308. The 4 challenges (and the biggest opportunity) facing the new PM

0:00Robert Peston:Eddie Burnham's debut has gone well, in a political sense, most would say. But does he really understand how important it is to revive UK growth and how constrained he'll be by public sector debt? What about the twin imperatives of reforming the civil service and the tax and welfare systems for this age of artificial intelligence? Does Burnham have a plan and what should it be? In assessing whether the new Prime Minister can put the British state back on the path to recovery, there was one person I wanted to talk it over with perhaps more than any other. He's Gus Lord O'Donnell, who held the most important jobs in Whitehall over decades and perhaps has the best sense of when a government is being steered to calmer waters when it's heading for the iceberg.

0:47Robert Peston:Here's my conversation with Gus O'Donnell. 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 built Octopus, 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 Kraken.

1:30Robert Peston: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 realised 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 sense, Craig. Thank you. Right, we're going to go to the episode. For adults with Crohn's disease or ulcerative colitis symptoms, every choice matters. Tremphaya offers self-injection or intravenous infusion from the start. Tremphaya 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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3:30Robert Peston:Gus, great to see you. I really want to concentrate on three big themes today. One is what kind of reforms of the civil service we need to see for an artificial intelligence world. Second, and this is another big issue I know you've been giving a lot of thought to, which is on the assumption that we do see significant displacement of jobs, maybe permanent, maybe temporary. What, again, in this AI world does that mean for how we should look at changing the tax system, changing the welfare system? But I just want to start, actually, with the debut of Andy Burnham. You've seen a few debuts from inside Downing Street.

4:18Robert Peston:as cabinet secretary, but also in other roles. Just for the first few weeks, marks out of 10? So I'd say very high. I'd give him eight out of 10. And I have seen the Thatcher major, the Brown-Blair transition. So yeah, I'd say one thing he's done is he's communicated much more effectively. And I think what that's done is given hope to his backbenchers. And I think what's important about that is there are going to be some very tough decisions, which I'm sure will come on to, to come. He needs to take his parliamentary party with him. And therefore, he needs to give them hope. Because to be honest, what I was hearing in Parliament from lots of Labour MPs was, actually, I'm going to not have a job in a few years' time.

5:06I'm going to be out of a job. Therefore, can we kindly become more popular? Can we think about how we communicate better with the population? So I think he's got that right. The question is using that political capital to good effect.

5:20Robert Peston:When you say to good effect, there are some big decisions that have been forced on him. And they stem from some big structural problems that he's inherited. One of them is a very low growth British economy, an economy that really hasn't grown at any significant rate since the financial crisis. Coupled with that, living standards also not risen in any significant way since then. Deep concerns about inequality. But then there is another very significant strait on him, which is, you know, he has inherited government debt as a share of national income that on the most conventional measure is about 100 % of GDP.

6:05Robert Peston:interest rates paid by the government high and rising. Some of that is a direct result of uncertainty caused by both Trump's war in Iran and Trump's inability, refusal to manage, you know, US debt, some would say in a more prudent way. The question I suppose I've got to put to you is we haven't had what even remotely looks like any kind of comprehensive or compelling economic plan from Andy Burnham yet, what would in an ideal world you like to see from him, particularly since we've got his first big budget, John Healy's first big budget coming up in October? Well, first of all, I am not worried by the fact that we haven't had a plan yet.

6:52I actually think that's a good thing because I think I want all of his new ministers, and my God, there are a lot of them, to bed in, to think about what the big issues. You've raised all of those things. Some of them will be basically out of our control. Wars in Russia, Ukraine, Middle East and all the rest of it, energy prices. So he needs to think about what is it I can control within this? I've inherited this situation, as you say, 100 percent debt GDP ratio, you know, debt interest bill being one of the largest spending programs. So what does he do about it? He starts to think about what are the big things we need to change?

7:30And I think, first of all, it'll be the welfare system. We know that's unsustainable. Social care, he's mentioned. The tax system, which is not encouraging jobs. So there's a whole bunch of things which will come together. He said he wants a 10-year plan. I think that's a really good idea because a lot of these things require some extra spending on prevention, which will bear fruit, a lot more investment. And he needs to think about how do we change the tax system? Because, to be honest, it's a bit of a mess at the moment, as we know. So the tapers go all over the place with childcare and all the rest of it.

8:02The marginal tax rates move all over the place. So there's a fundamental reform to be had. And I hope that John Healy, as a chancellor, will grab all of that because he knows he's got to spend more money on defence. He knows he's got to reform the welfare budget. So he needs to think about how do I stimulate growth at the same time?

8:20Robert Peston:The catch 22 that Starmer and Reeves comprehensively failed was how do you, in a sense, combine reassuring lenders to the UK, markets, creditors, with also giving businesses hope, consumers hope, that it's a good environment to spend and invest in. And, you know, we remember when Starmer became Prime Minister and Reeves became Chancellor, the prevailing mood that they propagated was one of gloom, that they inherited this appalling mess, taxes were going to have to go up, and the whole country at that point said, okay, in those circumstances with taxes going up, we're not going to spend, we're not going to invest.

9:16Robert Peston:And, you know, they broadly shot themselves in the foot. He has begun very, very differently. You know, he's a sort of like Sonny Jim Callaghan in some ways, for those of us old enough to remember him. He's got a cheerful demeanour. I think it is probably the case that in general the mood has improved. but the markets remain a problem. So how does he, in a sense, provide the stability for people to lend to the UK, invest, spend, without, as it were, scaring people, that the way he's going to do that is to whack up taxes, which would then take all that demand out of the economy? Sure. And like you say, he started well.

10:06I mean, one of the problems for business, as you rightly say, They want stability, predictability. They didn't get that from the political scene because we had a prime minister who was deeply unpopular. And there was all this talk about, is he going to stay? Is he going to change? So that's gone. We've got a new prime minister who's said lots of the right things. And therefore, you've seen consumer confidence rise already. Now, what we need to do is then back that up. I mean, there's a lot of talk from Rachel Reeves and Keir Starmer about being good for business and growth, a lot about growth, but not a lot of action.

10:37So he needs to do something serious on growth and planning and getting things going.

10:44Robert Peston:We go back into sort of recent history. I mean, one of the sort of paradoxes of, I say, the last 20 years is probably the only prime minister I can remember who genuinely, I think, wanted to make growth the top priority was also the most disastrous. I mean, there's no question in my mind that Liz Truss meant it when she said growth was my number one priority. But the execution was then about as bad as you could possibly think with the mini budget. The worry I have, I mean, I assume that Andy Burnham gets that growth matters. But then he has done a lot of saying, you know, we've got to invest in the British economy to make it more resilient against climate change.

11:36Robert Peston:We've got to reform social care. It's going to be a big bill there if he does what he says, providing a proper social care service for older and vulnerable people is going to be very expensive. So there's all of that. He wants more housing. He wants more infrastructure. All of this stuff is expensive. And so obviously, if you're in the markets or indeed, if you're in the opposition parties, you're saying it means only one thing. Taxes are going up. If we, however, get into a cycle where everyone just assumes it's all going to be paid for with higher taxes, we won't get the growth. No. So that's why everyone seems to assume that the growth on all this investment has to come from increased taxes in the public sector doing it directly.

12:23You think about where the big investments that we need are. We're going to need private sector money for that, undoubtedly, right? So what he can do is provide a stable, predictable background to that and a proper regulatory system that will reward private sector putting the money in, be it in the utility sector, be it in improving the national grid. I mean, people always talk about buses in Manchester. They are run by the private sector. You know, so they always think that this is all about nationalizing everything. Absolutely not about nationalizing things. This is about getting the structure right.

12:59So the private sector says, actually, these guys mean it. And then, as you say, the fact is you're getting that investment, which is more spending in the economy, more jobs, more confidence. That comes through. And then you get the background in which people can say, actually, I feel more comfortable about spending more. And the economy starts to build up. And then you get into virtuous circles. Once confidence builds, people want to invest more. They don't feel they need to save quite so much. So we're in a world where you do get growth, but you don't get an explosion of spending on the public sector.

13:35But as you rightly say, the public sector is going to have to spend more. What we need to do is have a longer plan, because the last thing we want is like a one off, like, let's say, winter fuel allowance being changed. You know, they need a package which looks at how they tackle all of these issues. So we've got triple lock. We've got sickness and disability. You know, social care. There's a whole range of things. And he needs to get together. And John Healy and Pat McFadden, with the help of Alan Milburn and his report, there are ways we can do this. You know, Gordon Brown's phrase of make work pay is something absolutely crucial that they need to work on.

14:15Robert Peston:No, I completely agree with that. But I would argue the hardest challenge that he will probably face is indeed in that area of welfare reform. So Jim O 'Neill, who thought very hard about going to work for Andy Burnham and, you know, only recently decided not to, comes on this podcast quite a lot. And the last time he was on, he said the most important thing he would like to see from this government is serious intent in terms of two kinds of reform of the welfare system. On the one hand, putting in place reforms that means the bill for supporting working age people, particularly when it comes to disability, doesn't increase by the tens of billions that is currently forecast to increase over the coming few years.

15:13Robert Peston:But that requires not only a much more imaginative policy in terms of helping vulnerable people either to keep their jobs or get into work, but it will also require some quite controversial decisions about who gets the money. And then secondly, he takes the view, which I think pretty much every economist in the country agrees with, and almost no politician will say they agree with, which is the triple lock is past its time. And we have to reform the formula that says how much people get from their pension in retirement. retirement. He says both of those are absolutely crucial. I think he's probably right.

15:55Robert Peston:But can the reform remotely happen on the time kind of shortish timescale that would allow John Healy in his first budget to announce some, you know, fairly important bold investments without spooking markets? So I think you're, I completely agree with you and with Jim, that economists, wherever they are on the political spectrum, are actually agreed on the things we need to do. And you've explained what they are. The failure we've always made, and I say this to economists in government, it's not enough to be professional, you have to be persuasive. So we need to find a way to make the politics of these things work.

16:34If you think about some of the big things we've done on reforming public sector, one of the things we did that's most effective was on pensions, reducing the future costs to government of pensions by getting people to save more, by just changing the default. It didn't cost anything, but people now have to opt out rather than opt in to pensions.

16:54Robert Peston:That was such an important reform. I would argue it's probably the last big, serious economic domestic reform that this country has actually pushed through. And it was a long time. I mean, this is what, 2000 and I don't know, four, five or something. It's a long time ago. People have forgotten the tricks. It wasn't tricks, but it was the way in which you make very difficult things politically saleable. So number one was the change of the default. Number two was saying we are going to increase the pension age, but in 10 years time. Give people plenty of time to plan for that. So the way you can do triple lock is you can do all sorts of ways we can do this.

17:34When you look at the problems with the triple lock and the way in which the Office of Budget and Responsibility looks at the unsustainability of these things, they're a long way into the future. So you can actually phase these things to give people time to adjust, think about how they manage their resources. And that, to me, is the trick. We need to take the economically blindingly obvious and make it politically saleable, which is why my first point about why it's so important that Andy Burnham has got his MPs on side is absolutely crucial. That's going to be the key part is when we come to that budget and the 10 year plan that we're supposed to have and the spending review, there are going to be tough decisions and they've got to stick with him.

18:18Robert Peston:One of the things I do remember about both Tony Blair and Gordon Brown is they told a story about the kind of fundamental reforms we needed to see. But they told it over weeks and months and in some cases years. He did announce some quite big things like, for example, digital ID, but it came out of a completely blue sky. Right. And it wasn't altogether surprising to many of us that there was then a backlash against it because they'd not made any attempt to sell the idea of a digital ID to the British people. Do you think Burnham has the ability to tell that kind of long term story consistently that would allow the abolition of the triple lock, that would allow welfare reform?

19:06Most certainly, because I think he'll also have learned. Remember, you know, he was a minister way back and I remember working with him. The phrase that Gordon Brown and Tony Blair used was prudence for a purpose. Right. And that was like, OK, we're going to stick with some conservative spending plans that are quite tight. But we're going to do this so we can improve public services. So we can increase the amount of money we spend on health and so we can make lives better for people. And we need that kind of long term story because we are going to have to do some tough things quite short term.

19:36And as you say about AI, I mean, and the digital thing, I mean, that was an example of how not to do it. Digital AID being sold as an answer to illegal immigration, when actually it's an answer to the problem of how do we improve public services? And if you get it right, then you can easily improve public services and save money at the same time.

19:58Robert Peston:So if one is now going to be slightly concerned, maybe possibly critical of Burnham, I was disappointed that one of his very early announcements was to can digital ID. I mean, Starmer had already softened it by saying it wasn't going to be compulsory. And I wasn't sure that was the right decision. But it's been totally canned now. Now, you edited what I thought was a very, very interesting report into how, particularly in an artificial intelligence world, the public sector, Whitehall, needs to be reformed. And in that report, you said that so much of what can be done to improve public services and make Whitehall more efficient actually flowed from a digital ID.

20:44Robert Peston:So how worried are you that it's been canned? So, OK, call me a natural optimist, if you like. But I'm not so worried because I think digital ID, the digital ID card, became a problem because, as you rightly say, the way this was sold was totally ridiculous. And I can understand why people got upset about it. Right. I personally think we can now, because they made it such a bad product, you just had to ditch it. But actually, the fundamental idea, and I got this, I talked to loads of permanent agencies doing this thing for the Global Government Forum, that basically, we can get all of the benefits of this if we get this right.

21:24And we create a system of digital ID, not necessarily with a card. And I think we could do it to start with non-compulsory. If you look at Denmark, which is a system.

21:35Robert Peston:So you think what he's announced in terms of canning it, you don't think it's as serious as it seemed? No, and look, I mean, if you think of what Andy Burnham announced very early on, he announced all sorts of things, which he's now gone back on, like the bond market doesn't matter and all that sort of thing. So I think one of the great things about Andy is he's a very fast learner. I think when people put to him how we can improve public services, all this stuff he's going to get, he'll realize that actually you've got to sell to people that this is something that's going to make their lives better.

22:04It's going to improve that, you know, when you get knocked over in the road outside and taken to a hospital, they're actually going to be able to access your health records to sort out that you are allergic to this antibiotic and that this is your blood group and all sorts of things. So there are massive benefits from this, which, you know, data sharing is part of it as well. So that I think this is definitely possible. But it's a rebranding exercise, I would say.

22:30Robert Peston:Okay. But then to get to the fundamentals of this, one of the recommendations that you and the other permanent secretaries and authors of the report said was we have departments that are in silos that may have suited a country in a pre-digital world, but are now totally inappropriate. and there's got to be, you know, these walls, particularly when it comes to sharing of data, have to come down. Do you get the sense that, you know, your successor, current incumbent of Covenant Secretary Antonio Romero and Andy Burnham, understand that this has got to be a priority, that there has to be, you know, with somebody, you know, my mum died a few months ago.

23:26Robert Peston:And actually, one of the things that was positive, actually, was now when you register a death, they will send the information that, you know, your nearest and dearest has, you know, a loved one has died to all the relevant departments. And you only have to register it once, which is, that is a positive. That shows you one of the advantages of some kind of data sharing. But it's a rare example. There's very little of that that actually happens at the moment. And I need to give a shout out to Lee Lewis, who is permanent secretary of the Department of Work and Pensions, because it's done in my day.

24:01Tell us once. It was a brilliant programme. And we need a lot more of that. And in order to do that, you need a centre that understands what are the things the centre has to do, because there's all sorts of departments. Now, that report, you're right, said that actually we need to define what the centre, namely the cabinet office in this case, needs to do. I had a kind of concept of subsidiarity. It's like, you know, like get out of the way for departments who need to do the detail of their things. But those things which actually cross departmental boundaries or things where like, you know, you've got a system for taking minutes or for, you know, for God's sake, make it the same across government.

24:41You know, don't don't get multiple contracts and pay bloody, you know, one of these companies millions of pounds multiple times. It's ridiculous, right? So I think the changes will do that. I'm mostly against changing the ministerial machinery of government on these things. But actually, I think these changes do provide a core. And I think, as you're right, Antonia and Kat Little have worked on making sure that the key decisions will be made centrally, which will improve efficiency, I hope. And we've got quite a lot of the AI ministers have stayed. We've now got an AI minister in cabinet.