Rest Is Money Hosts:Is part of what needs to happen distribution or redistribution from older to younger? Yeah, I think to some extent Andy Burnham and the turnover of Prime Ministers over the last decade is a symptom of the problem and the problem is...

0:19Paul Johnson:Support for this episode comes from Octopus Energy and the founder and CEO Greg Jackson is with us now. so greg talk to me about kraken what is it and why is it spinning off from octopus energy when we

0:33The Rest Is Money Hosts:built octopus uh we also built a software platform like an operating system like ios or android on your phone to enable energy companies utilities starting with octopus but frankly anyone in the world to be much more efficient to use vast amounts of data to be able to become more innovative and to serve their customers better that piece of software is cracking we've used it not only for octopus but companies in the uk like edf and eon have used it to improve their business too but you know what it turns out over time companies realized that they were licensing from a competitor and so we've had to spin it off so it can reach its full potential yeah makes

1:16Paul Johnson:sense, Craig. Thank you. Right. We're going to go to the episode.

1:46Paul Johnson:Need a hiring hero? This is a job for Indeed Sponsored Jobs. So good, so good, so good. New summer arrivals are at Nordstrom Rack stores now. Get ready to save big with up to 60 % off brands like Rag & Bone, Levi's, Adidas, and Free People. Join the Nordic Club to unlock exclusive discounts, shop new arrivals first, and more. Plus, buy online and pick up at your favorite rack store for free. Great brands, great prices. That's why you rack.

2:27The Rest Is Money Hosts:hello and welcome to the rest is money with me Robert Pairston and me Steph McGovern now

2:33Paul Johnson:it's obviously everyone's talking about this looking likely that Andy Burnham's going to become the 59th Prime Minister of the United Kingdom he's got a hell of his job on his hands It's one we talk about a lot on this show. So what's his problem and how might he solve it? To talk about this, we've got Paul Johnson back with us, former director of the Institute for Fiscal Studies. Lots we want to ask him, Robert.

2:55The Rest Is Money Hosts:Yeah. And look, what's so timely about this is Paul has just started a project, which is about how we get the growth rate up. He's just finished a report showing quite how appalling the economic performance of the UK has been over the last 20 years. And it's the first stage of a set of work about how we recover, how we rehabilitate. And so here's our interview with Paul Johnson. And maybe it'll set the agenda for the new prime minister.

3:22Paul Johnson:Paul, good to have you back. Loads to get through with you. I know one of the things we want to talk about, obviously, is the problem Andy Burnham has to solve. You've been working with the Prosperity Alliance and you've got some interesting research that's just come out on the wealth gap and the prosperity gap. So, first of all, do you want to set the scene for us in terms of what you think the problem is that we have in this country that needs solving?

3:43The Rest Is Money Hosts:Yeah, I think to some extent, Andy Burnham and the turnover of prime ministers over the last decade is a symptom of the problem. And the problem is that we've not got better off for about 20 years. So, average earnings today are very similar to what they were 20 years ago. So, you know, 10, maybe 15 ,000 pounds a year less than they would have been had growth, had incomes continue to rise as they did in the 50 years before the financial crisis, before 2008. So, we've broken a sort of generational contract. So, young people in particular have struggled as a result of this. They've seen their earnings flatline.

4:22The Rest Is Money Hosts:And if they're graduates, they're obviously paying a 9 % tax in addition on anything that they're earning. and they haven't benefited from the wealth boom, which has been helpful to the older generation. So the problem we have effectively is one of very little growth over a very long period of time. It's not surprising under those circumstances that the electorate is frankly pretty fed up. And that's, I think, what we should understand when people talk about a cost of living crisis. What they're talking about is a living standards crisis, which they're feeling because as soon as something at all difficult happens, the Iran war or what have you, increases in energy prices, because they've not seen an increase in living standards for such a long time, that feels like a real squeeze.

5:09Paul Johnson:So just to clarify what you're saying, Paul, is that average salaries would be about 10 to 15 grand a year more if we'd have carried on the trajectory we had. Yeah.

5:18The Rest Is Money Hosts:I mean, it's a huge gap. It's like 25. Average salaries, which is getting on for 40 ,000 now, they'd be 50 ,000 or more if salaries had continued to rise as they had pretty much every year in the 50 years before the financial crisis. Now, that wouldn't affect be true of everybody, and maybe that's a slight overestimate, but it's undoubtedly the case that we're much worse off than we might reasonably have expected to be 20 years ago. And this particularly, of course, hits, as I say, working age people, particularly that younger group. And it makes it much harder for them as well to accumulate the sort of the housing and the pension and the other wealth that the older generation got used to doing.

6:01The Rest Is Money Hosts:Now, there are multiple issues raised by fundamental growth problem, which we talk a lot about. The big simple question, can these problems be wholly addressed by what you might call a growth strategy? Or does there also have to be some rebalancing? Because the other trend, which, you know, you and I have talked about for years, is how relatively speaking, older people have done significantly better than younger people. and is part of what needs to happen in a sense distribution or redistribution from older to younger. Because I would argue that probably if you're an older person listening to this podcast, even though you may have done better than young people over the last 15 years, you probably don't feel as though life is wonderful and you're sort of living in clover.

6:55The Rest Is Money Hosts:It's one of the reasons why whenever there's a debate about the triple lock, the formula for raising the state pension, pretty much every politician runs away from saying we need to reform it. Yeah, I mean, I do think that the fundamental issue here is growth and it's easy to say and it's much harder to achieve. I mean, no one's pretending that it would be very easy to get growth back onto a high trajectory. We can talk later about the ways in which you might do that. But I do think the fundamental question is about making sure that we have economic growth. Without economic growth, then wealth becomes more important relative to income.

7:35The Rest Is Money Hosts:It becomes much harder to fund the welfare state. It becomes harder to fund defence. And the electorate gets fed up. In terms of redistribution, yes, there's probably a case for, I mean, I think most people would, most certainly people who look at this, most technocrats and policy wonks would say, well, the triple lock really doesn't make very much sense. And at some point it has to stop because, you know, If you carry it on ad infinitum, it would literally take up the entire economy. So you have to stop at some point. And we need to decide where to stop. But actually, I think we almost kind of over-focus on the triple lock.

8:09The Rest Is Money Hosts:I mean, where do we really spend money on older people? Yes, the state pension, but it's less than in most European countries. But where else have we really increased spending? It's been on health. Now, we need health. I mean, I'm not saying we shouldn't try and keep people alive, though we haven't done it very productively. I mean, efficiency, productivity in the health service has collapsed over the last seven or eight years. We're also clearly paying for social care and all those kinds of things. At one level, because the population's ageing, we're going to have to do more than that. But whilst we've increased spending on the older group, we've hit young graduates with big loans and big repayments.

8:48The Rest Is Money Hosts:We've cut benefits for younger people. But most importantly, most importantly, they just haven't had a pay rise.

8:54Paul Johnson:And just on that point, just to remind everyone, the triple lock is obviously how much the state pension goes up by each year. And it's based on either it's a minimum of either 2.5 % average earnings growth or CPI inflation. And so the point is, it's a minimum of 2.5 % every year. And what you're saying is that is not sustainable, but it's not the biggest worry because we've heard obviously Andy Burnham say he's going to stick with the triple lock.

9:19The Rest Is Money Hosts:It's clearly not sustainable forever. Now, what we need for the state pension is a view of what level do we want it to be? It's currently about 30 % average earnings. Now, maybe we think the right number is 33 % or maybe we think it's 30%. Whatever we think it is, we should say, well, that's where we want to get to. And maybe we keep the triple lock until we get there. And then we stick at that point. It's turned out the triple lock's been quite expensive over the last 15 years, partly because we've had such a bizarre economy. If we'd had the triple lock for the 15 years before it was introduced, it would cost almost nothing because earnings were generally above inflation and were generally above 2.5%.

10:00The Rest Is Money Hosts:So you just increase it year in year in line with earnings. But as it's happened over the last 15 years, quite often 2.5 % has been the biggest number in that calculation. And sometimes inflation has been bigger than earnings growth and sometimes earnings growth has been bigger than inflation with the result that it's just kind of ratcheted up. So it's also kind of unintended that it was quite as different as it's turned out to be. One of the paradoxes of the correct focus on young people and the fact that their earnings and wealth is so massively underperformed over the last 15 to 20 years is, of course, that the government has recently pushed up the minimum wage for young people and attracted a lot of criticism, including from the man Alan Milburn.

10:47The Rest Is Money Hosts:I mean, I wouldn't say it's criticism from him, but he has raised a concern that we hear a lot from employers. The problem with tackling low wages for young people through just putting up the minimum wage is at this particular juncture where the economy is flatlining. Lots of employers say, well, we can't afford these young people. And all it does is exacerbate the unemployment among young people. So there is this chicken and egg thing, as it were. How do you get young people's earnings up if you're not, in a sense, going to have that kind of market intervention? Yeah, well, of course, I mean, the minimum wage, the national living wage has been growing pretty fast over the last decade.

11:26The Rest Is Money Hosts:It's now one of the highest in the world. I mean, it's amazing. 30 years ago, we didn't have any minimum, and now we've got one of the highest in the world. It's interesting what it's done. It's increased the earnings of low earners, as you'd expect, but it's really compressed the difference between the bottom and the middle. And that's created its own problems for employers because we're now, it's remarkable, having had years of worrying about inequality, we almost have too much equality in the bottom half of the labour market. So the gap between someone in the middle and someone at the bottom is much smaller today than it was 20 years ago.

12:04The Rest Is Money Hosts:And that means, of course, that often employers are complaining, well, I can't get someone to accept a promotion to a more difficult and responsible job because they only give them 20p an hour or whatever it is more for doing it. So that compression is itself an issue. And why have you got the compression? Because you forced that increase in the minimum wage, but you haven't got the increased productivity, which, as it were, gives a good reason for increasing pay elsewhere. Now, when it comes to younger people, I think a lot of us were quite, I mean, I'm broadly in favour of a reasonably significant minimum wage.

12:40The Rest Is Money Hosts:I mean, it was certainly until recently, it didn't appear to have had much effect on employment. I think we're certainly at the limits to what you can achieve with that. But I think a lot of us were concerned when the government increased it very significantly for the youngest workers. Yeah, that's what I'm talking about. Exactly. Because when you're an employer, actually, when you've got a 20-year-old, you need to train them. You need to put quite a lot of effort into them. And part of the deal has always been, well, they don't know very much then, but they also get quite a lot from the work and then they'll progress later.

13:13The Rest Is Money Hosts:But if as an employer you've got a choice between a 20-year-old with no experience and a 25-year-old with a bit of experience and you have to pay them the same, well, you're probably going to go for the 25-year-old.

13:23Paul Johnson:And also just that point on that, because even like the 16 to 18 year olds, and we've seen this in our business, it's been double digit increases in their wage, which on top of national insurance contributions and business rates and energy bills and everything else, when there's a choice between what you can afford, it's often the young person that you can't afford because you've got to pay the energy bill, you've got to pay the business rates and everything else. And that's then obviously seen this uplift in unemployment. And, you know, I think part of the reason why we have so many needs is because those entry level jobs are just not there in the way they were.

13:55The Rest Is Money Hosts:I mean, you see these swings in policy to some extent. I mean, 30 years ago, we were really worried about people being out of work because we had quite high levels of out of work issue. And actually some reforms of the welfare system were done to try and bring people into work, particularly lone parents, for example. many more loan parents in work than used to be the case historically we haven't had a as big a problem with neats as many european countries and now we've swung into another place where actually partly because of policy partly for other reasons we've ended up with the reverse we ended up with a sort of world in which we had many fewer people out of work and an issue around in work low pay and now we've kind of gone back to a world where we've kind of solved the the low pay bit in the sense that the minimum wage has gone up but we've gone back to the period where particularly the young people we've got high levels of people out of work and the policy often takes it's often slow to respond to these trends yeah i mean so i mean the big question therefore is if the problem is that living standards have been rising too slowly for those particularly on on sort of of middle incomes, is the solution more government intervention or less government intervention?

15:19The Rest Is Money Hosts:Well, I mean, the solution obviously is a complex one. And in the end, it is better policy across a range of things. So one of the things that's holding living standards down, of course, is that there's been big, big, big tax rises over the last few years and continuing on through this decade. That has a direct effect because it's just taking money out of people's pay packets. It has an indirect effect. We're taxing employers more. We're creating problems in the economy. There are other things which really matter. So number one, I would say, is house building and actually having a rental sector and a housing sector where people can afford to live.

15:58The Rest Is Money Hosts:So one of the big issues for younger people particularly is the cost of housing. And that affects both their living standards directly, but it also affects the capacity of the economy to grow if you don't have enough housing. And then there's a whole series of things around employment regulations and rental regulations and the regulation of utilities and infrastructure and transport and education. I mean, there's no silver bullet here. I mean, there is no silver bullet. And this is the political problem that to do all of the things that I would argue you need to do on these, A, they're not short term going to have a big effect.

16:34The Rest Is Money Hosts:B, they may be short term politically difficult. And C, you get the benefit five or ten years down the road. And we've seen political cycles just, you know, they barely manage five days in five years. I mean, there's a ton of stuff, you know, in terms of individual policies to talk about. I mean, housing obviously is terribly important. There's obviously the question of social versus private, which is pretty important. How much should the government be investing directly itself in low-cost housing? I mean, probably my favourite moment of the Makerfield by-election was the Count Binface intervention, where he said that he would promise to build at least one affordable home.

17:18The Rest Is Money Hosts:which felt that it sort of slightly captured what's been going on in the housing market.

17:24Paul Johnson:We need to get Count Binface on, you know.

17:27The Rest Is Money Hosts:I mean, I'll give you a very clear answer to that. The answer is housing. It's not affordable housing, it's housing. It is. Because one of the things that's interesting about Burnham, you know, I was talking actually to Doug Alexander, a member of the Cabinet who's supporting Burnham, and he did point out something which should be encouraging, which is in Glasgow it takes something like 50 weeks to get permission for house building and in Manchester it takes I think 15 weeks. So he has had an impact in Manchester when it comes to speeding up permissions. One's impression is in London it takes 15 years.

17:57The Rest Is Money Hosts:Burnham, you know, does for the country what apparently they claim he's done for Manchester which is speeding up permissions for house building. That would be a good thing. It absolutely would. I mean there are other issues around house building. I made a quip there about London. I mean, we're really struggling to build anything in London at the moment. That's partly to do with planning, but it's also partly to do with the cost of land and the cost of meeting social housing needs or requirements and so on, and regulations on high-rise buildings, all of which has made it very expensive to build.

18:31The Rest Is Money Hosts:And actually, oddly enough, the price of housing in real terms has come down somewhat. So you need to act on quite a number of issues there. But why do I say housing rather than affordable housing? Of course, we want housing to be affordable. But the best way of making housing affordable is to increase the supply of housing. And one thing we... Can I just ask you on that? Because one of the things that is really striking to me is the difference between Britain and America when it comes to the living standards of young people. Now, the living standards of young people may not have been going up quite as fast as for previous generations in America.

19:05The Rest Is Money Hosts:But actually, they have been rising relatively rapidly in America. how much of that is to do with the fact that they have a more active housing market and house building market in america well it's part partly that and of course that varies in different parts of america if you go to san francisco and silicon valley they certainly don't have anything approaching affordable housing and partly that reflects some of the difficulties about building in particular areas but i mean the main reason that young people in america have been doing well is that earnings have been rising productivity has been rising, and the economy has been growing.

19:37The Rest Is Money Hosts:Now, America is a much more unequal society than here, and actually there's a much, much bigger gap between rich and poor there, but the electorate on the whole is seeing that their living standards are rising. Well, they don't have the Gen Z problem that we have. Indeed. Paul, we love talking to you. We always feel we're making progress in solving the country's problems, but there's more work to do after the break. Hi, this is Gary Lineker from Goalhangers. The rest is football. This episode is brought to you by WISE. It's only when you start moving money between currencies that you really think about the exchange rate, the fee and what might be hidden away in the small print.

20:13The Rest Is Money Hosts:Whether you're living abroad, paying someone overseas or just trying to manage your money across borders, you want a fair exchange rate, an easy transfer and no surprises along the way. WISE keeps things simple. Wise is a smart way to move the currencies you need around the globe. It works in more than 160 countries and with over 40 currencies. Most transfers arrive instantly. Wise uses the mid-market exchange rate, like the one you see on Google, with no markups or hidden fees. So when money needs to move, you can see the rate, know the fee and get on with it. Join millions saving billions on hidden fees by downloading the Wise app today.