Breaking the Cycle: Report launch with Shadow Chancellor Mel Stride

Join us for the launch of ‘Breaking the Cycle’, a new report by economist and CPS Research Fellow Dr Gerard Lyons.

The paper sets out a comprehensive economic strategy to help Britain escape from a mutually reinforcing cycle of weak growth, rising debt and higher taxes.

The event will begin with a short speech from Shadow Chancellor Sir Mel Stride MP followed by a presentation of the report’s key findings and recommendations by Dr Gerard Lyons and will end with a Q&A chaired by CPS Director Robert Colvile.

in the autumn of last year, a headroom of around 10 billion. All of those uh that was blown and several billion more. It was repaired in the spring by the chancellor and it’s almost certain that that will have been blown all over again and considerably more this time. And so we go through the coming period, the long period as uh Robert puts it, up to this next budget with a great sense of uncertainty and fear amongst business that the these further tax increases are going to do further uh damage to our economy. There are huge long-term pressures that we face as a country. defense America decoupling geopolitically to some degree from European defense is going to need a greater commitment to defense spending and every 1% of GDP that we spend on defense is about 25 billion pounds there huge pressures coming that way we also know that we have an aging population and that is going to mean more pressures on uh our health service and in the 1960 for example we spent three times as much on defense as we did on health that has been inverted today and yet the peace dividend is now over and yet the pressures through an elderly population remain and will be growing. Uh pensions clearly another huge pressure welfare particular particularly economic inactivity and of course also bearing down as a result of the size of our debt is those servicing costs that I’ve already referred to. But I think what the report is saying is that if we can get growth going, if we can have that radical prescription perhaps like we did and discovered back in the 70s to transform our economy, then there is a way through our economy. If it had just been growing at the trend rate up to the great uh global financial crisis of 2008, if it continued at that rate, it would be 25% bigger than it is today. Our productivity is 20% lower uh broadly than the United States, France uh and Germany. And if we could just double the trend rate of growth that we’ve seen since 2008, all those fiscal risk and sustainability graphs that the OBR produces showing uh debt to GDP spiraling up to hundreds of percent totally uh unsustainable levels would actually be completely flattened. So growth per capita is central uh to coming through this period. The report looks at three pillars. Uh the first is fiscal uh responsibility. One message I want to land very clearly today as I did with the RSA at a speech I gave a couple of months ago uh is that we made mistakes when we were in office. We did at the back end of 2022 when we had unfunded tax commitments of the order of tens of billions into a fairly inflationary uh marketplace and economy tight labor markets without the OBRs being involved and so on. We will never ever again as a party do anything other than clearly explain how any fiscal measures we bring forward are to be funded unlike this government that has fiddled its fiscal rules allowing them to borrow those huge amounts that I referred to. We need to look at the size of the state. How is it that before COVID we had about a third of a million civil servants and yet today that figure is up over half a million? That does not compute and it tells you a great deal about the bloated nature of our state. We have to win a public argument that improving public services is about reform. It is not simply about putting ever greater sums of money into those public services. And I was very pleased to see that when it came to taxes that the report is leaning firmly into lower taxes. I spent a little bit of time earlier this week in Nashville in the states in the home of Arthur Lafer discussing some of the issues around decreasing taxes and yet increasing the yield on those taxes. And I think uh Gerard you refer to the Manhattan skyline of different marginal tax rates, the complexity that we have across the uh tax uh territory and very good to see you coming down very firmly against wealth taxes. These taxes do not work. And what we’re seeing in our country at the moment is between 10 and 15,000 high netw worth individuals that have left. Now, socialists will say, “Good riddance. Why do we need them?” It will take about a third of a million people on average earnings to cover the tax that have walked out the door as a consequence of this government’s ruinous policies. Those policies impoverish all of us. On the supply side, we do need to get public investment up. We need to get private investment up. We can talk about that. Planning is going to be absolutely critical. Building more houses, which is just not solely about intergenerational fairness and social justice. It has an economic imperative. If we are to have a thriving economy, we have to have places for people to live that are affordable where the work itself is. Railways, trains, roads, all of that stuff. Infrastructure. Why is it that the Chinese can build the Beijing to um Shanghai railway in just three years and yet HS2 lingers on forever with its 120 million pound back tunnel to boot. Energy costs absolutely essential. You cannot run an efficient uh competitive economy if you’re running electricity costs five to seven times the Chinese, five times the Americans and the Canadians, 50% more than the French and the Germans as well. So there’s a huge amount that we need to do particularly with the AI revolution coming along, the need for uh energy hungry uh data uh centers uh in the Republic of Ireland about 20% of their electricity output goes solely into data centers. that is the scale of the demand that we will be seeing coming down the line in our country. And then finally uh the uh financial and monetary stability arguments that are put in the report I think are very interesting and certainly worthy of debate the importance of keeping inflation down. important questions around uh the central bank’s uh quantitive tightening this whole issue about what we do with reserves that banks are holding with the central bank whether we should have a tiered system or make changes there and important points about regulation we become far too riskaverse far too anti-growth you look at the FCA for example the consumer duty I think has got out of balance uh with the ability for those functioning in that sector to go out and generate wealth employment uh and in turn of course pay taxes. So what I think we need is we need to be fiscally responsible but we need to be radical. We need what I would call responsible radicalism and I think that’s at the heart of what this report is about and I very much welcome it. Thank you. Thank you so much. And now Joe and I should say by the way the report is available to download from the CPS website. We were g given the economic circumstances, we we were updating until um uh and until right at the last minute, so um we’re not able to print copies out um in time, but um yes, it is very much worth reading. I will. And now Gerard will well Mel’s already summarized the findings, but Gerard will thank you Rob. Thank you, Shadow Chancellor. Well, good morning everyone. Hope you’re all well. Um comments this morning fall into three parts which mirror the reports. First, the current state of play of the economy. Second, the three key foundations that underpin what I think should be the principles for sound future economic growth. And then third, tying it to some of the current key hot political and policy topics. But first, the current state of play. Um, breaking the cycle is the deliberate choice for the title of this report because if we continue on current trends, the economy will continue to grow slowly, debt will continue to rise, taxes will continue to increase, and basically living standards will stagnate and the UK will become less attractive in which to invest. It’s also an important title for the report because often I find when I come across some politicians that they tell me, we can’t do that. the short-term costs are too high or sometimes they have enthusiasm to do something else that’s politically attractive. The reality is that something has to change. Now, admittedly, when one looks at the UK, indeed any country in Western Europe in particular, we’ve been hit hard by two major shocks in the last 15 years or so. Naturally, the 2008 crisis and the pandemic. That being said, that is no substitute for the policy environment that subsequently followed. But the 2008 crisis is worth stressing. When one talks about trend rates of growth, people tend to often close their eyes, etc. But let’s think of it this way. A 21-year-old before 2008 would seen the economy double in size by the time they were 47. They would have seen living standards accordingly increase. A 21-year-old now would have to wait until they were 64 until they saw the economy double in size in real terms, taken out of inflation. That’s a significant shift. Britain has become unfortunately a low growth, low productivity, low-wage economy. At the same time, because of policy responses, we’ve become a high spend, high tax, high debt economy. Something has to change. The underlying thesis of this report is that we need to save, invest, and compete. And we must focus on GDP per head. It’s not just economic growth as measured by GDP, but given the size of the population increase, we need to actually have all policy gear to achieving the same objective. Just to state what has happened to GDP per head or GDP per capita, um it grew by just under 2% in the 90s, 1.1% in the 2000s, 1.3% 2010s, and 0.3% since the pandemic. Now, it’s not all bad. We are the sixth biggest economy in the world. In terms of GDP per head, depending whether one includes territories or different measures, we’re in the 20s, low 20s, but um we’re still significant. Um we have worldclass expertise in different sectors, whether it’s the financial sector, the creative sector, and worldclass companies as well. But it’s important, and as we stress in the report, we need to change our terms of reference. The global economy is seeing a significant shift in the balance of power. You almost need to turn the atlas around and look at it with America on the right and South Asia, India, Bangladesh, Sri Lanka, Pakistan on the left. Indo-Pacific region is going to be the future center of economic growth. Unfortunately, Western Europe is the slow growth region. We need to compete not only with our neighbors, but we need to compete internationally as well. Unfortunately, however, to conclude the first part, we are still a very imbalanced economy. Imbalanced by place, by people, by productivity, and also in eco terms as well. By place, London versus the rest, coastal versus inland, urban versus rural. By people, old versus young, homeowners versus renters, by productivity, skilled versus unskilled workers. and also workers now versus those who are idle. In economic terms, it’s the budget deficit and the current account deficit. Britain, like France, are the two G7 countries more dependent on international investors to buy our debt. So, not only do we need to actually address the issues, we need to actually keep the financial markets as well as the population at home on side. That leads on to the second part which is the key three underlying principles. The shadow chancellor touched on these. We need to actually not sequence these. We need to do them all if we can at the same time. Fiscal policy, supply side agenda and monetary stroke financial policy. On fiscal policy, the UK economy is heading for a debt trap. Debt trap is equivalent to sort of maxing out on your credit cards and not being able to pay the monthly interest rate payments. Once our debt goes above 100% of GDP, as it will by the turn of this decade, and if economic growth is less than the rate of interest we’re paying on the debt, which it will be, then we’re going to have to run to stand still. We would then have to run a budget, a primary budget surplus. After paying off your debt interests, we need to be in surplus. That’s a hard task. Very hard task. Particularly when the demands in the public sector are so intense and as the shadow chancellor touched on, defense and other spending is increasing or demands for that area certainly increasing. Britain has only run a budget surplus, never mind a primary budget surplus, seven times since 1969. couple of years with Roy Jenkins, three years with um Gordon Brown, although we did spend a lot on the shadow side, shall we say, and a couple of years with Nigel Lawson as well. But we need to actually fundamentally change. Now, public spending continues to rise. In the report, I say there’s no ideal level for where public spending should be as a share of GDP, but 45%, which is where we’re heading, is not where it should be. 35 to 40% used to be regarded by economists as a sensible level. In the Thatcher area, we got down to 35%. If we aimed for 35%, then even at the end of two parliaments for now, so not next election, the election after that, that would leave public spending at over 1.8 trillion in an economy that’s 5.25 trillion pounds in size. So even getting down to 35% still leads a pretty big public sector in terms of nominal terms. I’m not saying you cut public spending everywhere. Quite frankly if defense spending is going up hard power you need to in my mind increase soft power and diplomatic power. I find it personally crazy that we’re cutting the foreign office budget by onetenth at a time when you go across the world. Britain’s message needs to be sort of heard loud and clear. So it’s about being sensible in terms of where you spend and in the report I implicitly say you need to be curbing welfare spending and also curbing health spending which is maybe a surprise. Welfare dependency needs to fall. We need to tighten allegibility for indefinite leave to remain. We need to make other structural reforms. But to conclude the second part if you look at the policy options at the moment how do you get out of this situation when you are heading for a debt trap? There are six options. grow, reform, austerity, tax, borrow, inflate. Let’s rule out inflating the debt away that’s not credible in any way, shape, or form. Ideally, you you need to grow the economy and you need to reform public sector services using AI. Both of those take time. So, hence we’re back into the other three, tax, austerity, or let’s call it curbing public spending, borrow. Unfortunately, we saw austerity in areas that maybe did not necessitate austerity over the last 14- 15 years. We saw a lack of opportunity in terms of borrowing at very low interest rates or taking advantage of opportunity in 2012, 13, 2019. But ultimately, you need to keep spending under control. Tax plays a very important role. It’s not about cutting tax all the time at all costs. The most important immediate issue is tax simplification. The Manhattan skyline of taxes. That was a phrase used by Warrick Lightoot who used to advise a few chancellors. When you go across the tax spectrum, marginal tax rates go up. You need to simplify taxes. You also, in my mind, need to cut taxes like stamp duty. But over and above, you need to get the fiscal picture in shape before you start to contemplate reducing taxes. The second foundation is the supply side agenda focused on all the eyes investment, innovation, infrastructure and incentives. We know from economic theory what’s required to boost investment and to boost innovation. Let me just cite some of the things that economists generally would agree on. It’s always dangerous when economists agree, hasn’t he said, more finance and lending for firms, sound macro policies, a skilled workforce, a lack of bureaucracy, predictability, simplicity and low taxes, expectation of future demand and functioning and supportive infrastructure. The supply side agenda is not only important in its own right to boost growth. It’s often overlooked how important it is for future fiscal and monetary policy. By having an effective supply side agenda, you allow future fiscal policy to become more effective. It’s not only about reducing public spending, reducing debt, but you do need to have that fiscal lever when the economy hits shocks. At the same time, by boosting the supply side and boosting trend growth, you lower the future neutral re level of interest rates at which the Bank of England can set rates and keep inflation in check. And the third foundation is about low inflation, financial stability and the city. I would argue that here in Whitel and Westminster, people often don’t look enough at this area. I understand why. There’s a reluctance to talk about the bank and city institutions because it’s often felt that’s questioning their independence or their integrity. The independence is without doubt. What I’m arguing is that we need to challenge their competence and their credibility. Cheap money led to asset price inflation, led markets to not price properly for risk, led to a misallocation of capital, zombie firms remaining in business, growth companies not having access to capital, and it fed the cost of living crisis. So, we need to actually have credible monetary policy. We can talk about this in the Q&A, but also very importantly, the city needs to stand up and be accountable. It’s not only about having a competitive city. It’s also about the city actually helping drive domestic economic growth. We had the McMillan gap identified in 1931. It’s still there. In 2019, the Bank of England in a future of finance report acknowledged that there was a 22 billion pound gap facing small medium-sized enterprises and then did nothing about it. So the whole financial side needs to be addressed. Third and finally, very briefly, I then link the report into some current key hot topics. Migration, low migration does not mean no migration. A healthy economy needs skillfocused, economically focused migration policy. uh but we need to attract the people we want and that means a change in terms of our current policy. The flip side of having an open borders policy is that we’ve underinvested in domestic workers and we’ve underinvested underinvested in domestic capital. The June comment strategy paper from the prime minister acknowledged that in six out of 10 sectors seen the biggest increase in noneu immigration employment or employment of non-EU nationals, let’s be precise, coincided with the six sectors seeing a decline in domestic employment. The same report acknowledged how we were attracting more um engineers at the same time as cutting apprenticeships in those areas. So, we just needed joined up thinking. We need to have a migration policy, but we need a credible one. Energy, we need to align green and growth. The green agenda is vitally important, but I argue we need to have energy addition, not energy substitution. Green and growth don’t clash if you do it properly. It’s sound basic economics. You add renewables as their cost comes down, as technology improves, as storage increases, as reliability increases, then they start to displace fossil fuels. So you need to have as the shadow chancellor touched on low energy costs as well as addressing the green agenda. We in the rest of the report talk about housing, wealth taxes and resilience. But maybe let me finish on that resilience. It’s about how we reposition ourselves in what is a changing and a growing global economy. There’s no reason why the UK cannot continue to do well in the future. But we do need to face up to the reality of where we are now and that if we don’t change our currency policy stance, we’re going to be heading for a debt trap and we’re going to continue to stagnate with low growth. Hence, breaking the cycle is where I think we need to be focused. Thank you. Thank Thank you. I mean I think a lot of people are going to ask ask questions so I’ll I’ll keep my involvement in this uh fairly fairly brief. Um but s two two two big questions. Um, you said it’s always dangerous when economists agree, but economists do most I mean, well, certainly on the on the right and center, right? Economists do mostly agree with, you know, pretty much everything you’re saying. Like, you know, as I I was on a panel with the head of the IPR the other day, and he said, you know, we we we have a choice between becoming, you know, we we’ve we’ve we’ve had, you know, we’ve tried to have American levels of taxation and European levels of spending, and it’s time for us to choose between America and Europe and uh and obviously we should choose Europe. And I said, well, no, obviously we should choose the one which which actually grows and has is massively richer than us. Um, but so I think most people on the said right would would would appre would sort of say yes, you know, spending and tax are out of balance. Growth is an issue like we really do need to do a lot of these things, but the vote the voters do not seem to be in that in that place at the moment. Um, they are still they are still in the you know they still think you can have um, you know, you can have they are they are cists put Boris Johnson to shame. um you know they want um all of the spending and none of the taxes. How do you make the argument to people that oh and sorry just one and you know and also many of them do think they’re doing if if we do need to raise taxes for example it can all come from from the wealthy how do you actually make the arguments to voters that you know we do have to live within our means as as as Mel said Mel do you want to maybe go first okay so so I I think there are several things in that one is uh why have we not grappled effectively with these things uh in the past as we might have done I think part of it is political uh will I think part of it is the uh political realities of trying to make fundamental changes which uh in the longer term uh is for the good of the economy and everybody in the shorter term there will be winners and losers with the losers making a lot of noise as you would expect and the winners staying rather quiet and the political uh repercussions of that I think there’s an element of the the frogs you know in the water slowing the water getting slowly hotter and hotter and hotter until uh you know it becomes utterly unbearable I think we’ve been on this slow almost imperceptible slide towards the kind of darker places that Gerald Gerard and I have referred to. You can see set out in the OBR’s longer term uh forecasting. Uh as I discussed um I did say in my opening remarks that we do need to win an argument at least on public services that getting the right outputs is not solely about putting ever more money in. It’s about fundamental reform. And I think you’re absolutely right. Uh that is an argument that has yet to be won but needs to be won and my party needs to be in the vanguard of winning that argument between now uh and the next uh general uh election. Um another thing that we need to do along the path to winning that argument is shine light of truth on the populist alternative. So where reform will say well of course low taxes are the answer. Well, we all agree with that and where therefore we are going to pledge to take everybody earning up to £20,000 out of income tax altogether. We have got to be the grown-ups in the room that say, “Well, hold on a minute. How are you going to fund that?” When Nigel Far says, “Well, there’s savings everywhere to be made.” Point out that the IFS says that it’s up to about 80 billion the cost of that uh tax cut, which is about half what we spend on the National Health Service every year with its 1.5 million employees. their numbers do not add up. And I think if I can just project forward a little bit of um prediction here, I think the economy could well get a lot bumpier than even we’re experiencing at the moment. And I think in a world in which you’ve got a Labour party that is just demonstrabably doing economically incoherent things, a populist party that is offering fantasy economics. We have got to be that party that comes through the center both standing up for fiscal responsibility but with a clear radical agenda that people understand that can get us out of the problems that we’re leaning into. George, you’re obviously not a politician, but um one one of the sorts of things you senses you get on people this is like you that it will take some kind of crisis take some kind of forcing point. I mean do do you think that’s true or do you think we can actually reform in sort of peace time conditions? Well, one plausible outcome is that a crisis forces a change in thinking. But the other part of the debate is this that when one looks at the whole fiscal debate at the end of the day, people aren’t stupid, but those people who want to engage in the fiscal debate, they’ll turn on the radio that listen to things is all focused on fiscal headroom. Um the there was an external review of the OBR earlier this year and I was one of the external experts who contributed to it and Dutch fiscal experts and they basically said in the UK you need to change your move away from fiscal headroom short-term to look at fiscal sustainability fiscal solveny. Um that would have been an opportunity maybe for the chancellor to have decided to move away from fiscal rules. If each day you’re a member of the public and you’re listening to fiscal headroom and someone says you can always treat the taxes, then you tend to think it’s a short-term measure. If we’ve changed our terms of reference, not just in terms of looking at the competitive economies across the world, as I touched on, but looking at fiscal solvency and people then heard on a regular basis, goodness, if we don’t change things, um, debt to GDP is going to 275%. We’ve had debt to GDP admittedly at 250% after Napoleonic wars and after the second world war. So it was for a reason. Uh we tend not to have debt to GDP in peace time those levels. So I think we need to so in answer to your question yes a crisis forced by the markets saying that policy is not credible could force a rethink but at the same time I think we need changed our terms of reference. Politicians clearly have that ability but so too do economists. So, it’s it’s not the sort of scrap the OBR um thing. It’s it’s it’s focus it’s you it’s make it so that the OBR’s long-term fiscal projections are the thing people pay attention to rather than can we hit this tiny target a tiny artificial target 5 years out. Well, the whole process at the moment is back to front, but the OBR’s forecast dictate policy. The OBR doesn’t want to be in that position. The OBR play a very important role. In the paper, I did do say that one of the future areas is institutional reform. I’ve often argued that the Treasury should be split into a growth and the budget department. They’re a super ministry, but I think it’s too political. It takes up too much um headroom or bandwidth, whatever you want to use at the moment. So, I think that should be part of the future, but the OBI, I think, plays a very important role. Cool. Well, I think um I mean, John wants to come in and I think people would rather hear from John Redwood than me. So, um, well, two great speeches and and thank Mel very much for setting out exactly the themes and principles we need for a future uh, sensible growth oriented regime with low taxes. Uh, my point is on productivity. We’ve had a collapse in the public sector down 8 and a half% a 40 billion black hole since 2019 and Mel has rightly said part of that is massive over recrement of administrative and back office staff at a time when you don’t need all of those. That’s a containable problem which we could discuss in a longer seminar. But I wanted to also provide a reason why private sector productivity is so disappointing in this country now. uh an often overlooked reason and that is that government policy is deliberately closing down the most productive parts of the private sector uh probably the most productive area is oil and gas um very high levels of capital input to numbers of people so you can have very high wages and very high tax take and that is now banned we can’t have new exploration development that knocks on we’re just closing two major refineries uh the the lopsided American trade trade deal decided to delete our ethanol industry. We’re about to lose two olifins plants. A major fiberglass plant closed earlier this year, anything to do with energy and high energy cost, we are wrecked. And most of those things are the high productivity areas. So I do hope in in the formation of policy for a sensible government and trying to influence this one for the better, we will concentrate on all the bans and all the excess taxes and carbon and emissions problems that mean that we’re closing down all of our industry to import things from abroad, which is really bad green policy because you end up with more CO2 as a result on all the imports. Another ban of course coming soon. We won’t be able to make petrol and diesel cars here. So, we’ll presumably import nearly new ones from abroad. And again, CO2 will go up. Yeah, joined up thinking is key. I go out to Asia a lot and they are perplexed at some of the policies, not just in Britain actually, but Western Europe. High energy costs um are a big problem for economic growth. So energy, we at the very least should be trying to reduce energy cost to be on the par with our competitors in Western Europe. Um energy addition as I say in the report as opposed to energy substitution. I’m not against the green agenda but one needs to be sensible about how one executes and implements some of these policies. I mean Mel your party leader was up in Abedine the other day. So yeah, so I mean look if you look at we’ve been talking about growth uh the sectors of the economy that have been at least growing to some degree services thank heavens because we’re largely a service economy construction and a few other areas but one of the areas that has literally just been going down like this is chemicals for example. Yes. Uh, and if you ask the question why, well, you’ve got a government in terms of the North Sea is taxing the living daylights out of the businesses up there, not granting licenses for further exploration when, ironically, the Norwegians are sucking this stuff out of the same basin uh, just up the waterway. Uh, and you’re destroying jobs in their tens of thousands. You’re making us less energy secure. And in terms of the carbon footprint, the alternative is often liquid natural gas coming into Milford Haven that has four times the carbon footprint of what you’d be sucking out of the North Sea. So it is absolutely bonkers. And this is the sacrifice of uh economic rationalism on the altar of uh of of ideology which is so much the story of this government. You see it in all sorts of areas. VAT on private schools being another perfect example of of pretty much uh the same kind of thing. But I think to the broader point as John says you know what has happened to productivity in the public sector is it’s gone backwards. I mean the health service productivity has gone down uh since uh uh covid and I think there are questions that we have to ask about what we expect uh from our public services certainly how we deliver them. Gerard mentions artificial intelligence. When I was Secretary of State at work of pensions, I had the AI team assembled and put right outside my office, much to their shagrin at the beginning because they thought they’d be spied on or whatever. But they loved it because I would pop in and sit down with them and encourage them if there were any roadblocks to making change and I was there to unblock them. And we made great things happening. And at the risk of going on too long because I think it’s important to flesh some of this stuff out. I’ll give you a couple of examples. One was a project called whitemail whereby uh DWP received 20,000 pieces of correspondence a day generally prior to AI had been handled by human beings is now being read in about two hours and also because it can spot patterns and outcomes marry the two up is able to prioritize those who should be dealt with first as a priority as being most vulnerable. Uh we had something called the um uh job center of the future project going uh in which with the uh claimants’s consent when they’re speaking to the work coach uh those conversations are listened into and by repeating matching outcomes and uh the ingredients of those conversations over tens and hundreds of thousands of interactions, you can start to more intelligently target your resources on the people who really need it. So, if Charlie turns up late on a Friday afternoon, you with no CV, you know, you need to see him the next day. Uh, if Ethel turns up bang on time on a Monday morning with a CV and she’s got a degree in a certain specialism, you might not even need to see her ever again. And the system can spit out the next steps in a very efficient way or write the person’s CV and so on and so forth. And you can get the talking about productivity, the case load of some of those uh uh job center uh work coaches up from a hundred clients to probably up to about 160 170 through using that technology. The problem with technology is not that it isn’t there, it’s there all these things. It’s the diffusion of that technology is the big challenge and that’s where you go into theme space where it’s particularly weak and I think there are there is a lot of big thinking that we need to do in that sense. One of the stats that we monitor is um asylum and immigration case load per worker per day which has been another one of the ones which is absolutely um well FD and Bloomberg side by side. Thanks Sam Fleming from the FT. Uh I wanted to put a couple of points from Gerald’s report uh to you SL. Um firstly on the fiscal rules do you agree that the fiscal rules have become too focused on a a headroom target over a three or five year horizon? Should there be a more fundamental reform of the fiscal rules? And second of all, he mentioned tax simplification um and specifically stamp duty, which obviously is a tax on transactions and therefore moability. Are you open to a sort of more fundamental rethink of the property taxation system? Thank you. And also stamp duty on chairs would be another abolished. Yeah. Uh yeah. Hi, Phil at Bloomberg. Um thanks. It was excellent stuff Jared. Um just the solution the growth solution is always touted by everyone but obviously there’s a temporal issue here because you know the budget is in a few weeks time this growth is not going to come to the rescue if anything the OBR is going to do a downgrade and it’s going to be an even bigger problem. Um but so the immediate issues are you know as you mentioned there’s the questions of austerity what shape it should take and and tax rises and you talked about health changes in health and talked about changes in welfare um and I just on on the spending side are there big areas that you can go at Jared and and um Mel your thoughts please so fiscal rules and and what would you do if you’re if you’re Rachel Reeves uh okay so uh I think we we should always and we will be looking as a party at the fiscal rules and the way they operate. Why is it that we’re asking particular questions about the fiscal rules at the moment? Part of it, of course, is because the the economy is being mismanaged and they’re not being hit. And part of it is because and as part of that, I suppose the headroom that’s been targeted being just under uh 10 billion at the time of the autumn budget and the spring statement is pretty thin. Now, we actually had I think on one occasion about six and a half billion. So, you know, we’ve all And Jeremy Hunt has now said he regrets that doesn’t. Yeah, he he does. But yeah, but therein lies a general point about economic health as much about as about uh the rules. Um I do think there’s a piece of work to be done around the question as to how you encouraged and incentivize investment in the longer term which we both touched on as being a a a problem both privately in the private sector but also R&D investment in the public sector in particular over many years and how that is accommodated with the rules. I’m not convinced that the puffle definition of uh of debt that this government is currently using is appropriate. But without getting too technical, I think there’s a some thinking to be done certainly on that. On the question of uh uh tax simplification and stamp duty, I think Gerald, in your report, you suggest scrapping the 0.5% on share transactions and I think there’s something quite attractive about that particularly because it’s a source of competitive disadvantage compared to, for example, the United States. uh SDLT if you look at uh taxes that have uh a laugher aspect to them. In other words, you could conceivably reduce the rate uh and increase the yield. I think there are at least three which are fairly obvious. One is the high rate of capital gains tax where people in particular have the ability to control whether and when they fall due to that tax and the evidence is in the short to medium term at least that higher rates actually generate lower uh yield. The second one is actually SDLT, stamp duty on property uh which is a transactionbased tax. It undoubtedly slows down the number of uh transactions and it has knock-on consequences in terms of all the economic activity that is generated when people move home, the decorators and so on and so forth. Um but equally it has an economic impact in just slowing down the ability of people to move around to where the work is and that has an impact as well. So I am very skeptical about the value particularly the upper levels of stamp duty uh land tax in terms of how do you affect uh savings in the public sector where we’ve touched on welfare a few times. If you were to take the cohort of people aged uh between 16 and 64 working age that have some health element to their benefits today and you were just to keep that cohort at the same level over the rest of this parliament instead of going to where the OBR says it will go, you would save about 15 billion pounds every year. If you were to take that number in that cohort back down to where it was precoid and most people would say, well surely we can kind of get to that through time, you would save 35 billion pounds every year. To contextualize that, that would be enough to take every business in this country out of business rates altogether. It is a huge saving to be made. It will need political will. It’ll need a lot of careful thought in order to deliver that, which is why we need the time to do it. It certainly won’t look anything like what this Labor government did, which was to allow fiscal requirements to drive welfare reform with Rachel shouts over to Liz and says, “Help, find me 5 billion.” That’s not the way to fundamentally reform a welfare system. But there are fundamental reforms that could be brought in particularly around work capability assessments, particularly around uh PIP uh disability and incapacity that I believe could drive very significant sav savings while being better targeted on those that need the help most. Do you agree? Would would you if you were Rachel is was welfare where you’re where you’re looking? Well, I agree with what’s been said, but the um reality is that spending changes are not going to be seen as necessarily sufficiently quick or credible. Uh the markets would like to see something done in this budget that prevents us being in a repeat situation this time next year. A repeat situation to what we had last year in the 10 weeks running up to last year’s budget as well as the three months running up to this where there’s a worry about taxes going up. confidence starts the south. The outlook for any economy depends on the interaction between the fundamentals, policy and confidence. And the one thing you can’t really predict is confidence. Earlier this year, business and consumers were more confident about their own situation than they were about the wider economy. That should give one course of optimism. That being said, um it’s a very fragile situation. So when it comes to the budget, um I would argue that the only thing that’s really credible given the constraint in which the chancellor has put herself is to break the manifesto commitments because the only taxes that will give you the sufficient revenue to close this year’s fiscal gap and to build in headroom to avoid a repetition next year is to actually move those big taxes. But if we have the peacemill approach that appears to be coming out from number 10 and number 11 of changes here and changes there then I think while we might see the gap closed this year it will not leave the markets confident about what will happen next year and that’s the challenge for the chancellor. So if one looks at it, one could raise income tax by 2 p in the pound and the top rates are taxed by 5 p in the pound and you’ve closed your fiscal gap. You could I’m not saying advocating this, but I’m saying that when you actually look at the numbers, the only taxes that you can move that really make big differences are those big taxes. Well, presumably you’re not endorsing a No, can I just quickly cover that? I I I think I’d slightly nuance that view, okay, with uh you know what what is the impact that’s coming down our our way in terms of the fiscal headroom. We know that the reversal on the welfare changes plus the reversal uh on the winter fuel payment uh means testing means that she’s about6 billion pounds down on a 10 billion headroom. Critical now will be what does the OBR decide on its productivity and growth assumptions underpinning the forecast? they have been very optimistic for quite a considerable period of time. Now may be the moment that they get uh uh downgraded substantially. That is the sort of scenario which might push you down as well the outer bounds of the NIS who suggested we might have a 40 billion pound black hole. I mean that would be huge. So to Gerald’s point about does she have to go for the heavy lifting taxes and uh break the manifesto commitment? I think it will be determined to some degree to get back to the OBR, the OBR’s call on that particular judgment. 100% agree. I would expect the OBR to trim their productivity forecasts and that in turn would make them more cautious about trend growth. They’ve got a one and two/3s effectively view trend growth as we moved through this um rest of this decade. Um that would imply a fiscal gap maybe 25 billion pounds or that order of magnitude. then you need to build in some headroom to give yourself room for maneuver next year. And even though the UK is in a better position than many of the other G7 countries, we have sticky inflation and a lack of fiscal credibility, which means that we still have a risk premium in the eyes of the financial markets. So we need to address those concerns of the markets. It’s not just about the here and now, the immediate numbers in front of you. is about getting the markets to have confidence in your fiscal and economic vision and that’s the challenge for the chancellor um and in some respects it’s a self-made problem uh given the whole backbench issue with spending uh this summer. So she if I can cut you there so we just we’ve got about 10 minutes left and I am sorry I’m basically blinded by by the spotlight. So Camille I will I will trust you to pick wisely. Hi there, Marissa Alen Carr from CICM. Um, I think it mentions it in passing in the report, but with the trade deal this week with the US President Trump, um, you know, is this deal good for growth and what will the tries do differently? And separately, just could you spell out a little bit how much of the blame lies with the sort of so-called arms length bodies and the Bank of England, you know, other bodies such as the debt management office which has also received some criticism. How much of the blame and the fiscal sort of scenario lies with those bodies rather than the government. Thanks. Cool. And we can take another one. John Busby, uh, member of the Conservative Party with no intention at the moment of moving away from that. Um, Dr. Lions, I I managed to read your beginning and end of your document, the whole thing. Um I’ll just make a statement that u I mean I do business on an international level so in most markets um if I was to say that the number one reason that chief executives get fired is not their inability to formulate policy but to implement it then uh I guess this is a question more for sel what are you going to do you know what are the actions that are going to be taken rather than a great deal of well we need to do this and we need to do that and we I think we all know that we need to do this and we need to do that. How are you going to do it? Actually I’m not clear that people do agree that we need to move this and that. Um coming back to what Rob said earlier. Um well economists actually don’t fully agree everything. Um the Brexit issue um we I covered that in the report last year. So for uh the um CPS so I’m not going to go through that again now but some people see that as the easy option and it I would say they’re wrong. Uh but also many economists would actually if they were here now would say that public spending has to rise and taxes would have to rise and they would often frame a reference Scandinavia or some group of countries that fit their objectives. uh the OECD data shows a very wide dispersion in terms of the uh tax take across the world but many of the competitive economies and the economies we need to compete with more in the future are basically lower tax economies but it’s important to stress low tax is not the answer to this it’s just part of of the overall thing so exec so you do need to have a clear vision that’s credible and you need to have joined up thinking even in the answers we’ve given today it’s quite clear that even in terms to the execution of policy. There’s not always joined up thinking. So having a clear vision is important and to win the debate that that’s the direction of travel is an important part. But you’re 100% correct. It’s about um well it’s not all about execution. You need to know what you’re executing, but execution is important that I completely agree. And now perhaps on the on the Trump trade trade deal and so look let’s see what transpires. We’ll find out soon enough. We’re led to believe there might be some uh cooperation around small modular reactors with exgen uh energy in uh the states. If that is something that through speeding up approvals and so on speeds things up more generally and creates opportunities for us overseas, all well and good, we’ll obviously be looking at anything that’s going to be said now on uh tariffs uh as well on the debt management office in particular. you know, they’re there to conduct the option auctions to sell uh the guilts and I think by and large do a pretty reasonable job. That would be my uh view. I think we’re probably going to see more uh shorter uh uh maturity uh guilts uh coming into play given what’s happened at the 30-year end uh of the market. Some of that driven by uh the appalling record of this government, but some of it has to be said also with the windown of uh uh defined benefit pension schemes and therefore a shift in the kind of demand uh at the long end uh that’s happening there in terms of I think a really interesting question about implementation. Let’s go back to DWP. DWP has a budget of about a quarter of a trillion pounds a year. It employs 90,000 people. If it were in the p private sector and you were looking for a chief executive and a team to run that operation, you would have a worldwide search. You would pay the person that was running it a huge amount of money to do so with a huge incentive scheme attached. And you would fully expect the dial to be shifted at least by an appreciable amount. Having done that and translated across a quarter of a trillion pounds, 90,000 people, that would be an investment well made. The system we have at the moment is that the prime minister looks around the available runners and riders some of whom have uh who are eminently not uh the right people to run it and selects the best person that’s available out of probably 300 odd uh people. Um so I think there are questions that need to be asked actually that how do you maintain the democratic accountability a secretary of state that sits in cabinet is responsible for that department but at the same time has the kind of operators and infrastructure around at the top of those organizations that can really drive change with the very best and most capable people doing it. And that’s something that uh I’m thinking about. I I know that there are a load more questions. Um if we but we can we probably have time to sneak in two more and then that’s it with quite short. Um hello John Moss. I’m another Conservative member not going anywhere. Um you talked a lot about investment, talked a lot about growth. I think the investment we need and the growth we need is clearly in the private sector and one of the perhaps failings of the last Conservative government was not to reverse some of the things that the Labor government did before 2010 uh in terms of disincentivizing people taking responsibility for their own health. Now we’ve got a big issue with care. Is there a partner solution here where we tax incentivize people to invest in their uh potential care costs in the future in their health uh now through insurance in a way which will put those savings into the private sector for investment uh as we do with pensions? Yeah. My name is Franier. I’m a CPS supporter. Uh lots of great stuff in the report and uh it’s very nice to see issues like the Manhattan skyline and uh the choice of industrial sectors and the uh challenging of the fiscal rules. all of these things which are tend to be accepted but really do incredible damage. I suspect the the problems are are worse fiscal problems are worse than what you’ve stated because if you added in unfunded pension schemes and unfunded infrastructure repairs the the figure would increase significantly. So this is a very good debate that that is taking place today. And my question is how does this debate happen in the in the public realm? Because what we hear are sound bites but we are not hearing long full frequent speeches and there’s lots and lots of political space and and that’s in a sense my frustration is the the the the the proposal, the framework isn’t getting put out there sufficiently. Okay, two very good questions to to finish with. Okay. So uh on the issue of uh private sector and encouraging that look I think it is substantially about tax about certainty uh about the animal spirits about lower regulation all of that kind of framework that government can set without government being that big beast in the middle of it that’s crowding out a lot of opportunities for the private sector not least through demanding uh demands and driving up interest rates and so on through being a big player in the economy in that in that On the health point, I do think we need to do some thinking and we are around particularly occupational health actually because if we go back to economic inactivity and our long-term sick and disability cohort, that’s about 3 million rising in the OBS as do 4 million people who have no work requirements whatsoever. that most of those people have been on a journey and it has started actually 400,000 of them every year falling out of the workplace going to a doctor then so on and so on to benefits and then becoming a long way away from the labor market and being very hard to get back into employment. So I think tax uh particularly among smaller and medium-sized enterprise tax reliefs around some of that kind of occupational health stuff upstream could actually be very beneficial uh to the economy. I’ll make just one observation on tax simplification is that it is very easy to talk about and very easy to agree on the value and benefits of doing it. It comes both with political challenges around winners and losers. Typically it has some kind of immediate economic distortion effects which you have to think about and often it comes with great cost. So, one of those buildings in the Manhattan Highline across the income tax uh regime will be the withdrawal of the personal allowance for those earning 100,000 up until about 125, which produces very high marginal tax rates as does the interaction of the benefit system, child benefit, uh tapering away, student loans, all sorts of other things that throw up these ridiculous. In fact, you get up to about 78% uh marginal tax rate if you’re if you’ve got three children and child benefit is being reduced. That has clearly very negative economic consequences. But to iron out that wrinkle of the withdrawal of the personal uh allowance, okay, would cost 5.5 billion pounds every year. So this headroom that the chancellor’s not got and tried to keep at 10 over half of it would have been gone on just taking that one wrinkle alone out of the uh into the simplification space. So we should not underestimate the challenges here and doing it. The best thing to do is get the economy in good shape and then you can more easily do these things and do them in a in a in a timely fashion. Yeah, I completely agree. Um I echo what’s been said. Look, control the controllables is very important within the report. Just to maybe highlight some nuggets and also come back to the execution terms of pensions policy within it. U civil servants in my personal view should be offered the ability to have higher pay rather than taking all in pensions. It gives them upfront benefits and reduces future costs. In terms of social care, look at international best practice. Japan has society 5.0. They social care is very much based on investment whereas we go for low cost. That’s um other changes. Small mediumsiz firms are key. They’re the backbone of the economy. We mentioned that in the report. CPS did an excellent report a few years ago about one of the things that small firms wanted in terms of predictability of tax. But Treasury was against it because it might have cost them money in the near term even though if it worked it was bound to give them more money in the future. So make incentives matter at the end of the day and you need to simplify the regulatory the tax environment to be consistent with your objectives but at the end of the day we need to have a progrowth strategy but we need to deliver on that and it’s got to be GDP head to actually make sure it improves living standards. Thank you both very much. Um so very quickly um there’s obviously a very long road to November the 26th. I’m sure we’ll be hearing more from SL. Um we have a full well a a lot more uh reports to come in the next few weeks and months. Um a full program at the Conservative Party conference which will feature Gerard discussing some of these issues and if he’s not sick of the sight of me uh I will be in conversation with Sel uh there as well. So please do join us for that and uh as I said again um go to the website and read the report. Thank you very very much. [Applause]