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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Let's stay on the

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Speaker 1: UK Commune.

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Speaker 2: Inflation slowing lesson expected last month as fuel price has

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Speaker 2: crept higher, underscoring the reluctance of central banks to actually

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Speaker 2: begin cutting rates. Well, here to discuss the UK's economic

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Speaker 2: outlook is a former Chanceer of the Exchequer at Philip Hammond. Mi,

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Speaker 2: tra Hammond, thank you for joining us. I mean we

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Speaker 2: talk about the economy, but also you're also Defense Secretary,

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Speaker 2: and it almost feels almost more important in this day

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Speaker 2: and age, with all of the uncertainty and the defense spending.

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Speaker 2: Would you first of all agree with the former defense

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Speaker 2: secretaries that we just have to increase defense.

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Speaker 3: Spending now, well, I think we will have to increase

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Speaker 3: defense spending in a measured way over a period of time.

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Speaker 3: And I think a great deal depends on post the

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Speaker 3: American elections, what the position of the US is around

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Speaker 3: NATO in Europe and how clearly we can rely on

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Speaker 3: the continuing guarantee of the American Alliance in the defense

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Speaker 3: of Europe in the future against potential Russian aggression. But

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Speaker 3: there's no doubt we're not spending enough on defense. None

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Speaker 3: of us are spending enough on defense, and we're going

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Speaker 3: to have to factor that into what is already a

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Speaker 3: very difficult public spending agenda for the UK.

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Speaker 1: So what happens to UK defense and European defense?

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Speaker 2: If Donald Trump is, for example, it like did and

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Speaker 2: says actually NATO means reforming and we're.

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Speaker 3: Going to give a lot less to it, then the

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Speaker 3: Europeans have to step up and fill the gap. And

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Speaker 3: that's quite a big gap to fill because we're heavily

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Speaker 3: dependent on the Americans for many strategic elements of our defense.

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Speaker 3: I don't just mean the nuclear deterrent, but the ability

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Speaker 3: to airlift large numbers of troops, for example, depends crucially

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Speaker 3: on American support. So we would need to invest quite

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Speaker 3: a lot more money in defense. I think the important

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Speaker 3: thing here is that the overall envelope of public spending

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Speaker 3: cannot continue to expand. So when we talk about these

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Speaker 3: things that we have to do decarbonization, increasing our defense spending,

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Speaker 3: we also have to talk about what we are going

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Speaker 3: to do less of in order to be able to

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Speaker 3: afford these things. That's the grown up debate, and to

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Speaker 3: be very honest with you, it's quite difficult to get

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Speaker 3: that debate going in an election year, So how.

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Speaker 1: Would you do it?

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Speaker 2: You know, you're always look at the numbers and always

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Speaker 2: try to balance out. First of all, defense does it

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Speaker 2: need to go to three percent of GDP? Or is

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Speaker 2: five hundred million one off enough?

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Speaker 3: Not yet three percent of GDP? And money isn't the

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Speaker 3: only issue. We've also got to be able to recruit

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Speaker 3: enough people. At the moment, the defense establishment is struggling

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Speaker 3: to recruit the people it needs to spend its current

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Speaker 3: budgets to use its current budget allocations. So the two

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Speaker 3: things go hand in hand. But I think look go

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Speaker 3: back to what the Chancellor was just saying about growth.

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Speaker 3: In the end, this is all about growth. If we

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Speaker 3: have strong, consistent economic growth driven by productivity increases, not

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Speaker 3: just by a growing population, then we will be able

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Speaker 3: to forward to do more, including over time more public spending.

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Speaker 3: But first of all, we have to get that growth

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Speaker 3: equation right. And although it looks like we are now

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Speaker 3: getting on top of the inflation problem, which has been

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Speaker 3: the predominant theme for the last couple of years, we

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Speaker 3: still have this long term challenge in the UK that

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Speaker 3: our productivity growth has been very flat for ever since

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Speaker 3: the global financial crisis. And our economic growth is simply

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Speaker 3: not strong enough to support an aging population with a

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Speaker 3: very sharply rising demand for public services.

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Speaker 2: But so how do you actually fix the productivity problem?

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Speaker 2: The US productivity numbers are a little bit better because

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Speaker 2: of a large number of immigrants actually coming to the country.

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Speaker 1: Does AI help with productivity? How would you go around it?

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Speaker 3: Technology can indeed help with productivity, but we've got to

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Speaker 3: make sure that we adopt and innovate in the right way,

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Speaker 3: that we sees the opportunities that are available. I agree

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Speaker 3: with the Chancellor. I think the UK growth prospects are significant.

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Speaker 3: We've got a very good track record of technology adoption.

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Speaker 3: The British people are very open to using technological innovations

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Speaker 3: in their everyday lives, more so than in many other countries.

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Speaker 3: So the raw material is there, but we've got to

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Speaker 3: make sure we seize the opportunity. And one of the

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Speaker 3: challenges of democracy, of course, is that we have to

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Speaker 3: persuade people that they want things to change. And people

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Speaker 3: are very conservative with a small c often don't like change,

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Speaker 3: and it's about selling change to people. Working out how

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Speaker 3: in a democracy we have those big debates and we

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Speaker 3: reach the right long term decisions around these big difficult

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Speaker 3: issues because many of our adversaries and even many of

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Speaker 3: our friends around the world who are competitors with us,

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Speaker 3: don't operate the same kind of democratic cistm them don't

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Speaker 3: have to build the same kind of consensus that we

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Speaker 3: do in the liberal democracies of Europe.

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Speaker 2: So one of the more immediate and these are longer term,

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Speaker 2: extremely difficult subjects.

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Speaker 1: Very important. On the short term, I mean.

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Speaker 2: Does it make more sense to increase defense spending or

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Speaker 2: cut taxes and that could also lay the foundation actually

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Speaker 2: for future growth.

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Speaker 3: Either way, well, I'm strongly in favor of an agenda

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Speaker 3: to cut taxes over time as we can afford to

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Speaker 3: do so. But we can only cut taxes if our

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Speaker 3: public spending is less than our tax receipts. Driving economic growth.

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Speaker 3: Achieving higher levels of economic growth should increase tax receipts

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Speaker 3: and should ultimately enable us to have both lower taxes

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Speaker 3: and higher spending on public services, including things like defense.

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Speaker 3: But we've got to do things in the right order. First,

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Speaker 3: you grow your economy, and that requires investment, maybe at

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Speaker 3: the expense of consumption. The consistent theme if you look

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Speaker 3: across countries around the world that have achieved decent levels

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Speaker 3: of economic growth over long periods of time. The consistent

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Speaker 3: theme is high levels of saving and high levels of investment,

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Speaker 3: and we've got to do better in that area. Once

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Speaker 3: we've done that and we're running surpluses in our public finances,

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Speaker 3: then we can start looking at cutting taxes. I'm afraid,

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Speaker 3: as Liz Trust and Quasi Quaite demonstrated a couple of

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Speaker 3: years ago, trying to do it the other way around,

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Speaker 3: cutting taxes first, funding it by borrowing simply doesn't work.

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Speaker 2: When you look at UK defense and foreign policy. Should

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Speaker 2: the UK continue to sell arms to Israel if they

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Speaker 2: are in breach of international law?

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Speaker 3: Well, we have a very clear and strict regime about

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Speaker 3: who we can and can't sell arms to, and these

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Speaker 3: things are reviewed very intensively when there's a period of

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Speaker 3: conflict or disturbance going on in the world. So you know,

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Speaker 3: it's not for me to second guess that chargement that

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Speaker 3: will be made internally within government according to the rules.

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Speaker 3: But we have one of the strictest arms export regimes

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Speaker 3: in the world and I'm confident that it will be

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Speaker 3: operated properly. Often people on the outside say, well, it's

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Speaker 3: obvious you shouldn't be selling arms to this country or

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Speaker 3: that country. Things are often a little bit more complex

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Speaker 3: than that in terms of the way international law works

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Speaker 3: and the way the rules are applied.

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Speaker 1: When you look at you know, we're on tenderhooks.

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Speaker 2: And this was quite difficult four days in the Middle

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Speaker 2: East trying to understand how Israel retaliates if they retaliate.

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Speaker 1: Do you think the Prime Minister will.

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Speaker 3: The Prime Minister of Israel, Look, I think it's very

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Speaker 3: difficult for Israel not to retaliate in some form to

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Speaker 3: this Iranian action. Prime Minister Netanya, who will be getting

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Speaker 3: urged from all sides, including the UK, to ensure that

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Speaker 3: any response is moderate and non escalationary. I honestly don't

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Speaker 3: believe the regime in Tehran wants to provoke and all

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Speaker 3: out war with the United States and Israel. That is

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Speaker 3: not in their interest. But they also have their domestic

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Speaker 3: audience that they have to satisfy. Prime Minister Netanya, who's

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Speaker 3: in the same space. He has a very difficult domestic

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Speaker 3: balancing act. And that's one of the big drivers in

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Speaker 3: the evolving geopolitical situation in the Middle East. The trick

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Speaker 3: which the Americans, in particular will be working on at

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Speaker 3: the moment. Is finding an action that the Israelis can

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Speaker 3: take which satisfies Israel's are more proper without provoking Iran

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Speaker 3: into a further counter response. I don't know what that is,

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Speaker 3: but I hope very much that they managed to find

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Speaker 3: something that works.

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Speaker 2: Okay, speaking about your prime minister, the UK premisore Ishi Sunak.

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Speaker 2: Is there a chance actually that the Tories do something

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Speaker 2: that will not be complete wipe out at the next

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Speaker 2: general action.

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Speaker 3: Well, there's always a chance because the world is an

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Speaker 3: unstable and unpredictable place and lots of things could happen

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Speaker 3: between now and the autumn when the election will probably

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Speaker 3: be held. I think it's what the Chancellor has said

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Speaker 3: to you is probably right that the feel good factor

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Speaker 3: will be starting to creep back into the economy. So

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Speaker 3: the economic situation, after a very difficult few years post

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Speaker 3: COVID will start to look and feel a bit better.

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Speaker 3: But we've got a long way to go, let's be honest.

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Speaker 3: The polls are suggesting that the Conservative Party has a

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Speaker 3: mountain to climb at the next election. But never say never,

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Speaker 3: because events can change people's minds very quickly.

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Speaker 2: But is it possible for the Conservative Party to win it.

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Speaker 3: On the economy, I think it's a challenge to be

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Speaker 3: honest because I think although I think the economy will

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Speaker 3: be improving by the autumn, I think that many people

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Speaker 3: have in their minds the events of the autumn of

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Speaker 3: twenty twenty to the mini budget, spike in interest rates

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Speaker 3: and so on. And you know, the Tory Party's principal

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Speaker 3: pitch to the public has always been our responsible management

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Speaker 3: of the economy. I trust Jeremy Hunt Rishi Sunat completely

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Speaker 3: on responsible management of the economy. But I think what

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Speaker 3: has happened in the recent past has damaged that brand

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Speaker 3: to be honest, and we've got to rebuild it.

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Speaker 2: Does it matter if the election is too close to

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Speaker 2: the US election?

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Speaker 1: Would that worry you?

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Speaker 3: No? I suspect our election will be close to the

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Speaker 3: US election. I think the question is whether it's just

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Speaker 3: before or just after.

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Speaker 1: Does it make a difference, I.

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Speaker 3: Really I'm not sure. I'm not sure whether it makes

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Speaker 3: a huge difference.

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Speaker 2: Philip Avon, thank you so much for joining us today.

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Speaker 2: That was a former UK Chancellor of the exchequerat