'Trussonomics' Gets a Reality Check

the Bloomberg Breakfast Index. It's pretty it's pretty shocking. Seventeen percent more expensive than it was last year. And milk was up and like the breakdown all the different bits, milk up for I think was the highest increase. And this is inflation really where it hurts right the general population. They're not going to be able to afford the basics. I'll save because I don't have milk and my tea.

I'm Franci la Well with David Merritt in the London studio and this is in the City, Bloomberg's podcast, connecting you to the stories at the heart of the City of London. Now this week, as we inch closer to the election of a new prime minister, we thought it would make sense to do a little fact checking on the candidates proposals for the struggling economy. That's right, you know, obviously inflation a huge topic in everyone's minds. The two candidates don't seem to be able to tell us exactly

what they're going to do to tackle it, do they? Yeah? And this is I guess a campaign that's as old as times. You promise things and then maybe once you get into power, it doesn't really add up because you see so many more problems that you have to be faced with. And it's a weird campaign, isn't it. Because they're not talking to all of us, most of us

in the population. They're talking to this small group we don't even know exactly how many they are, but Tory Party members, and you've got to assume their priorities are probably a little bit different to the public as a whole. So Dave to dissect this difference between what he calls campaign economics and the governing kind of economics. I spoke to Pania Gordon chief An with Simon French. Sam in French,

thank you so much for joining us. So we're trying to figure out, first of all, where we are in the UK economy and how bad is it. It's pretty bad. There's no sugarcoating, and I'm afraid we expect a recession starting the fourth quarter, lasting for two quarters. Now it has to say the Bank of England sea coming five successive quarters, which would be a contraction on the scale of the global financial crisis. I have to say they have to condition those forecasts on a nounced government policy.

That's an impediment because we expect some more support to come. But whichever version you want, the Pamea Gordon's Island French version or the Bank of England Andrew Bailey version, it's pretty bad going into this winter for the UK, the the Andrew Bailey version. So I was in the press conference and I have to say people are looking around saying I'm a little bit depressed without a very big,

very big shot. Rising energy prices has exacerbated the fall in real income CPR information is now expected to pick at just open the UK as slowed and the economy is now forecast to enter recession later this year. Were they just being honest or is this worst case scenario? I think journalists are certainly smart enough to look at some of the distribution analysis which isn't necessarily coming across

in the Monetary Policy report. But we've seen from other research organizations the impact on particularly the bottom perhaps even the UK population, who by my estimates will be spending upwards of one pound in every five on their energy,

both household energy and petrol for their cars. And that is an extraordinary increase and I think the level of hardship that that might generate is one of the reasons why you look at those macroeconomic forecasts and you look at the component part of the distributional impact, and you can get quite depressed quite quickly. And what I often get asked is why do we not talk about Brexit? Is it can you no longer talk about Brexit without being accused of being a remainder And how much impact

does that have on the economy? We should talk about brexits. There is little doubt I think that the UK economy is about three smaller today as a result of the decision of the UK to leave the European Union. Is that as bad as was presented in the worst case no deal scenario. If Treasury suggested a shrinkage of about

eight to nine percent GDP. No, that hasn't crystallized, but there is clear obvious impact from additional trade frictions, reduced business investment, and the fact on a trade way to basis sterling is still trading ten to fifteen percent lower than it was ahead of the referendum. Now, bringing that back to energy, an energy market that is priced almost universally in US dollars clearly a weaker sterling. This is

U S dollars. Means that there is a bigger inflationary impulse and is part of the reasons you quote those longer and higher inflation figures the impact of a weak currency, but also labor shortages, which must filter through of course how much people are asking for wage increases. Act. Again, this is one of my frustrations with some of the economic commentary we get in the UK is the labor

shortages are not unique to the UK. You're also seeing labor shortage another part of the economy as a legacy of people reappraising their options, early retirees, people with long COVID. But what you do then is in the UK context, you ratchet on top of that a change of the migration regime what used to be known as third countries India, Pakistan, the Philippines, Nigeria and now a much bigger proportion of

the total net migration of the UK. Employers in the UK since the accession of the additional eight EU states in two thousand four have built up strong networks between the UK and poland UK Lithrough any part of these europe now have to pivot adjust to a different route

of migration. That takes time. That in the parlance of Brexit, what we've done is we put sand in the cogs of the economy that sam will eventually work through questions how much damage you do In the meantime, what are the two or three policies that the next Prime minister can put in place to try and mitigate some of those shocks if we're talking about economic shocks in terms

of household incomes. We we touched on this a little bit earlier, which is the specific targeted support for the bottom to three income cohorts, which isn't necessarily what we've heard about in the campaign, particularly from the nest Trust campaign, which is about tax cuts, particularly to corporations and national insurance. Well, there's a lot of people who will be a zero

beneficiary of those changes. They cost about thirty billion pounds, but actually the benefits will not be those people who will feel the biggest pinch this winter. So I would suggest from a you know, if you give you if you want three one would be to start with specific support for low income households. Second thing is I think we have to acknowledge that over the medium too long term this is only solved by energy independence energy security.

Now it may well be that the political pressure will become too much for the government not to broaden its windfall tax that's already introduced on all CEA oil and gas. If that is going to happen, what message are you sending to the domestic supply chain about ramping up capacity. Because one of the reasons I've been critical of the energy price cap, which has protected households, it disrupts the really important price signals that we get in markets, which

is not which is not a price cab like European style. Right, This is not how the French do it. They they cap the price. This is a soft pricing cab, yes, which actually beautifully segues into the third and final suggestion, which is what is the optimal if you like industrial structure for retail energy providers, because if you talk about

what France have done, they've affectively nationalized DDF. Are we going to out the back of this maintain a retail market where there is a diversified set of providers who it appears, at least to the consumer, that it's heads you win, tails we lose in the event of uncertainty on the future path of energy prices. When wholesale gas prices were as they were for a decade, fifty per firm, then you know company profit margins, retail energy profit marginers

will be pretty constant just to playing your margin. But in the event that it's gone four d five ten x times on the gas price, we're having potentially bailout specific industrial support. Does that suggest the starting structure of UK retail energy was fit for purpose? I think there are more questions and answers on that one of the moment. So you have two candidates that are trying to become prime minister, one as a former chancellor, the other is

Liz Truss. They're going around the country. Who are they talking to because it feels like they're really talking to the hundred and sixty thousand Conservative members that will vote for them. You are absolutely right, and I wrote recently about the difference between campaign economics and governing economics. At the moment, we are hearing the economics of campaigning and not campaigning for the votes of thirty forty million UK electured.

It's the hundred and sixty two hundred thousand Conservative members. Now we know the demographic characteristics. They are somewhat older than the average electorate, They're somewhat whiter than the average electorate. There's somewhat richer than the average electorate. That tells us

a little bit about their preferences. If you you look at you know the sort of demographic profiles and the political preferences of that group, which maybe why we're seeing, at least from the lizt Trust side, a lot of channeling of Margaret Thatcher, former UK Prime Minister in the nine eighties, who was very remains very popular, very potemic for that group. The flip side from Rashi sink you are seeing more conversations about or more statements of fiscal discipline.

The idea of we're also channeling actually something Margaret Thatcher's keener, which is a good housekeeping of the public finances, but as a result of actually generated quite a big gap in there sort of the scale of their fiscal plans, but also the rhetoric they're using. So let's focus on tax cuts. Liszt trust her big thing was as soon as I get in power, if I get into power, I cut taxes. She can hardly do a U turn on that. And so what does that mean for the

UK economy. We're an inflationary environment. This is the biggest headache for households, it's the biggest headache for the Bank of England. We're going into tax cuts. I mean, let's not beat about the bush on this, because I think there's been a lot of misinformation spread. Standard economics is that if you increase your budget deficit through either additional spending or cutting taxes, then that will be at the margin inflationary. It's not gonna be deflationary, it's not gonna neutral,

it's going to be inflationary. But it is also true that in the context of inflation that is likely to hit something of the order of thirteen percent in the UK by the end of the year. That will be you're not quite a rounding error. But the impact of thirty million pounds worth of tax thirty billion, where the tax cuts is going to be relatively small in the context of events that are going on three thousand miles to the east of us that are impacting wholesale energy prices.

So it is one of magnitudes. But there is no doubt that you are adding fuel, or be it a limited amount of fuel to what is already an inflationary fire. But that makes the life of the rich easier, but not necessarily the ones that are struggling the most with the cost of living. Well that certainly if you're looking at the type of tax cuts that are being proposed by the Trust campaign, let's be quite specific here. She is suggesting reversing the increase in national insurance contributions that

came in earlier in the year. That was quite a progressive You can argue whether it's a good or a bad thing, but unambiguously, more affluent households paid more than poorer households, and therefore if you reverse them, you do go on the reverse journey. And at this point, given the distributional impact of higher energy prices, do I think that is an appropriate tax cut? Um Personally, I think

it is poorly targeted. If you've got a finite amount of public resources you want to devote to supporting households through this period, I'm not sure i'd pick that National insurance increases the want to reverse let's trust gets in. What's her biggest challenge economically in the next four eight hours. How is she going to support UK household incomes through this winter? How targeted is that going to be? And probably the biggest decision is she's got two broad options.

She can either give money directly to households, you support specific cohorts and indeed not support specific codes to govern is to choose. She has to make those choices in the first forty eight hours um. But then if she doesn't want to support household incomes, will she just cap the energy tariffs at a level below what the futures

market is pointing to effectively tear up the formula. If she were to do that, most UK retail energy companies in the UK would immediately become insolvent and therefore effectively you're talking about nationalization. So two very very different paths with very very different implications. She's going to decide which of those two broad paths she has to pick early on, and do you think she'd be prime Minister to the

people or a prime minister to the Conservatives. The problem, if you like, in answering that question about let's trust, is let's trust, and her opponents have used this and I'm not I'm not jumping on a political Bandmarcon. It's just a statement of fact. She was a Republican, she's now a monarchist. She was a lib Dem she's now a conservative. She was a remainer, she's now a leaver. Therefore,

it's quite difficult actually to answer your question. I'm not going to, sort of, if you like, an criticize her for that. I actually think it's a virtue. If you experience different stuff in life, you change your views. That's that's that's that's a good thing. I don't like ideal logues who don't change their view regardless of the evidence.

But in terms of being able to answer your question, it's quite difficult to know how pragmatic she will be when the electorate change from the aforementioned hundred sixty two thousand to trying to win a re election in late The problem is whichever choice she picks, she'll have to upset someone by promising if you like campaign economics, you want to be all things to all people, which, let's be honest, the current UK Prime Minister Boris Johnson made

a has made a career of doing. Eventually you'll disappoint someone because you have to make those decisions in government when you campaign. You don't have to make them when you are in government. You have to choose. And will she disappoint if you like her base who swept her to power by promising them stuff on Brexit, on tax cuts which the realities of office may may make it very difficult to achieve. I guess that the economists and the city no, she soon act better because he was

in charge of finances for this country. Is that what he will be as prime minister? Will he put the same policies in place? He's been quite public and it's no secret I think to any of your listeners that him and the current ime Minister Boris Johnson did not see eye to eye on the economic path and therefore this wasn't I feel like a pure economic strategy of Richie Sunk. This was always as it was in the

latter days of Gordon Brown and Tony Blair. It was a compromise which avoided the two hit it and punching each other. I don't think it ever came to that, but at least metaphorically punching each other. And therefore we don't necessarily get a read from his period in office as a Chancellor how he would be as Prime minister. Having said that, I do think his fiscal conservatism small c is genuine. He does worry about debt, he does

worry about sustainable finances. He is quite from everyone who's worked with him, people I have a lot of respect for saying he's very, very diligent. I think it is that diligence and that work ethic that is, from my perspective, was trying to understand his economics the most appealing because it's likely therefore to be a consistent and logical So it is up to the Prime minister really to set the economic targets or the economic trend or a really be you know, at the end of the day, the

Chancellor and their advisors. Well, I think you're alluding to a very interesting point, which is who will be the chancellor under either Liz Trust or Rishi sink Um. But I think the smart money is on current Energy Secretary Quasi Quarte being the Chancellor for Trust. For trust and what we know about quasi quarteng is he co authored with Donic rab and Liz Trust Britannia Unchained, which had a very different vision for the UK economy than the

current UK economy. Will that crystallize in the stuff that's coming out of the Treasury or will he be selected because this trust thinks as Prime Minister, she wants a

treasury who are lockstep with what she's setting out. There's a very different challenge actually for Rishi Sink, which was a challenge that Alisa Darling faced when he took over as Chancellor from Gordon Brown, is if the permer Chancellor, who knows the Treasury inside out then moves into number ten, you can't get much past someone who might want to sort of continue to take quite a detailed look at

the economic brief. I think the reality is whoever they surround themselves by, they will be impacted by events that even sat here now with the if you like the foresight of what is to come in terms of the economic slowdown, the economic pressures, it will be shaped by events that none of us can predict and What you therefore look for is someone who has the intellectual rigor consistency to appraise those options in real time and make bold,

evidence lead decisions. And that's what you would want to see from the advisory base, rather than necessarily a makeup that has preconceived ideological attachments. Does the city and do bankers have a favorite candidate? Oh, to the degree that I can ever speak for the city, that anybody can ever speak for the city, I think, Um, there is probably a slight preference for Rishi Sunak, but I wouldn't say it was overwhelming. What are you doing for lunch?

Last time the podcast crashed a working lunch you had at Sweeting? You remember that you're like our first guest presenter at Sweeting. I do, and it was it was a brilliant way to end that lunch to come and chat to you guys. You ran away. I didn't run away. I tried to run away because then you know, UM, no a client lunch which I'm very much looking putty because there is so much for UK focus. Is there's a small MidCap UK investor who is looking at the

UK situation. And we've talked about this for years. Franc which is since the Brexit vote, UK assets have been at a considerable discount. Global investors have taken a dim view of politics and economics in the UK, and this individual in question I'm lunching with today has a conviction that there's still and its conviction I share the UK still has some great companies, some great intellectual property there

at attractive valuations. But actually, and if you're just going to encompass all we've just chatted about in the last twenty minutes half an hour, it is if that can just be put together with some stable governance. Gosh, I was one thing I would agree with the trust campaign is the UK's best years could still be in front of her. So the business lunch is back. It is with a vengeance, even in August. Definitely, Simon French, thank you so much. It's been a huge pleasure. Thank you Franz.

Thanks for listening to this week's in the City. We'll be back next week with a look at the London housing market for the ultra rich. But in the meantime, if you like our show, please head on over to Apple Podcasts or wherever you listen to podcasts and rate, review and subscribe. This episode was hosted by Me franc I Laqua, with a small appearance by ME David Harritt. It was produced by Summer Sadi and special thanks to Simon French