291. Does Burnham have any wiggle room?

0:00Steph McGovern:What Andy Burnham should be doing if he becomes the next Prime Minister.

0:03Robert Peston:I think the manifesto will make it almost impossible for him to do the kind of stuff we need to do to regenerate the economy. The chance is really important. You probably don't want someone who's got their eye on your job.

0:15Steph McGovern:That makes me think not worth street in. This episode is brought to you by Octopus Energy. Greg Jackson, the CEO, is with us now. Now, Greg, I want you to look into your crystal ball and tell me what's your vision in terms of, let's say, 10 years for how the average UK house will be powered.

0:36Robert Peston:As we build out more and more renewables on the grid, the underlying electricity system is much more volatile. And that means that people have got their own solar panels, their own batteries can help balance the grid. And cars are going to be doing that as well. so you're going to end up with a system that looks a lot more like the internet where everything is automatically improving just like in the internet improves your bandwidth here it'll be improving your energy cost and prices are going to come down and by the way it brings prices down even for those people who don't have the solar panels and batteries or the electric cars because it makes the whole system more efficient for everybody let's hope that's right then greg thank you now on

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2:25Robert Peston:Hello and welcome to The Rest Is Money with me, Robert Paxton.

2:28Steph McGovern:And me, Steph McGovern. Now, today we want to focus on what Andy Burnham should be doing if he becomes the next Prime Minister and also what he is constrained by. He's saying he's going to stick with the current fiscal rules, not deviate from Labour's manifesto. So what does that all mean in reality? To talk about this, we've got Paul Johnson back with us, former director of the Institute for Fiscal Studies.

2:49Robert Peston:I mean, I'm going to be really interested in what he has to say for the very simple reason that I think the manifesto will make it almost impossible for him to do the kind of stuff we need to do to regenerate the economy. But those around him disagree with me. What does Paul think?

3:02Steph McGovern:Obviously, everyone's talking about what Andy Burnham is going to do when he potentially, very likely, becomes prime minister. there is constraints around him though aren't they so one of the things everyone keeps talking about is fiscal rules and he has said now he said that he's going to stick with these fiscal rules just remind us what they are and what they mean broadly speaking there are two rules uh one is that um we should three years out so by 20 29 30 uh be borrowing only to invest so that uh that that constrains the amount we can borrow um in that year and there's a second rule which says that overall debt in the way the government currently measures it should be falling as a fraction of national income in that year.

3:44Now, we're currently meeting those rules, not by very much, but we're currently meeting those rules on OBR forecasts. Though one of the reasons we're meeting those rules is the government is saying, I would say pretending, that it's going to be cutting spending on a bunch of public services in that last year, in that election year. So, that's how tight we are up against those particular rules.

4:09Robert Peston:Can I talk to you about the second rule which Rachel Reeves changed was probably her biggest change when it came to you know the fiscal rules and it allows her to net off certain categories of assets from debt when measuring whether the national debt is rising or falling and you know assets like for example the student loan book can be netted off. Talking to those close to Andy Burnham, they say that they believe that he could, in inverted commas, interpret that rule in a different way, which would somehow allow a lot more government investment. Do you think that's right? Well, I mean, the rule, which has got this lovely name, per snuffle, public sector net funding liabilities, is designed really only to capture financial instruments.

5:03That's right. So the student loan book is a financial instrument. It's not designed to capture the value of physical assets. Now, you might think that's a bit odd.

5:14Robert Peston:But can I just ask you a question on that? Because one of the things I wondered about when they designed the rule is let's just say you are giving a lot of money, which they are, in support of a new nuclear power station, right? Now, one of the things that I was quite struck by was when Ed Miliband announced a big chunk of money for, I can't remember which of the power stations it was, it was not deducted as an asset from the per snuffle, even though it was going into some kind of corporate structure. And I just wondered, essentially, whether it was possible to do some, putting it in a slightly derogatory way, some financial engineering with some of these things so that you could essentially do more of it and deduct it from the debt measure.

5:59Robert Peston:I mean, two things, I mean, or three things. Infrastructure investment is already treated differently from day to day because it doesn't count against the borrowing rule. So it's already treated relatively generously. It's not day to day, but it's not netted out of the shop. But just say any infrastructure investment is more generously treated. Secondly, there is a reason for treating financial stuff differently from other stuff, which is it's actual cash that you're borrowing. So the markets, you know, it doesn't matter how you define it. If you're borrowing money, you're borrowing money, you're borrowing money.

6:29And the question is, how much can you actually borrow from the markets? You might be able to persuade the markets that you're going to get such a good return on this that they're happier to do it. So the question is not really, in the end, what is your specific structure of your rules. It's how well your economic policy is defined and how much you can convince people that you're doing a good thing. But the last thing I'd say is that we hear a lot about people saying governments don't borrow enough, they don't invest enough, and you might argue they don't invest enough. This country has seen its debt rise by more than almost any other major economy over the last 25 years.

7:05We have run a loose fiscal policy, a looser fiscal policy than almost any other major country over the last, certainly since financial crisis, arguably since the turn of the century. So what we're not in is a world in which, you know, we have really tightened down relative for everybody else. We haven't. We've been incredibly loose relative for everyone else in our fiscal policy. and that has come back to bite us really really hard in the backside because again as we've discussed we're spending well over 100 billion pounds a year just on debt interest this stuff is not free you know you can treat your rules however you like and you can make a case for

7:46Robert Peston:more investment but it's not a free lunch but you yourself in your analysis of why we have a low growth economy point out that relative to most of our competitors you know and this is public sector and private sector, we invest less than other countries, and that is a direct contributor to low growth. So if we're not going to break this downward cycle, we've got to find a way in both private sector and public sector to invest more, surely. Absolutely. And actually, the bigger gap is in the private sector. Nowadays, we're actually nearer the average on the public sector. But of course, we're still suffering from, actually, particularly, you look at the 1990s, where we invested nothing.

8:25I mean, that government in the 1990s, Ken Clarke's got a very good reputation in a way as a chancellor but he was disastrous in terms of the total lack of investment over that period so I'm not arguing against investment but I am saying a it's not free and b we might want to cut welfare to fund investment we might want to increase taxes or we might say we're going to ask the next generation to pay for it but you ask the next generation to pay for it only if you can persuade people to lend you the money in the short term.

8:53Steph McGovern:And isn't the point as well, no matter what the rules are, it will be the markets and the bond markets who judge whether they are being followed or not and will decide whether. Well, they'll judge whether they think we're a good bet. And don't forget, at the moment, they don't think we're a good bet. They charge us more than almost any other country. Now, there's all sorts of reasons for that. I mean, one reason is actually our inflation has run ahead of other, particularly G7 economies over the last 15 years. I mean, embarrassing. I hadn't realised this until relatively recently, but our inflation rate is on average being one percentage point above that of other major economies.

9:26Because of our reliance on energy and things like that. Well, partly because we've actually been running relatively loose fiscal policies, partly because the way our labour market works, partly because we were so generous with energy subsidies and so on that it then pushes up. And actually, we are very dependent in energy on imported gas. There are all sorts of reasons for this. But again, if you're going to splash more cash, you do need to worry about inflation and the impact that that then has on borrowing costs.

9:55Steph McGovern:And the other big thing here is obviously that Andy Burnham's saying he will stick to the Labour manifesto, which they obviously came into power with, although he wasn't an MP then. He didn't come in and get elected on that, which would mean not taxing working people. But of course, they've already driven a huge horse and coaches through that. I mean, you know, the idea that this government isn't taxing working people more is for the birds. I mean, the, you know, the biggest tax rise in history, arguably, under both the last government and this, is a decade's worth of freezes to income tax allowances and thresholds.

10:27That's an enormous increase in tax on working people, as, by the way, is the increase in employer national insurance contributions. That is an increase in tax on working people. Now, I'm not saying that was a bad thing to do, because if you want to do the things that the government wants to do on public services and indeed on investment, then you need to find some way of raising it. Certainly the spirit of the Labour manifesto has been chucked in the waste paper basket a long time ago. Now, in terms of the precise letter which says they're not going to raise rates of income tax and so on, then maybe that's still being kept to.

11:00But don't forget, the Labour manifesto said we have a fully costed manifesto and here are£6 billion worth of tax rises and spending rises. And what have they done? Something like£60 billion of tax rises and£80 or something billion of spending increases. Now, again, I'm not saying that was the wrong thing to do. As you'll know, I wanged on for hours before the election about how that was the most likely outcome and how everyone's manifesto wasn't honest.

11:26Robert Peston:They were all lies. I mean, we talked about this for a good year before the election. you and I.

11:31Steph McGovern:Well, Paul, I'm going to pause you there. Loads more still to ask you, but we're just going to go to a quick break. This episode is brought to you by Vanguard. Look, if you're listening to a podcast about finances, you likely already know that your money could be working harder, but we know it can feel overwhelming knowing where to get started and even dipping your toe into investing can make you feel out of your depth. It's a mindset that's pretty hard to shake without the right guidance. You might even find yourself wishing you could just get the pros to invest your money for you. Well, you can.

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14:03Robert Peston:It is striking to me that Burnham implied, I mean, I don't think he's going to be able to find the relevant 24 billion, as it were, but he implied that he disapproves, actually, of the increase in employers' national insurance. One of the reforms that I think is highly likely that he will do would be to equalize the rates of capital gains and income tax. Now, I assume he would couple that with, you know, essentially reintroducing generous inflation allowances so that you do get protected or, you know, the value of your initial investment is protected, as it were. I can't remember what your view is on that kind of reform, because obviously there is quite a lot of tax planning by people to convert income into capital, which essentially does reduce the tax rate of wealthier people.

15:02Robert Peston:Is that kind of reform sensible? What kind of money could it raise? Yeah, I think there are definitely sensible things you can do with capital gains tax. One of them is to increase the rates, but at least give an allowance for inflation. And actually, you need to give an allowance for inflation plus a bit, in my view. So, the other thing you also need to do is is stop forgiving capital gains at death so if you increase rates you just give people an even bigger incentive to hold on to things until they can pass it on to the next generation because it's just completely forgiven would it raise lots of money um i don't know it certainly wouldn't raise very large amounts of money remember capital gains tax is a relatively small tax we're talking a few billion exactly not more than 10 billion you wouldn't get more than 10 i mean even 10 billion would be something like a 50 increase in the revenue from capital gains tax now you're not you know you're not going to get that without some really dramatic change and the impact on economic growth is you do need to concern yourself a bit about that I'm having a senior moment now and I can't remember the name of the Fed chief who just died Greenspan Greenspan rightly or wrongly his shtick was that capital gains tax is the worst tax in the world for the point of view of economic growth I'm not sure if that's true but there's certainly some

16:14Steph McGovern:evidence that you need to worry about it well talking to entrepreneurs about that it can sometimes stop people selling their businesses though and then holding on onto them for longer because they don't want to pay a capital gains tax and then that can stop the growth of that business by some new eyes coming in and making it better yeah now i think i think if you if you give a decent allowance for inflation plus a bit that mitigates a lot of those concerns don't forget This is what we had under Nigel Lawson. I mean, you know, we had capital gains tax rates, which were equalised to income tax rates, but with an allowance for inflation.

16:47And we've been messing around with it for the last 30 years. It wouldn't be a bad outcome if we got back to capital gains tax rates at income tax rates, but with an allowance for inflation. But don't think that's going to change the fiscal numbers any dramatically.

17:01Robert Peston:Well, that is my concern. I think there's a bit of naivety in the Burnham camp about this, because I think they think it's somehow going to raise some colossal sum of money, Which you just won't. I mean, it's just, you know, just simple arithmetic. You don't need to be an economist to see that.

17:13Steph McGovern:Everyone's talking about Andy Burnham becoming prime minister. How important is the chancellor role? Does it matter who they are? The chancellor's really important, but my sense is that they're going to get their lead from Andy Burnham because he's, you know, I think one of the issues sometimes is that prime ministers don't really take enough notice of what's going on in the Treasury. Equally, it's a huge job and obviously the Chancellor is going to be really important in helping set that direction. It's always the most important decision that I think any new Prime Minister makes when they're setting their top team.

17:51Robert Peston:One of the reasons why there are those close to Burnham who favour Ed Miliband as Chancellor, putting to one side whether the bond markets love him or hate him or North Sea investors love him or hate him. Just part that over there. The one thing that he does have is experience for years of working in the Treasury. And if I'm honest with you, one of the things that I felt in the end was a problem for Rachel Reeves is I just felt, particularly at the outset, the officials just ran rings around her because she just had no experience of working in that institution. I think if you want to govern, you've got to have somebody at the Treasury who knows how to manage the institution.

18:40Well, you also need someone who knows what they want to do. So obviously Gordon Brown had no experience of the institution when he came in, but he stamped his authority for good or bad very, very fast with the help of a couple of very, very abled special advisors. And of course, Ed Miliband was one of those. It was very striking that Lord Nick McPherson, who was the permanent secretary of the Treasury, has made some quite strong interventions saying he thinks Ed Miliband would be perfectly good as a chancellor because he's got that experience and he understands the Treasury and all those sorts of things.

19:09I mean, there are two things that I think the prime minister needs to think about when appointing a chancellor. One is that they need to be broadly on the same page. I mean, you don't want them to be dramatically going in different directions.

19:22Steph McGovern:No, more fighting. That's all we'd have. You probably don't want someone who you think has got their eye on your job. But you also do want someone who is going to be reasonably acceptable, as it were, to the people who we need to borrow money from. So you need to balance those things out against one another. And I'm sure those are the sorts of things that he'll be taking cognizance of. That makes me think, not Wes Street in. Well, he doesn't fit the first two of those, does he? Yeah, exactly. yeah maybe not ed though on the basis of the market reaction maybe the current home secretary well i don't want to say apparently she's 100 % not gonna do it one other person i think is 100 % can't do it now is john healy because he can't go to treasury um unless he's going to you know find a huge amount of money for defense um which i'd be very surprised if um if that's going to Who does that mean?