Chapter 1: What is the main topic discussed in this episode?
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Welcome to Merrin Talks Money, the podcast in which people who know the markets explain the markets. I am Merrin Somerset Webb, and this week I am speaking with Andy Haldane, former chief economist at the Bank of England. Andy, welcome to Merrin Talks Money. Merrin, it's wonderful as ever to be joining you. Well, the UK knocked around a sort of 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 26, 27, which I think is something of a shock for most Brits. We're poor. We're not getting any richer. Our economy is a mess. Even our housing market is a mess. I find it quite hard to find those optimistic bones in my body right now.
And, you know, even as we are speaking, we're speaking, by the way, on Tuesday, the 21st, just as I was waiting, Andy, for you to come on, I was having a look at what was going on in the stock market. And I see that Chris Nicholson is down 39% in a matter of minutes on a profit warning.
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Chapter 2: Why does Andy Haldane believe the UK feels poorer despite its wealth?
Subject to that, do I think there's something that could be separately labelled and separately marketed? I think probably yes. Would that require a tax sweetener, either inheritance or maybe even a temporary extension of the ISA allowance? Yes. I think, as you know, and as you've spoken about extensively, I think you're right to speak about it.
We have north of £2 trillion parked up in cash, earning negative real returns.
Right.
Bringing some of that into the equation in a sort of patriot bond, a war bond, I think that could be quite good marketing and quite good fiscal arithmetic. So, yes, I think that ought to be an option on the table, but as a complement to rather than substitute for doing something on spending. And I suppose none of this would matter.
None of this would matter at all if the economy was growing properly. This is the core problem. This is the core problem. If the economy was growing properly in real terms by 2%, 3%, 4% a year, if GDP per capita 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 but, which I'm hoping was going to be... It's just not yet. And you're right. I mean, growth is the great redeemer for debt problems, public debt problems in particular. You grow your way rather than digging your way out of a debt problem.
So that ups the ante on us making good on the oft-heard claim from politicians over many decades now, Marin, who have had growth as their number one objective. Here's the but. Here's the good news, right?
Yeah.
If you were a Martian, or any other planet actually, an 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. I mentioned those fiscal deficits that have been running for a whole century. Actually, both households and companies in the UK are running financial surpluses.
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Chapter 3: What are the implications of the UK's fiscal situation on defense spending?
And what's true of tax is also true of regulation. Again, I used to be a regulator, for heaven's sake. But nonetheless, the individually well-intended actions of now more than 100 regulators in the UK nonetheless 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 will need to change if we are to have companies and households put their balance sheets back to work, Perrin. Yeah, I mean, I think you're absolutely right.
In many cases, it's often less the rate of tax, particularly when it comes to corporate activity and starting a small business, for example, or anything like that. 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 tax of 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 deliberate, but a lot of it is just, I can't do this admin. It's just too hard. As someone who set my own small business a few 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, 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.
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 investing, we talk about investing in personal finance a lot. And one of the things that prevents people investing, prevents them sorting out their personal finance is friction. It's admin.
Literally, there is nothing in the world that people hate more, apart from war, I guess, but in general, admin. Admin is everybody's personal hell. Yes, an overly complex admin of that that oozes from every port. So there's lots that could be done.
I mean, the good news is, because there's a risk there of us disappearing down a plug hole again, I blame you for that, is all this is exactly fixable with the political will and a degree of political skill. These are fixable problems. They're 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 UK PLC might be the most innovative nation on the planet, right? Absolutely. So you look at the pipeline of venture capital-backed businesses that are growing like Topsy and And we rank, you know, this be businesses, you know, north of 25 million a year revenue.
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Chapter 4: How does the UK's tax rate impact economic growth?
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 rates going from here? And honestly, I'm asking on behalf of the property market here. Yeah, oh, very good. Well, look, like everyone else, my historic reputation at the start of this year
was that inflationary pressures were abating. And they really were abating. They'd 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 employees at the Bank of England for not lowering 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 other side of the boat with an expectation of now rate rises, not just in the UK, but in the US and the Euro 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 in two very fundamental and significant respects. First, the scale of shock, at least so far, tempting for it in saying this, but the scale of shock so far is nothing like on the same scale. That was a shock to the cost of living of north of 10% in the UK. At current energy prices, we're talking a shock to the cost of living of 2% or 3%. So much smaller shock.
What's more, that smaller shock to costs is breaking on an economy that's very different, and a labor market that's very different than back in 21, 22. Back then, we had resurgent demand. coming up against constricted supply post-COVID, the result 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 is soggy. The labor market is soggy. Firms do not have pricing power. Workers do not have pricing power. The upwards 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 bank and the Fed were to raise rates this year if energy prices remain at or close to where they are right now. This is a time for sitting gleefully on your hands and seeing how the world pans out. And that would be the mainstream economist's view. I'm very far, as you know, from being a mainstream economist.
On this occasion, my tribe might even have got it right. Very, very unusual. What about house prices? Obviously, 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 in that it makes houses more affordable.
But of course, with mortgage rates slightly higher than they were, however affordable they may look in absolute terms, they still 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 tracking sideways. I mean, it's not just about rates, although, of course, we've seen
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