Treasury Committee
Wednesday 14th October 2026
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14:16
Speaker 1
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Speaker 1
Order, order! Welcome to the Treasury Select Committee on Wednesday the 14th of October 2026. Today we are beginning our evidence sessions ahead of the budget on the 28th of October. And today we've got some eminent economists in front of us to talk about what challenge is and options the Chancellor of the Exchequer is facing as he finalises that budget. So I'm really pleased to welcome and welcome back. In fact, Doctor Bidda Beck-friis, who's the senior vice president and economist at Pimco.
Welcome back to you, Doctor Beck-friis. Lord Jim O'Neill of Gatley who is the economist. We know a senior economist, very well known and often in the media, and was also a former former commercial secretary to the Treasury at the Treasury, and actually was, I believe, offered Lord O'Neill a job under the current Prime Minister but chose to stay outside government. Is that a fair summary?
Welcome back to you, Doctor Beck-friis. Lord Jim O'Neill of Gatley who is the economist. We know a senior economist, very well known and often in the media, and was also a former former commercial secretary to the Treasury at the Treasury, and actually was, I believe, offered Lord O'Neill a job under the current Prime Minister but chose to stay outside government. Is that a fair summary?
14:17
14:17
Speaker 1
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Speaker 1
I think I think it's fair to say you're probably making waves whether you're in or out of government. And then we have Professor Anna Valero, who's a former adviser to the last Chancellor of the Exchequer, Rachel Reeves MP, and is also now director of the growth programme at the centre for Economic Performance at the London School of Economics. So a warm welcome to you, Professor Valero. First time to this committee. So I'm going to ask John Glen MP to kick off.
Mr. Glen.
Mr. Glen.
14:17
John Glen
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John Glen
Thank you very much. I'd like to start by trying to get your all of your assessments of the state of the economy and what your view is on its situation now, given what's happened with the Iran war. I mean, obviously, we've seen ten year gilts that now, 5.41%, 30 year gilts are at 5.88% and topped 6% for the first time since 1998. What is your overall assessment of the state of the UK economy? Could I start with Doctor Beck-friis? Yeah I'm sure.
14:18
Speaker 2
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Speaker 2
So we've been surprised by the resilience of the UK economy. But I think it's important to put this in a global context. Growth has been strong everywhere since the start of the year. So in the US, Asia, Japan and most of Europe. Even even Germany that's been in a very long recession has picked up at the start of the year. So this is nothing in our mind that is UK specific.
It's global global drivers behind this. But of course, it's been surprising in the context of the of the war. And in particular, it's been surprising in the UK given the state of the labour market. And given the fact that fiscal policy here is is tight in most other countries, it's even neutral or, or, or loose. And you know, what's what's the main source of resilience. You know, AI is clearly part of that story.
I think it's showing up in two ways. First of all, investment spending. We're in the midst of a global CapEx boom, and we're seeing this in Europe, but clearly concentrated in the US and Asia. And that spillover spilling over into and strong exports across the world. And then second of all, it's showing up in higher equity prices and asset prices more broadly. And that means that consumers in general have continued to, to, to, to spend.
And even though interest rates have increased, broader financial conditions haven't really tightened that much in the context of higher asset prices. And so our outlook, tremendous amount of uncertainty. You know, we need to be humble. There's a lot of upside and downside risks. But the baseline is that this resilience will continue. But it's easy to think of downside risk to to this in the context of AI spending, in the context of the, you know, energy uncertainty around the energy prices and also the uncertainty around financial conditions.
I
It's global global drivers behind this. But of course, it's been surprising in the context of the of the war. And in particular, it's been surprising in the UK given the state of the labour market. And given the fact that fiscal policy here is is tight in most other countries, it's even neutral or, or, or loose. And you know, what's what's the main source of resilience. You know, AI is clearly part of that story.
I think it's showing up in two ways. First of all, investment spending. We're in the midst of a global CapEx boom, and we're seeing this in Europe, but clearly concentrated in the US and Asia. And that spillover spilling over into and strong exports across the world. And then second of all, it's showing up in higher equity prices and asset prices more broadly. And that means that consumers in general have continued to, to, to, to spend.
And even though interest rates have increased, broader financial conditions haven't really tightened that much in the context of higher asset prices. And so our outlook, tremendous amount of uncertainty. You know, we need to be humble. There's a lot of upside and downside risks. But the baseline is that this resilience will continue. But it's easy to think of downside risk to to this in the context of AI spending, in the context of the, you know, energy uncertainty around the energy prices and also the uncertainty around financial conditions.
I
14:20
John Glen
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John Glen
just follow up on that. And obviously, there's been new assessment made by the IMF yesterday about UK growth for 1.2% for 2027, set against the OBR of 1.6 in March for 2027. Could I draw you in to comment on what you think the outlook is for next year, and whether you see this resilience continuing, given that what we see in the markets.
14:20
Speaker 2
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Speaker 2
So yes, the the our baseline view is that growth will be slightly above 1%, not 1.6%. That would be not not our baseline outlook, but that that the resilience continues. We tend to think that UK trend growth is somewhere around 1%, perhaps a little bit higher. So next year, you know, trend like growth perhaps slightly slightly stronger.
14:21
14:21
Speaker 2
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Speaker 2
Well there have been optimistic for for for many years. Of course they downgraded productivity growth last year. So that sort of mark to market to what the sell side and the private sector were were expecting. But you know, there's been there's been a slowdown in UK trend growth over the last few decades. And I think it takes a long time for, for forecasters to update their, their assumptions. You know, if you look at growth in the UK over the last few years, it's been a fairly soft around 1%.
You know, it's not 0%, but it's not like the US of of 2%. So forecasting is very difficult. I think a baseline is to extrapolate what the recent trend is. And if that's been around 1%, I think that's a it's a fair baseline to to start with.
You know, it's not 0%, but it's not like the US of of 2%. So forecasting is very difficult. I think a baseline is to extrapolate what the recent trend is. And if that's been around 1%, I think that's a it's a fair baseline to to start with.
14:23
14:23
Speaker 3
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Speaker 3
I agree with especially the earlier parts of that. One of the many fascinating things to me is I think growth over the first half of the year is actually running in excess of 2%. And even when I point that out to people around this part of the world and many others, they either don't believe it or dispute it. And it's it's possibly a consequence of so long that growth has disappointed.
14:25
Speaker 3
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Speaker 3
Part of part of the sell side community is taking it for granted that that is some kind of bad thing going on with the seasonals where it might be. Who knows? Thank God I don't have to do the forecasting thing I once had to do for so long. Yeah, but I don't dismiss the possibility that in this case, the consensus has got it wrong because as you sort of touched on, most importantly, I'm sure will talk about more.
The productivity numbers have started to improve. Finally, just when amusingly, the OBR kind of gave up on that ever being possible. Yeah. You know, even without the revisions to how the the mainstream calculation are. And so it could be something of more substance. And the one thing I maybe come back to this, that I have a somewhat out of consensus view on. It's not impossible that some of that has got nothing to do with AI, and it's because the the National Insurance surcharge increase was such a shock to employers that it's actually indirectly kicked off some steps that effectively boost productivity.
And I think that is quite feasible that that might be happening.
The productivity numbers have started to improve. Finally, just when amusingly, the OBR kind of gave up on that ever being possible. Yeah. You know, even without the revisions to how the the mainstream calculation are. And so it could be something of more substance. And the one thing I maybe come back to this, that I have a somewhat out of consensus view on. It's not impossible that some of that has got nothing to do with AI, and it's because the the National Insurance surcharge increase was such a shock to employers that it's actually indirectly kicked off some steps that effectively boost productivity.
And I think that is quite feasible that that might be happening.
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14:28
Speaker 3
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Speaker 3
You know, I mean, as the expert for the gilt market, I guess, you know, it is it is worth emphasising. I looked at it myself a bit more closely again recently that. It's hard to suggest and of course, post IMF forecasts. It's it's they gave it a lot of attention to. It's not obvious to me that the gilt market is necessarily being penalised because of our relative shifts in fiscal things, although I'm contradict myself, the absolute level of where our yields are obviously does have something to do with it.
But our our gilt market hasn't been hurt as much as from last time I looked, which I think was Friday. Any other G7 bond market over the past year. And then when I delve into my own sort of not so intense analysis that I would do, I think it is something more to do with the inflation outlook and inflation expectations and, crucially, with it, the market assumption for the profile of the Bank of England, at least from a sort of cyclical perspective, would be my would be my guess.
But our our gilt market hasn't been hurt as much as from last time I looked, which I think was Friday. Any other G7 bond market over the past year. And then when I delve into my own sort of not so intense analysis that I would do, I think it is something more to do with the inflation outlook and inflation expectations and, crucially, with it, the market assumption for the profile of the Bank of England, at least from a sort of cyclical perspective, would be my would be my guess.
14:31
14:31
Speaker 3
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Speaker 3
Linked to how I answered the first question you gave me? I don't dismiss the possibility that the OBR might be right. And as it relates to other things, we're going to get into the most important thing for me from a, let's call it cyclical or tactical perspective, is this budget doesn't screw any of it up because it's been quite a while since we've had 2% growth.
14:32
14:32
Speaker 2
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Speaker 2
Well, I agree , if you look at it over the last year we've seen a pretty a lot of volatility in global fixed income, pretty sharp repricing in global fixed income. UK yields are higher but they have been higher or going higher in most other countries in the world. So US, Japan and most of Europe, Australia. So it's not been driven by UK specific factors. Instead global factors.
I'm sure we can get into these. But you know the energy shock has been part of it. The fact that we're in in the midst of our global CapEx boom is, is part of it. I don't think that global fiscal policy or debt sustainability concerns have been a key driver of why rates have increased over the last year or so. Now, that said, if you take a snapshot of where yields are now in the UK, they are high, a little bit higher than in the US.
The reason they are high is really because the front end of the curve is high. And that means that the policy rate is high. And there's an expectation that the Bank of England will tighten fiscal policy going forward. Oh sorry, monetary policy going forward. So four hikes is now priced for the Bank of England over the next year. And you know this clearly relates to to inflation deflation the inflation outlook. Inflation has been high for a long time.
And there are inflation risks going forward. Fiscal policy and fiscal policy credibility. Yes. I think that is lifting yields a little bit here in the UK. But I would not overplay that. Perhaps it's worth, you know, about 20 basis points or so.
I'm sure we can get into these. But you know the energy shock has been part of it. The fact that we're in in the midst of our global CapEx boom is, is part of it. I don't think that global fiscal policy or debt sustainability concerns have been a key driver of why rates have increased over the last year or so. Now, that said, if you take a snapshot of where yields are now in the UK, they are high, a little bit higher than in the US.
The reason they are high is really because the front end of the curve is high. And that means that the policy rate is high. And there's an expectation that the Bank of England will tighten fiscal policy going forward. Oh sorry, monetary policy going forward. So four hikes is now priced for the Bank of England over the next year. And you know this clearly relates to to inflation deflation the inflation outlook. Inflation has been high for a long time.
And there are inflation risks going forward. Fiscal policy and fiscal policy credibility. Yes. I think that is lifting yields a little bit here in the UK. But I would not overplay that. Perhaps it's worth, you know, about 20 basis points or so.
14:35
14:36
Speaker 2
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Speaker 2
About 20. So the way you can look at this is to look at the shape of the interest rate curve. So when markets are getting worried about debt sustainability and fiscal credibility in a country, then what tends to happen is that the curve tends to steepen. So the long end long dated bonds yields tend to go up more than short dated bonds. And if you look at the shape of the UK curve, yes, it's a little bit steeper than in the US.
It's a little bit steeper than in Germany. But again, in the context of perhaps 20 basis points or so. So I wouldn't overplay it. The key reason why rates in the UK are high is because the Bank of England policy rate is high, and there's an expectation that they will raise raise the policy rate going forward.
It's a little bit steeper than in Germany. But again, in the context of perhaps 20 basis points or so. So I wouldn't overplay it. The key reason why rates in the UK are high is because the Bank of England policy rate is high, and there's an expectation that they will raise raise the policy rate going forward.
14:37
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14:37
Speaker 4
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Speaker 4
Yes, I think I can speak more in depth perhaps on growth, productivity, those aspects. So I mean, I think, yes, the IMF concluded that globally we've seen more resilience than perhaps was anticipated. But I think we've also seen, as Jim said, that the UK has done relatively well. So while our growth isn't good relative to the past, where we had growth rates over around 2% so far in 2026, we are top of the G7 in terms of where the IMF and the OECD have put forecasts for this year.
We're second in the G7. And so, you know, I think this is this is something to celebrate in some sense. You know, there's been a lot of issues, uncertainty globally to deal with. So but underlying that, just to go a bit more into the productivity data. So I think, you know, since the financial crisis, many of us have been working on this productivity puzzle in the UK, which is something that's shared by other economies, but the UK was considered to be worse.
And this was an issue for us because we already had a gap in our productivity level versus our main comparators. And our worst performance meant, you know, this gap was getting bigger. So what we've seen recently is two revisions in the data, which suggest actually our productivity is better than we thought. So in per worker terms, since 2024, performance has been improving when we use better measured labour inputs. So administrative data from Paye tax records.
So what you'll see between 2024 Q3 and 2026 Q2 is GVA per worker has increased by 2.8% over that entire period. And annualised that is 1.6%. So this is actually quite close to our pre-crisis trend in per worker terms, which was around 2%, and it's much higher than what we saw in the previous methodologies.
We're second in the G7. And so, you know, I think this is this is something to celebrate in some sense. You know, there's been a lot of issues, uncertainty globally to deal with. So but underlying that, just to go a bit more into the productivity data. So I think, you know, since the financial crisis, many of us have been working on this productivity puzzle in the UK, which is something that's shared by other economies, but the UK was considered to be worse.
And this was an issue for us because we already had a gap in our productivity level versus our main comparators. And our worst performance meant, you know, this gap was getting bigger. So what we've seen recently is two revisions in the data, which suggest actually our productivity is better than we thought. So in per worker terms, since 2024, performance has been improving when we use better measured labour inputs. So administrative data from Paye tax records.
So what you'll see between 2024 Q3 and 2026 Q2 is GVA per worker has increased by 2.8% over that entire period. And annualised that is 1.6%. So this is actually quite close to our pre-crisis trend in per worker terms, which was around 2%, and it's much higher than what we saw in the previous methodologies.
14:41
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14:41
Speaker 4
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Speaker 4
And and actually, all of this is driven by how you measure workers. And actually some analysis has to Jim's point, it doesn't necessarily seem to be a shedding of lower paid workers in sectors. So actually Resolution Foundation have done some work on that. We've also looked at the sectoral makeup, as have they. And it's quite broad based across sectors as well. So ICT makes quite a positive contribution.
But so do other sectors too. So the other recent revision. So that was GVA per worker. So one way of measuring productivity, the other recent more recent revision is to do with how we measure hours. So bringing our methodologies in line with international approaches. And this is actually a big shock that that shows that our slowdown since financial crisis is not as bad as previous previously thought. So the previous thing I talked about was the recent uptick.
Now I'm talking about what we've seen in that entire period since financial crisis. So during that period, GVA per hour, which is kind of a better measure because, you know, you can account for the fact that different workers work different number of hours. Pre-financial crisis, we had around 2% annual average growth restated. It's now 1.3%. So that's really, really important.
But so do other sectors too. So the other recent revision. So that was GVA per worker. So one way of measuring productivity, the other recent more recent revision is to do with how we measure hours. So bringing our methodologies in line with international approaches. And this is actually a big shock that that shows that our slowdown since financial crisis is not as bad as previous previously thought. So the previous thing I talked about was the recent uptick.
Now I'm talking about what we've seen in that entire period since financial crisis. So during that period, GVA per hour, which is kind of a better measure because, you know, you can account for the fact that different workers work different number of hours. Pre-financial crisis, we had around 2% annual average growth restated. It's now 1.3%. So that's really, really important.
14:44
John Glen
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John Glen
About that. In principle, it seems strange probably to people watching this, that you're sort of restating the last 16, 18 years of productivity trajectory in the economy, consequential of a new statistical method. That's what you're saying is happening. Yeah. So it was it was true anyway, except we didn't measure it. Right?
14:45
Speaker 4
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Speaker 4
Yeah. I mean, I think that's the thing. It's a measurement issue. And of course , this doesn't mean our productivity issues are solved. It doesn't because ultimately we've seen stagnating living standards since financial crisis. We've got an overall slowdown still that needs to be dealt with. We've got large scale regional gaps within the country, and we still have that gap with our international peers. So of course, we still need to be focusing on raising productivity.
It's just this aspect two two sources of optimism. One, that our slowdown hasn't been worse than our comparators, and two, that we've got an uptick in the per worker terms more recently. But I mean, I think also, you know, you can then look at the things that underlie productivity growth. And we've also seen that business investment, for example, is seeing some.
It's just this aspect two two sources of optimism. One, that our slowdown hasn't been worse than our comparators, and two, that we've got an uptick in the per worker terms more recently. But I mean, I think also, you know, you can then look at the things that underlie productivity growth. And we've also seen that business investment, for example, is seeing some.
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14:46
John Glen
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John Glen
Mindful of your colleagues come in? Can we just sort of look at the context or the budget? Yeah. And that's what we're here for really in terms of what things are going to drive growth and productivity. Obviously, Lord O'Neill will come to him in a moment, has made some statements over the last few months. What would you say would be the priorities for the government in terms of decisions that they can make at two weeks today to improve growth and productivity trajectory and continue what you say is already happening?
14:47
Speaker 4
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Speaker 4
Yeah. I mean, I would say, you know, we've got this uptick in business investment recently. We've seen business confidence recovering. I think this is fragile given the continued global uncertainty we have. So I wouldn't want to see that damaged. I think this is in line with what you've talked about recently. So being mindful of raising cost for business to maintain this increased investment. Positive sentiment. I think Barclays Prosperity Index talks about confidence rising and stronger appetite for investment.
14:48
Speaker 4
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Speaker 4
thing. Well, I mean in general I would prefer to avoid taxes on on business. But I think obviously this is a difficult fiscal context and there are many different objectives. The other thing I would want to prioritise, and this is something the previous Chancellor did with her change to the fiscal rules, was the importance of public sector investment. This has historically been the margin to be adjusted when fiscal situations get difficult. But this is so crucial for for growth.
Thank
Thank
14:49
John Glen
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John Glen
you. Neal, can we come back to you? You've obviously made significant intervention against the alignment of CGT rates to contacts. It seems to me that that's probably been ruled out, or at least the realignment has. Whether there is actually going to be an increase in CGT. Would you say that any I mean, to me that Rachel Reeves did a delicate job of increasing CGT to an optimal level to increase some revenue, but not to deter people from raising of assets.
Do you think any further increase in CGT would be detrimental?
Do you think any further increase in CGT would be detrimental?
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14:51
Speaker 3
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Speaker 3
But so my overall view, which I, I think I reiterated in something just very the past few days is because of some of these slightly cautiously encouraging trends, the last thing the budget should be doing is to do things to interrupt them. And. Given how business feels so beaten up over. However far you want to think, any tax increase needs to be really thought through more carefully than before, especially things like CGT.
Another part of my life, I'm heavily involved in venture capital investing, especially as it relates to regional things. And this is highly risky stuff. And, you know, to have this simplistic view that it should be taxed at the same level of income, in my view, has just simply no understanding of those kind of things. And more importantly, and I'm sure we'll get into this quite a bit, the whole, I mean, you get quite a few of you guys have been involved in this stuff before.
The whole reason why there's a fiscal buffer, I think is, is sort of getting has got a bit lost in the way people look at it. It's supposed to be for when there's exceptional circumstances. And I personally think these are pretty exceptional with, I think, as one of you mentioned, as part of your questioning, with obviously oil prices in particular. And and to go pushing through tax increases that who quite knows where our wonderful leader in Washington is going next? But it's not inconceivable that a week after the budget, you know, oil prices could be considerably lower.
So you want to use the buffer when you really need it, in my view. Can
Another part of my life, I'm heavily involved in venture capital investing, especially as it relates to regional things. And this is highly risky stuff. And, you know, to have this simplistic view that it should be taxed at the same level of income, in my view, has just simply no understanding of those kind of things. And more importantly, and I'm sure we'll get into this quite a bit, the whole, I mean, you get quite a few of you guys have been involved in this stuff before.
The whole reason why there's a fiscal buffer, I think is, is sort of getting has got a bit lost in the way people look at it. It's supposed to be for when there's exceptional circumstances. And I personally think these are pretty exceptional with, I think, as one of you mentioned, as part of your questioning, with obviously oil prices in particular. And and to go pushing through tax increases that who quite knows where our wonderful leader in Washington is going next? But it's not inconceivable that a week after the budget, you know, oil prices could be considerably lower.
So you want to use the buffer when you really need it, in my view. Can
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Speaker 3
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Speaker 3
I'd be more opposed to anything on CGT if they if there has to be some numbers found, I would I would think it might default to bank some kind of modest move on bank taxes, but I wouldn't be a fan of that either for the reasons that you touched on. But you have to make the numbers work on something and everybody always rules out the manifesto. The infamous manifesto pledges. You know, you've got to do it on something.
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Speaker 2
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Speaker 2
Well, I can I can speak from a from a bond market point of view, what the bond market would like to, to see. And I think, you know, look, it's easy to say from a bond market because I understand the political constraints on, on, on tightening fiscal policy. But, you know, the bond market would would welcome, you know, more fiscal fiscal tightening and in particular, an effort to bring down the deficit, the near-term deficit, not the, you know, long term deficit or the headroom, but an effort to bring down the near-term deficit.
And I think that could to the extent the government would surprise the market with more tightening than expected, and I think the bond market would don't if they surprise with with running, you know, more expansionary fiscal policy and there's more fiscal slippage than the bond market now is on high alert. And that would almost certainly lead to higher higher interest rates depending on what what what type of fiscal slippage it would be.
And I think that could to the extent the government would surprise the market with more tightening than expected, and I think the bond market would don't if they surprise with with running, you know, more expansionary fiscal policy and there's more fiscal slippage than the bond market now is on high alert. And that would almost certainly lead to higher higher interest rates depending on what what what type of fiscal slippage it would be.
15:00
15:00
Bobby Dean
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Bobby Dean
Just to follow on from that point, because I appreciate the point you made, Laura. I know about the head rooms there for for buffer room. And this is a time to use buffer room, but it does also feel like we're living through times where there's always an excuse to eat into the buffer room. Every every year there's a new event that means that perhaps now's the time to eat into buffer room. And it's one of the reasons, I guess, the previous chancellor was forced into lifting the overall headroom because it was being buffeted by events.
So, I mean, perhaps this is also a question for Doctor Beck to please come in afterwards, but do you think the bond markets would tolerate it if they would say, well, actually we are needed to enter the buffer time again, because yet again, there's a crisis in the world that we need to, to, to. I
So, I mean, perhaps this is also a question for Doctor Beck to please come in afterwards, but do you think the bond markets would tolerate it if they would say, well, actually we are needed to enter the buffer time again, because yet again, there's a crisis in the world that we need to, to, to. I
15:01
Speaker 3
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Speaker 3
mean, it's clearly a risk for the reasons you say, but I think if it's carefully explained and the way things seem to work these days, what is also interesting about so far this budget, virtually nothing of what the supposedly planning to do is being leaked, except the fact that they appear to have floated the idea of playing around with headroom, partly to get the reaction of people in the gilt market, I assume, and it doesn't look to have upset them yet.
So it is. It is a risky thing because of exactly what you say. But I personally think because we have something a little bit rare from recent years where the appears to be some growth taking place and there are genuine, pretty wild things going on in global circumstances that have not been there in to this degree, other than maybe the first year of the Russian invasion. I think this is if you're not going to use it.
The whole reason why the budget numbers look more difficult are primarily for these reasons. So of
So it is. It is a risky thing because of exactly what you say. But I personally think because we have something a little bit rare from recent years where the appears to be some growth taking place and there are genuine, pretty wild things going on in global circumstances that have not been there in to this degree, other than maybe the first year of the Russian invasion. I think this is if you're not going to use it.
The whole reason why the budget numbers look more difficult are primarily for these reasons. So of
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Speaker 3
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Speaker 3
It comes back to the big picture things. And I'm sure we'll get into this as well chair about the often called the sacred cows or now that's a golden golden opportunities. Personally I think the bond market should be and probably is more interested is how serious a leader in this country is going to be at some point about dealing with the things that seems to petrify everybody.
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15:05
Bobby Dean
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Bobby Dean
Which was that we, we, we, we often obsess about this point figure. And I think you indicated in your previous answer, that's not the thing to focus on. It's certainly not the bond markets focus. So what what let's assume that the buffer level does come down for whatever reason, especially. What else would you be looking out for for, for reassurance that debt sustainability was still going in the right direction.
15:06
Speaker 2
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Speaker 2
So I think the bond market will be fairly sanguine if they reduce the headroom to 15 billion. You know, if it's ten, 15, 20 billion, these numbers are very small in the context of the uncertainty where the economy we I mean, we spend a lot of time at Pimco debating where the economy is today and where it will be in three months time. You know, forecasting whether that will be in three years time is, you know, the uncertainty bound is so high that we and the bond market put very little weight on, you know, a few billions, three years out in particular in an election , election year.
So, you know, markets will discount. Of course, it's a you know, to the extent the government reduces the headroom, that's a bad signal in terms of fiscal commitment. But, you know, it's not what the bond market will focus on. Instead, what we will focus on. You know, when I open up the OBR document, the first thing I will look at is what the gilt issuance will be this year and next year, and in particular, what the deficit will be this year and next year, and potentially in two years time, because that dictates the amount of issuance.
And of course, the closer it is to today, the more credible it is. So, you know, for us and we you know, I've said this last year , and we continue to say that it will be increasingly important to see that the deficit continues to come down and it has come down. You know, from now it's running around 4%. A year ago, a year, two years ago is 5.5, 5.5%. So there has been a reduction.
But there's more to do. And, you know, the bond market will would, you know, we'll be looking for that deficit to continue to come down in particular to something close to a three, you know, three handle, preferably, you know, a, a mid to low three handle next year the bond market would perceive as very encouraging.
So, you know, markets will discount. Of course, it's a you know, to the extent the government reduces the headroom, that's a bad signal in terms of fiscal commitment. But, you know, it's not what the bond market will focus on. Instead, what we will focus on. You know, when I open up the OBR document, the first thing I will look at is what the gilt issuance will be this year and next year, and in particular, what the deficit will be this year and next year, and potentially in two years time, because that dictates the amount of issuance.
And of course, the closer it is to today, the more credible it is. So, you know, for us and we you know, I've said this last year , and we continue to say that it will be increasingly important to see that the deficit continues to come down and it has come down. You know, from now it's running around 4%. A year ago, a year, two years ago is 5.5, 5.5%. So there has been a reduction.
But there's more to do. And, you know, the bond market will would, you know, we'll be looking for that deficit to continue to come down in particular to something close to a three, you know, three handle, preferably, you know, a, a mid to low three handle next year the bond market would perceive as very encouraging.
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Bobby Dean
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Bobby Dean
Thank you. Moving on to other things that drive growth, professor Valero I know you was involved in the formation of the industrial strategy in your time with the Treasury. Could you sort of explain to me how you think the industrial strategy is going to drive growth and address some of the sort of headline criticisms of industrial strategies in general about whether or not you should just leave, leave things to market devices? And actually, the government shouldn't be involved in this space because picking winners, etc..
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Speaker 4
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Speaker 4
Sure. So I think, you know, actually there's been quite a development in the way economists think about industrial strategy in recent years internationally and in the UK. I don't think it's a substitute for getting the right horizontal conditions for growth and investment. So economy wide policies, whether they're planning reform, pensions reform to get investment flowing, all of those things are really important. But the reason I think there's a role for more targeted vertical policies, which we might think of as industrial policy, is because actually governments always have such policies, even when they don't have a proper strategy setting out how they make decisions around them, but also because it's given we've got limited resource and limited policy attention, it's worth focusing that into the areas that are most likely to drive growth.
And the reality is that different sectors, different technologies face different barriers to growth. Some of them might be more emerging sectors where, say, R&D grants are really important, and there are decisions made all the time about what should be priority areas to fund. Others are, you know, financial services, professional business services, which are major sources of our growth in the UK. It's perhaps more talent and regulatory environment, less subsidy. So I think there is this important role.
If we want to get growth, we've got a number of things we're really good at. So a lot of the analysis we've done at the LSE and the government has also done to inform its industrial policy is to think, where do we have strengths either now or potential strengths we can leverage? Where is global demand and domestic demand likely to grow. And then a number of other considerations too. What's the regional distribution of the opportunities that would bring.
Does it contribute to resilience? And I think that resilience point is really important in this day and age, because I think we're beyond being able to be completely agnostic about supply chains and where things come from. We can't produce everything here in the UK, but there are certain arguments for having capabilities in some areas or having strong international partnerships to make sure we have secure supply chains. So, you know, all those IS8 are areas where we have strengths, current strengths, potential strengths.
It's not all about propping up incumbents, which is the old style industrial policy. This has been framed as a modern industrial strategy, which is about innovation. So disruption as well, business dynamism supporting those nascent sectors, which could be big growth areas of the future. And in doing so, I think it's got, you know, the broad strategy has a number of cross-cutting policies which actually matter. They're kind of horizontal in many cases, but they might matter in particular for these sectors.
So if you take planning reform that's obviously very important for net zero infrastructure. It's very important for lab space and places like Cambridge Life Sciences. But then there's these eight sector plans. And in each of those there's like a much deeper look. What are some of the issues that the evidence suggests that the sector suggests? And also, you know, what are the frontier technologies? So it's not simply blanket support across everything.
What are the frontier technologies?
And the reality is that different sectors, different technologies face different barriers to growth. Some of them might be more emerging sectors where, say, R&D grants are really important, and there are decisions made all the time about what should be priority areas to fund. Others are, you know, financial services, professional business services, which are major sources of our growth in the UK. It's perhaps more talent and regulatory environment, less subsidy. So I think there is this important role.
If we want to get growth, we've got a number of things we're really good at. So a lot of the analysis we've done at the LSE and the government has also done to inform its industrial policy is to think, where do we have strengths either now or potential strengths we can leverage? Where is global demand and domestic demand likely to grow. And then a number of other considerations too. What's the regional distribution of the opportunities that would bring.
Does it contribute to resilience? And I think that resilience point is really important in this day and age, because I think we're beyond being able to be completely agnostic about supply chains and where things come from. We can't produce everything here in the UK, but there are certain arguments for having capabilities in some areas or having strong international partnerships to make sure we have secure supply chains. So, you know, all those IS8 are areas where we have strengths, current strengths, potential strengths.
It's not all about propping up incumbents, which is the old style industrial policy. This has been framed as a modern industrial strategy, which is about innovation. So disruption as well, business dynamism supporting those nascent sectors, which could be big growth areas of the future. And in doing so, I think it's got, you know, the broad strategy has a number of cross-cutting policies which actually matter. They're kind of horizontal in many cases, but they might matter in particular for these sectors.
So if you take planning reform that's obviously very important for net zero infrastructure. It's very important for lab space and places like Cambridge Life Sciences. But then there's these eight sector plans. And in each of those there's like a much deeper look. What are some of the issues that the evidence suggests that the sector suggests? And also, you know, what are the frontier technologies? So it's not simply blanket support across everything.
What are the frontier technologies?
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Bobby Dean
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Bobby Dean
I just one more question on that point. So it sounds like you're saying that maybe the sort of laissez faire approach previously was a bit naive. It's left us exposed to particular risks in relation to resilience, and also didn't allow us to sort of grow our competitive advantage for key industries. If that's about getting those countries to sort of start scaling and thriving, how do you feel about sort of mergers and acquisitions? Because it feels like UK businesses are not UK businesses very quickly, quite often now.
And do you think there needs to be more done because you could you could register the fact that a foreign company wants to buy one of our businesses, a good signal for the economy because we're producing those businesses in the first place. But when you look at the rate, is that a problem for the UK economy?
And do you think there needs to be more done because you could you could register the fact that a foreign company wants to buy one of our businesses, a good signal for the economy because we're producing those businesses in the first place. But when you look at the rate, is that a problem for the UK economy?
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Speaker 4
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Speaker 4
I think I mean, competitive markets are really important for innovation and growth. And obviously there's been a lot of work at the CMA in terms of thinking about in innovative markets, how do you make sure that competition policy keeps pace? I do think in some areas, you know, we often do slightly lament some of the big companies that have simply been bought up and perhaps haven't been our own big growth stories in the past. And perhaps given today's world and some critical technologies or areas where we need sovereignty, I think, you know, there's a stronger case for thinking carefully about who controls ultimately, who controls certain technologies and assets.
I mean, this is this is a big debate, obviously, in AI for us and many other economies as well.
I mean, this is this is a big debate, obviously, in AI for us and many other economies as well.
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Speaker 2
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Speaker 2
Well, that's the clearly the drawback of having high debt. And we've seen this, you know, not only the UK, but in in many other countries. You can see this in response to the ongoing Middle East war. You know, the fiscal response, not only in the UK but elsewhere, has been very limited compared to the response that we saw in 2022 during the pandemic. So I don't think there's much fiscal room for the government to run more expansionary fiscal policies.
The good news, though, is that even though there's not a lot of fiscal space, there's a lot of monetary policy space at the moment. So in the next downturn, I would expect the Bank of England to have to do the heavy lifting in terms of running counter-cyclical policy.
The good news, though, is that even though there's not a lot of fiscal space, there's a lot of monetary policy space at the moment. So in the next downturn, I would expect the Bank of England to have to do the heavy lifting in terms of running counter-cyclical policy.
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Speaker 2
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Speaker 2
Well, to the extent that the government reduces the deficit when the sun is shining, that is obviously better to have, you know, start the start going in going into rainy day, you want to start with a lower deficit. But again, you know, just to highlight the, the, the game between fiscal and monetary policy, you know, to the extent that the government would tighten fiscal fiscal policy, now there's a lot of room for the monetary policy to offset the negative drag that the tight fiscal policy would would imply.
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Speaker 3
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Speaker 3
Is designed to have more ambition on public investment spending, which I definitely believe done in with, with one very important addition that I am. Trying to use any opportunity I have to push for. We need an OBR for infrastructure so that we can get out of some of the mad game that goes on in our wonderful democracy, where we don't seem to be able to ever really dealing with anything that is long and might cost a few shekels.
And if we had a very publicly known and credible independent body that opined on project X multiplier effects, I think not just the gilt market, but all markets would be are crying out for the UK to do something like that. So people understand that we are actually investable, and you could definitely borrow plenty more in those circumstances, as opposed to trust me, I know best.
And if we had a very publicly known and credible independent body that opined on project X multiplier effects, I think not just the gilt market, but all markets would be are crying out for the UK to do something like that. So people understand that we are actually investable, and you could definitely borrow plenty more in those circumstances, as opposed to trust me, I know best.
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Chris Coghlan
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Chris Coghlan
You say infrastructure. Would you include R&D as well? Yes. Okay. Because Doctor Beck-friis, when you came, I think a year ago, I asked you a similar question. You thought that , in fact, if I remember correctly, bond markets wouldn't find it that credible if the government was saying, you know, we're going to borrow to invest, therefore give us a lower rate, or is that still your view or not?
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Speaker 2
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Speaker 2
The extent that the government chooses to borrow more to invest, that would almost certainly lead to higher yields, and that could also crowd out investment in other areas. Because we are now living in the UK in particular, you know, the UK is really pushing to the limits of the of the credibility. So the bond market, again, just to reiterate, first and foremost cares about the headline deficit. Of course, the composition of the deficit may matter. You know, to the extent the government borrows to invest, that may improve GDP growth going forward.
And that may be a positive for the fiscal trajectory as a result. But there is a lot of uncertainty around, you know, the multiplier, whether or not when that would show up in in the GDP numbers. And until that is shown up, I think the bond market will discount that quite, quite heavily. Can
And that may be a positive for the fiscal trajectory as a result. But there is a lot of uncertainty around, you know, the multiplier, whether or not when that would show up in in the GDP numbers. And until that is shown up, I think the bond market will discount that quite, quite heavily. Can
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Speaker 3
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Speaker 3
I my I think we need something completely different as to how has been the modern norm, so I wouldn't I that's vaguely possible, but I wouldn't favour that route. The. Another thing again, if it come up. Chair, that I've become persuaded that also we should consider playing around with the tax incentives to do with how. With pension pots, I have become a big fan of the idea of removing the tax free lump sum, unless it's invested in UK assets.
As somebody just amusingly pointed out to me at an event I was at earlier, right now, Nvidia has a bigger share of global market cap than the whole of the UK equity market, and what happens to their share price matters more to our pensioners investments. And they're getting a tax benefit. Why? Why do we not change that risk reward so that you avoid that kind of feeling if there's going to be credible infrastructure, a better framework for infrastructure investing done.
As somebody just amusingly pointed out to me at an event I was at earlier, right now, Nvidia has a bigger share of global market cap than the whole of the UK equity market, and what happens to their share price matters more to our pensioners investments. And they're getting a tax benefit. Why? Why do we not change that risk reward so that you avoid that kind of feeling if there's going to be credible infrastructure, a better framework for infrastructure investing done.
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Speaker 4
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Speaker 4
I mean, I just wanted to kind of agree with some of that because obviously we have the public finance institutions that have been boosted significantly. But if if they were to kind of have even increased capacity, I don't think that would impact on the fiscal rules. Of course, it would still be borrowing. So I think that just makes it even more important that there's some sort of really evidence based adjudication, that anything that is being done will generate the return.
It's worth the extra borrowing and is truly additional as well. And I mean, this is the remit of these types of programmes in the British Business Bank and the National Wealth Fund, etc..
It's worth the extra borrowing and is truly additional as well. And I mean, this is the remit of these types of programmes in the British Business Bank and the National Wealth Fund, etc..
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Speaker 4
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Speaker 4
I think that's really important. You know, 120, I think over 120 billion extra publicly financed capital expenditure versus the previous government's plans. This is really important. Obviously, such projects do take time to have an impact. And the OBR did score them and there's some lag to that. But I would say, you know, we don't know for sure what's driving the pickup in productivity so far, but I would
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Speaker 3
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Speaker 3
what is a better strategy than growth in every postcode? It depends in what for what purpose you're saying it . The best way of getting growth in every postcode is getting ten year bond yields down 200 basis points because that would affect everybody that has to borrow for anything by its use. It's been used in the context of giving devolved powers from my 15 year now getting on for experience in a lot of this.
That is a very dangerous path to go because it basically opens the door to every part of England at least, and maybe others saying, give me some money, but whether they have the. capacity or. ability and desire to take the. responsibility that goes with it is amongst the many. questions the other. Very important additional. point is, if that is going to be at the centre of your approach to trying to achieve greater national growth, you've got to really.
prioritise the places that are going to matter. And a slightly. uncomfortable thing for me in this context, and maybe somebody from. Carlisle is, despite the fact London's own growth performance has been very weak by its own standards the past 15 years. And so the gap has narrowed. It is still the case today that London is the same size as the next eight most important places put together, so it's quite an interesting challenge for this PM, but one of the things I think they should do is try to do something about at least helping London stop slowing.
And then . In the
That is a very dangerous path to go because it basically opens the door to every part of England at least, and maybe others saying, give me some money, but whether they have the. capacity or. ability and desire to take the. responsibility that goes with it is amongst the many. questions the other. Very important additional. point is, if that is going to be at the centre of your approach to trying to achieve greater national growth, you've got to really.
prioritise the places that are going to matter. And a slightly. uncomfortable thing for me in this context, and maybe somebody from. Carlisle is, despite the fact London's own growth performance has been very weak by its own standards the past 15 years. And so the gap has narrowed. It is still the case today that London is the same size as the next eight most important places put together, so it's quite an interesting challenge for this PM, but one of the things I think they should do is try to do something about at least helping London stop slowing.
And then . In the
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Speaker 3
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Speaker 3
how should government identify those places? I think they've got to be really careful about it. I I'm a fan of. encouraging or allowing some. competition that you certainly don't want to hold back the places that appear to be already showing some progress with some of the limited. devolution that they've had, not least because that will encourage other. areas and maybe including. Directly you're part of the world, that they will.
entertain the. structures and additional. responsibilities that I believe should go with it, rather than . Just
entertain the. structures and additional. responsibilities that I believe should go with it, rather than . Just
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Yuan Yang
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Yuan Yang
would be your criteria for identifying those places with the greatest potential? Yeah, so I think I mean, I agree with that. So for me, when I hear growth in every postcode, I think it can mean different things when you're talking about different. policies or also even to different audiences. I mean, I think ultimately everyone wants growth to be felt in every postcode, but I think most people would agree you're not going to have an innovative cluster in every postcode.
And if you look at the PM speech last week, actually, he. emphasized that you will have perhaps one global cluster in every region that's not spreading the jam. So I think to have more regionally balanced growth, we're going to need to identify those clusters. Your question is how you identify them. I've been in lots of discussions recently with kind of the research and policy community thinking about data. And this is actually really. important because for measuring innovation and growth.
And if you look at the PM speech last week, actually, he. emphasized that you will have perhaps one global cluster in every region that's not spreading the jam. So I think to have more regionally balanced growth, we're going to need to identify those clusters. Your question is how you identify them. I've been in lots of discussions recently with kind of the research and policy community thinking about data. And this is actually really. important because for measuring innovation and growth.
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Yuan Yang
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Yuan Yang
You need a range of data sets and particularly in place, no one data set gives you all the answers. And then you complement national. comparable data with locally generated data, which will give much richer insights but not necessarily be comparable. So I think that data and the evidence, you know, where where are regional strengths, where is where is it a true strength that actually there's some evidence that policy could address the barriers and see growth? I also think it's really important to think about the connectivity.
So to get growth in every postcode, it's about effective and functional labour markets that people can access the jobs. And unfortunately, in many parts of the UK that just doesn't happen in London. We're lucky because you can travel quite far to get to your job and it will be a good job because London is actually, even in absolute terms, the eighth innovation cluster in the world, based on academic publications, patents and venture capital investment. So this is something that is crucial for our growth.
And I, you know, I agree for us to to grow nationally, we need to continue bolstering.
So to get growth in every postcode, it's about effective and functional labour markets that people can access the jobs. And unfortunately, in many parts of the UK that just doesn't happen in London. We're lucky because you can travel quite far to get to your job and it will be a good job because London is actually, even in absolute terms, the eighth innovation cluster in the world, based on academic publications, patents and venture capital investment. So this is something that is crucial for our growth.
And I, you know, I agree for us to to grow nationally, we need to continue bolstering.
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Yuan Yang
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Yuan Yang
But also. understand there are very real gaps that policy can address. For too long we've been too centralised. I think there's strong evidence that. decentralisation will help, that the industrial strategy has begun. Quite a detailed. process of that regional strength identification. It's identified where these different growth sectors cluster. But if we want to prioritise even more, I think we're going to need more of that analysis.
And it sounds . Difficult,
And it sounds . Difficult,
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Yuan Yang
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Yuan Yang
positive multipliers or not, so my. understanding the case made at the time was that there are actually. It's not just the benefit for London, but it could be. There would be spillovers to the rest of the country. And obviously London is a global city, increasing competition from internationally. There is that economic case, but obviously for. sustainability reasons, I would want to know that any . Extra
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Julie Minns
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Julie Minns
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Speaker 4
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Speaker 4
investment without pushing up gilt yields? So the bond. market doesn't really focus too much on the regions versus the, you know, the federal level. So there's no there's no difference really between, you know, local authorities or the federal of course, the bond market would will look at the, you know, the general. government's balance sheet and make its assessment. But whether or not it's from . Local
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Speaker 1
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Speaker 1
If you give money to local areas, there's a financial discipline in government. There's mechanisms for holding government to account for its spending. With the mayoral model in this system, there isn't such a. mechanism in place. It's a lot weaker. How would the markets react to money going out to local areas if there's not accountability measures built in so that the pound is . Being
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Speaker 3
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Speaker 3
Lord O'Neill, do you think that that should be something that they should have as a principle? Yes. You know, because of my previous life and spending half of it sitting on a plane, going somewhere. including living in the US twice. I don't think we should mentally regard it as such a oh my God thing, that different . Parts of the.
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Speaker 3
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Speaker 3
I will I would be pretty cautious about that without. And it goes back also to this question about part of the reason why the competitive thing appeals to me is to encourage places that aren't getting what they could, because they. refuse to accept. greater need for. accountability and responsibility, which I've spent many wasted hours over the past . 15
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Speaker 1
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Speaker 1
years nearly on that issue itself. Under the previous government of the Towns Fund, there were . consultants fund was of funding for to build competency and. capacity in those areas. Often they're very small projects, actually. So there's kind of a lot of hoops to go through, and we can discuss bidding for money and so on.
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Speaker 1
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Speaker 1
Extremely important, including for some existing mayoral authorities. There's been some evidence, obviously, in Manchester, there's a good example of this, of where national civil servants and and bodies have people have been attracted to go and work there rather than in Whitehall. Yeah. But that's still quite underdeveloped. There . Are parts of
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Speaker 1
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Speaker 1
there for themselves, but to help build it in other places. I think it's crucial. And I mean, that's what I mean. It's difficult to put a timescale on this. But realistically, I mean, back when the last last time there was a Labour government before 2010, Manchester was often the crucible of. experimentation because there was good, strong leadership there even before mayoralty was introduced. But there were much other areas of the country just didn't have that capacity.
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Speaker 3
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Speaker 3
And it's not just Greater Manchester, as I was part of a small group recently with the current Chancellor, and it was pointed out to him that the borough with the fastest growing productivity in England is actually Rotherham his seat, and it's because of the HMRC actually linking directly into its pure. geography fluke. It's because of the University of Sheffield, really. And I think I personally think there is some signs that South Yorkshire is starting to show some momentum.
And there's you know, I was at a big thing in the West Midlands last week where I also detect that more than I would have done before. So on the on the things that these their team are looking at, I think one of the things you should consider taking some risk on is the places where there is already some momentum of things being showing signs on the data we can get of growth being a bit better, and with it, their own analysis of whether there is the.
And there's you know, I was at a big thing in the West Midlands last week where I also detect that more than I would have done before. So on the on the things that these their team are looking at, I think one of the things you should consider taking some risk on is the places where there is already some momentum of things being showing signs on the data we can get of growth being a bit better, and with it, their own analysis of whether there is the.
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Yuan Yang
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Yuan Yang
lumpy source of funding perhaps. I'll go to you first of all, Professor Valero. Yeah. So I mean I think there are lots of debates. So I think just just to step back for one second, I think there is quite a lot of agreement that some fiscal diva will be a good thing for growth. I think where there's real debates is the. implementation because of capacity accountability, what we've just discussed, and then exactly what the design looks like.
And so one of the aspects of design is which taxes and what share. Then the other is this issue of equalization. So I think there are lots of kind of proposals out there on what that equalization . Would look
And so one of the aspects of design is which taxes and what share. Then the other is this issue of equalization. So I think there are lots of kind of proposals out there on what that equalization . Would look
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Yuan Yang
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Yuan Yang
on? How would you crystallize that into? Well, I mean, first I would I would sequence this the places that have the. underlying kind of evidence based capacity. Second of all, I suppose it is about, well, whichever tax is going to be shared, then thinking about modelling what different scenarios look like, which places might be more exposed, and therefore like what's the optimal design. But I think you ultimately would need to have some scenario analysis and then think about how to go .
About it.
About it.
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Speaker 1
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Speaker 1
Learning lessons from other taxes or other countries that have similar. And then the pace at which this is done. So, you know, we're hearing reports in Whitehall that some departments are being asked to give large amounts of money, you know, as soon as you can give it out to the local local areas. I suppose my my background means I'm naturally cautious about just pouring money out from Whitehall, where for all its faults, there is an accountability process.
But how fast do you think we can really get that, that that. devolution of fiscal evolution that is being . Talked about? I'll
But how fast do you think we can really get that, that that. devolution of fiscal evolution that is being . Talked about? I'll
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Speaker 3
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Speaker 3
But especially as it relates to where welfare, I suspect, is going to go, quite a few of them are going to have to give up quite a bit, and that's possibly the bigger challenge than the other one that you you're asking about. But of course there then has to be pretty serious. analysis of . Whether there
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Yuan Yang
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Yuan Yang
You know, the, the trailblazers as they were called. So I suppose like adding in new areas of spending. Again, it's it is about, I think the pace depends on the extent to which we feel that good decisions can be made, which depends on local capacity, local growth plans and strategies being in place. And I was on the South Yorkshire Mayoral Advisory Council before the election and, you know, just in the early stages of their growth plan, but they had clear views on what some of the strengths, what some of the assets were in the region and what some of the barriers are as well.
But I think taking, say, innovation. So the PM's speech last week talked about more devolution of some of the more applied parts of innovation. And I think for that, the risks that those of us in the innovation community would talk about is, are you going to erode kind of the extent to which funding goes to . Excellence.
But I think taking, say, innovation. So the PM's speech last week talked about more devolution of some of the more applied parts of innovation. And I think for that, the risks that those of us in the innovation community would talk about is, are you going to erode kind of the extent to which funding goes to . Excellence.
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Yuan Yang
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Yuan Yang
place doesn't have that full picture of, you know, national excellence, where it is, how how the region compares to that. So I think it's really good to have seen in that speech that Ukri would be closely involved. And I think these partnerships between the national institutions and the local leaders are so important. And again, there are things we can build on there. So the National Wealth Fund with regional.
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Yuan Yang
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Yuan Yang
The OFI with some regional capacity building and pilots that they've been setting out, the Green Book Review and further promises, I think, since then to kind of build capacity through Secondments and other things. I think all those things are really important to have that analytical capability to put projects together, to assess them, and then work with the national . Institutions
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Yuan Yang
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Yuan Yang
the previous Chancellor made in her two budgets? Well, I mean, that's a really difficult question. I'm not that comfortable to answer it. I mean, I think, you know, let's just go by, I suppose we could go by some of the things that there's been public criticism or reversals on. And I think, you know, I think everyone would agree that welfare needs to be.
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Yuan Yang
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Yuan Yang
On how do we get growth. And that takes long term. So you've mentioned I mean, was part of that involved, you know, getting getting the fiscal position onto a sustainable footing required some difficult decisions. And I think I think what we all know is that it's always difficult to raise a tax. There are always. losers and there are always trade offs. And of course, things like the employer NICs that does raise costs for.
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Speaker 3
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Speaker 3
So I'm going to ask Lord O'Neill next. I was on a call with the one and only Ortloff for two days ago, and I know what his answer would have been. It would have been no. I think this is relevant for how the current leadership appears to have started. I think the biggest mistakes were made in the run up to the budget, and including when they were taking power, where they.
created a.
created a.
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Speaker 4
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Speaker 4
The bond market. reacted pretty sharply in response to the budget sold off sharply, more so, of course, than in other regions. And the reason it did so was was was two reasons. First of all, was the inflationary nature of the tax hikes, in particular, the National. insurance hike and the higher minimum wage that drove to some extent, was part of why inflation remained high and that complicated the Bank of England reaction function.
So you saw a repricing of the Bank of England expectation. And then the second point was that the fiscal tightening was almost exclusively delayed into future years, as opposed to in the very near term. And so the fiscal deficit, you know, it didn't really improve much in the first year. If you fast forward then to the second budget in November, was it December or November last last year, then the market reaction was much more. benign and gilt yields fell in response to the budget.
Not by much, but by but a but a little bit. And and there were no, of course. inflationary tax hikes there that were in fact. deflationary sorry. disinflationary measures. And there was an improvement in the .
So you saw a repricing of the Bank of England expectation. And then the second point was that the fiscal tightening was almost exclusively delayed into future years, as opposed to in the very near term. And so the fiscal deficit, you know, it didn't really improve much in the first year. If you fast forward then to the second budget in November, was it December or November last last year, then the market reaction was much more. benign and gilt yields fell in response to the budget.
Not by much, but by but a but a little bit. And and there were no, of course. inflationary tax hikes there that were in fact. deflationary sorry. disinflationary measures. And there was an improvement in the .
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Bobby Dean
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Bobby Dean
got we've got a vote coming. So I do need to move on. Bobby Dean MP thank you, chair. We've talked a bit about how we can achieve growth, but growth also takes some pretty big hits at times when we've had the health pandemic or maybe climate related shocks that happen to the economy as well. So I'm interested in this question about. sustainable growth. And I think often we talked about Heathrow earlier, and you did actually mention Professor Valerio about the the trade offs, maybe with emissions.
And sometimes that's poses a kind of political question weighed up against an economic one. But is that actually the case? Should we not be weighing up the sort of short term, medium term economic growth benefits versus the potential long term effects if we have to invest more in things like. mitigation because of climate change, is that an analysis that's already happening in government? Do you when you look at decisions like Heathrow or jackdaw or all these sorts of big environmental projects, is there an analysis about what the sort of short and medium term growth is versus the potential .
And sometimes that's poses a kind of political question weighed up against an economic one. But is that actually the case? Should we not be weighing up the sort of short term, medium term economic growth benefits versus the potential long term effects if we have to invest more in things like. mitigation because of climate change, is that an analysis that's already happening in government? Do you when you look at decisions like Heathrow or jackdaw or all these sorts of big environmental projects, is there an analysis about what the sort of short and medium term growth is versus the potential .
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Yuan Yang
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Yuan Yang
You know, often things that involve some cost, which is often an investment today, build resilience to a future shock. And therefore that would be great because you'll have less of a negative fiscal impact when that shock comes. And I think this kind of analysis does happen. And there are often trade offs. intertemporal trade offs, and you can take that to a really micro level to a firm making a. decision on investment, should it invest in something like energy.
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Yuan Yang
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Yuan Yang
You know, clean energy technologies and other clean technologies are identified in the industrial strategy as being growth areas. Because many countries are investing in these technologies. We've seen the cost massively coming down their clean technologies, their modern technologies. They're smart. So there are growth opportunities in those things. If we actually purposefully try and capture them, that's the purpose of an industrial strategy. Rather than just thinking about deploying these technologies.
Let's build . Those
Let's build . Those
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Bobby Dean
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Bobby Dean
supply chains so that our own firms can benefit from the growth that it brings. And Doctor Beck-friis, I'm interested in whether the bond market thinks about this risk register of potential future shocks, and whether it. recognises that if governments are kind of insulating themselves from them from greater investments in the health system, to be more resistant to a health shock in the future is that sort of thing that bond markets pay attention to, or is that too detailed at the moment? Is that sort of that sort of blow, the .
Blow the
Blow the
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Bobby Dean
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Bobby Dean
uncertain for you to have an interest in? So give me an example of, well, for instance, let's say that we had more bed capacity in the NHS ahead of the health pandemic. That's something that feels like maybe it was just a social decision, but but then ended up maybe costing the economy more because we weren't perfect climate to we've had shocks this summer in terms of heat. We might have more flooding over the winter. He asked me, for example.
So I'm just . Giving the
So I'm just . Giving the
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Speaker 3
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Speaker 3
Functionality not already sit within the OBR itself, or do you think it needs to be a separate body? I've talked about it. A people at the OBR, they don't. A lot of it is sort of macro economic analysis where the OBR set up for macro. So I think the crucial thing is that it would allow the OBR to actually .
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Speaker 3
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Speaker 3
Could that achieve a similar effect to what you were describing would be beneficial? I didn't know that. I've always been a. I remember discussing it with some very eminent people, including those that. originated some of the medium term financial strategy type stuff. I think the OBR should be encouraged to focus on the trend rate of growth. One of my own sort of weird feelings in my brief time as a minister in the Lords, in the Treasury's, you were you were talking about all these changes.
And the single biggest thing that always influenced everything was a change in the Obr's latest forecast of next year, of which, in my judgment, from my previous life, as good as they are, they don't have any edge over anybody else. As to what a slight contrast to what you. From my.
And the single biggest thing that always influenced everything was a change in the Obr's latest forecast of next year, of which, in my judgment, from my previous life, as good as they are, they don't have any edge over anybody else. As to what a slight contrast to what you. From my.
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Chris Coghlan
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Chris Coghlan
So I'm very I didn't know that. I'm very sympathetic to that view. Professor Leary. Just one of my favorite subjects is public R&D. Obviously the where we are right now, if I understand correctly, we're about the middle of the G7 on this. How important do you think this is to long term growth? And secondly, I think for 27 out of the last 30 years, we've had the lowest level of public R&D in the G7. So if we're really serious about long term growth, surely we should be aiming to be at the top of the top of the G7, especially as you know, the numbers aren't actually .
That
That
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Yuan Yang
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Yuan Yang
compared to other other items of public expenditure. So first of all, to say another area, I mean, it was a couple of years ago now, but another area of data restatement was on business investment in R&D, where we found actually we were not quite low. We were actually relatively better than we thought as a share of GDP. But I think R&D is massively important for growth. There is really compelling evidence. Now, best has some reports that show the returns, the broader returns to £1 of public money in R&D being, I think, 7 or £8.
It's not just important in the abstract, though. It's important for an economy like ours because we are actually, you know, this is actually a proper source of optimism. I think we're a very innovative. economy and we're also very innovative in things that matter in today's world. So, you know, that means there's growth opportunities and also resilience opportunities and everything else. So the issue is, however, there's rising international competition in many areas. Many other countries are spending a lot of money on R&D.
So we can't necessarily compete in terms of that scale, but we can at least protect and build on what we have and just make sure that we're channeling it, particularly on the applied side, channeling towards growth opportunities. I think on the basic science, you're not always going to know what those growth opportunities are. So the current Ukri buckets approach, I think is a positive one. Our strengths stem from our . Strengths in
It's not just important in the abstract, though. It's important for an economy like ours because we are actually, you know, this is actually a proper source of optimism. I think we're a very innovative. economy and we're also very innovative in things that matter in today's world. So, you know, that means there's growth opportunities and also resilience opportunities and everything else. So the issue is, however, there's rising international competition in many areas. Many other countries are spending a lot of money on R&D.
So we can't necessarily compete in terms of that scale, but we can at least protect and build on what we have and just make sure that we're channeling it, particularly on the applied side, channeling towards growth opportunities. I think on the basic science, you're not always going to know what those growth opportunities are. So the current Ukri buckets approach, I think is a positive one. Our strengths stem from our . Strengths in
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Yuan Yang
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Yuan Yang
important to stick with those fiscal rules capital though, isn't it R&D? Yeah. So yes it is. But we've got the investment rule which has already enabled more public sector investment, including R&D in this in this SR period. And then of course, things like the British Business Bank and the activities they do, they are allowing innovative firms to grow.
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Speaker 1
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Speaker 1
Actually, just from the mentality thing of the board of the of the puffins. You know, we can we, we, the way that a lot of them came into existence sort of came out of crises. And they often seem, you know, yet another civil service department, but they, they should be at the forefront of. asbestos that relates to the benefits of R&D.
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Harriett Baldwin
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Harriett Baldwin
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Speaker 3
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Speaker 3
budget numbers, have you done an assessment of what impact that has on the budget? So so the answer is no. It will have an impact in terms of the in terms of the flow, and it will have an impact in terms of the stock. Because, you know, when the Bank of England is doing qty, it's reducing the size of the balance sheet. And so you stop paying interest on reserves and also getting less interest coupon.
So that's, you know, that's a, that's a,
So that's, you know, that's a, that's a,
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Bobby Dean
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Bobby Dean
be very interested in hearing it. Thank you. Thank you very much. Bobby Dean MP. Yeah. Just another question for you, Doctor Beck-friis, because there's been a lot of chatter this time about the lack of chatter around the budget and how the bond markets might be responding to that. The fact that it's tight lipped means there'll be less sort of fluctuation. Do you do you think that this is a good thing, or is it just moved the moment to budget day itself and there might be more reaction or .
Stronger
Stronger
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Speaker 3
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Speaker 3
reactions? Possibly if there's anything that surprised the bond markets. Well, it depends on what's announced clearly. But yes, I mean, I think it's been good in the sense that it's been less a little bit less volatility this autumn. But, you know, we need to put this in context. This year has been.
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Speaker 3
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Speaker 3
Not because of the budget but you know, global fixed income and volatility has picked up everywhere. But it's actually this year in particular picked up in the UK since the start of the year. And volatility in the UK gilt market is now. realized has been much higher than elsewhere. And I do think that, you know, we spoke about the level of yield and fiscal credibility. But but I do think this fiscal sorry, this volatility partly.
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Speaker 3
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Speaker 3
You know, this notion around fiscal credibility in the UK because whenever you have an adverse shock, suppose energy prices go higher, the markets, you know, start doubting that the government will do the right thing to balance the books. And the reason I say that is because it's really it's picked up everywhere. But the three countries where it stands out has been UK, France and Italy. And all of these countries have some concerns around fiscal credibility. But again, this you know, the nature of the shock has not been the UK budget or fiscal policy.
You know, the nature, but . You know,
You know, the nature, but . You know,
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Speaker 2
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Speaker 2
more around the Middle East and energy prices. Thank you very much, Mr. Dean, doctor Beck-friis and Lord O'Neill. I mean, we we were talking about we talked about growth. We've got to get investors investing. You've got experience with this. What would persuade investors that the Chancellor's. commitments will be delivered?
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Speaker 3
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Speaker 3
terms of in the bond markets for you in the bond market. Well, I mean there's there's always going to be investors. There's the question is at what price they are willing to. invest at. And, you know, to lower the again, this is easy to say from a from a bond market point of view, but to lower the interest rate, you know, to some extent, extract it, attract more international investors to lower their yield, you know, first and foremost, you know, tightening fiscal policy and reducing the near-term deficit is is number one.
Number two is, is to avoid, you know, the inflationary tax hikes that we saw two years, two years ago. And number three, I think is just, you know, going forward, less of a focus on the this concept of headroom and and more . Of a
Number two is, is to avoid, you know, the inflationary tax hikes that we saw two years, two years ago. And number three, I think is just, you know, going forward, less of a focus on the this concept of headroom and and more . Of a
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Speaker 1
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Speaker 1
We somehow managed to have made a bigger mess out of dealing with them than many other places. And we've had a couple of. self-induced ones arguably as well. And so people are sort of conditioned to, oh yeah, the UK is that place that always gets everything wrong. And that's part of it. And I link it to, I think I touched on it earlier, but I think about this another way right now, America's biggest stock market quoted company is more valuable than the whole of our equity market put together.
That doesn't seem to me to be over the big picture, likely to remain the case unless we keep getting everything wrong. And so I think there is. And it also links to how I describe the sacred cows as golden.
That doesn't seem to me to be over the big picture, likely to remain the case unless we keep getting everything wrong. And so I think there is. And it also links to how I describe the sacred cows as golden.
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Speaker 1
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Speaker 1
Seem to think, yeah, you know, sooner or later we're going to have to deal with them. And that's why I. admire the announcement that's been made by this prime Minister about the triple lock, because that's one of the things that I think in the in the I'm a bit surprised bond market people I talk to don't talk about that more. But it is. conceivable that that could be saving by.
2050 . anywhere from. 2 to 5% of GDP. And I think going back to one of the questions about OBR,
2050 . anywhere from. 2 to 5% of GDP. And I think going back to one of the questions about OBR,
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Speaker 4
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Speaker 4
investment or that not not an enabling private capital investment. I mean what we want is for that to to crowd in the private sector investment. We know for too long public sector investment was too low in the UK and also volatile because it was always adjusted because it's quite easy to adjust in the sense it's longer term compared to crucial day to day public services. So I'd like to see that. I think, you know, on tax it's perhaps these are smaller things, but I think they can really matter.
But things that within the system can. incentivise more investment in the types of things that we want. I think that would send a very positive signal in terms of the direction of travel. One very minor thing is, you know, the incentives around investing in skills. I think skills are quite a barrier to growth in the UK. We've seen employers investing much less over time, and there's more we could do, particularly now thinking about AI and the fact that businesses might be under pressure to replace workers and use these new technologies.
Do
But things that within the system can. incentivise more investment in the types of things that we want. I think that would send a very positive signal in terms of the direction of travel. One very minor thing is, you know, the incentives around investing in skills. I think skills are quite a barrier to growth in the UK. We've seen employers investing much less over time, and there's more we could do, particularly now thinking about AI and the fact that businesses might be under pressure to replace workers and use these new technologies.
Do
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Speaker 1
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Speaker 1
To me is the most important part. And many sub bits of it, one of which. personally to the most. advanced mayoral authorities, I would like to see almost complete devolution of adult skills. Part of the problem, as I'm sure many of you know, in these areas that have been there, they were supposed to have had a lot of skills. devolved quite some time ago, but it's effectively been.
Yes, you have, but we're going to be monitoring what you're doing every five minutes. That isn't devolution. So things related to that are what . Personally. And I'm assuming that there's going . To be no
Yes, you have, but we're going to be monitoring what you're doing every five minutes. That isn't devolution. So things related to that are what . Personally. And I'm assuming that there's going . To be no
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Speaker 3
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Speaker 3
Yeah. Well commit to fiscal discipline. Keep going. Commit to fiscal discipline. Make sure that there's no fiscal slippage. And in future years and you know, that will have the benefit of hopefully reducing interest rates and the interest costs for the government going forward. And also, you know, free up some space to . Run
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Speaker 2
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Speaker 2
more significant. countercyclical fiscal policy in future downturns. Can I thank our witnesses very much indeed. That's Doctor Peter from Pimco, Lord O'Neill with many things, and Professor Anna Valero from the LSE. The transcript of this session will be available on the website. uncorrected in the next couple of days, with thanks to our colleagues at Hansard. Thanks to our colleagues at Bow Tie for the broadcasting. And .
Thank
Thank
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