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Burnham, a debt crisis and why higher taxes are coming · Week in Business

• 0:00
  SPEAKER_00: This is a City AM Studios production.
• 0:04
  SPEAKER_00: Welcome back to the week in business.
• 0:06
  SPEAKER_00: I've been away, back home on the Isles of Scilly, good couple of weeks.
• 0:10
  SPEAKER_00: Didn't wear my shoes, didn't wear a watch, barely checked the news, but even out on my boat with my kids swimming in the sea, there was always something in the back of my head that said September's going to be busy.
• 0:26
  SPEAKER_00: And I think that is going to come to pass.
• 0:28
  SPEAKER_00: Why?
• 0:28
  SPEAKER_00: Because we are on the brink of an economic crisis.
• 0:34
  SPEAKER_00: And I don't use those words lightly.
• 0:36
  SPEAKER_00: Now let me be clear.
• 0:37
  SPEAKER_00: This is not simply because Andy Burnham has become Prime Minister or he's done something or said something or is pursuing something which is triggering a particular crisis.
• 0:48
  SPEAKER_00: It's more a case that there is an economic storm brewing in economies around the world.
• 0:55
  SPEAKER_00: And each country affected by that will be affected in its own way for its own reasons.
• 1:02
  SPEAKER_00: And we could look at America and we could look at the extraordinary debt pile,$40 trillion.
• 1:08
  SPEAKER_00: We could look at Japan with the situation in its own bond market.
• 1:13
  SPEAKER_00: Even Germany and France are experiencing difficulties.
• 1:18
  SPEAKER_00: In the UK, like everywhere else, borrowing costs are increasing.
• 1:23
  SPEAKER_00: They are increasing faster here, and they are going higher here than other European countries.
• 1:30
  SPEAKER_00: And the question is why?
• 1:32
  SPEAKER_00: And it cannot simply be blamed on Andy Burnham.
• 1:35
  SPEAKER_00: But the bottom line is it's happening on his watch and he's going to have to deal with it.
• 1:39
  SPEAKER_00: Now that might derail his plans for a happy clappy growth in every postcode, hope in every heart agenda that he's enjoyed TikToking about over the summer.
• 1:50
  SPEAKER_00: Well, tough.
• 1:51
  SPEAKER_00: Life's not fair, politics isn't fair, the crisis is going to come to a head on his watch, and he's going to have to deal with it.
• 1:58
  SPEAKER_00: Now, what form is this crisis going to take?
• 2:01
  SPEAKER_00: These elevated borrowing costs for the British government in particular.
• 2:06
  SPEAKER_00: Now, the reasons for this are, yes, of course, to do with concerns around inflation, concerns around the Iran war continuing.
• 2:15
  SPEAKER_00: But it's also the case that in this country our credit is wearing a bit thin.
• 2:22
  SPEAKER_00: And we're being presented with the bill, if you like, for many, many years of frankly, living beyond our means, putting up with low growth and poor productivity and borrowing an ever-increasing amount of money.
• 2:38
  SPEAKER_00: We are sitting on an appallingly large multi-trillion pound debt pile in this country, and we are paying north of£100 billion a year just to pay the interest on our borrowing.
• 2:51
  SPEAKER_00: Just consider that and put it in the context of a defence budget that's about 60 billion, I think, and a central political argument of our days about how to find another four or five billion.
• 3:02
  SPEAKER_00: We are in danger of running out of money, and the markets are close to running out of patience.
• 3:11
  SPEAKER_00: And it's very concerning when, you know, previously quite neutral, dry experts, the likes of Sir Charlie Bean, formerly of the Bank of England and the OBR, and Jim O'Neill, formerly of Goldman Sachs and the Treasury, are saying uh into almost every microphone they can find this week that it does not sound as if Andy Burnham recognises the scale of the challenge.
• 3:35
  SPEAKER_00: Now, I I imagine that Burnham does, because he's not an idiot.
• 3:39
  SPEAKER_00: But it's very damaging for him to give the appearance that he doesn't, because it sends signals to markets that he does not intend to rein in spending, or that he wants to continue with his very expensive proposals to take greater public ownership of housing, energy, transport.
• 3:58
  SPEAKER_00: Um these these things are, I'm afraid, for now, something of a political luxury.
• 4:05
  SPEAKER_00: The elevated yields on British bonds are already having a very serious effect on the extent to which he'll be able to do anything that he spent the summer talking about doing.
• 4:15
  SPEAKER_00: Let's just take the uh elevated yield on the two-year bond.
• 4:19
  SPEAKER_00: Uh it's high and climbing, uh, and the principal um readout from that is that investors are anticipating now a series of interest rate hikes.
• 4:30
  SPEAKER_00: So, how does Burnham's cost of living premiership sit alongside a reality whereby the Bank of England raises interest rates three further times?
• 4:40
  SPEAKER_00: Now, it's not a given, they might not.
• 4:41
  SPEAKER_00: Indeed, they they like to be in a bit of a we'll wait and see, thank you very much pattern.
• 4:45
  SPEAKER_00: But that pattern's gonna break at some point, and current market expectation is that there'll be interest rate increases.
• 4:51
  SPEAKER_00: Well, that's gonna uh hamper mortgage uh holders and businesses.
• 4:56
  SPEAKER_00: Looking further ahead, if you like, at the 30-year bond and the increased premium um attached to that, that is a signal of of uh of an entirely different kind that sends alarm bells ringing about foundational credibility, about long-term credibility of the UK economy, of its borrowing requirements.
• 5:14
  SPEAKER_00: And there are a number of things that any Prime Minister now, looking at those numbers, really ought to do.
• 5:20
  SPEAKER_00: And they ought to say very clearly to those international investors and to the markets and to the city, here are some things I'm going to do to get a grip with this situation.
• 5:29
  SPEAKER_00: Now, when Burnham stood up in the House of Commons and said that change begins with honesty, I did think for a moment that he might start to grapple with some of these questions.
• 5:39
  SPEAKER_00: Of course I didn't really.
• 5:41
  SPEAKER_00: Um Burnham's definition of honesty is is very much a case of his my truth rather than the truth.
• 5:48
  SPEAKER_00: Um, and and Burnham's truth is that um all the problems in the country are because of Margaret Thatcher and Brexit.
• 5:54
  SPEAKER_00: Uh, and Labour MPs love that.
• 5:56
  SPEAKER_00: And the solution to this is to have a more active state, bigger government, probably higher taxes, to pay for his great reorganisation of local governments and nationalizations of key industries, etc.
• 6:09
  SPEAKER_00: And as Jim O'Neill said, that is precisely not what international investors want to hear right now.
• 6:15
  SPEAKER_00: So what would honesty look like?
• 6:17
  SPEAKER_00: It would begin by saying we spent 300 billion pounds to get through COVID.
• 6:22
  SPEAKER_00: That's real money.
• 6:24
  SPEAKER_00: Um it would begin by saying that the welfare bill, which is going to hit uh something like 450 billion pounds a year by the time of the next election, is utterly, utterly unsustainable.
• 6:36
  SPEAKER_00: That our current healthcare spending is on a trajectory that is unsustainable, that we can't afford to give 30 billion quid to Mauritius uh in order to sweeten the deal of handing back the Chagos Islands.
• 6:49
  SPEAKER_00: I don't there's an awful lot of places you could start to say, here are some things we cannot do, and here's why we cannot do them.
• 6:56
  SPEAKER_00: And you know, Burnham's got some political capital.
• 6:59
  SPEAKER_00: He could make the case, he's not gonna call it austerity, but he could be honest.
• 7:03
  SPEAKER_00: I fear his lack of honesty is going to lead to a very chilly winter.
• 7:08
  SPEAKER_00: And what is going to happen at the budget on the 28th of October?
• 7:12
  SPEAKER_00: He's gonna be presented with a range of options: increased borrowing, cut spending, uh, or increased taxes.
• 7:19
  SPEAKER_00: And where do you think his instincts are gonna take him?
• 7:22
  SPEAKER_00: Expectation of tax rises now are baked in.
• 7:26
  SPEAKER_00: People talking about capital gains tax hikes, more windfall taxes on the banks, forms of wealth taxes.
• 7:31
  SPEAKER_00: This is very, very, very damaging territory for the Prime Minister to take this country towards.
• 7:39
  SPEAKER_00: Um, and I I'm afraid I've seen nothing so far that suggests he recognises the scale of the challenge that this country faces and his own responsibility to do something about it.
• 7:50
  SPEAKER_00: Whether that's talking about changes down the line to the triple lock, even signals at this point about changing some of these big ticket items that we cannot afford would go some way to calming nerves.
• 8:02
  SPEAKER_00: But he's more interested in Thatcher bashing and talking about hope in every postcode and growth in every heart.
• 8:09
  SPEAKER_00: I think I got that the right way around.
• 8:11
  SPEAKER_00: He says he's got a credible plan.
• 8:13
  SPEAKER_00: It does not sound credible to me, it does not look credible to the bond market, and it's gonna come to a head.
• 8:19
  SPEAKER_00: So there you go, I'll cheer you all up after summer holidays.
• 8:23
  SPEAKER_00: Um, we are moving into the autumn, things are gonna get very real very fast.
• 8:27
  SPEAKER_00: And you can follow every twist and turn of it with the City AM app and on cityam.com, and I will see you next week.