The tough fiscal reality facing the UK government

We can do things differently. But what you can't do is say you'll get everything you always had and in some magic way by brushing things under a large carpet in the treasury, the bills don't turn up. Or we can just borrow whatever we like forever. And there are no consequences. There are no constraints on government. You can believe those things for a few years. And then suddenly you will find it catching up with you. Hello, and welcome to the IFS. I'm Helen Miller, Director of the Institute for Physical Studies. Today's episode is intended as something of a public service broadcast. As the Labour Party gear up for a leadership contest, we are going to be explaining the public finances context that will underpin politics and political choices in coming years. Whoever the Prime Minister and the Chancellor are, they will find themselves constrained by the same set of challenges. Public debt is high. Borrowing is currently high. Borrowing costs are so high that if they were a department, there would be the second biggest department outside of the health department. Taxes as a share of GDP will soon be higher than they have been in the UK's history. And the state is due to continue growing across the rest of the parliament. Despite that, services will feel constrained because demands on the state are also growing. I think we, as a country, will be better placed to tackle the challenges ahead and engage with the policy choices if there was a more widespread understanding of what's happening with our public finances. So today, we are going to try to fill you in. And to help me help you, I'm delighted to be joined by my colleague, Max Warner, and by Chris Giles, who is the economics commentator at the Financial Times, and who, fun fact, starts his career here at the IFS. And loves numbers and explaining economics just as much as we do. So welcome to you both. Great to be in. Chris, before we get into the numbers that we all love, why should people care about the fiscal situation? It's not quite as exciting as talking about things like nationalisation or nurses or other good stuff, but why does this matter? I think it is as exciting as talking about nationalisation or nurses because it is all of that. It's everything the government does, whether it's your pension, benefits, your health, your education, policing, immigration, all of these things depend on the public finances being in roughly relatively good order, so that the government can pay for it. Money doesn't grow on trees. It has to come from somewhere and where it comes from, ultimately, is the public finances. That's your reason to keep listening to the podcast because it underlies everything and I, you know, wholeheartedly agree that it's fascinating. Max, we're going to try and walk people through some of the main planks of the public finances. I think we should start with a deficit because that's probably the bit that's in most controversial in coming years. So let's get going with what is the deficit and how big is it? The deficit is really the difference in a given year between how much the government receives, mainly in tax revenue and how much it spends. So maybe it's worth walking through a kind of simple example. So this year, the government is set to spend about 1.4 trillion pounds. It's set to receive about 1.2 trillion pounds. So it's set to spend more than it receives. That means it's in a deficit and that difference is what will be borrowed in that year. So it's roughly 130 billion pound deficit is set for this year. So again, that's more spending than is being received in mainly tax revenue. Now often when we think about the deficit, we kind of think a little bit differently about investment spending or day-to-day spending. So of that 130 billion pounds that's set to be borrowed this year, about 80 billion is for investment, and about 50 billion is for day-to-day spending. So that's on things like paying salaries for teachers, benefits, all of those kind of normal operations. So when we think about the deficit, it's set to be about 130 billion pounds this year. But a lot of that's for investment. We also talk about the current deficit. That's the difference between how much we spend on day-to-day government operations and taxes. And that's set to be about 50 billion pounds this year. And painting with a broad brush, this government when they came in increased the deficit. They did more borrowing. They've got it down in the past year. What are they planning to do in the next couple of years, Max? That's right. So we're still currently this year step to operate a current budget deficit. So again, borrowing because we're spending more than we get in as receipts. Now, crucially, this government's plan is to get that down. Indeed, they currently plan to get us into a current surplus in 2829. So that means day-to-day spending is more than covered by taxes, worth remembering that we will still be borrowing to invest in that world. But we're set to get into a surplus by 2829 and then continue that for the next couple of years. Chris, Max mentioned my move due to moving to a surplus. That's following the physical rule where the government is targeting getting into at least balanced in the book. It's actually going to get a surplus to give yourself some headroom against that. But it's very unusual that the UK runs a surplus. We've done it next and never. Occasionally we've managed it, but not very often. Why are we doing this? Why are we trying to get back into balance? Ultimately, we don't want the debt. So we've been talking about the deficits. So that's the difference between taxes and spending. But ultimately, all of those deficits, they accumulate up. They add up together over years. And that's the debt that, you could say, the government owns it. But it's us. It's all of us in this room. And everyone in Britain, we owe this money to the people who we've borrowed from. And that's fine. Countries can run, I have debts. They can run deficits. But what you don't want is those debts to become growing every year so fast that they become unsustainable. Now, so far, Max has been talking everything in billions of pounds. Actually, it's better to do this relative to something else, like relative to the size of the economy. Because if there's inflation, then all these billions of pounds numbers get bigger. No one understands what 10 billion pounds is what that means to you, because you have to divide by 68x million people. It's better to divide it into the size of the economy. So our deficit at the moment is just over 4%. It was last year. 4% of the size of the economy. That is too high to have stable debt as a share of the size of the economy. So we have borrowed, we got debt in this country. Roughly the same amount as what we produce in this country every year. And again, that again is not a disastrous amount, but you don't want it rising year by year by year as a share of the economy. Because that becomes unsustainable. The amount you have to pay on the interest of that rises every year. That means you have less money to spend on other things, like health, education, pensions, etc. And that means ultimately you will find yourself in a nasty crunch at some point. And you want to avoid that. So the reason that we are currently trying to balance the current budget deficit, get that down to zero, is roughly, I mean, you can get into the weeds of the fiscal rules. But roughly, if you do that, then your debt level will roughly stay stable as a share of the size of the economy. And you could go on like that forever and it would be fine. It is worth to sing shit as Max was saying between the current, the day-to-day budget, the spending on things like benefits and salaries and the investment budget. So walk us through Chris, why are we worried about the current budget and getting that down to balance but more relaxed about the investment budget? Well, again, if we're talking very broad brush terms, what we're doing when we're investing is we're going to consume some services, let's say, I mean, we're sitting here very close to HS2. So sometime in the 2040s, we might be consuming, we might be able to travel on that very large piece of capital expenditure or we might go to a hospital or have an MRI scan, something with a large piece of capital equipment, but we're not going to consume that today. So it's sort of, again, these are all very broad brush rules of thumb that if you buy something which you'll consume in the future, it's okay to let people in the future pay for it. So let's talk about depth briefly. So Chris mentioned there that, so the deficit is about borrowing. We don't want to be borrowing too much because at the moment we're basically adding more to the depth pole than we are paying off and that's the recipe for having debt ever increasing. The government has a second fiscal rule that's about getting debt down. They're not really getting debt down to the current plans. It's just about, it's just about stabilizing. I think some people will sort of ask, how much debt could we cope with? We've currently got something close to 100% of GDP, depends on how you measure it. We don't think zero is the right number. How much debt's too much, Chris? Well, again, what's the length of a piece of string? So it depends on lots of things like what interest rate you have to pay. So if you have much lower interest rates, then you can sustain a higher level of debt without the ongoing cost of servicing that debt being very high. So it depends on a number of things. So one is the interest rate. Two is how much of a surplus are you willing to have to run so that you can pay the interest on these things? And these are societal questions. So there is no correct answer. But let's just put it into some historical terms. Before the global financial crisis in 2008, 2009, we thought 40% of national income was the limit that we should allow ourselves as the UK to have debt. Now it's 100%. So our public finances overall have deteriorated quite significantly over the last 20 years or so. And again, that's not a disaster. We just have to pay more to service it. But we don't really want that to continue because at some point, you might find that financial markets, where we borrow from people in financial markets a lot of it's ourselves and pension funds things like that. But people might not want to lend or not want to lend that terms that we want to borrow. And that is the real problem we don't ever want to get into that sort of circumstance. And it's quite striking. You look back across that period that public debt has gone up, you know, it's like tripled over that 20 year period, partly because we've had these big events like the financial crisis, COVID, wars where debt has ratched it up. So you say Chris that if we run a budget balance from maybe a small surplus, debt will be sort of fine forever. Of course, if you have other shocks come along, that could push debt up. So I think although it doesn't feel like good times at the moment for people, it is relatively good times in the sense that we're not currently in the middle of a pandemic or a financial crisis. Well, we do have a war going on in New Zealand, which is potentially going to make things worse again. But I think you make the really good point, which is one reason you actually want to get debt down rather than keep it stable. So I sort of said, it's fine. That was a little bit glib. So will you are serious about that? You want to get it down so that in difficult times, and we've had some really difficult times in the last 20 years or so, government can be is there to do what only government can do, which is to provide some insurance to society for dealing with very difficult things like a pandemic or a global financial crisis or war. Because you've even lost the key, one of those circumstances and not be able to borrow. People have worked physical space, they have in mind having some room in your public finances to respond to these kinds of shocks. Max, another reason that things feel I think tougher now than they did 20 years ago is not just because borrowing is relatively higher, debt is much higher. But also it's costing us a lot more to borrow certainly than it was 15 years ago. Let's give us some of the numbers there. How much should we be spending on servicing this big part of debt? That's right. Debt interest has shut up a lot over the last few years. So we're spending at the moment about £110 billion a year on debt interest to kind of put that into kind of more context. That's roughly 8% of what the government are spending. So right now about 8% of all of the government spending is going towards paying those debt interest costs rather than other things that we might want to spend money on. And that shut up a lot, as you said, pre-pandemic, we were spending about 4% of total government spending on debt interest. So we've seen this really big increase. And that's part of the reason. It's not the only reason, but part of the reason we see the size of the state growing substantially over this period without necessarily feeling like the state is doing a lot more. It's also you mentioned Chris about who we're borrowing from. And that's quite important here because we're not in a situation where we couldn't borrow more, we could borrow more, but it's always about the price at which we're borrowing. And as Max, it's already pretty high. But let's talk a little bit about more about who we are borrowing from. I mean, who's the bond market? People will have heard about the bond market, but of course it's not, it's thousands of individuals in this thing. Who is lending the government money? Well, we talk about the bond market. We'd pretend it is a person, but it isn't, as you say, there's lots, lots of people. And if we go back a few years, when we had a lot of private sector pensions, which are defined benefit pensions, there's a real fashion pensions, which if you're still in the public sector, you'll have so it's two thirds of a salary at the end if you've worked there for 40 years or whatever. That's what you would have got in the private sector. Those pensions were funded, and it was mostly pension funds who were buying bonds partly because of regulation partly because it matches roughly because there's a steady stream of interest paid on these bonds. And it's roughly matches it paying out pension, so those pension funds wanted to get it. But in some ways, I'd unfortunately, but just as a fact of life, those pensions are basically don't exist anymore in the private sector. And demand from pension funds for those sorts of assets has basically gone through the floor. And you might be surprised, but now there's it's a huge amount of hedge funds. So people who are really speculating in financial markets who are doing the purchasing, they are borrowing a lot of money and then buying debt not just of the UK. So the UK is in no ways unusual here. This is globally. And they can make a little bit of money just on small changes in the price of that debt. And so they are doing quite a lot of bets, quite a lot of zero sum bets actually. So they are taking money off other hedge funds. But while that goes on, there's actually quite a lot of demand and have those hedge funds not been around, not just the UK, but a lot of other countries would have probably found it quite difficult to borrow as much as they're borrowing in the pandemic and in more recent years. And that's that's basically bad news for the government, right? Because they used to be these like to these pension funds who were basically pretty consistent buyers of government debt. The government wanted to sell debt. They bought it. They wanted these long dated assets, liabilities that they could match their their pension pots. They were trying to pay out. Now as you said, you have these hedge funds that are doing lots more trades, often heavily leveraged trades. They're borrowing lots of money in order to buy government debt. And they're basically more responsive now to to prices. So it's harder for the government to plan around this. I mean, how worried you think the government should be that we now have more foreign investors, more hedge funds as the buyers of this of the government debt? I think you can you can paint a picture of a worrying situation. But I don't think we should start getting too concerned. What a the UK is not alone, b the UK is because of its history or selling a lot of debt to pension funds. That's already that's out there. And that's on very, very long terms and quite good terms for the UK as well. And that you don't have to resell that every year. So the UK isn't in the market as much as other countries say the US for example turns over 30 to 40 percent of its national size of its economy per year because it's borrowing at very, very short maturities, whereas we borrow we've tended to borrow longer in the UK. So that means we have like having a fixed rate mortgage, what we have to pay is fixed for sometimes up to 50 or 60 years. We have debt that goes out to 2073 in the UK at the moment. And so we have the longest debt. So I don't think in all the advanced countries. I don't think we should get too concerned. But you can it you can at the same time, it wouldn't be a UK specific thing this. You can imagine a world in which hedge funds are suddenly not making money and they all decided to pull back at the same time. And the people who've lent them money to go and bet in the markets say they want to you know pull things back in and then you would find that lots of countries suddenly didn't have a lot of demand for their debt and the price would go up a lot. And that would then get very difficult. Now the price of this debt is complicated because it's not just about how much people want want it. That price is often paid. Certainly when you're borrowing for one year, actually what you pay is much more geared to what central bank set as their interest rate. And then when you borrow for 50 years, it's much more about what is it? How you as a country do people think you can pay it back? Because everyone thinks you can pay it back over one year. So that sort of risk that credit risk in lending to the UK over one year is basically zero. But lending to the UK over 50 years, you've got to start thinking about that. But I think looking through your office leaders, tons of complexity here. But there is in some sense kind of a simple supply and demand relationship here. Right. If the government decides it wants more debt and/or if the people who are lending to it suddenly want to lend less, those things push the price up. So when people talk about are we in hawk to the bond markets or can we borrow more? The answer is always we're far from not being able to borrow. It's always a question of how expensive that borrowing and a lot of it's not about simple supply and demand. How much are you putting out there? It's about whether people think that your policies are sufficiently credible that there's not going to be in some sense in a crisis somewhere, five years down the line where you as a government will not seem credible and people will start questioning your ability to pay it back. And that's the key thing. That's why it's rather silly to say, as Andy Burnham did, we didn't want to be in hawk to the bond markets because you are in hawk because we borrowed from the bond markets, all the people who are lending to us. And so long as we want to keep borrowing from them and it's very likely we will, because as Max said, we're not planning to borrow nothing on a year-to-year basis. And some of this debt also matures and then we have to then borrow that money again because we pay it back every when the debt matures. So you could only default and say, right, that's it. We're not paying back all you borrowed from us and tough luck. We're not going to pay back, which countries do have the sovereign power to do that. Tends to be a very, very bad idea, though. So let's just imagine that the government, or a government does, follow through on these consolidation plans. We get to a point where we've got a balanced current budget, debt is stable, how, what composition will we be in? Is that good news? Well, let's compare with other countries. That's quite a good comparator. So we compare with the rest of the G7, the average of the G7. We've had a bigger deficit than the rest of the G7 since 2003. So even before the financial crisis, this year might be the first year that we have a smaller deficit than that of the average of the G7. So go, go, go, you okay. And if we follow through, we'll have a very significantly smaller deficit than the rest of the G7. So though that doesn't solve our total public finances and all the issues of debt and where everything stands, it would demonstrate to the outside world that the youth was able to think seriously about its public finances and get its house in order, maybe better than other countries because the key thing is that the UK is not alone in having these debates. Before we come back to the credibility of the kind of plans and what that looks like, nothing we should pick up is interest rates. So one thing people would have noticed is the government interest rates have been going up and that they are higher than in other countries. Without going too far, don't have a whole crease. Big picture, why is the UK government just been able to pay more to borrow at the moment? The big picture is partly because there's an expectation that the Bank of England will keep its interest rate higher than other countries. It's 3.75%. When you look at their markets, that look at how expectations are where they think the bank will go and they think the bank will increase their interest rate to 4.40% and basically stay around for perpetuity. When you look at the same markets for the European Central Bank, it's around two that imperpetuity. So there is a sense in financial markets that the Bank of England needs to set a higher interest rate to stabilize our economy than the European Central Bank needs to do. Now those moods can swing a lot but that's 2 percentage points difference and that is the main reason why UK borrowing costs for the government are significantly higher than those in the eurozone. The US is slightly different and that is because it has an ability to borrow because people feel they need dollars and there's also an expectation that the US interest rate will settle around 3-ish in that sort of zone and therefore it's a little bit cheaper. Japan has traditionally felt it needed very very low interest rates because it's economy since 1990 has been in a bit of a funk and so needed that to stimulate things and that's all changing and everything's converging. But the key driver here is what do people think central banks need to do to keep their these economies stable with stable inflation? That's the key driver. More than that, some countries will have a little bit of a premium you've got to pay for borrowing a long time because people you're taking a risk if you set lender government for 50 years and you want a bit of extra return for that risk and then there's a little bit of credit risk. Do we think this country will pay you back? But let's not get too excited about that last bit. The credit risk element of government debt is rather small. What do you make of the some people making the argument that political instability in the UK is making us borrow a premium, the fact that we now see to play our through prime ministers pretty quickly and we have some of these plans, we'll get back to the current plans that sort of don't actually ever get enacted. Do you think we're paying a premium because of that political instability? I think there's certainly a bit of a premium. We certainly saw that in 2022 in the brief list trust government. We saw UK government debt costs or the government borrowing costs that interest rate paid on government borrowing go up disproportionately relative to other countries. And now you can have a long argument. You can say let's strip out the future bank of England rate and say oh and in the end it's not it's a little bit similar to France, a bit better than Italy, bit worse than Germany if you do that. That's what the sort of results you get. But is part of what the expectations of what the Bank of England is going to have to do to stabilize inflation? Is that due to political instability? All these things are, you know, you can't in the end control for all these things. I think all you can say in a broad rash terms is if you have politics that people in financial markets, people lending to the government think is not conducive to running a healthy and stable economy, then you as a country are likely to have to pay a little bit more. And we are probably seeing a little bit of that in the UK at the moment. Yeah, I think I agree with that analysis. So let's quick recap before we unpack some more of that. So we have we have borrowing that's fairly high. But due to come down actually quite quickly in the next couple of years, debt is high and under current plans due to stabilize. Boring costs are pretty high and we're spending actually quite a bit of a big share of our budget on servicing the national debt. Max, let's talk about spending because we've talked about how borrowings due to come down, but that's predicated on some pretty ambitious plans about the state in the next couple of years. So talk us through what's due to happen to public service spending across the rest of the parliament. So as we've talked about the deficit, this difference between tax and spending, one of the key levers you have as a government is to think about that spending side and a really important, certainly not the only part of spending, but an important part of spending is public service spending. So things like on the NHS, education, defence, local government, all of those kind of things. Now, I think important context is when this government came into office, they increased public service spending quite a lot. Previous plans from the previous government were implying very slow rates of spending and the government topped them up quite substantially. And then over the rest of this parliament spending has been and is set to continue to grow, but we've talked about quite a lot, that spending is quite front loaded. In the sense that we saw in 2023, 24, 25 big increases in spending for public services, and then it's slowing down. Still growing, we're not in a world where spending is falling, but it's growing quite slowly. And that means towards the back end of the parliament, there are some really difficult decisions that might need to be made. Spending at the moment is not set to be growing fast enough that you could top up defence spending, give the NHS the kind of money that it will always ask for, and continue to grow everything else. So that leaves really kind of a difficult decision for governments about do you stick to these spending plans and have to decide ultimately some areas are going to see slow growth or frankly cups, or are you going to do what essentially most governments tend to do when it really gets to this and say, we know we've been settled in these quite slow growth, but we've decided when we have to really see what that would look like, we don't like that, we're going to top it up, but don't weigh in the future, it's going to be slower, because that helps, but for now we're going to top up. So I think the spending is a really, a really important area here. And I think it's worth putting out in that how just how big an important NHS is. We've said before in this podcast, it's just huge. It dominates public spending. And therefore, if the government did decide to give the NHS something like historical average, that would very quickly and very easily lead to cuts in other areas. Right, the NHS is a really large area of spending, like by far the largest, at least the public services. And that means even, you know, even if you're growing the overall envelope, if you're growing it relatively slowly, giving a decent increase to the NHS can just absorb all of that increase. And the challenge is it's not just the NHS now, you know, education, we tend to think of as growing a bit, but pupil numbers are falling, you know, maybe there's a bit less pressure on education, but we now have defense, which is the next biggest area of spending after NHS in education. Now we have a lot of pressure on defense too. So a world where we have health spending going up and defense spending going up is really going to squeeze things. Is it even possible for the government, is the question we get asked all the time, could they increase defense spending without either cutting other departments or raising taxes? So the government have currently set out plans to increase defense spending to 2.6% of GDP by next year and then to keep it the year after. But there's broader ambitions to get to 3% of GDP in the next parliament, 3.5% by 2035. And there's clearly pressure for defense spending to grow further and faster. We, Chris's colleagues have talked a lot about the defense investment plan. There's a lot of media discussion about, is that delayed because essentially there's not enough money for the government to achieve its defense ambitions, all of the plans for the different armed forces. And so imagine a world where the government does decide to go further and faster on defense. Well, you could think about trying to get to 3% of GDP by the end of this parliament. Well, under current spending plans, that would absorb all of the growth in all public service spending to get to 3%. So everything else would have flat real-terms budgets. And there's no way a government would give the NHS a flat real-terms budget. It's just not going to happen. So you'd give defense its top-up, you give the NHS something, everything else overall would be left with real-terms cuts. So I don't, not saying that's going to happen because I think, you know, governments have choices here, but getting defense, getting the NHS really within current budgets leaves tough, tough decisions elsewhere. I mean, I, I, I, I'm, I'm skeptical. I think like you said, partly even if we ignore the defense issue, it was looking pretty ambitious to be cutting other, for a Labour government in the run-up to general election, to be cutting some spending departments or really holding about the NHS, while also there are still tax rises going through the system. I think this sort of square in the circle, but in why is it that tax is historically high and things feel so tight? And the answer is partly because we're spending lots of money on interest and partly because service needs are rising a lot, but I think a special Labour government to sell that would have been pretty tricky. And like you said, once you're adding defense, it just looks really difficult to find some money. So and and the fact that sadly we have some historical precedents that say that governments don't tend to actually do this. They always kick the can down the road. But on this, let's just quickly become most point about the kind of theory of you put some money up in front and you solve some problems because that, that, that, that, that, that, that could work, right? And there is some catch-up to do. I mean, Max, you spend big chunks of your life thinking about NHS productivity and issues. How confident are we feeling so far, but whether than he signs of rays of hope there? Right, and you're waiting that there's more. might be, we might think about investments that could be made, that could increase productivity. Indeed, you know, the government did increase public service investment spending quite a lot. NHS productivity and more broadly, public sector productivity is key here. I'd add, you know, the third reason that we're not seeing, despite the size of a state getting bigger, we're not seeing maybe the benefits. You mentioned debt interest, you mentioned higher need. It's also just the state as a whole is less productive than pre-pandemic broadly. So the ONS and other measures would suggest we're putting more money in, we're not quite getting as much out proportionally. So on the NHS, as a kind of case for optimism in the short term, in the last year or two, the NHS has on its measures and indeed in our analysis, been getting more productive. Now, it's still less productive than pre-pandemic, but we would hope that there is some scope for catch-up growth, and actually that is going to help. I think it's unlikely to be, I think that help, that could help. I think it's unlikely to be in a world where we're going to see productivity growth that means spending can grow really slowly. It's more about, does it have to grow quite high or a little bit slower to meet demand? Productivity there is going to be really important. But I think we should also be a little bit careful about the scope for productivity gains. The government already really banking on big, big historic productivity gains. We've seen multiple fiscal events in recent years where things look a little bit tight, and suddenly the government thinks, well, actually, we can make some more productivity gains in just the end years. We're going to take a little bit more money away from departments. That's happened multiple times. True productivity gains are great for everyone, essentially. Everyone's a winner. But I think we do need to be a little bit skeptical about penciling in big gains to make spending plans look like they can grow more slowly. The other bit of this puzzle, or this story, we should fill in in fiscal rules, because even if we took an optimistic view of the future, we said, actually, maybe we'll see some productivity gains. Maybe the government could find a way through with these tight spending settlements. I think there are always people who also say, well, actually, isn't it the fiscal rules that the problem? Aren't they the thing that are constraining us? And actually, we should just get rid of them, and that'll be the solution to this problem. It's, I mean, Chris, let's start with why not the countries have fiscal rules now? And they vary a bit in their exact design. But what's the point of fiscal rules? Why do we need them? Do you want your question, can we get rid of them in a word? No. You can get rid of fiscal rules if you're willing to just to say, well, we will run ship-shaped public finances. You don't need fiscal rules, but fiscal rules are there really not, don't get too obsessed by the exact definitions of them. They're really rules of thumb that if you adhere to them, nothing is going to go probably terribly wrong with your public finances. That's the, that's as detailed as you want to get. So in the UK, I think you can describe our public finances relatively simply, just say that right at the moment, we're borrowing about 4% of national income. At that level, we're going to have rising debt in perpetuity if we kept at that at that level. It's not sustainable. We need to do some sort of consolidation of either cutting spending or increasing taxes. Currently, the government is planning essentially to increase taxes so that at the end of the decade, we'll be borrowing about 2% of national income and that is broadly sustainable. You could, if nothing goes wrong in no wars, etc, run that forever and that would be broadly okay. And then when you look further ahead, because we've got an aging population with greater health needs, then that again gets much more challenging in the very long time. You don't need fiscal rules to talk about the public finances, but they are quite good at constraining government. So within government, how in that conversation, everyone says, can I give me some more money for education, give me some more money for policing, etc, etc. And it's quite good for the people in charge of the purse strings. So actually, no, you're going to have to find some other savings within your budget, because if I gave you that money, then that would break the fiscal rule. So they have that sort of purpose and that sort of policing role in the public sector. But that's all they are really. So in the UK, we have two, one is to balance the current budget. The second one is to get a certain definition of debt. We don't need to go into, make it stable, make it come slightly fall as a share of the size of the economy. If you have those two things going on, you know, while that while that is true, your public finances will be okay. But that isn't the whole description of public finances. And when we haven't really talked about the long term, we talked a little bit about defense, which is sort of a medium term issue. But in the long term, the truth is that in an aging society needs, we we we we become expensive to this state as people when we get old and in firm, whether it is through health, through pensions and through social care, those needs. And while we are in a society where we save the state will meet those needs, the fact that there's going to be a hell of a lot more people over 85 when people get, be able to get really expensive in the years ahead means that just to make the state not do anything better for each individual, it will be a lot more expensive. And we as a society just have to recognize that because it's not going away. We either have to say, okay, we're going to we're not going to have all these rights that we think we have they don't exist anymore. That's fine. That's a societal choice if we want to make it. Or we say we just have to raise taxes and pay for it. It's all doable. But what's not doable is pretending it doesn't exist and pretending it can just happen. Or maybe I'll be out of office soon. So what else can deal with the problem? All those things are the things that we shouldn't be doing. It's not hard to start to look at the medium term and say, well, we could run taxes at 50% of national income. Lots of other countries do. It's not the end of the world. It's not socialism. Look at Denmark, look at Sweden, look at France, look at Germany. There is a limit to how high taxes can be. But if they are well designed, broad, everyone pays. And so you don't get the sense that taxes should be paid by somebody else, whoever that might be, then it's all doable. But let's not bury our heads under the sand. We know this is coming down the road and we just have to deal with it. And I'm going to come back to the long term because I also want to make growth, actually growth might be a way to ease the way I think to make all of this a bit easier. But first, I'm going to go on one of the things you say, Chris, about there are different measures of debt and we shouldn't get too far upon that. But I think it is worth reminding people, Max, that the government did change the fiscal rules so that they can do a lot more investments bending. The fiscal rules have certainly changed. And in a couple of ways, one, as Chris mentions is the government changed the measure of debt. Broadly, you can think about this as to be a slightly wider measure so that some government assets, some government liabilities are included. So the student loan book, for example, is now included. Some other things too. I think there's that. There is then also that we changed kind of what we're targeting when it comes to the current budget balance and then there's the horizon. We can get into the weeds too much there, but I think big picture, the fiscal rules have changed. Chris mentioned the big picture fiscal situation is pretty similar and being sensible is still being sensible. The change in the rules has given the government a little bit more room, perhaps for buying to invest, but isn't unambiguously just making things easier to spend and buy it. I think, Pauliwell illustrates that you can have lots of different fiscal rules. And you say, Chris, what matters ultimately is they're looking through the particular rule and thinking about the underlying public finance and what do you want to happen with borrowing and debt. It is also however costly to keep writing down rules, telling people you've got these rules and they're throwing them out the minute they get a bit inconvenient. So there is some, there is some payoff to, if you're going to tie your hands to sticking with them and to not not changing them too frequently. Let's go a bit about the future. We're not going to go through all the different options that are big, really talked about in the leadership campaign. We'll wait for that campaign to get off properly. The question that I think we'll get increasingly asked is, is there room to do anything differently? So if we do have a new Prime Minister of Chancellor, how much scope, Christian there is for them to actually just make different to the current the current same? Well, I think politics ultimately can do anything it likes. So long as society, you could take society with you, we do not need to have half of the government budget necessarily going on welfare payments, including pensions, by the way, in as part of welfare payments. If we chose not to, but that is taking a lot of money off people who rely on those payments, we don't have to. We can change the boundaries of the state in the 1980s. Inside the boundary was what are now privatized utilities and other nationalities, what were previously nationalized industry. So we can do things differently. But what you can't do is say you'll get everything you always had. And in some magic way, by brushing things under a large carpet in the treasury, the bills don't turn up. And there are no consequences, whatsoever, because some weird accounting mechanism you say that taxes just come from spending, and there are no constraints on government. You can believe those things for a few years, and then suddenly you will find it catching up with you. So as long as you are sensible and think about the public finances in a sensible way, and it's fine to borrow. And especially if you're in a recession or a big downturn, that's when government needs to borrow a lot, but it does need to get its public finances in order, in the medium term. I think the key thing is just to not pretend there's some easy option, and just look at the actual questions you've got and where things can happen. And it's just wrong to say that there are constraints there like the fiscal rules are stopping you doing anything. I don't know. I'd echo that strongly. As Max said, the government's spending what? 1.4 trillion? That's a lot of money. You can spend a lot of different ways. We should mention in passing as well, Max, that we're expecting the upcoming budget, who has a chance for us to be setting out some more details of the spending plan. So while the government is set out, what it thinks, the overall spending will be in the end of the Parliament. We don't yet know how it's due to be allocated. So there's still scope for a government to be allocating across its spending priorities. Under the current framework, the government will have a spending review next year. Where it will actually have to spell out some of the details, how it wants to allocate, how much money goes to VNHS, how much goes to education. But yeah, at the budget, one of the key decisions will be, does it want to change those overall budgets for public service spending? And indeed, does it need to top up this year or next year? That's quite a frequent thing to also do at a budget to think about in the very short term, are there pressures that we need to top up? And then let's just finally end on talking about growth just very briefly, because we haven't really mentioned it yet, but I think it really is the thing that could make all of this situation difficult. We mentioned we have a high, high pile of debt. We're really certainly not going to be paying that pile of debt down pound for pound. What's going to make it manageable if we have a bigger economy so the debt becomes smaller relative to the economy, it's how we paid off debt after the second, after the Second World War. I mean, how much of a focus should they think they should be for governments, Chris? There's going to be getting up growth. It should be a huge focus always, and we should never forget that what had been something that we just assumed that growth would be two and a half percent per year since the Second World War until 2008. We'd have ups and downs, but that was the average. It was very stable, that's not been stable since 2008. Under all political parties, it's not a party political thing, but clearly what growth does, it raises the size of the economy. That pulls in more tax revenue, and it doesn't necessarily make you have to spend more. Just because you've grown faster doesn't mean that you have to spend more on the NHS. It doesn't mean that probably that wages will have to go up more in the health service, so that public sector wages don't fall behind those in the private sector, but it doesn't mean there is a big benefit from a more rapidly growing economy. The more effort you can have on growth is an important thing, but let's just be really clear about this. Sometimes when you say that, they'll say people say, "Oh, well, let's spend more and we'll get more growth." Just be careful because having stable public finances, that is a growth project in and of itself, because that gives people confidence to go out and invest in the private sector. Don't put all your eggs in the public investment basket because private sector investment is five times the size as public sector investment. Sometimes here, particularly on the left, it's all about public investment. Well, it just isn't. What we really want is we want the economy doing well, such that both the public investment allows people in the private sector to say, "This is a good place to build an office. This is a good place to build a factory." All of these things, not just building stuff, but building interconnections with a good place to have bridge digital connections. The more we can get the private sector to think that as a country, then the better we are all off. Even if that means that you might have something, you don't want built next to you, built next to you. And I'm going to squeeze in one more question. I've increasingly come to think that part of the problem we have in this country is that people don't quite realise how important that is and also think that the results will be quicker than they actually will be. And obviously, it's going to take time to build infrastructure or to change your tax or educational competition system in order to get growth up. To what extent do you share my concern that part of the problem is that people are expecting to be able to turn that ship around too quickly? It's not a quick thing because this is millions of different individual investment decisions and things. I'm just doing things slightly differently and slightly better as we learn over time. And these things don't, you don't turn them around overnight. There isn't, you can't click your fingers and there's a magic fix to anything. One good thing about not having the UK, not having performed so well is that you can do a bit more learning by watching what other people do and trying to take the best ideas from elsewhere. But if we're looking at what's really happening in the US, what's driving the US economy, which is growing faster than ours, at the moment, well, they're building enormous data centers. Absolutely vast. Could you do that in the UK? Well, you couldn't at the moment and certainly not quickly. So we do have to think, it's not just planning, but we do have to think about how do other countries do it? What is the scope for successful economic performance in the 21st century? And we need to be resolutely focused on that and allowing that to happen and not expecting it to be quick. You're absolutely right. You know, each one thing, you know, if you take something enormous, HS2, not probably a very bad investment decision is going to cost over 100 billion pounds. But even 100 billion pounds spread over, however many years, it's about 10 billion pounds a year was the size of the economy that is a third of one tenth of one percent. It's tiny and that is an enormous building project. That's, so even something like that doesn't really show up in the growth figures. And because there's 70 billion people here and it's what we all do every day that matters. And it's a nice reminder too that we in these debates shouldn't just talk about how big the state is and how big it, how much, how big, how big tax and spend are also about the underlying policies that actually might, might improve things. But let's wrap up there, rather than start a new podcast, all about growth policy. I think we've talked about how, you know, borrowing in the UK is high and it's pretty expensive. There are good reasons to be getting borrowing down from its current levels. We will still be investing pretty significant sums at the end of the parliament under current plans and debt will be stable. So it is not some radical drive to austerity. The state is still growing. I'll just be growing a bit more slowly in the coming years than it had been before. And there is going to be hard work under current plans to do to be constraining spending wild demands on the state are growing. And they are going to keep growing as the population ages. So we need to get used to having these conversations about difficult trade-offs because they are not going away anytime soon. What would make it all easier is economic growth. We had a bigger economy. We could have more stuff, more health care, more infrastructure without having to take it away from other places. And we need good policies and a good vision and some patience and realism that we are not going to be able to fix those problems overnight. We're going to need to expect to have the policies feed through in coming years and decades. So of course there will always be a debate about how big the state should be and how much we should redistribute. There will be different opinions on all of that. But what would make a real difference is the policies that will increase our productivity. But let me end there by saying thank you to Chris, thank you to Max, thank you to all of you who have listened. If you found that interesting and informative please do share it with your friends and colleagues so that they can be better informed about these debates too. And we look forward to seeing you next time. Thank you.