Latest / Merryn Talks Money / To Get The UK Growing Again, We Need Cheap, Secure Energy with Simon French

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To Get The UK Growing Again, We Need Cheap, Secure Energy with Simon French · Merryn Talks Money

0:02
Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. Welcome to Maren Talk's Money,
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Speaker 1: the podcast in which people who know the markets explain
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Speaker 1: the markets. I'm marrin Sumtetweb and with me once again
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Speaker 1: is Money Distilled. Author and senior reported John Steppek. John,
0:22
Speaker 1: can't get enough of you in your mean coin chat
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Speaker 1: this week. But the reason that you the audience are
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Speaker 1: joining me for this conversation is we want to have
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Speaker 1: a bit more of a roundtable conversation. Now that's hang on,
0:32
Speaker 1: it's not the audience. I really should have read this
0:34
Speaker 1: before we started. Hang on. But John, the reason you
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Speaker 1: are actually joining me for this conversation as well as
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Speaker 1: the one we had earlier in the week, is that
0:43
Speaker 1: we want to have more of a roundtable style discussion
0:45
Speaker 1: with our guests. This week, we wanted to talk about
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Speaker 1: Rachel Reeves, what exactly is going on in her head.
0:53
Speaker 1: We're trying to figure out what choices she has given
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Speaker 1: the very tricky fiscal situations she's found herself in, and
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Speaker 1: trying to figure out whether she is beginning to change
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Speaker 1: her thoughts about how she wants to take the economy
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Speaker 1: forward from here. So to help us answer all this
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Speaker 1: and really get into what can be done to encourage
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Speaker 1: growth in the UK, and we're using the word encouraged,
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Speaker 1: not create. For a very particular reason. We've brought in
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Speaker 1: Simon french Managing Director, chief economist and head of research
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Speaker 1: at PAMA Liberian. Welcome, Simon, and lucky you you are
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Speaker 1: in the studio right there with John today.
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Speaker 2: I am and thank you for having me back Maren
1:30
Speaker 2: on the podcast, and I am particularly interested in hearing
1:33
Speaker 2: how much milania coin John has bought in the last
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Speaker 2: seven days.
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Speaker 1: John is useless of this. He doesn't even have a
1:41
Speaker 1: coin base account. He doesn't know does coin, he hasn't
1:44
Speaker 1: got any bitcoin, he hasn't got an ethereum, I mean nothing.
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Speaker 1: It's hopeless. Whereas I, on the other hand, I'm slowly
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Speaker 1: becoming exceptionally rich on the back of my crypto holdings.
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Speaker 3: We call diamond tynes.
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Speaker 2: Do I want to know?
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Speaker 1: Don't do you? Simon? I'm guessing that you don't have
2:08
Speaker 1: any Milennia coin, or indeed any Trump coin.
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Speaker 2: I am so fiat you would not believe with similar
2:17
Speaker 2: number of letters and similar first first letter.
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Speaker 1: Well, I'll tell you what when the debt apocalypse comes,
2:24
Speaker 1: don't you two be running to me. You've had your chance.
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Speaker 3: I've got my gold.
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Speaker 2: I'm stacked up on rice pudding, so I'm all good,
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Speaker 2: thank you.
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Speaker 1: Well, well we find them, right, Simon, this is all
2:34
Speaker 1: about you. We're all about what you think anyway. Your
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Speaker 1: latest tweet. Simon, by the way, is very active on Twitter.
2:40
Speaker 1: What's your handle Simon at French Economics At French Economics.
2:43
Speaker 1: Definitely sign up or follow him if you haven't, because
2:45
Speaker 1: he does tweet lots of interesting things. Says last week
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Speaker 1: for something you don't hear often these days anywhere. Fair
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Speaker 1: play to the UK government. The penny has dropped on
2:55
Speaker 1: growth and the flurry of announcements on some genuinely thorny
2:58
Speaker 1: policy areas. We're dogging airport expansion, orientation of regulators, judital reviews,
3:03
Speaker 1: AI life science visas, all this kind of thing all
3:05
Speaker 1: suggest a change of emphasis from blaming the economic inheritance
3:10
Speaker 1: to getting out of the way of growth. Now, Interestingly,
3:14
Speaker 1: when we talk, when I introduce this and I talked
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Speaker 1: about encouraging growth, not creating growth, I think the three
3:19
Speaker 1: of us probably all start from the same point, which
3:21
Speaker 1: is that it is not possible for a government to
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Speaker 1: create growth. It is only possible for a government to
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Speaker 1: facilitate growth. Is that a fair assumption to start with, Simon.
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Speaker 2: I think it's a fair assumption of the three people
3:32
Speaker 2: on this podcast, and it's probably a fair assumption of
3:34
Speaker 2: how the economy operates. I think if we're being really
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Speaker 2: candid and hopefully on this podcast, we can be one
3:41
Speaker 2: of the intellectual inspirations for the missions policies, of which
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Speaker 2: the principal mission is economic growth. Marianna Marzakato would not
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Speaker 2: agree with us if she was on this podcast, where
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Speaker 2: she does believe that the public sector balance she can
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Speaker 2: create economic growth. So there is while I think we
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Speaker 2: agree and there's a unanimity on the contryb is it's
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Speaker 2: not necessarily a unanimous view on the people who have
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Speaker 2: the ear of the Chancellor Rachel.
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Speaker 1: Reeves, which is something of a shame, isn't it.
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Speaker 2: Well it is, But I think if you are cut
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Speaker 2: part full, and I think again the three of us
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Speaker 2: try and be cut part full when we look at
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Speaker 2: economic growth. The one thing that can be said about
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Speaker 2: this government from people who are close to them and
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Speaker 2: have seen them how they've behaved in opposition through their career,
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Speaker 2: is they're relatively fast learners. And what you didn't read
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Speaker 2: out was the second part of my tweet, which is
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Speaker 2: there are some big caveats to the praise. Three caveats
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Speaker 2: I put in to the praise I've given the government
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Speaker 2: from its change of tone. And the main caveat is
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Speaker 2: they made a strategic, massive mistake over the summer blaming
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Speaker 2: the economic inheritance, talking about a black hole, talking about
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Speaker 2: the worst economic inheritance in the Second World War. Have
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Speaker 2: they learned the lesson just in time before animal spirits
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Speaker 2: are entirely crushed? I'd venture there are signs of that,
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Speaker 2: and therefore few more constructive. You'd say they've learned lesson.
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Speaker 2: They've learned what it is to be in government where
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Speaker 2: words actually have consequences, and therefore have pivoted just in
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Speaker 2: time to keep some of the good will. And there
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Speaker 2: was actually quite a lot of goodwill on the fourth
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Speaker 2: of July when they were elected.
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Speaker 1: Okay, so that's the first bit that that they've really
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Speaker 1: destroyed the vibe in the UK.
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Speaker 2: I think that's right now. Look, economists again differ on
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Speaker 2: whether vibes are important. And look, some people I have
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Speaker 2: a lawful lot of respect for in the economic sphere
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Speaker 2: go a vibe sentiment, it's not really material drive of
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Speaker 2: economic growth. I would say, though, what you can see
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Speaker 2: in the data is that we're in quite a unique
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Speaker 2: position post pandemic, post Brexit, where if you like poly crises, Brexit,
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Speaker 2: the pandemic, the cost of living crisis, the inflation associated
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Speaker 2: with the Ukraine war has driven up the household savings
5:54
Speaker 2: rate and driven down the propensity of businesses to invest
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Speaker 2: and to some ex and those vibes, which you know
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Speaker 2: in if you like normal times, are probably not a
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Speaker 2: great driver economic activity. And I think John has a
6:07
Speaker 2: nuanced fionnce so might want to bring his views in.
6:11
Speaker 2: Not telling you how to run your own podcast, of course, men.
6:13
Speaker 1: But everyone tells me how to run my podcast.
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Speaker 2: I wouldn't do it. I wouldn't do it. But I
6:19
Speaker 2: think at this particular junction in the economic cycle, given
6:23
Speaker 2: that sentiment was improving, given that we know household balance
6:26
Speaker 2: sheets were in pretty decent position, and the opportunity was
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Speaker 2: for them to divest of those savings, you know, take
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Speaker 2: on additional leverage drive consumption economic growth, that was a
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Speaker 2: big mistake that that destruction of vibes.
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Speaker 3: I actually one point I was going to jump in there
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Speaker 3: briefly because I am when this aide of the vibes
6:46
Speaker 3: might get count basically, But I guess the way I
6:50
Speaker 3: would fream it is that that has actually been a
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Speaker 3: material change, particularly since the budget. And the material change
6:57
Speaker 3: is that the budget kicked employers squeadly in face and
7:01
Speaker 3: it was unexpected. So to my mind, there's no surprise
7:04
Speaker 3: that were employers thinking about. You know, the message from
7:08
Speaker 3: the top, you know, if you are in an office
7:10
Speaker 3: or you know, in the workplace now is we're cutting back.
7:14
Speaker 3: We're going to have to be careful about your pay
7:16
Speaker 3: rises next year. There is a there's a specific reason
7:20
Speaker 3: for the vibe shift, and it's because the tax and
7:24
Speaker 3: the private sector more. And that plays out to all
7:26
Speaker 3: the people who work in the private sector, you know,
7:28
Speaker 3: because it makes people more worried about losing their jobs.
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Speaker 3: It makes people more worried about So I suppose, I mean,
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Speaker 3: there's an actual there's a material, practical reason for the
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Speaker 3: vibe shift, and I mean that's that's definitely the way
7:40
Speaker 3: I think about it. I mean, it amounts to the
7:42
Speaker 3: same sort of thing. But yeah, I mean I think
7:45
Speaker 3: that the animal spirits get hit, but they get hit,
7:47
Speaker 3: it's not just talking down the economy. It's the things
7:49
Speaker 3: that they've done as well that don't help. When I
7:53
Speaker 3: think they specifically putting national insurance contributions up on the
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Speaker 3: employer side was a big, big part.
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Speaker 2: Of that, and I think that's correct. And there were
8:02
Speaker 2: two big errors also made in the run up to
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Speaker 2: the election that boxed them in on tax and they
8:11
Speaker 2: were the tax lock the idea of not raising income
8:15
Speaker 2: tax VAT and NIS. Although you know employer nicks employee
8:22
Speaker 2: NIX and then linked to that was not raising taxes
8:25
Speaker 2: on working people opened up the angle to raise employer NICK,
8:29
Speaker 2: so almost it was reverse engineered into a situation where
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Speaker 2: if you wanted to raise significant amount of tax, you
8:34
Speaker 2: really only had one option. That was the first problem.
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Speaker 2: And then the second problem is employer NIS increases in
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Speaker 2: isolation probably wouldn't lead to this negative response from employers.
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Speaker 2: But at the same time as an employer rights package
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Speaker 2: expected to cost about five billion pounds for the wider
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Speaker 2: economy and increases in the national living wage about three
8:56
Speaker 2: times the rate of current CPI inflation, and you are
9:01
Speaker 2: tightening the visa restrictions from the legacy of James Cleverly's reforms.
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Speaker 2: Last December. That is an awful lot for employers to
9:09
Speaker 2: go to absorb in one go. Now, I began my
9:12
Speaker 2: career as a twenty two years ago as a labor
9:14
Speaker 2: market economist, and back when we did labor market reforms,
9:18
Speaker 2: you did a local pilot, you did a green paper,
9:21
Speaker 2: white paper, You tried to understand the behavioral reaction of
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Speaker 2: employers and employees before you then roll stuff out. My
9:27
Speaker 2: criticism of government is all well meaning things here in
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Speaker 2: terms of raising tax for public services, making for more
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Speaker 2: secure employment, but doing it all at the same time
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Speaker 2: feels a real risk of a policy error.
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Speaker 1: Yeah. So it was all done at the same time
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Speaker 1: without quite enough thought about how these seemingly well meaning
9:45
Speaker 1: things would work together. Yes, Yeah, And that this worry
9:50
Speaker 1: here is that there is more to come, that the
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Speaker 1: fiscal rules are going to be breached, and that it's
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Speaker 1: going to be very hard for Rachel Ruves to find
9:58
Speaker 1: any way out of it and raising taxes further, and
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Speaker 1: that automatically suggests there would be new taxes that would
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Speaker 1: again fallen employers rather than employees.
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Speaker 2: Yeah. I think that is one of the fears going
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Speaker 2: into the twenty sixth of March, which is when the
10:13
Speaker 2: Ober released their updated economic forecasts and assessment to whether
10:18
Speaker 2: the government will hit it's self imposed we must always
10:21
Speaker 2: say self imposed fiscal rules and also the tenth vintage
10:25
Speaker 2: of fiscal rules since nineteen ninety seven, so they always change.
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Speaker 2: But the reason I mentioned the sheer scale of how
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Speaker 2: many fiscal rules we've had over a relatively short period
10:36
Speaker 2: of history is that one of the options available to
10:39
Speaker 2: ratiary should she choose, And there's always a delicate balance
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Speaker 2: of credibility versus pragmatism versus political expediencies whether she changes
10:49
Speaker 2: and has an eleventh iteration of the fiscal rules. But
10:53
Speaker 2: there are other options of play. You can do departmental
10:55
Speaker 2: spending cuts restrict benefit eligible. You could also hope that
11:02
Speaker 2: the Bank of England helps you out in terms of
11:04
Speaker 2: its quantitative tapering and the liability that that has for
11:07
Speaker 2: the exchequer through the treasury indemnity, or you know, in
11:11
Speaker 2: terms of debt servicing costs. You could hope that the
11:13
Speaker 2: Bank of England is more aggressive with rate cuts and
11:15
Speaker 2: starts to bring down at least the front end of
11:17
Speaker 2: the curve, and the back end of the curve also responds,
11:20
Speaker 2: although that is probably more driven by events stateside than
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Speaker 2: domestically in the UK.
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Speaker 1: Yeah, so that's not something that she can control. But
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Speaker 1: let's say we get to the point where it is
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Speaker 1: clear that the fiscal rules are going to be breached.
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Speaker 1: As you say, one of her options is to change
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Speaker 1: the fiscal rules, and that might be the most sensible
11:36
Speaker 1: option at this point. But assuming that she's boxed herself
11:38
Speaker 1: in so firmly both politically, what would you think would
11:43
Speaker 1: be the other best option for her? Is there a
11:47
Speaker 1: I mean, you say she can cut spending by changing
11:49
Speaker 1: entitlement to benefits, etc. But that's a tough gig over
11:52
Speaker 1: the short term.
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Speaker 2: It is a tough gig over the short term. And
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Speaker 2: you know, the problem that I think a lot of
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Speaker 2: us foresaw and not being wise after the event pre
12:03
Speaker 2: election is a lot of conflicting promises on tax on
12:07
Speaker 2: public spending. You know this phrase not returning austerity to
12:10
Speaker 2: the public sector. The reality is that good housekeeping of
12:16
Speaker 2: departmental budgets, demanding efficiency savings shouldn't be a thing when
12:19
Speaker 2: you're boxed in on a fiscally It should be something
12:23
Speaker 2: you know, every good business does as business as usual.
12:26
Speaker 2: It's as a standard count of taking out. Yeah, absolutely,
12:29
Speaker 2: and so to the reason why I focus a little
12:33
Speaker 2: bit on benefits and let's get into the specifics of this.
12:36
Speaker 2: The eligibility for what used to be known as disability
12:39
Speaker 2: Living announce is another personal independence payment hip. If you
12:42
Speaker 2: speak to Opposition or now Opposition, at least until the
12:46
Speaker 2: third of July, they were the government, a lot of
12:49
Speaker 2: their spending plans to hit pretty similar fiscal rules were
12:53
Speaker 2: predicated on really bearing down on signals and disability eligibility
12:57
Speaker 2: through the personal independent payment, which is pretty jected to
13:00
Speaker 2: really skyrocket over the next few years.
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Speaker 1: And they thought that has sky rotted over the last
13:04
Speaker 1: few years. I mean, it's gone berserk over the last
13:06
Speaker 1: couple of years. And there's been this conversation about the
13:09
Speaker 1: extent to which this is related to flaws in the system,
13:12
Speaker 1: the extent to which is related to the benefits being
13:15
Speaker 1: too easy to claim or be able to claim in
13:17
Speaker 1: maybe the wrong way, and the extent to which is
13:19
Speaker 1: being related to to a rise in ill health in
13:21
Speaker 1: the UK.
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Speaker 2: Right, Yeah, and all of those things are I think
13:24
Speaker 2: objectively true. Even Tony Blair, who is not renowned perhaps
13:28
Speaker 2: for being a sort of small state advocates, has come
13:32
Speaker 2: out publicly and said you know this has gone too
13:34
Speaker 2: far in terms of the eligibility. But also it's not
13:37
Speaker 2: just pip itself personal independence payment. It is the gateway
13:42
Speaker 2: benefits that that opens up, which also has a liability
13:45
Speaker 2: for the taxpayer. And but for the point of doubt,
13:49
Speaker 2: if anybody's going well, it will all making sound very
13:51
Speaker 2: easy in terms of spending, cutting department and spending. None
13:54
Speaker 2: of this stuff is easy, be it departmental efficiency savings,
13:57
Speaker 2: be it annual managed expenditure, or at ME which is
14:01
Speaker 2: the part of welfare payments, abolishing the triple lot. Look
14:05
Speaker 2: all this stuff is it is really really high politically.
14:07
Speaker 2: I'm not denying it. But let's not pretend that raising
14:10
Speaker 2: taxes is going to be either easy politically or in
14:14
Speaker 2: the best interests of an economy where demand looks by
14:17
Speaker 2: almost any measure pretty soft. Right now.
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Speaker 1: Let's look at it the other way around, then, and
14:22
Speaker 1: pretend that the fiscal rules are not going to be
14:25
Speaker 1: broken so we don't have to worry about these incredibly
14:28
Speaker 1: short term things and changing the way the UK economy
14:31
Speaker 1: is run based on minus shifting guilt reels, et cetera,
14:33
Speaker 1: which of course is ridiculous in itself. Let's say that
14:36
Speaker 1: doesn't happen and talk about the best things that ritual
14:39
Speaker 1: rufs could do to really facilitate growth. I mean, I
14:41
Speaker 1: think as a starter point, we should probably say that,
14:44
Speaker 1: as we said earlier, none of us really feel that
14:47
Speaker 1: you can create growth. We feel you can only facilitate it.
14:50
Speaker 1: And if you're going to facilitate it, or at least
14:52
Speaker 1: lay create an environment in which growth can happen independently.
14:55
Speaker 1: You're talking about making sure that you have low and
14:59
Speaker 1: simple taxes. That's a long term project. That you have
15:01
Speaker 1: a state that doesn't overbear the private sector again, another
15:05
Speaker 1: long term project. That you have a solid and effective
15:09
Speaker 1: transport infrastructure again, another long term project. A good education
15:13
Speaker 1: system we kind of have that, horay, reliable and easily
15:16
Speaker 1: accessible legal system do we have that we can discuss.
15:20
Speaker 1: All these things are what you need if you're going
15:22
Speaker 1: to create an environment for growth. These are all long
15:25
Speaker 1: term projects. Changing any of those things in the UK
15:28
Speaker 1: is not something we can do over a period that
15:31
Speaker 1: might allow Porridge or Reefs.
15:32
Speaker 2: To keep a job.
15:33
Speaker 1: What can she do in this short to medium term
15:37
Speaker 1: to help things along?
15:38
Speaker 2: Do you think at the risk of triggering John again
15:41
Speaker 2: in terms of economic vibes. I think a North Sea
15:46
Speaker 2: oil and gas licensing would be the first place I
15:49
Speaker 2: would start. Why because you could say, well, the big
15:54
Speaker 2: economic impacts could be, for example, you know, rejoining the
15:58
Speaker 2: Customs Union or the single mard like it. But the
16:00
Speaker 2: political uproar that would create seems like that that is
16:04
Speaker 2: off the table. So let's look at practical short term
16:07
Speaker 2: measures where you change the narrative about the government, you know,
16:11
Speaker 2: ruling out some growth accreative policies on ideological grounds. If
16:19
Speaker 2: you say the world has fundamentally changed from when we
16:23
Speaker 2: were in opposition, where we were against Norse oil and
16:26
Speaker 2: gas exploration, we have a gentleman now in the White
16:30
Speaker 2: House and Donald Trump, for whom we are or we are,
16:34
Speaker 2: reliant on his country's exports of fide natural gas. Don't
16:37
Speaker 2: listen to Simon French. Listen to the press release of
16:40
Speaker 2: Centrica two weeks ago on the madness of the UK
16:46
Speaker 2: swing supply of energy being reliant on gas being transported
16:50
Speaker 2: from three thousand miles away, with a counterparty who, by
16:54
Speaker 2: any objective measure, is only really interested in himself and
16:59
Speaker 2: maybe the broader US economy, and therefore is not going
17:02
Speaker 2: to do any favors in a situation where potentially to
17:06
Speaker 2: his strategic advantage would limit that supply. Securonomics, we don't
17:10
Speaker 2: hear much about secureomics anymore, but we did pre election.
17:14
Speaker 2: Is entirely consistent with having more domestic energy supply. Now,
17:19
Speaker 2: you may be uncomfortable with the carbon footprint implications of that,
17:25
Speaker 2: but you're consuming it anyway. But adding to the carbon
17:27
Speaker 2: footprint by getting it shipped across the Atlantic or brought
17:30
Speaker 2: over from Katar that is economic madness. But the sorter
17:36
Speaker 2: economic impulse of that is relatively small. But as a
17:40
Speaker 2: signal that you're prepared to sacrifice some of your ideologies
17:46
Speaker 2: because you really think that investment a secure energy ecosystem,
17:51
Speaker 2: a lower cost energy ecosystem, is really important. That sends
17:54
Speaker 2: a really powerful message to the private sector who may
17:58
Speaker 2: be looking to deploy capital and going Actually, this government
18:01
Speaker 2: is pragmatic, not ideological. Yes, I agree with that entirely.
18:07
Speaker 2: And again there's some material change, arguably some material change.
18:11
Speaker 2: I mean Marin on non tax as well, you mentioned tax.
18:14
Speaker 2: I mean there's a seventy eight percent marginal tax rate
18:17
Speaker 2: through the excess profits. Levey On on Norse oil and
18:21
Speaker 2: gas profits. I understand politically why that's very very popular.
18:25
Speaker 2: But look, I'm not a massive lafforist. I don't think
18:29
Speaker 2: you know, Laffer has much to say around most of
18:32
Speaker 2: our tax rates. But on that I think there's very
18:35
Speaker 2: strong empirical evidence that actually reducing the tax take actually
18:40
Speaker 2: does bring in more revenue because you just get more investment,
18:44
Speaker 2: more domestic production, you will take increase the tax take,
18:48
Speaker 2: not just from the tax take for the treasury, but
18:50
Speaker 2: the decommissioning budget, which of course goes up. There's the
18:55
Speaker 2: more existing production just can't be extended its lifespan, and
18:59
Speaker 2: the libel it comes back on the taxpayer and the exchequer.
19:02
Speaker 2: If you extend licensing and you make a more favorable
19:05
Speaker 2: tax environment, you reduce that liability. So it has a
19:09
Speaker 2: dual sided positive fiscal impact that can get Ratleries out
19:12
Speaker 2: of a black hole.
19:14
Speaker 1: But you are a left for us, really, Simon, I'm
19:16
Speaker 1: an every one that you know.
19:19
Speaker 2: You believe that.
19:23
Speaker 1: You can't deny that with every tax rate, there is
19:26
Speaker 1: a point, there is a point at which you collect
19:28
Speaker 1: less than you would if you had it a couple
19:30
Speaker 1: of percentage points lower.
19:31
Speaker 2: I agree, and it's across the board.
19:33
Speaker 1: It's just it's just higher than most people would say.
19:36
Speaker 1: I mean, I would say that around fifty percent. You know,
19:41
Speaker 1: when you get to the point, one for me, one
19:42
Speaker 1: for you, everyone's like, yeah, do you know what, maybe
19:44
Speaker 1: we'll just all have less. So there is a point. Yeah, absolutely,
19:49
Speaker 1: But none of these incredibly rational and sensible sounding ideas
19:55
Speaker 1: are remotely possible as long as the British government employees
19:59
Speaker 1: Ed Miliband and it's committed to net zero. Right, that
20:02
Speaker 1: is correct, so not going to happen. I agree with you, Maren,
20:05
Speaker 1: Thank you. I appreciate that.
20:07
Speaker 2: John.
20:07
Speaker 1: Do you agree with me?
20:08
Speaker 3: Oh? I agree with the point. I think it might
20:11
Speaker 3: be changeable sort of. Boys don't have a tough war,
20:15
Speaker 3: doesn't it? Because you've got If Sir Rachel Reeves kinda
20:18
Speaker 3: needs to keep her job for ko Starma to keep
20:21
Speaker 3: his job, well it's Ed Mellerband doesn't He kept his
20:24
Speaker 3: job for Kierstam to keep his job. And if Kire's
20:26
Speaker 3: actually ruthless, which I think would be a good thing.
20:31
Speaker 3: I think that would be his most positive trait that
20:33
Speaker 3: I've observed, then he is not stupid and he'll know
20:37
Speaker 3: which one of them is for the job.
20:39
Speaker 1: Mmmm. Interesting. This is Also, one of the things that
20:41
Speaker 1: we've heard a lot about from both Reeves and Starmer
20:44
Speaker 1: recently is about AI and about data centers and all
20:46
Speaker 1: these incredibly energy heavy things. And again this type of
20:52
Speaker 1: drive for growth is very difficult in an expensive energy environment.
20:57
Speaker 3: Also, I should just very quick comment to the the
21:00
Speaker 3: token Scottish person on the podcast.
21:05
Speaker 1: That's you.
21:06
Speaker 2: That's you.
21:06
Speaker 3: In this case, Aberdeen's been absolutely gutted by Yes, the
21:11
Speaker 3: oil industry in this country, and Aberdeen used to be
21:14
Speaker 3: an important city in Scotland. How can we never hear
21:18
Speaker 3: about it?
21:19
Speaker 2: You suggest that media is London and Southeast focused.
21:22
Speaker 3: It was not just that, I mean in Scotland. There
21:24
Speaker 3: must be people up in arms about the end of
21:27
Speaker 3: the oil and gas industry, given that in twenty fourteen
21:29
Speaker 3: it was the primary reason for Scottish independence. I don't
21:32
Speaker 3: really understand why we very rarely hear any mutterings of
21:38
Speaker 3: descent about the fact that, yeah, I mean, you know,
21:42
Speaker 3: this entirely important capital of the North of Scotland has
21:46
Speaker 3: been entirely de industrialized by our stupid Westminster imposed north
21:52
Speaker 3: Sea oil open.
21:53
Speaker 1: Of course, see the things that the politicians in Scotland
21:57
Speaker 1: are all super pro you know, they're Mary Kane zero.
22:00
Speaker 1: They're very keen on getting rid of the gas and
22:05
Speaker 1: oil industry up here. It's a very strange thing. So
22:07
Speaker 1: we hear very little about it because it's one of
22:09
Speaker 1: those things in which the SMP has been in full
22:10
Speaker 1: agreement with Westminster, despite the fact that they're effectively lopping
22:14
Speaker 1: off one of the only successful industries in Scotland and.
22:17
Speaker 3: The antes we see Watson practice. Look, if it ends
22:20
Speaker 3: up coming back, I.
22:22
Speaker 1: Just think it will. I mean, you know that, as
22:24
Speaker 1: we have said several times on this pod and during
22:26
Speaker 1: our conversations, the global vibe is changing, and so gradually
22:29
Speaker 1: the UK vibe will change, not the you believing vibes.
22:32
Speaker 2: Of but just on a broader energy point. Look, let's
22:37
Speaker 2: take the data points, which is the UK across the
22:40
Speaker 2: industrial world has the highest cost of energy. There's a
22:44
Speaker 2: lot of areas and John certainly knows that this is
22:47
Speaker 2: a regular theme of my research notes, which is the
22:50
Speaker 2: UK has often pointed out to be exceptional, largely exceptionally
22:54
Speaker 2: negative when it really isn't. It's middle of the road,
22:57
Speaker 2: but on certain some benchmarks it does stand out, and
23:02
Speaker 2: on the cost of energy it does stand out like
23:04
Speaker 2: a sore thumb. Speak to any energy economist. I'm not
23:08
Speaker 2: an energy economist, but speak to any of them who
23:11
Speaker 2: this is their day job. They will tell you that
23:13
Speaker 2: the future is a pluralistic set of energy sources. It
23:17
Speaker 2: is not hitching your wagon on a single source, either
23:21
Speaker 2: intermittent or otherwise. And that's what I feel like. I
23:25
Speaker 2: struggle with with the idea of ideology driving the energy
23:28
Speaker 2: debate when the real experts, the true experts in this area,
23:32
Speaker 2: tells you that almost whatever scenario and none of us
23:35
Speaker 2: have a perfect scen I wish we did, although may
23:37
Speaker 2: put economists out of business if we had a perfect
23:39
Speaker 2: view on the future. But I think most of us
23:42
Speaker 2: can agree that, you know, placing your bets across multiple
23:47
Speaker 2: energy sources is certainly the most resilient way to go
23:50
Speaker 2: about having an energy strategy.
23:52
Speaker 3: And I also think the point of the booton, didn't
23:54
Speaker 3: it to be kind of home growing especially no is
23:58
Speaker 3: a bit over looked. I mean an awful lot of
24:01
Speaker 3: this sort of like the current plan seems to be
24:03
Speaker 3: based on the idea that we will continue being able
24:06
Speaker 3: to import from Norway and France whenever we can't generate
24:10
Speaker 3: our own wind. And also as you say L energy
24:13
Speaker 3: from the US. If we've got it in our own backyard,
24:16
Speaker 3: then why aren't we benefit from the economic activity they're
24:20
Speaker 3: getting out of the ground. Well, you know, giver us.
24:23
Speaker 3: And also you know you can think of it as
24:26
Speaker 3: is it food males? You can call it energy males.
24:28
Speaker 3: Energy males for L energy we can cut back on those.
24:32
Speaker 3: So yeah, no, I mean absolutely, And the secure anomics
24:35
Speaker 3: argument I think makes an awful lot of sense or
24:38
Speaker 3: energy specifically.
24:39
Speaker 1: Let's move on to inflation and interest rates. The conversation
24:44
Speaker 1: around this is constantly changing. Where are you expecting things
24:47
Speaker 1: to go over the next year or so, thinking about
24:50
Speaker 1: thinking about listeners, mortgages.
24:52
Speaker 2: Of course, we've got six right cuts this year, which
24:55
Speaker 2: is anti consensus. And it was a brave call maybe
25:00
Speaker 2: that I made earlier in the year. I noted that
25:03
Speaker 2: Goldman Sachs came out with the same call this morning,
25:05
Speaker 2: and suddenly my sales desk at Pamel Librum took notice,
25:08
Speaker 2: which may question my own personal impact. But the market
25:15
Speaker 2: has moved slightly more towards me. It still only sees
25:19
Speaker 2: two and a half to three cuts, but it's certainly
25:22
Speaker 2: moved away from its arch hawkishness. In the first couple
25:25
Speaker 2: of weeks of January. How do I, if you like, intellectually
25:29
Speaker 2: empirically stack that up. And actually John gave me or
25:34
Speaker 2: led Tea this up quite nicely about ten minutes ago
25:36
Speaker 2: by talking about the fact that a lot of what
25:39
Speaker 2: we've seen in the budget is actually disinflationary. A lot
25:43
Speaker 2: of focus has been on employer nicks being passed through
25:46
Speaker 2: to end consumer prices, and of course one of the
25:48
Speaker 2: options for companies is to pass it through in end
25:50
Speaker 2: consumer prices. But the Bank of England did a helpful
25:53
Speaker 2: survey back in November that it's used its decision maker
25:57
Speaker 2: panel to ask them what the companies planned to do
26:00
Speaker 2: in terms of their impact passing the impact of employee
26:04
Speaker 2: nicks on and there was actually a pretty even spread
26:07
Speaker 2: between the four options available, and one of them is
26:10
Speaker 2: inflationary higher prices, but actually the other three are disinflationary
26:14
Speaker 2: and they are reduced profit margins, reduced employee wages and
26:19
Speaker 2: reduced employment. And so in my model, and I think
26:22
Speaker 2: we've started to see MPC members Alan Taylor, the newest
26:27
Speaker 2: member of the MPC, and the speech last week, which
26:29
Speaker 2: I thought was very good, and Sarah Breeden both start
26:32
Speaker 2: to pivot towards the fact that this might not actually
26:34
Speaker 2: be the big inflationary impulse domestic impulse that I guess
26:39
Speaker 2: has been forefront investors' minds, and just to show this
26:45
Speaker 2: is not economists and sort of abstract bit of modeling.
26:49
Speaker 2: Always I find in terms of rns's so PLC is
26:52
Speaker 2: releasing their their their, their, their, their financial information next
26:58
Speaker 2: is the best in class. I think Simon Wolfson, Lord
27:00
Speaker 2: Wolfson is is brilliant at presenting a breakdown of how
27:03
Speaker 2: his business works and what were some pretty inflationary impulses
27:08
Speaker 2: through the National Living Wage Employer Nicks. Actually, once you
27:12
Speaker 2: take into account all the mitigating actions, including non wage
27:15
Speaker 2: costs in the supply chain, what does the end expectation
27:18
Speaker 2: passed through to end consumer prices for this year? Just
27:21
Speaker 2: one percent? And I think to some degree that's like
27:25
Speaker 2: a real worked example of how I think perhaps overdone
27:29
Speaker 2: was how inflationary employer Nicks are going to be and
27:33
Speaker 2: therefore a slightly less inflationary backdrop therefore a faster rate
27:38
Speaker 2: cutting cycle than I think the market's currently pricing.
27:41
Speaker 3: It's senseesting you see like scenes, but he's just converting
27:43
Speaker 3: see and it's cutting thetos and jobs as a dayly
27:46
Speaker 3: result with the place, of course the budgets or that
27:52
Speaker 3: kind of makes your point, although it's sort of like
27:56
Speaker 3: it's it's yes, it's good, it's not gonna be inflation
27:59
Speaker 3: that it's not very happy sort of story that is
28:01
Speaker 3: also going to be terrible for employment.
28:04
Speaker 2: Absolutely right. Look, if I look at my forecasts for
28:06
Speaker 2: the year, I'm more confident than I was a few
28:09
Speaker 2: weeks ago on the rate path. I'm less confident on
28:12
Speaker 2: the growth path. The two sides of the coin there,
28:16
Speaker 2: and I recognize that demand. All the indicators on demand,
28:21
Speaker 2: both from employee surveys, consumer surveys, the CBI growth indicator,
28:29
Speaker 2: all the major the pmis, of course purchasing manager indices
28:34
Speaker 2: are all suggesting a pretty soft demand picture. And therefore
28:37
Speaker 2: I think the risks that, if you like, we get
28:39
Speaker 2: a technical recession Q four, Q one or even Q
28:42
Speaker 2: on Q two this year have certainly grown. Albeit I
28:47
Speaker 2: think the second half of the year we'll see a
28:51
Speaker 2: lot of the stuff that the government has spoken about
28:54
Speaker 2: to enable growth. I'm not want to trigger merin to
28:57
Speaker 2: enable growth, to get out of the way of growth
28:59
Speaker 2: will start to sort of come through and Therefore, I
29:01
Speaker 2: think I'm a bit more optimistic on the second half
29:03
Speaker 2: the yeage, whether it can make up what I think
29:04
Speaker 2: will be a pretty soft first half.
29:06
Speaker 1: You mentioned the impact for the UK of of President
29:12
Speaker 1: Trump in terms of energy. What other impacts might there
29:17
Speaker 1: be for us? I'm thinking about what tariffs obviously attacks.
29:22
Speaker 2: Yeah, so on tariffs, the direct impact is relatively contained.
29:26
Speaker 2: So the UK exports about sixty one billion pounds worth
29:29
Speaker 2: of goods to the US, which is equivalent to about two
29:32
Speaker 2: percent of our GDP. Compare that to the Eurozone, which
29:36
Speaker 2: exports about five hundred and fifty billion dollars worth of goods,
29:39
Speaker 2: and that's about four percent of their GDP. So it's
29:42
Speaker 2: half as relevant in the UK as the U Zone,
29:44
Speaker 2: but it's only a tenth as relevant as Mexico and Canada,
29:48
Speaker 2: which have exports of goods to the US equivalent to
29:51
Speaker 2: between about twenty to twenty five percent of their GDP.
29:54
Speaker 2: So when you benchmark the UK gather against other major economies,
29:57
Speaker 2: are how sensitive they would be to a just a
30:00
Speaker 2: you know, a uniformed tariff for costs all trading partners.
30:03
Speaker 2: The UK's relatively has limited exposure. But the UK is
30:10
Speaker 2: also quite an open economy and global growth. The overall
30:14
Speaker 2: impact of tariffs on global growth and activity does have
30:17
Speaker 2: an outsized blowback on UK economic activity, So I think,
30:23
Speaker 2: you know, direct impact rather less than the market is expecting,
30:27
Speaker 2: but that secondary impact, if it really derails global growth
30:31
Speaker 2: MOMENTUMI is where the UK is possibly more exposed, particularly
30:34
Speaker 2: on the services side, in terms of economic activity.
30:37
Speaker 1: But we can't quite forecast an impact. Can We can't
30:40
Speaker 1: really put in the numbers because we've really no idea
30:42
Speaker 1: what's going to happen.
30:44
Speaker 2: Much much smarter the people than I have tried to
30:46
Speaker 2: sort of make sense of this in terms of the
30:50
Speaker 2: quantification on global growth on on tariffs. But we're all
30:54
Speaker 2: trying to guess, aren't we, on the degree to which
30:58
Speaker 2: this is a negotiating position to extract concessions across other
31:05
Speaker 2: policy priorities for the United States or weather. And there's
31:08
Speaker 2: a respectable view, which is that trumpon point zero, which
31:12
Speaker 2: had remarkably little impact on the trade balance of the US,
31:15
Speaker 2: had remarkably little impact on global growth, had remarkably little
31:18
Speaker 2: impact on global inflation. Is well, history is the best judge,
31:22
Speaker 2: so it'll be just Trump two point zerirably the same
31:24
Speaker 2: that may be different bluster, but it will have the
31:26
Speaker 2: same material impact. Those are respectable views both. I think
31:30
Speaker 2: it's just really really hard to conviction put it into
31:34
Speaker 2: your model for for growth, for inflation and then therefore
31:37
Speaker 2: by extension the rate path.
31:39
Speaker 1: So we'll put that under. We don't know, we have to.
31:41
Speaker 1: We have to, Yeah, we do. The other thing I
31:44
Speaker 1: wanted to ask you about, John. You may have other
31:46
Speaker 1: questions before we let something go, but I wanted to
31:48
Speaker 1: ask you about the non existent productivity revolution and where
31:52
Speaker 1: you think there is a possibility for the UK actually
31:55
Speaker 1: improving productivity. And we hear a lot of guff about
31:57
Speaker 1: AI etc. But we haven't really seen any results yet.
32:00
Speaker 2: So of all the announcements in the last few days,
32:06
Speaker 2: and look, there've been a flurry of announcements, probably because
32:09
Speaker 2: Rachel riefs as the time of recording in Davos speaking
32:13
Speaker 2: to people who like pro growth announcements. So look the grid,
32:17
Speaker 2: the famous number ten or number eleven grid has clearly
32:20
Speaker 2: been engineered to make this a growth week. I hope
32:23
Speaker 2: it won't just be a growth week and we move
32:24
Speaker 2: on to other stuff next week. I hope it's a
32:26
Speaker 2: growth year or a growth four and a half years.
32:29
Speaker 2: But the one thing that did raise my eyebrows this
32:32
Speaker 2: morning is the government's suggestion it will co opt all
32:36
Speaker 2: the recommendations in a recent review into what I think
32:40
Speaker 2: we could all agree is the overreach of judicial reviews
32:43
Speaker 2: in delaying the cost of capital deployment. And most of
32:47
Speaker 2: the companies we speak to say the UK hasn't got
32:50
Speaker 2: an absence a paucity of investable propositions, but the timeline,
32:54
Speaker 2: and they're by extension, the cost, the cost of capital
32:59
Speaker 2: to deploy and the leading time to deploy capital is
33:02
Speaker 2: just a big impediment here, and judicial review being an
33:06
Speaker 2: element of that anything and if this is material and
33:09
Speaker 2: they will recommend all the copt all those recommendations to
33:13
Speaker 2: limit the scope and the duration of judicial reviews into
33:18
Speaker 2: critical national infrastructure. That feels to me like a crucial development, which,
33:23
Speaker 2: when you're talking about productivity, does have I think it's
33:28
Speaker 2: not let's not pretend it's going to be short term,
33:30
Speaker 2: but over a medium long term view, a much much
33:33
Speaker 2: more constructive backdrop for productivity growth in the UK.
33:36
Speaker 1: Interesting, John, this.
33:38
Speaker 3: Is this is going back to fiscal rules and policy making.
33:43
Speaker 3: Do you think there's any chance that this may be
33:47
Speaker 3: the government to get rid of or saide Lane and
33:53
Speaker 3: a helpful week that it will be our and it's
33:56
Speaker 3: sort of just it's still blows my mind that the
34:01
Speaker 3: OBR was invented fifteen years ago by a Tory government
34:04
Speaker 3: to rub the kind of noses the going Labor opposition
34:08
Speaker 3: and their failure post two thousand and eight, and now
34:10
Speaker 3: it's been used by a Labor government to rub the
34:12
Speaker 3: tody noses in it and it has hamstrung them all
34:16
Speaker 3: for the last fifteen years. And it just seems madness
34:20
Speaker 3: that we have this sort of like very recently born
34:24
Speaker 3: Kwang Go dictating to our politicians how much they're allowed
34:28
Speaker 3: to spend or else something awful is going to happen.
34:32
Speaker 2: Marin, You're honest. In the studio, you can't see that
34:34
Speaker 2: John is dressed up as Liz Trust. But I'm he
34:38
Speaker 2: is a dawned from tearing Liz Trust's attire.
34:43
Speaker 1: He has always been a fan look for.
34:45
Speaker 2: The voices of the voices of any doubt. I get
34:49
Speaker 2: lots of stuff wrong, but I did write a column
34:52
Speaker 2: in a help a reasonably respectable broadsheet newspaper that talked
34:58
Speaker 2: about the moment of g OBR omnipotence, which seemingly was
35:03
Speaker 2: just ahead of the election when Rachriez was talking about
35:06
Speaker 2: greater powers, and I wrote it columns saying, actually, I
35:10
Speaker 2: think that is the moment of peak risk paradoxically for
35:14
Speaker 2: the OBR, because when it performs a what is seemingly
35:19
Speaker 2: a blocking function for both sides of the political aisle,
35:22
Speaker 2: you might get political consensus that its role needs to
35:26
Speaker 2: be reviewed. So while I don't think the markets are
35:32
Speaker 2: in a position for if you like a left field
35:36
Speaker 2: announcement on scaling back the obr's role in arbitrating over
35:41
Speaker 2: fiscal rules, I do think over time we will see,
35:45
Speaker 2: if you like bipartisan agreement that it is a little
35:49
Speaker 2: bit crazy, will be it no fault directly of the OBR.
35:52
Speaker 2: It's a fault of what the mandate they've been given
35:54
Speaker 2: in the charter of a budget of responsibility. We will
35:56
Speaker 2: see a scaling back or of that, because I think
35:59
Speaker 2: polity on both sides will say from very very different
36:02
Speaker 2: starting positions, this is getting in the way of good
36:04
Speaker 2: long term policy making. Albeit the OBR would clearly argue
36:08
Speaker 2: encounterable change. In that case, a fiscal charter which or
36:10
Speaker 2: the charter budget of responsibility that we have to operate to.
36:13
Speaker 3: That sounds good.
36:15
Speaker 1: There is one more there is one more thing that
36:17
Speaker 1: we must talk about before we let you go, which
36:20
Speaker 1: is the UK stock market. And you've written in the
36:23
Speaker 1: past or suddenly we've talked in the past about the
36:26
Speaker 1: idea that UK pension funds should be obliged to invest
36:29
Speaker 1: in UK assets in a similar way to those in
36:31
Speaker 1: the say Australia, Canada, etc. Pension funds having such a
36:34
Speaker 1: small percentage of their assets in the UK at the moment,
36:37
Speaker 1: and you suggested this would be one way to save
36:39
Speaker 1: the rather miserable UK stock market. That's still your view,
36:44
Speaker 1: I assume.
36:45
Speaker 2: Yes, albeit I hope I am not tineered and haven't
36:49
Speaker 2: seen the sort of quite violent pushback against mandation, and
36:54
Speaker 2: not just a political level, but also in parts of
36:56
Speaker 2: corporate UK some of the wealth managers very vocal vocally
37:01
Speaker 2: anti this and approach to change the allocation using mandation.
37:06
Speaker 2: So maybe the Pensions Review in its second stage, it's
37:11
Speaker 2: had its interim report with a mansionhow speech back in November,
37:14
Speaker 2: we'll look at FYSCAL questions which have been they've been
37:19
Speaker 2: told to not address fyscal questions. The tax incentives to
37:22
Speaker 2: own UK assets. But I think we can both agree
37:24
Speaker 2: with twenty seven years of data behind us that the
37:29
Speaker 2: removal of dividend interest tax relief in the late nineties
37:32
Speaker 2: accelerated that allocation away from the UK, And you mentioned
37:35
Speaker 2: in your intro to that question Australia their equivalent of
37:40
Speaker 2: dividend interest tax relief Frank dividends is one of the
37:43
Speaker 2: reasons why Australian pension funds are forty x their overweight
37:48
Speaker 2: their own domestic market, because it's made fiscally attractive to
37:51
Speaker 2: do so. Now the personalities leading the puns and review
37:54
Speaker 2: have changed. It was Emma Reynolds. She's been moved because
37:57
Speaker 2: of tu the pisidic's resignation to different roles. She's now
38:02
Speaker 2: doing City Minister and Torston Bell is now Pensions Minister.
38:05
Speaker 2: It remains to be seen whether Towston, who has some
38:08
Speaker 2: interesting views on them on the broader pension savings ecosystem.
38:12
Speaker 2: What is view is around the allocation to the home
38:16
Speaker 2: market and the impact that has on the cost of
38:19
Speaker 2: capital for UK companies, on investment on the tax base.
38:23
Speaker 2: A lot of the things that we've said are reasons
38:26
Speaker 2: why the UK has gone too far in terms of
38:29
Speaker 2: under allocation to its its domestic market.
38:32
Speaker 3: That's interesting. In the Homphrey from Yes Minister context, I believe.
38:38
Speaker 2: Don't tempt me, John, don't tempt me.
38:40
Speaker 1: We might we might say that after we've finished recording.
38:45
Speaker 1: So you're absolutely wonderful. We love having you on. Thank
38:48
Speaker 1: you very much. I mean asked one last thing of
38:51
Speaker 1: you before you get to go, and do, by any chance,
38:54
Speaker 1: have a favorite book you would like to recommend to
38:57
Speaker 1: our listeners. One that is something to do with investing
39:01
Speaker 1: or finance obviously, or in politics or not actually just
39:04
Speaker 1: you know, something appropriate, that's all.
39:07
Speaker 2: So the one I'm reading of the moment, so it's
39:09
Speaker 2: front of mine. I'm not a big reader of books,
39:11
Speaker 2: but I was. I was away over the weekend. You're
39:14
Speaker 2: down with the kids, well I know, but I was
39:18
Speaker 2: reading one on effectively digital detos and the name is
39:24
Speaker 2: escaping with this is terrible, a readiant book and I
39:27
Speaker 2: can't remember the title.
39:28
Speaker 1: But forget it later and put it in the show notes.
39:31
Speaker 2: Can you please do? Can you please do that? But
39:32
Speaker 2: the idea that you've got just so much, so many
39:35
Speaker 2: apps and I'm guilty of this on your phone that
39:37
Speaker 2: you know the doom scrolling environment just has a really
39:40
Speaker 2: unhelpful and actually, let's make it about economics. It has
39:45
Speaker 2: massive diminishing marginal utility every additional scroll you do, and
39:49
Speaker 2: therefore optimizing that, not not completely going anti technology or
39:54
Speaker 2: anti smartphone apps, the huge productivity of Anchila has but
39:59
Speaker 2: actually wreckanizing that there is a bliss point and most
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Speaker 2: of us are the wrong side of that bliss point.
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Speaker 2: And it's just made me think a little bit more
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Speaker 2: about what apps are absolutely essential on my phone on
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Speaker 2: which I need to get off or have some time
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Speaker 2: Limit's a little cues to change my behavior of engaging
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Speaker 2: with that. So that would be one that if you
40:17
Speaker 2: can put in the show notes. It's a really good
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Speaker 2: book which I'm about three quarters the way through, and
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Speaker 2: it has genuinely changed my behavior and how I consume information.
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Speaker 1: Okay, brilliant, I need that. What with you know, being
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Speaker 1: on Twitter while you've been talking joke.
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Speaker 2: God, I'm sober, both sons. I mean, you're scrolling while I'm.
40:42
Speaker 1: Thanks for listening to this week's Marin Talks Money. If
40:44
Speaker 1: you like a show, rate review and subscribe wherever you
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Speaker 1: listen to podcasts and keep sending your questions and your
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Speaker 1: comments and mirror money at Bloemberg. Don't that. You can
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Speaker 1: also follow me and John on Twitter or x. I'm
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Speaker 1: at mariness w and John is John underscores Stepek. This
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Speaker 1: episode was hosted by Me Maren zumset Web. It was
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Speaker 1: produced by Someersidi and Moses and sound designed by Blake
41:05
Speaker 1: Maples and special thanks of course to Simon French