WEBVTT - Michael Saunders Talks UK Fiscal Policies

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news. Yeah.

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<v Speaker 2>I'm joined in Westminster by Michael Saunders, former Bank England

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<v Speaker 2>policymaker and now a senior advisor at Oxford Economics. Lovely

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<v Speaker 2>to have you back, Michael. We had that inflation reading

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<v Speaker 2>yesterday two point three percent. Richie Seene access inflation is

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<v Speaker 2>back to normal. The financial markets reckon it's so sticky

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<v Speaker 2>a June rate cut is off the table.

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<v Speaker 1>Who's right? I think a June rate cut is looking

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<v Speaker 1>very unlikely after the inflation figures. The decision to call

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<v Speaker 1>the election won't really alter that, other than in a

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<v Speaker 1>very limited extent. The NPC would be especially reluctant to

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<v Speaker 1>do a surprise rate change during an election campaign. I

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<v Speaker 1>think that they would prefer not to do anything which,

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<v Speaker 1>by their own actions would be a cause for the utility.

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<v Speaker 1>Look in practice, a June rate cut is probably ruled

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<v Speaker 1>off by the inflation figure.

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<v Speaker 2>So will there be any worry on the NPC about

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<v Speaker 2>looking as if they're giving a helping hand to the government.

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<v Speaker 1>I think it's rather that with the inflation figures come

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<v Speaker 1>out higher than expected, they don't have the evidence to

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<v Speaker 1>cut rays for now. But also, you know, there's no

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<v Speaker 1>great rush. They can afford to wait for a bit

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<v Speaker 1>more data to come through, and as I said, they

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<v Speaker 1>themselves wouldn't want to be a cause for volatility.

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<v Speaker 2>Do you expect more members of the Military Policy Committee

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<v Speaker 2>or former colleagues to join Swatty, Dinger and Dave rams

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<v Speaker 2>And and voting to cut in June?

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<v Speaker 1>Possibly? But actually I think unless the May inflation figures,

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<v Speaker 1>which hall still come out before the June meeting, are

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<v Speaker 1>especially low, I think it is more likely that they

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<v Speaker 1>would wait until August that the NPC has set out

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<v Speaker 1>the conditions for lower interest rates, that pay and prices

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<v Speaker 1>had to come down more or less in line with

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<v Speaker 1>the forecast in the May Monetary Policy Report. So far

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<v Speaker 1>the news has been a little bit higher than they're expected,

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<v Speaker 1>So it's really the evidence which you would need to

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<v Speaker 1>see to change before the NPC members votes would also

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<v Speaker 1>change their.

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<v Speaker 2>Services inflation particularly sticky. What would be a healthy level

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<v Speaker 2>to start to cut.

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<v Speaker 1>I think it's fair to cut rates gradually before pay

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<v Speaker 1>growth and services inflation are back to target consistent rates.

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<v Speaker 1>So a target consistent rate of pay growth would be

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<v Speaker 1>about three and a half. Services inflation probably about the

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<v Speaker 1>same kind of pace. As long as you're reasonably sure

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<v Speaker 1>you're on a path to that, then you can start

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<v Speaker 1>to cut rays gradually. Conscious that the lags on Mountree

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<v Speaker 1>policy are quite long and therefore if you wait until

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<v Speaker 1>everything is sorted, you've probably left it too late.

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<v Speaker 2>And just thinking again about the election, does kir Starmer

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<v Speaker 2>if he wins, have the fiscal room to grow the

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<v Speaker 2>economy significantly in five.

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<v Speaker 1>Years, Well, this is going to be the big challenge

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<v Speaker 1>for whoever's in government for the next few years. The

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<v Speaker 1>UK has low potential growth, which means the trend growth

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<v Speaker 1>of tax revenues is quite low. There's strong pressures for

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<v Speaker 1>higher public spending from the aging population and increase need

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<v Speaker 1>for defense spending. And we've got to get the public

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<v Speaker 1>finances back onto a sustainable path. Now, trying to reconcile

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<v Speaker 1>those three is going to be a difficult task for

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<v Speaker 1>whoever's in government. The best way to do it is

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<v Speaker 1>to do measures which can raise the economy's potential growth.

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<v Speaker 1>Then tax revenues will be stronger, the public finances will improve,

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<v Speaker 1>and you'll have more money to spend on public services.

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<v Speaker 2>Of course, growth is something that both parties agree we need.

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<v Speaker 2>We haven't had the election manifestos yet. But knowing what

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<v Speaker 2>we know so far about Labour's plans, do you think

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<v Speaker 2>that financial markets will be worried by their a new

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<v Speaker 2>change of gomnum? So?

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<v Speaker 1>I think financial markets and international businesses will be extremely

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<v Speaker 1>relaxed about the prospect of a change to a Labor government.

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<v Speaker 1>Now that's partly because Labor themselves are viewed as a

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<v Speaker 1>moderate centrist party. It's also because the Conservatives have perhaps

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<v Speaker 1>lost their previous claim to be the party of economic

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<v Speaker 1>competence after the chaotic period of the last few years.

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<v Speaker 1>We've had you know, five prime ministers, seven chancellors. Honestly,

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<v Speaker 1>I've lost track of the numbers of business secret faries,

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<v Speaker 1>housing ministers and industrial strategies. So you know, I think

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<v Speaker 1>probably investors would perhaps breathe a sigh of relief.

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<v Speaker 2>And I mean you rub shoulders with these business leaders

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<v Speaker 2>all the time, they're your clients. Do you think that

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<v Speaker 2>Labor has now become the party of business.

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<v Speaker 1>To an extent? Yes? I think yes, I think that

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<v Speaker 1>they've made quite a mark shift in the last few years.

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<v Speaker 1>But it's also, as I said, that the Conservatives have

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<v Speaker 1>forgone their previous claim to be the party of business.

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<v Speaker 1>Of economic competence and.

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<v Speaker 2>Hasn't recovered that.

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<v Speaker 1>I don't think really. No GDP per head in the UK,

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<v Speaker 1>which is a key drive of living standards, is still

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<v Speaker 1>lower than it was in twenty nineteen. Now, I mean

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<v Speaker 1>I wouldn't call that a successful economic strategy.

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<v Speaker 2>Okay, what the one economic policy then that you would

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<v Speaker 2>advise any party to put in place that would make

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<v Speaker 2>a significant difference in their manifesto.

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<v Speaker 1>So I'm going to cheek slightly and I'm going to

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<v Speaker 1>go for three closer trade links with Europe, hire public

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<v Speaker 1>investment and build more houses.

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<v Speaker 2>And the housing policy of care Starmer. Do you think

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<v Speaker 2>that that will or or the Conservative Party do you

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<v Speaker 2>think that it will make much of a movement in

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<v Speaker 2>the housing market.

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<v Speaker 1>Well, the key thing is to make it easier for

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<v Speaker 1>people to buy a house and thereby move to where

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<v Speaker 1>the jobs are, and that's improvement in labor mobility would

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<v Speaker 1>help businesses to hire, to invest and improve the economy's

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<v Speaker 1>potential growth rate. Now, the Conservatives have at times talked

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<v Speaker 1>of higher house building, but actual house building has been

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<v Speaker 1>really low. So a government which puts higher house building

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<v Speaker 1>as one of its key aims, I think that would

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<v Speaker 1>help to improve the economy's long run.

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<v Speaker 2>Potential, would it lower prices there?

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<v Speaker 1>It would lower prices, but the mechanism is to make

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<v Speaker 1>it easier for people to move to seek job opportunities,

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<v Speaker 1>and that helps firms to hire, helps businesses to invest,

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<v Speaker 1>allows new opportunities to expand.

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<v Speaker 2>Okay, Michael Saunders, Economic advisor at Oxford Economics, with a

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<v Speaker 2>little view on what we might be able to expect

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<v Speaker 2>from the election manifestos from both parties, will wait for

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<v Speaker 2>them to come up