00:00We're joined now by international economist Vicky Price, who we love having on Global Business Group.
00:04Good to see you.
00:05Look, the government is talking about a decade of renewable,
00:08but if there was one economic test which will define whether it succeeds or fails, what's that?
00:15Well, growth, I'm afraid, in the next couple of years, because of course then we're going to have elections.
00:21So for Andy Burnham, I think that's the most important indicator he'll be looking at.
00:26And of course, how do you get that growth?
00:28You did already mention a few of the ways in which people might feel better off,
00:34which is if the cost of living reduces or at least comes under some sort of control.
00:38And I think that's where they're focusing now to improve consumer confidence.
00:42The real question is whether businesses are going to feel more confident to produce that growth, which is so important.
00:48He's pledged to spend more on infrastructure, on public services.
00:53And of course, there's a lot of growing pressure to spend more on defence.
00:58Is there a credible way to do that within the fiscal rules?
01:02I suppose I'm wondering how flexible he's going to be.
01:05Well, the fiscal rules do allow for borrowing for capital spending.
01:08So if you put a lot of the defence expenditure, which is due to take place, I'm assuming, of course,
01:14that is agreed between the Chancellor and the new defence secretary.
01:18Remember, of course, that the current Chancellor was the defence secretary until relatively recently.
01:24If there is an agreement on how that money can be found, then it has to come out of capital
01:31spending.
01:31And that capital spending is allowed under the rules that exist now because there are two rules.
01:37Well, three rules, really.
01:38First of all, that you only spend on current expenditure, in other words, the National Health Service, maybe support on
01:49welfare from taxes that you raise.
01:52So you don't go out and borrow, but you can borrow for investment infrastructure, for example.
01:58Or HS2, which is that line which is meant to connect London with Birmingham, which is costing a huge amount.
02:04All that is allowed.
02:06But within all that, you also have to get your debt-to-GDP ratio to decline at the end of
02:12five years.
02:13It was originally three years now, certainly by the end of the Parliament.
02:16So you're constrained.
02:17But you can, in theory, borrow more if you want it.
02:21The government's made such big promises.
02:25And, yes, you're talking about that flexibility.
02:26But I'm wondering, because the markets are watching all of this closely, are investors convinced that the numbers add up?
02:33Not yet.
02:34I mean, we have, as you suggested, seen this increase in 10-year yields.
02:37But they are happening everywhere because, of course, we have high oil prices.
02:42We have the war in Iran still continuing or resuming and then continuing.
02:47And things don't look like they're likely to be sorted out in a hurry.
02:50So those are still hanging over, those concerns hanging over the markets.
02:55And, of course, all that means higher inflation and higher interest rates.
02:59So against that type of background, it's very, very difficult to see what can be done by moving things around
03:05a little bit
03:06or perhaps one of the areas that Andy Burnham, the new Prime Minister, wanted to see happen,
03:11which is regions doing better without some serious expenditure.
03:15I'm afraid since COVID in particular, what we've seen is that the cost of levelling up,
03:19in other words, seeing that the various regions across the country do as well as perhaps London and the southeast,
03:26which have been outstanding by comparison to the rest,
03:29that has become now considerably more expensive.
03:32So there's a limit to what can be done and certainly what can be done over the next couple of
03:36years.
03:37I mean, how much with government really does this government have?
03:40I mean, can it really pursue this much more ambitious economic agenda or are they really at the mercy of
03:47bond markets setting the pace?
03:50Well, they can influence the bond markets because if there is a little bit more confidence,
03:56particularly from businesses and they start investing, then that's going to be good news.
04:00And what you've seen already is that indeed defence stocks have done quite well and the FTSE has gone up,
04:05in fact, today.
04:06That's the main index of big companies in the UK.
04:11It was just suggested there is something there.
04:13But unfortunately, the economy has flatlined since the end of the first quarter.
04:18Nothing much is happening.
04:19Nobody's really hiring lots of additional people.
04:21So we've got unemployment sort of steadying as well.
04:25So you haven't really had any big movement in any direction.
04:29Everyone is very, very cautious right now.
04:32And that's the real issue.
04:34The markets are convinced that there is going to be growth and that growth will be able to fund some
04:38of the expenditure,
04:39which Andy Burnham will want to see happen to make people feel better off, perhaps,
04:45or cut some of the taxes for working people, which is also a possibility.
04:51What they're looking at is maybe raising the threshold from which you start paying tax,
04:56which has been frozen for ages.
04:57But that, of course, means less tax collection.
04:59The markets will be looking at that and trying to recalculate what it means for those fiscal rules that you
05:05referred to earlier.
05:07So they will be watching out very, very careful.
05:10We won't get a budget to explain it all until hopefully early October.
05:15But still, that gives us a couple of months of worry.
05:18Vicky Price, thank you so much for that in-depth analysis.
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