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Welcome to Merrin Doalgs Money. The podcast is which people who know the markets explain the markets. I am Maren Thumbset Web and this week I'm speaking with Andy Haldane, former chief economist at the Bank of England. Andy, Welcome to Merrin Talks Money, Marin.
It's wonderful as ever to be joining you.
Well, the UK knocks around us that are number six in the world in terms of GDP as a whole, go down to GDP per capita GDP per head and we're actually knocking around twenty six twenty seven, which I think is something of.
A shock for most prints. We're poor, We're not getting any richer. Our economy is a mess even our housing market is a mess up. I find it quite hard to find those optimistic phones in my body right now.
And you know, even as we are speaking. We're speaking by the way, on Tuesday the twenty first, just as I was waiting Andy for you to come on, I was having it look at what was going on in the stock market, and I see that chrish Nicholson is down thirty nine percent in a matter of minutes on a profit warning I mean, quite a bad profit warning, but nonetheless just another example to me of the extraordinary fragility of everything in the UK at the moment. So listen,
I'll tell you what. Andy, Let's start with some of those miserys. Got to take this seriously. No, let's start with the UK's fiscal situation. We redo have a very major problem there and it makes it really hard for us to start doing the things that we need to do. And the classic problem that, of course, is defense. We know we have to spend more money on first, but we simply don't have the money. A fiscal situation is just too tis So let's start.
There.
Is there any hope that you can find in the UK's fiscal situation?
There's up you hope, and I fear you punctured my balloon before I even inflirted it. There, right, the let's start. Listen, The starting is not as anyone would wish. Growth is too low, inflation is too high, and the physical position is far too precarious. That is why when the world sneezes, the UK catches the cold. And this year has been another example of that being the case. We are a high beta leveraged bet on the global economy this year
has demonstrated that as if we needed proof. Nonetheless, and all matters fiscal I agree with you. We are in straightened physcal times. You know, our debt stock relative to national income has traveled over the course of this century. We have yet to run a fyscal surplus this century. We're shelling out now North vendera billion pounds each year just in interest payments. So I would say there is very little, if any physical space left unless some hard
choices are made about cutting spending. I think we are taxed out as a nation. We are maxed out when it comes to borrowing. So the knife must fall on public spending. If we are to chusele out some more room for defense spending, which surely we must, which surely we must in these insecure times.
There is time levin kunter intruct you before on for the butt, which I'm really looking forward to, really looking forward to the butt. But you know, historically, when you look at UK tax to GDP numbers, you know, all countries and one of the odd things about countries and tax right, all countries seem to have their own limit
when it comes to the percentage of GDP. They're prepared to stump up in tax and historically for the for the UK it's knocked around thirty six thirty seven percent, and we're now heading for over forty percent, which seems unsustainable anyway.
Yes, yes, I think we are. I mean even the Office for Budget Responsibility in its report around the spring statement a few weeks ago pretty much set as much, albeit in slightly closeted terms, that we are reaching the point where any further rises in the tax rate risks shrinking revenues I buy, disincentivizing, whether it's working or or selling a business or wherever it might be.
So we may even be there already. We don't know. We'll only be able to see over the next couple of years whether we've already raised rates to the point in the left at cut for everyone goes, well, do you know what I.
Want to exactly? So you know wherever precisely we are certainly near to that point. So the name of the game, if we are to cut ourselves, some fiscal slack will be about spending.
Cuts and so where do those cuts spend? Again? Where do those cuts come again? Before we get to the butt which, as I say, I'm looking forward to where would those in your mind? Where would they come? I'm one of the numbers that I give looking at and some incredulity is the fact that welfare spending is now the same slightly higher as the total income tax take. Now we can we talk about well welfare is mending
or including pensions. But nonetheless, if you say to a young person to know, by the way, every penny, every penny that you pay an income tax is going in welfare, is going on some kind of benefits spend that hurts.
That hurts well, I mean, the only two places where you find yourself some real money is either the NHS budget or the welfare and pensions budget. And to be clear, so the welfare and pensions in total is north about a third of a trillion pounds per year, which.
Three hundred and thirty something brilliant.
Yeah, of which actually the larger part goes on pensions rather than welfare. Indeed, it's the pensions bit that's been rising more rapidly that rather than the welfare bit. So I would say, on the assumption, which is not an unreasonable assumption, that the NHS has some special status, and indeed, giving our health challenges, it'd be hard to take the knife to that anytime soon. I think then the acts
would need to fall. If you're finding yourself a decent chunk of change, I'm talking you know, real money, tens of billions. You know, if we are on defense, if we're shy of two and a half percent of GDP, you need to get said of three and al percent of GDP. That's an extra one percent of GDP around thirty billion per year. You're not getting that out of
any budget other than NHS or wealth pension. So I think, looking seriously at the triple lock, looking seriously at the allocation of welfare spending, is I think a cineque non as getting to a more defensible position.
On defense, There's been talk about war bonds, defense bonds, launching a specific class of guilt for defense. That make any sense to you? I mean, I look at that and I think when I tell you how that it could really work, and it's been suggested by a few people it would really work if you said, you know what, we're going to lot to use new bonds specifically with defense.
And we don't normally hypothecate in the UK, but you know, why not at this point if you made those defense guilts free of inheritance tax.
So on this two things. One. I think that is an avenue, but I wouldn't pursue it as an alternative to doing something on spending. I think the market's tolerance for this the credibility of the UK's physical position. First thing is buttressing, and buttressing means this government demonstrating it has the ability to make difficult, politically difficult choices around spending. I think without that any further borrowing risks of raspberry from the markets subject to that, do I think there's
something that could be separately labeled and separately marketed. I think probably yes. Would that require a tax suiteener either inheritance or maybe even a spart of the temporary extension of the iSER allowance? Yes, I think as you know, and have you spoken about extensively, I think you're right to speak about it. We have north of two trillion pounds parked up in cash earning negative real returns. Bringing some of that into the equation in a sort of
patriot bond, a war bond. I think that could be quite good marketing, quite good fiscal arithmetic. So yes, I think that ought to be an option on the table, but as a compliment to rather than substitute four doing something on spend.
Okay, and I suppose none of this would matter, None of this would matter at all if the economy was grown properly. I mean one of the this is the core problem. This is the core problem. If the economy was growing properly, you know, in real terms, by two four percent a year, if GDP PAD capital was growing at any particular speed, then we wouldn't particularly have to worry about cutting spending because these problems take care of themselves.
But it's just not it's just not. So this is where we come to your butt, which is going to be just not yet.
And you're right, I mean, growth is the great redeemer for debt problems, probably debt forms in particular. You grow your way rather than digging your way out of a debt problem. So that that AP's the anti honors making good on the afterd claim from politicians over many decades now, Marin, who have had growth as their number one objects. Here's
the but here's the good news. Right, if you were a Martian or any other planet actually alien, looking at not the public balance sheet but the private balance sheet of the UK, you would say in aggregate, it is in rude health. Okay, I mentioned those fiscal deficits that
have been running for the whole century. Actually, both households and companies in the UK are running financial surpluses and if you look at their balance sheet fundamentals, levels of debt both corporate and household are at modest levels by historical standards. So in terms of the balance sheet fundamentals of UK POC, we are poised for liftoff. There is plenty of fuel in the tank, plenty of ammunition there to be fired. Balance sheets are poised to be put
to work investment spending and the like. So the you know, this is one source of optimism. If the private balance sheet was broken as well as the public balance sheet, that would be a counsel despair. As it is, private balance sheets are in pretty good shape. Not everywhere and for every company or household, but in general they are.
Well, that's nice, but you have to but you have to then look at that and say find that it might be a reason why people aren't spending and investing and something has to change to incentivize them to do so. And a very high tax, very high regulation, very politically uncertain environment makes that difficult.
It does, it does. So what's getting in the way, you know, why are they saving rather than spending their balance sheet? Why are they not putting it to work? I mean, part of it's the way of the world. Let's be honest. The world is a noisy and certain place, and I totally get the desire to squirrel away some money for a rainy day. And let's be honest, this year, once again has brought a whole sequence of eight weeks of rainy days since the Ronian crisis struck. So some
of that is just the way of the world. But you're right, a chunk of it is domestically induced self harm, if you like, which is uncertainty around policy, which has been very acute over the past few years. Mean, both Budget twenty four and Budget twenty five took the legs from beneath the animal spirits of companies and households, either because a fearfulness of tax rises or in some cases because of a short tax rises. So we need government and policy to sign the hippocratic of and to genuinely
do no harm. I think the Spring Statement did a reasonable job on that actually, in that it was a It was a much smaller no news event, and that was better than some of its predecessors. But more than that the government. This government and previous ones need to get serious about providing the enabling environment for spending to take place, for animal spirits to be revivified, for balance sheets to be put back to work. We have a
UI to discuss this previously. We have a crazy tax system in this country, not just the level of rights, which we've discussed, but it's complexity twenty one thousand pages, among if not the longest in the world. Taking a chainsaw or a pickax to that rather than the pruning shears is absolutely what was needed. And what's true of
tax is also true of regulation. Again, it used to be a regulative having's sake, you know, But nonetheless, the individually well intended actions of now more than one hundred regulators in the UK, noneth less, can collectively add up to a quagmire. And that is where we find ourselves.
And on both regulation, to a lesser extent, on tax, this government, like its predecessors, has talked big and acted small, and that is that will need to change if we are to have companies and households put their balance sheets back to work.
Yeah, I mean, I think you're absolutely right that in many cases it's often less the rate of tax, particularly when it comes to corporate activity. And you know, starting a small business for example, or anything like that, you know, you don't tend to think about the actual rate of tax when you do that. What you do think about is the admin hurdles, the admin and regulatory hurdles, and
these are so difficult. And we know, you know, in the great Taxi billionaires saga that we hear all the time, we know that actually the majority of the tax gap comes from corporates, from small businesses, and a lot of that will maybe some of it's celeberate, but a lot of it is just I can't do this admin. It's is just too hard.
As someone who's their own small business for years ago, I've felt the full force of that, and I've been absolutely you know, I heard the howls of derision. But now having sampled this myself, I'm completely with small business owners and thinking this is an endless and rising tide of compliance, which, again you know, individually well intentioned, but the collective consequence I think is an overburdened engine of the economy because of course corporates are the engine of the economy.
Yes, And it's an interesting, utter failure of the public sector to understand the extent of the friction that is involved. I mean, we always say when it comes to you right about investing well by investing in personal finance a lot. And one of the things that prevents people investing prevents them sorting out their personal finance. It's friction. It's admin. Literally, there is nothing in the world that people hate more more, I guess, But in general admins admin is everybody's personal.
Health, yes, and an overly complex admin of that the users for every report. So there's lots that could be done. I mean the good news is because there's a risk there of is disappearing down a plocol Again, I blame you fixable with the political will and a degree of political skill. These are fixable problems. They are not intractable.
They're difficult, but they're not intractable problems to solve. And in the spirit of adding in a further dose of optimism, whisper it quietly, but UKPLC might be the most innovative nation on the planet. Absolutely. Look at the pipeline of venture capital backed businesses that are growing like topsy and we rank you know, this will be businesses you know,
north of twenty five million a year revenue. So not not yet unicorns, not yet with wings, but nonetheless the cults and thoroughbreds that are rising at real pace, the businesses we know are the wellspring of job creation, of value creation on our productivity generation. If you rank the UK on the absolute number of those cults and thoroughbreds, short of unicorns, but nonetheless with the potential to grow wings, we rank third behind the US and China in numbers,
not a per capita basis. Just guess what a lot more people in China and the US and there are the UK. We are towards the top of the pops. So when it comes to potential scale ups the unicorns prospectively of tomorrow, we are an innovation nation. We are smashing the lights out relative to the rest of Europe and arguably even relative to the US. The key metron is, of course, to nurture those cults and thoroughbreds, to enable them to grow the weeks.
Because now this is slightly the problem, isn't it that we can we can be first in terms of exciting companies and we're still twenty seventh in terms of GDPKO capita. How do we keep those companies here? I mean, you know, twenty years ago, companies of that size that you're talking about WUD already have listed and the wealth would already have been shared around. That's not the case now. So how do we keep those companies here? How do we
encourage more of them? And crucially also from from our point of view, how do we get those companies to list and make the UK stock market part of the equation.
Yeah, yeah, so lots in there. Let me pick off some bits of them. So obviously, the better the enabling environment, all the stuff you mentioned earlier on, the more likely it is that they will grow, the more likely is that they will stay. So that's a kind of prerequisite I think for growing our own given that the sea corn is plentiful and strong. When we look at you know, the UK scale up problem is not a new problem. It just happens that we've got a particularly good crop
just at the moment. The obstacles are partly financial and looking for ways of you're widening that pool of BC or PE or indeed public listing of companies. Smoothing the passage of that I think is really Importantn't the engine of that Again, there's not surprised to anyone needs to be our own patient capital investors, pension funds, insurance companies
investing more in UKPLC. We are the only pension fund on the planet that does not have a home bias towards our own companies and that is ridiculous and that needs to change, and that.
Then provides mandate that change. Sorry, would you mandate that change?
No, I wouldn't mandate it, but I would, you know, I would expedite our facilitation of that by you know, that means looking at regulation. You know, is what used to be called SOMCT what's now called somcy UK. Is that getting in the way of us putting those moneys to work? Is it the risk of version of pension fund trustees that's getting the work in the way of
putting those moneies to work? Can we provide more tax effient wrappers to enable people to put their money towards UK companies rather overseas ones.
I would, oh, yes, we can do that, We should do that.
I would work all of these channels, to be honest, because as you know, this is many trillions of pounds parked up in either overseas equities or in cash, none of which which is starving UKPLC at the financial fuel it needs and all those celts and Thoroughbreds to grow into unicorns. So parlus is financial and fixable because here's
the aerony. The money is there. The money is there, right, But the plumbing to get that money into our businesses, which is the same thing as saying growth tomorrow, isn't there. So that's a replumbing problem. We can solve plumbing problems. We can solve let it go well with the political will be going to solve plumbing problems.
It's the most.
Important there political will, I'd be far less optimistic. But the money is that it's even here at home. It's here actually here at home as well. So we have the businesses, we have the money to finance the businesses, We replumb the system, and hey, presto, you get business led growth, which of course is the only source growth of growth. You can have that sustainable over the longer term.
So these are the reasons if you peer in the balance sheet fundamentals, we have the businesses to enable the growth. We have the money to enable the businesses to grow. This is a plumbing problem that's eminently tractable, merrior In and if we did that, we could be smashing the lights out, not just at a startup at Scaler, but at gdpeop Ahead and all the rest. So this is my frustration but also my excitement about what's possible.
And you let me ask you about your one of your other areas of expertise. Interest rates. Now, there was an expectation before the war in Iran that rates would gradually be falling and that that would be good for all sorts of reasons, but that no longer looks like it's very likely. Where do you see where it's going from here? And lastly, i'm asking asking a lot of the property market here.
Yeah, oh very good. The well look my like everyone else, My story reputation at the start of this year was that inflationing pressures were abating, and they really were about it. They've been abating for the better part of six to nine months by the start of this year. And if anything, I'd been a bit critical of my former employers, the Bank of England, for not lurering rates faster than they had, which I thought was justifiable, given that inflationary pressures had
peaked out and were falling. Now the world has changed, and we saw financial markets run very quickly to the side of the boat with an expectation of now rate rises, not in the UK, but in the US and the EU area as well. That looks to me like a very significant overcorrection. Why do I say that. I suspect lots of people were repeating the Ukraine Russia playbook and this is not that this differs from that into very fundamental and significant respects. First, the scale of shock, at
least so far tempting for in saying this. The scalsure so far is nothing like on the same scale. You know, that was a shock that the cost of living of north of ten percent in the UK at current energy prices. We're being short to possibly thing of two or three percent, So much smaller shock. What's more, that smaller shock to costs is breaking on an economy that's very different, a labor market that's very different than back in twenty one
twenty two. Back then we had resurgent demand coming up against constricted supply post COVID, the results of which was an obvious bottleneck and we had cost push pressures, much larger ones alongside demand pull pressures, and the result was inflation. This time we do not have those frictions. Demand this soggy. The labor market is soggy. Firms do not have pricing power,
workers do not have pricing power. The output's impetus to inflation, therefore will be significantly less unless the war is a forever war. And as a result, I'd be surprised if the if the Bank and the Fed were to raise rates this year, if energy prices remain at of close to where they are right now, this is the time for sitting gleefully on your hands and seeing.
How the war, what happens, pans out.
And that would be you know, that would be the mainstream economists view, and very far as you know from being a mainstream economists occasion, my tribe might even have.
Got it right, very very unusual. What about house prices, obviously, there's you know, we've been looking at house prices quite a lot on this podcast, and we're fascinated by the real terms decline that we've seen so far across the UK and particularly in London, and that has positives and
that it makes houses more affordable. But of course with mortgage rates slightly higher than they were, however affordable, they may look in up so lout terms, this will become less affordable as mortgage rates rise.
Yeah, yeah, well, I mean I suspect a bit like for interest rates, we might find for a period the housing market and tracking sideways in the I mean, it's not just about rates. So of course we've seen many mortgage products just appearing off the markets and fixed rates picking up. But this is coming alongside and on top
of course of concerns about jobs. We've had the jobs market now weakening, well actually for a couple of years it's been weakening, but what initially showed up has reduced vacancy, it's has lately been showing up has increased and employment better report just yesterday suggesting an employment might pick up to closer to six percent than to five percent later this year. That might be overdone, but nonetheless, fearfulness of unemployment there's a good reason to hold off major purchases.
Houses across the consummate major purchase. So I'd be surprised if anytime soon whether we see a turn in that market. Nonetheless, if this wall were behind us, if there were a stronger expectation of rates being flat or perhaps even falling if people's inflation adjusted pay keeps on rising. And let's bear in mind it has risen for the last two years, and maybe at the second half of the year we
could see a degree of perkiness. But nonetheless I'd be surprised that this is a year of which the housing market turns decisively.
Yeah, as was when I look at the afordability measures. One of the things that I think is that the people who would normally be buying houses now maybe the first time buyers, are also the ones who have the nine percentage points extra effective income text to paying their student learns. And that's the sort of new dynamic in the housing market that might make it drag rather more than you might have expected previously looking at the affordability numbers completely.
I mean, at a time when the market I mentioned the jobs market with soggy for young people is dripping wet, it isn't it. And that is true both of those if you like, without a degree, and usually for those with a degree as well. The rates of graduate unemployment are sky high, and that's uncomfortable against a backdrop of them carrying around.
Yeah, that neterly, neatly onto AI. And when I look at the numbers for the young today and how difficulties for them to get jobs, and everyone says, oh, well, as AI taking all the extry jobs, AI taking the graduate jobs, etc. I suspect that's not really true, and in fact there aren't any graduate jobs because that parts of the ukare effectively in recession and people simply aren't hiring because the environment isn't good enough for it. And we look at it and we're casting around for a reason.
But this may just be an entirely normal employment recession of the type that we've seen many times before, and certainly when I graduated there were literally no jobs available.
Yeah. I mean the evidence we have so far on that, which is trying to tease a part if you like, cyclical unemployment or in some cases not so much unemployment but unwillingness to post vacancies from the structural AI component.
Can't find much of the second so far. Now, I think if you are a god fearing CEO, it's much easier to tell a story about AI as to why you're chopping vacancies or indeed heads than it is because your business is struggling, So I suspect it's been used as a defensive shield for a great many businesses when the truth is rather more mundane, which is about sluggish sales and elevated costs of course for pretty much everything, including people with National minimum wage and Moment Rights Bill
and all the all the rest of it. So actually, you know, in the spirit of a further optimism, I am optimistic, abet and a steady that the day I need not be the great job slayer that people worry about. If we play our cards.
Right, if we play our cards right, how do we play our cards right with a technology that we know so well we're know a lot about it, but no understand very little about how it will permit the economy going forward?
Really, don't you listen to the range of views on it, and we did. I don't know if you listened to a great podcast the other day about Lemms and how they've pretty much hit their ceiling already there's nothing more to come there. And then, of course you have the other approaches into attempting to find an AGI, which may take a little longer but are fascinating. So it's very hard to even understand how this will develop, let alone how it might embed itself in our economy.
No, that's all true. And you know, anyone who can say with confidence they know what the jobs of the death tomorrow might be is that's a fanciful notion. I think in this environment, nonetheless, are we equipping our young people, and indeed not the young ones with the sets of agile, malleable fungible capabilities as distinct from specific skills, to enable them to ride the wraps of whatever the new techology waves. So no, we are not. And that's what I'm talking about.
You know, playing our cards right means equipping our young people with those agile fungible capabilities.
What do you think they are? You're sending a kids to university today, and this is the question we get asked all the time, so geared to answer it. You're sending a kids to university today, what are you telling them to study?
Well, I'm not sure what's the university? I think I think that the neat rate for graduates is now higher than for A level students. So the big question about whether that is the right thing, certainly the word it's been done historically. Do I want a block of three years studying something that is I've half thought about on my acast form that that's less clear to me. What are the sets of capabilities that will best enable me
to surf the waves of technology. Well, we have job experience, I would say, uh, you know that, Penny, I think is now dropping. But the skills you accrete in the world of work, including you know how to work as a team, how to how to negotiate. Yeah, those what are sometimes called softer skills personal skills. Social skills are the ones that are least likely quickly to replaced by machine and the self. Same would be true of certain
classes of creative skills. You know, so creativity. The welcoming of creativity is moving across disciplines, and our current degree courses tend to be confined within disciplines. Yeah, yeah, so I think we could even though we know the job, we can guess what the capabilities that we needed, and then ask ourselves is our schooling and further on higher education system equipping kids with those capabilities. The answer is
a resolute no to that question currently, merin. And that would give me cause for pause, couldn't Should it be fixed?
Yes, everything will be fixed. This is great again brings us back to political will and finding the political space to do all these things. If you were going back to university now as a not a retiree, obviously an order person, what would you study?
Well, you know what I am at the moment, as you know, I am intrigued about how we make lifelong learning and reality. So something in that sort of education and meets entrepreneurship space. I'm not sure the degree course would be. Maybe it doesn't exist.
Make your own, make your own.
There are degrees in uh entrepreneurship, there are degrees in business, there are degrees in education. But how we get learning and earning to coexist on a lifelong basis I think is among the challenges of our time. If there exists a degree for doing that right now, maybe we should create one. A few years ago a friend of mine up in Manchester created a course in creativity because, of course,
contrard iss of popular belief, you can teach creativity. We know quite a lot about the creative process and what is needed, and that's the level of abstract thinking I think we need. And so something maybe around the fusion of work, business and learning, because I think that's where the action's.
At thank you, And is there anything that we haven't covered, anything that is super important that neither of us have mentioned and we should before we care.
Well the anything I had to say, we haven't touched upon politics, which is an usual viewing at me, and I've got no desire to deep dive into politics beyond saying this, Among the fiscal free solutions to the UK's malaise is by empowering local leaders. We are the most centralized country on the planet and that is not serving as well. Ultimately, if the name of the game is growth, growth comes from the bottom up and comes from empowering
local leaders. But I don't just mean government, I mean businesses, universities, civil society in local places too. So among the fiscal free measures I would take were I in power, thank Lord, I'm not, I would do DIVA properly, because currently it's been doing in a half baked and half hearted fashion, and we will not get growth until we properly empower local leaders, plural and local citizens, and which some some way short of that.
Arin. Thank you, Andy, and thank you for your optimism you've given us today. I think we and our listeners we appreciate that. Don't get it often.
Great is ever to chat to you Mary in conversation to be continued. But definitely, like I say, I like flipping the aphorism right, which is not where there's a will, there's a way, but where there's a way, there's a will. And if we can define the way, we can summon the collective will, those animal spirits to get our economy going and growing. I'm quite doimistic about that.
Thanks for listening to this week's Marrin Talks Money. This episode was hosted by Me Marren zumsep Web. It was produced by Someersadi and Moses, and sound designed by Blake Maples and Aaron Casper. If you like our show, rate to review and subscribe wherever you listen to podcasts, and keep sending your questions or comments The Merrin Money at Bloomberg dot net.
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