The Financial Fairness podcast
Episode One: The impact of the mini-Budget
Guest: Alistair Darling
September 2022
This episode was recorded on Wednesday 27th September
Why are tax cuts going to the highest earners?
What does the falling pound mean?
How high are interest rates going to go?
How are we going to pay for the mini-budget?
What does this mean for the cost of living?
In the week when the pound has plunged in value against the dollar, the interest rate the government had to pay on its debt went up, and the Bank of England had to intervene to deal with turmoil on the financial markets, we speak to Alistair Darling, Chair of the abrdn Financial Fairness Trust and former Chancellor about solutions to the cost of living crisis. We had planned this interview some time ago, but recent events in the economy have meant the focus of this episode has changed. Mubin quizzes Alistair on what’s happening right now, as well as longer term cost of living issues.
Alistair gives his frank opinions on the mini-budget, including:
On the OBR not being invited to review the mini-budget: “I can see why they didn't want anyone independent looking at this, because anyone independent would have said, ‘hold on, what on earth is going on here? Who's paying for this?’”
The 45% tax rate cut: “Borrowing money to give people at the top end who don't actually need the money through a tax cut, he [the Chancellor] can't possibly claim that's investment, I think a lot of them will just shove it in the bank.”
“The tax decreases announced last week will disproportionately benefit the super rich, in my view, it is quite wrong to have got rid of the top rate of tax. I believe that if you've got broad shoulders, you’re best placed to meet the cost.”
Who will pay: “We've started on a course, where we don't know how we're going to pay for this giveaway. And I can see all too clearly the risk of the cost falling on the people who are getting precious little at the moment, and who will end up paying for it.”
The ‘trickle-down’ theory: “There's actually very little evidence around which says, if you give people with lots of money, even more money, everybody else benefits from that.”
Transcript
Mubin: Welcome to the Financial Fairness podcast with me Mubin Haq
Alistair Darling: The immediate market reaction is definitely because the government didn't announce a plan to pay for this.
No, no, given what's happened - no, I'm not. I can see why they didn't want anyone independent looking at this, because anyone independent would have said, ‘Hold on, what on earth is going on here? Who's paying for this?’ And I think the fact they haven't done it has actually cost the present government dearly, because people are saying ‘I wonder why you didn't want anyone to look at all this’? And they begin to think something's going very wrong here.
The risk is if you don't have a plan, sooner or later it will hit your ability to maintain public spending - public spending on things like the NHS, where we know it's under pressure.
I fear at the moment, we've started on a course, where we don't know how we're going to pay for this giveaway. And I can see all too clearly the risk of the cost falling on the people who are getting precious little at the moment, and who will end up paying for it.
Mubin: Today we’re really pleased to have Alistair Darling back. We’re discussing the most topical issue of the day – the cost-of-living crisis, and in particular the mini-budget. As a former Chancellor and as chair of the Financial Fairness Trust, Alistair is well placed to provide some comment
Alastair, inflation is soaring, causing pain for millions. Given the recent mini-budget and the resulting market reactions, it makes sense to start there. So, what's your overall assessment of what’s been happening?
Alastair: Two things have happened to every country, certainly in Europe, but in the world, as well. And that is, as the pandemic ended, people went back to work, governments around the world put more money into the economy to avoid us going into recession, so far, so good. On top of that, you've got a war in Ukraine, and with the Russians cutting back on the supply of gas, that has meant energy prices really have spiked. And that's why governments have taken action to suppress the price rise, through the energy cap and other measures. And most of them have done that through borrowing.
On top of that, in the UK, the government recently announced a massive reduction in taxes. And, if you look at the combined amount of money this is costing - experts vary, but between say 150, and 200 billion pounds. That's an awful lot of money that's going into the economy. Now, because of that, the Bank of England, which has taken a pretty cautious view on raising interest rates, is likely now to put them up quite significantly. So you've got this combination of prices going up anyway, you've got inflation as well, you've got the value of the pound plummeting to levels we haven't seen since the mid 1980s, which means that the cost of goods you buy in the shops goes up because an awful lot of things are imported.
Mubin: Tell me more about the impact of this, who is it going to be affected?
Well, it tends to be people on low incomes, because they usually haven't got very much money to fall back on, they're not being paid so much. The tax decreases announced last week will disproportionately benefit the super-rich, in my view, it is quite wrong to have got rid of the top rate of tax, I believe that if you've got broad shoulders, you’re best placed to meet the cost of whatever the government has to do. So, it is people on the lower incomes that will pay the most. On top of that the government has run a risk that if the outside world, who after all lends us money when the government needs to borrow it, lose confidence in the government, and think the government doesn't know what it's doing and doesn't have a plan to get that borrowing down, then you get a sort of turmoil, which adds to this mix and makes things worse. When I was chancellor, we had to increase our borrowing with the banking collapse, and also to get the economy going again, which eventually did start to grow by 2010. But I was very, very clear, I had to have a plan, showing how we were going to get that borrowing down to a reasonable level. We don't have that today, which makes all this uncertainty deeply worrying. Because at the end of the day, when you get these crises it is people at the bottom end of the income scale, who actually ended up paying for it.
Mubin: Do you think that there wasn't a plan and that's what's led to this market reaction?
Alistair: The immediate market reaction is definitely because the government didn't announce a plan to pay for this. Governments across the world have taken very good steps to suppress the price of gas and electricity this winter. I thought the obvious thing to do was to pay for that by imposing a windfall tax on the energy companies, which have made an unexpected fortune through these price rises. But the present government decided not to do that. So that's somewhere between 100 and 150 billion pounds borrowing, which you've got no plan to get down.
Now, if you then go on a tax cutting spree with money you haven't got that means even more borrowing. We're paying more for our debt than Italy and Greece, now who’d have thought of that ever happening? And of course, the risk is if you don't have a plan, sooner or later it will hit your ability to maintain public spending - public spending on things like the NHS, where we know it's under pressure. And that is what I fear is going to happen. We've been here before. It happened - for those of us who are old enough to remember - in the 1970s, when the then conservative Chancellor Antony Barber went on what he called a ‘dash for growth’. Two years later, we were in the mire, we were in a complete mess, and frankly, it took 10 years to get out of it.
Mubin: There's been a lot of comparisons to the 1970s. Could you just expand on that a bit more? How we did get out of that inflation spiral, which was actually even higher than the rates we’re seeing today?
Alistair: Well, I'm not sure there was a strategy in the 1970s. We lurched from one problem to the next. And of course, there were three different governments. What eventually brought inflation down, sadly, was mass unemployment. And if you've got up to 3 million people out of work, not spending money, obviously, prices will start to fall if you do that. But it came at a terrible cost, because a lot of those people who lost their jobs 40 years ago, never went back to work. And you can still see, if you look around parts of the country today, you can still see the scars are there, people whose communities were devastated, the old industries had gone. So, the 1970s is not a great place to point to. I fear at the moment, we've started on a course, where we don't know how we're going to pay for this giveaway. And I can see all too clearly the risk of the cost falling on the people who are getting precious little at the moment, and who will end up paying for it.
Mubin: The rationale for the mini budget was that it would stimulate growth. What's your take on that?
Alistair: This was tried in America 40 years ago, undoubtedly, people at the top end of the income scale did very well. But you saw then a growth of an underclass of people who simply didn't get all the opportunities that were coming. I'm skeptical and there's actually very little evidence around, which says, if you give people with lots of money even more money, everybody else benefits from that, the ‘trickle down’ theory, it's called. I'd rather see money being spent on making sure that we can convert quickly, from carbon-based fuels to more environmentally friendly fuels and so on - that's investing for the future. Putting money into the health services is a necessity, putting money into education, science and research, that money is good spending. And if you have to borrow to do that, most people will say, well, actually, that makes sense. But borrowing money to give people at the top end who don't actually need the money through a tax cut, he can't possibly claim that's investment, whether or not they spend it, I don't know, I think a lot of them will just shove it in the bank.
Mubin: We’ve seen sterling reach new lows. Now, this was a trend which had been happening for some time. But what's your take on that? And what does it mean for people on low to middle incomes?
Alistair Darling: The reason that our currency is falling is because I think there is a generalised loss of confidence in the government's ability to steer us through this course. Everybody knows that governments in most parts of the world are having to spend more money because of the consequences of COVID because of the fact that economies all over the world are slowing down and some are going into recession.
But the real problem is, if governments incomes start falling, then there's less money to spend on things that we need to be spending. I mentioned earlier, there's also a direct cost when you've got a low pound. A lot of the stuff that you take for granted, electrical goods and so on, you don't have to go too far to find out they were actually made in another country. Now, you would normally counter that by saying ‘ah because the pound is cheap, it's cheaper for people abroad to buy our goods’. But unfortunately - and sorry that I have to make this point - since Brexit we've rather damaged trading relationships with our biggest trading partner in continental Europe. We don't have a trade deal with the United States that we were promised and so on. So, the compensating value of a lower pound isn't there for us. That's why I say you've got this cocktail and we're going to have to try and get out of it. There's two ways of getting out of it. One would be, of course, to reverse some of these things, which politically I think it would be impossible. The other will be quite damaging to us if the government says well, we're going to have to cut public spending.
Mubin: We've had huge spending cuts already with austerity. What more could be feasibly cut? Some services are being protected, like the NHS, and education.
Alistair: So there's no easy places to go. If there were easy places to go to cut things without anybody minding, then it would have been done - who wouldn't? At the end of the day you pay for it. If the policeman doesn't come when you phone 999, or you're waiting on the floor because you fell and can't get an ambulance or you're stuck in a queue waiting to get to A&E and so on, or your children were just simply not getting the education you think they ought to. It's bad for society, as well as been bad for the country.
Mubin: The OBR didn't provide any forecasts for the mini budget in terms of borrowing rates. Were you surprised Alistair?
Alistair: No, no, given what's happened - no, I'm not. I can see why they didn't want anyone independent looking at this, because anyone independent would have said, ‘hold on, what on earth is going on here? Who's paying for this?’
And I thought one of the good innovations announced by the government elected in 2010, was the Office of Budget Responsibility. I was tempted to do it myself beforehand, but we just didn't get around to it. But it meant that outsiders looked at all the figures and said, ‘What does all this mean’? When the government said, growth is going to be so much – outsiders will say, ‘Well, maybe so maybe not,’ and so on, and I think external examination of your decisions and whatever walk of life you are, is actually a good thing, get a third party to give it the once-over. And I think the fact they haven't done it has actually cost the present government dearly, because people are saying ‘I wonder why you didn't want anyone to look at all this’? And they begin to think something's going very wrong here.
Now, they've belatedly announced they're going to have a sort of event, in the end of November, which they're going to explain a bit more. And hopefully, the Office of Budget Responsibility will be allowed to have a look at it.
Mubin: Okay, so let's look at some solutions to this inflation crisis that we're facing. You've already touched on this Alistair. It's interest rates. It's the Bank of England's first line of defense for getting inflation under control. It's clear that current increases aren't working. And there's talk of interest rates rising up to five or 6%. What’s your views on this?
Alistair: Well, interest rates will remain high as long as the Bank of England believes that inflation slowing the system, because that's in crude terms, why interest rates go up. So, I think the key thing is to get our public finances under control so that people can say – ‘yes, we are borrowing all governments borrow, but we're borrowing for something that people can see will have a return’.
It's a bit like doing something to your house, it makes it worth a bit more, or makes it a better house. People understand that, So I think, the general answer to your question is I think the government have got to show to get spending under control. But, there isn't a single thing you could do that will bring down inflation, and make everybody happy. It's just a combination of things to do. Certainly I found in government, very often one of the best things you can government can do is not do something to make it worse.
Mubin: But I am presuming you think interest rates do need to go up? And I was just wondering what sort of timescale your thinking was in relation to that?
Alistair: Well, I suppose my thinking has changed in the light of recent events. I think the Bank of England's going to have to increase interest rates, more than they planned on doing and more quickly than they planned on doing it. I think that is now unavoidable. The Bank of England I think, has been, understandably – like a lot of central banks - have been very careful to walk along a tight rope to put interest rates up to help bring inflation down, but not do so much that you actually tip the country into recession. And this is not an exact science. What I do know is that although the Bank of England is independent, but the policy that the bank is pursuing has to be complimentary to the policy the government is pursuing. It looks like and it sounds like that the Bank of England was blindsided by what the government announced last week in terms of this over 100 billion pounds worth of spending. I don't think they knew it was coming. And that's not good. Certainly in my day, there was always conversations that people understood your thinking and where you might be going, because you don't want - if you suddenly find that the central bank doesn't really know what the government's doing, that is a big problem.
Mubin: And what you're saying is that that's not normal policy. That's not how things are done.
Alistair: The Bank of England may be independent, but the governor of the Bank of England, the Chancellor of Exchequer do meet, at the end, it's the banks call, that's why we made it independent 28 years ago. But the Governor needs to understand where the government's going. Because if he thought the government was doing one thing or another, he might say, well interest rates maybe don't have to go up so much, or alternatively, they will have to go up. And he’d tell the chancellor that. But it's the Chancellor's call on tax spending policy and it’s ultimately the bank's call on monetary policy. But ideally, the two things should work hand in hand. Because what people, want is stability. Because if you get some certainty, you get more confidence. If you've got more confidence, business invests, people can plan for their own individual futures and so on. When you don't know - and this is what going back to the 1970s when most people did not really know what one month would bring from the next - that's when you start getting people saying, ‘well, I'm not doing anything because I really can't take that risk.’ And if you get into that sort of spiral, then it's very damaging for the country.
Mubin: So just going back to what we were talking about earlier, which was what could the government do? Because we've got this fiscal event happening in November, one thing they could do in terms of a U turn, is this windfall tax on their energy companies? Is that something that you'd be recommending to them, which might help in terms of a borrowing?
Alistair: I think it would be a reasonable thing to do. At some stage, we're going to have to pay for all this borrowing. Now, the government's view is that, if all this works out, we'll get growth, though the pursuit of growth has been a pursuit that every government since probably there ever was in the last 300 years has been pursuing. Sometimes it works. Sometimes it doesn't. But, this is an example of where there was an abnormal need for expenditure. And it has to be financed. And there is an abnormal enrichment, if you like, of profits for the utility companies. And the two matched up. I wouldn't want to do anything that would stop energy companies doing what they do in the longer term. But I think they accepted, actually, many of them publicly said they didn't expect to make this sort of money.
Mubin: Because otherwise, if we don't do that, it's going to be families across the board are going to be paying for this through future taxes.
Alistair: It'll be taxes one way or another, that's my fear. But, we'll have to wait and see what the government does. Part of the problem, I think Is because although they've been in power for 12 years, and they've been, most of them have been around for 12 years - they're embarking on a route now that people are very unfamiliar with, although as I say it was tried in the 1970s. And it didn't end well.
Mubin: Energy bills are still fairly high, people have seen big increases. Let’s talk about energy saving measures. We've seen some fairly big reductions by government in terms of investing in this area, things like loft insulation, cavity wall insulation.
Alistair: Most houses in the UK could do with measures to make them more energy efficient. But it's so haphazard. A lot of the housing in, in this country is quite old and some of it is quite difficult to start making it wholly insulated properly. The Financial Fairness Trust is headquartered in the City of Edinburgh, there’s a lot of houses there, where it's very difficult to see how you could bring them up to the sort of standards of the 21st century. Although equally, there's lots of houses in the UK, built in the last 30 years, where, frankly, more needs to be done. It needs to be coherent, I suspect, it needs to be far more locally driven, because councils know what they've got in their area, whereas Whitehall or even regional government don't know that. Of course, I'd like to see that happen. But again, it's not going to happen without, grants and things, which means public expenditure. And if you're squeezing that, then it's not going to be there
Mubin: The government has offered some help towards increased costs, for example we've got £400 discount on fuel bills, £650 for everyone on benefits, £150 for those on disability benefits, £300 for pensioners. Do you think this goes far enough?
Alistair: You have to take a long-term view, what do you do to try and reduce these prices in the first place, which amongst other things mean diversifying where you get your energy from. You also have to look at the more immediate shorter-term stuff, and that's alleviating the impact of those bills, particularly on people with low incomes. But, it’s not one or the other really. And I think people will feel happier if we were all collectively doing a wee bit more on the tackling the causes of it, rather than always being in a situation having to do with the, the effects of the fact we haven't changed.
Mubin: And what about the role of wages. To what extent do they need to rise, or will it just fuel inflation?
Alistair: It is inevitable that, if people's costs are going up, they want to maintain their spending power so they will ask for higher wages. But the best way of dealing with this are people's expectations. If they think the government's doing things to bring inflation under control, then they might say, ‘well, look, this is something we've got to deal with’, rather than this is something just stretching way out and, why should my family suffer for it? Which is why - coming back to the point that I started with, and I'll finish with this point - is when you're in government, you've got to look at everything, the repercussions that follow from anything you do or you announce, what are the effects of this going to be, what are people going to make of it? And it all comes back to fundamentally the same thing. Do people have confidence that the government's got a grip of things and that things are under control? Once you lose control over events, it's very, very difficult to get them back. The best thing to do is not lose control, keep control and do sensible things that are for the good of the country as a whole. It may take time, but if people think you're following a route, you've got a plan, then they're likely to be more confident than if they're pretty sure you don't.
Mubin: Alistair, thank you very much for your time, it’s always a pleasure speaking to you
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Join us for the next episode where we’ll be discussing how we can eradicate food banks.
Until next time, thanks for listening.
