[00:00] Tim Leunig:We have one of the narrowest bases of VAT in the world. New Zealand has the widest. New Zealand has VAT on approximately 99% of things, and as a result, they can have a lower rate, and they don't spend millions of pounds arguing on whether a Jaffa cake is a cake.
[00:18] Ravi Gurumurthy:Hello, I'm Ravi Gurumurthy. I'm the CEO of Nesta, and this is Policy Fix. It's a miniseries of the podcast focused on what should Andy Burnham do. Uh, everybody in Whitehall is currently scurrying around figuring out what is Andy going to do? Uh, how is he going to um get—get the sums to add up? And that's what we're going to be focusing on today: What tax rises could he introduce? What spending cuts? And what could he do with the potential money?
[00:44]And I've got a fantastic person to—to join me here to think about that—is Tim Leunig, our Chief Economist here at Nesta. Welcome, Tim. Um, looking forward to the show.
[00:50]Um, we're going to try and cover a few things: one, what are the tax uh increases that this government should do; what are the potential spending cuts; and then with the potential money they raise from either of those things, where could they actually have fun and have an impact?
[01:09]Um, but before we do that, I think I wouldn't mind starting with you. I mean, you've been not just um an economist in the Treasury, but in many different departments. So you've got a good sense of what you might call the cul-de-sacs—all the kind of um smart-ass common ideas that come from think tanks that once you're in government, you go, "Actually, there are 17 reasons why that's just not going to work." And I just wanted to sort of—I thought this could be helpful um to sort of kill off some of those obvious cults. What are your—what are your top five uh cults?
[01:38] Tim Leunig:So the first one I'd start with is the idea that it's cheaper to build council houses if you use public sector land. I mean, it seems obvious: you don't have to pay for the land. But at the moment, when, say, a hospital owns land and it sells it off to a builder, it gets top dollar for that land, and it puts the money into running the hospital. So, if it now has to give away the land for council housing, well, that means the hospital now doesn't have the money.
[02:04]Yeah. And that's why it never happens, because the NHS will turn around to the Treasury and say, "You forced us to give up this money in the form of land. Now give us the money in exchange." So, there's no real saving there. And I've seen so many governments say this; none of them have ever done it. And it's for a good reason.
[02:18] Ravi Gurumurthy:Yeah. MOD land is—is similar to it.
[02:21] Tim Leunig:MOD land is the same, except that MOD land is almost always in pretty wacky places. We don't really want to build 50,000 houses in the middle of Salisbury Plain.
[02:29] Ravi Gurumurthy:Mhm. It's just in the wrong place.
[02:30] Tim Leunig:Okay. Next, uh, another one would be um parity of esteem for vocational and academic education. Almost every government's committed to that. And what none of them seem to realize is that parity of esteem is not something the government controls. Parity of esteem is something that we, the public, esteem. And I'll tell you what, on the day that I have a blocked pipe, I really, really value a plumber much more than someone with a PhD. So that parity of esteem is not something government can do anything about.
[03:00] Ravi Gurumurthy:So do you think that other countries do have a different relative status of vocational and academic roles?
[03:06] Tim Leunig:No, I don't.
[03:07] Ravi Gurumurthy:Don't you think that—you think they're all the same?
[03:08] Tim Leunig:I think they're all the same. I think in every country in the world, if your child goes on to get a PhD from Harvard,
[03:15] Ravi Gurumurthy:Mhm.
[03:16] Tim Leunig:your neighbors are impressed, grandma is impressed, everybody's heard of Harvard. That's why if you get a PhD, you get the words "Doctor," the letters "Dr." in front of your name. It is a mark of esteem, and I think it always will be.
[03:28] Ravi Gurumurthy:But don't you think in Germany or Holland there are more well-respected structured apprenticeship routes that then carry a certain degree of status because those qualifications have value amongst employers?
[03:39] Tim Leunig:So sometimes they lead to better earnings, and earnings definitely give status. When you see that this qualification leads to good earnings, and your son, your daughter, your friends could go on a decent holiday, live in a decent house, that's definitely valuable. But no, when we look at international surveys, "Would you like your child to become a doctor, a lawyer, an accountant, etc.?" people around the world tick those boxes before they tick, "Would you like your child to become a plumber?" or something like that. I'm not saying that's right or wrong; I'm saying it is what it is, and there's not a lot the government can do about it.
[04:14]Next, number three, uh, on the NHS, "Prevention is better than cure." That's clearly true. Neither you nor I want to have an operation on our heart. So, it is sensible for you and I to eat healthily. And obviously, Nesta does a lot of work on that. But every government says that. It's really hard to do in practice because when you first move the money over, there's some poor person queuing up for a hospital operation: they're—they're on a trolley, they're in a corridor, or they're on a—a waiting list that is so long they might die. So, moving that money into prevention is very, very hard.
[04:48] Ravi Gurumurthy:So you don't think it's um it's possible at all to be disciplined with the acute sector and actually start shifting money into...
[04:57] Tim Leunig:I think it's really hard. I think if budgets were growing, putting more of it into prevention would be a good thing.
[05:03] Ravi Gurumurthy:Mhm.
[05:03] Tim Leunig:But I think it's very hard to do in a world of constrained budgets. Okay, very hard.
[05:09]The next one will be early years education. Everybody agrees it's really important, but moving the money from later on to earlier is difficult because then what about the kids who are already seven or 14? You're taking money out of further education and remedial education, maths and English retakes, those sorts of things, and you're moving it into early years. That seems pretty harsh on the person who's 14 or 17. So again, people talk a good game.
[05:36] Ravi Gurumurthy:Mhm.
[05:37] Tim Leunig:They do not do.
[05:37] Ravi Gurumurthy:I'll say at least if—if you are going to increase early years education spend generally, let's increase it more proportionately in the earlier years and rebalance across the life cycle so that over, you know, a longer period, you—you rebalance...
[05:50] Tim Leunig:You should, absolutely. The only thing I'd say is that most school funding goes on teachers' wages, and in the medium term, if you want to keep up the quality of teachers, teachers' earnings have to go up with other graduate earnings, or else people simply won't want to teach, or they won't be able to afford a house if they are to become a teacher.
[06:10]Okay, next one. Uh, modern methods of construction in uh—ministers always love modern methods of construction. But the idea that ministers should be deciding what sort of technology house builders use to build houses is just as silly as a minister who once told me they wanted to come up with a national uh consumer database that small companies could use, a CRM system, and they wanted to go out and tender for this, and then make it free for individual firms. I mean, the day that ministers think they know how to run a company better than the people running the company is usually the day the minister has lost the plot.
[06:45] Ravi Gurumurthy:So you don't think there's innovation potential in—in construction methods? You think...
[06:49] Tim Leunig:Oh, I do, but I think the industry should be leading it, not government. I don't think having—saying it should be easy to get planning permission if you use this technique, etc., etc., is a sensible way to do it.
[07:01] Ravi Gurumurthy:But are there not ways in which the market currently functions which are suboptimal that mean that they don't invest in new technology or new ways of working that government could potentially have an...
[07:10] Tim Leunig:Well, government can have an effect, but the best way would be indirect. So if we gave out a lot more planning permissions so that builders knew they could build a 1,000, 10,000 houses every single year in Perth, then I think we'll find they would scale up and be predictable.
[07:27] Ravi Gurumurthy:Okay. Um, let me throw one more—couple more in. One: social value. So I think Andy Burnham's talked a little bit about essentially trying to achieve double dividends when you're trying to achieve not just um build a nuclear power station, but make sure that the local labor force benefits. Um, and that's something that we've done a bit more in recent years; other countries do more. Um, but you think that's a gold-sucker?
[07:51] Tim Leunig:I think it's usually a bad thing to do. You want to buy a nuclear power station. What you're really then saying is, "We're going to tax the construction of a nuclear power station in order to deliver these other things." By and large, you're better off just paying for the other things explicitly, 'cause the danger is you keep adding one more, one more thing, and soon you've got what we've got in Britain, which is the most expensive nuclear power plant in the world, which then has other really bad effects: it means we use less electricity, we build fewer nuclear power stations, and we burn more gas.
[08:21]I am an absolute plain vanilla person. If you want more apprenticeships in the West Country, pay for more apprenticeships in the West Country. And you know what? If we built a lot more nuclear power stations, there'd be a lot more jobs, and a lot more young people would come up to their FE college saying, "I want to do a course in this, because I can see it'll lead to a good job."
[08:38] Ravi Gurumurthy:Mhm.
[08:39] Tim Leunig:So, no, I worry a lot about social value.
[08:43] Ravi Gurumurthy:Um, what about—so the big play that Andy Burnham's got is devolution, including um some talk of fiscal devolution. Do you think um do you think that is viable, um particularly given the concerns of inequity that that can potentially result in in certain forms of fiscal devolution?
[09:03] Tim Leunig:So I'm wildly in favor of devolution, and I say that not because I want a job in Andy Burnham's cabinet, uh, but because I always have been. So the line I usually run with is that any power available to the mayor of South Bend, Indiana—have you ever been to South Bend, Indiana?
[09:19] Ravi Gurumurthy:I have not been to South Bend. What can you tell me about South Bend, Indiana?
[09:21] Tim Leunig:Absolutely nothing! Absolutely nothing. Exactly, you and almost everybody else. Uh, it's where Mayor Pete—Pete Buttigieg—who wanted to be the uh candidate for the Democrats when Joe Biden won. And I met him when I was in the US in 2019, and my line is: any power that he had as the mayor of South Bend, Indiana, should clearly be available to the mayor of London, the mayor of Manchester, etc., etc. We are the most centralized country in the world.
[09:48]But that does have risks for local areas. Andy Burnham was only able to do his reduced fares on buses in Manchester because he got a block grant from London. It's not something he talks about a great deal; it's not on the side of buses: "Your bus is cheap because London gave us the money."
[10:03]Yeah, but it's true. And that does mean if we have proper fiscal devolution, mayors are going to have to change their tunes, and they're going to have to stop whining to London every time they want something, and have tough conversations with local people: "Do you want cheaper buses? If so, your rates are going up, or some other cost is going up locally. We will put in place congestion charges." Manchester said no. A ULEZ? Manchester has said no. Uh, workplace charging for car parks? Manchester has said no. Those are the sorts of conversations where they'd have to say yes to at least some of them if we have fiscal devolution.
[10:39] Ravi Gurumurthy:So you're in favor of it. You don't get to call this, but what—how would you do it?
[10:44] Tim Leunig:Oh, I would take every power literally that Mayor Pete—I would get one of those nice tables from the OECD that gives all the powers in different areas, and I'd say, "Anything that is devolved to a majority of places is now devolved to these places whether they like it or not." They don't have to use the power, but I'm giving it to them. Wales hasn't used lots of the powers we've given it; Scotland hasn't used some of the powers we've given them. You don't have to use the power because we've given it to you, but we will give it to you.
[11:10] Ravi Gurumurthy:Okay, let's go into: okay, what are the top five ways in which this government can raise money?
[11:16] Tim Leunig:So first of all, it needs to think very hard about whether it should be raising money. If we look at the opinion polling, uh, the British Social Attitudes survey shows a record number of people now say they would like lower taxes and lower spending. So I think you're being pretty brave, given that taxes are now at an all-time high, pushing them up even further. But that's a political decision for Andy Burnham.
[11:41] Ravi Gurumurthy:So we—we'll get into sort of—because I, you know, I think should look at tax, you know, spending reductions as well. I guess your first question that you should get to is: Would you do—would you finance all the things that need to be done, like defense or things that he wants to be done, by spending reductions elsewhere and actually have no increases in the overall tax burden, or would you have some?
[11:58] Tim Leunig:So I think in—it's harder to do spending cuts in the short run. So I think in the next year or so, Andy Burnham will almost certainly raise taxes.
[12:07] Ravi Gurumurthy:Mhm.
[12:08] Tim Leunig:But I think he is taking a risk there because economic growth has been positive since Labour got in. You know, hats off to Rachel Reeves: she has managed to put up taxes and have growth. That is more than her predecessors. I think history will judge her much, much more kindly than she's judged at the moment.
[12:26]But there aren't many good taxes to raise at the moment. So the best thing to do would be to actually enforce the taxes we have. We have far too many people who don't pay their taxes. They're mostly, the evidence suggests, small businesses, and that's unfair to other small businesses that are competing with them. I do not want a world in which the dishonest people have an advantage.
[12:49] Ravi Gurumurthy:The tax gap is what, 30-40 billion? Can you get 10 or 20 billion with a lot more enforcement?
[12:55] Tim Leunig:I would have thought so. So that is where I would start.
[12:58] Ravi Gurumurthy:And—and when you say a lot more enforcement, uh, just paint a bit more of a picture on how you could do that in a way that actually—because that's a huge amount of money.
[13:06] Tim Leunig:Huge amount. Um, why—why is no one—you must always think if there's money lying on the floor, someone must have picked it up. So we should audit a lot more people, go in and look at their accounts. We ought to get a lot more serious about sectors that use a lot of cash, right? I was talking to someone serious from the world of building trades merchants, these big sort of warehouses where you can go and buy as a trade a boiler. And I said, "What percentage of your sales are cash?" He said, "Oh, the majority."
[13:38]I mean, really? Do we really think people are handing over to someone who fits their boiler £1,000 in £20 notes for any other reason other than they've been offered a discount because the guy isn't paying cash?
[13:51] Ravi Gurumurthy:Mhm.
[13:52] Tim Leunig:He said, "Yeah, people always start with the VAT." He said, "They can count them really quickly. We've really got to get serious about that."
[13:58] Ravi Gurumurthy:Okay, so that's one. That's the...
[14:00] Tim Leunig:So that is the number one thing I would do, for sure. I am a good, proper economist and not a politician. So the other things I would do would be things that improve the workings of the tax system. So that means VAT.
[14:14]We have one of the narrowest bases of VAT in the world; New Zealand has the widest. New Zealand has VAT on approximately 99% of things, and as a result, they can have a lower rate and they don't spend millions of pounds arguing on whether a Jaffa cake is a cake. We don't have companies that are trying to design a product to be in a different VAT class in order to get an unfair competitive advantage over a rival who has designed it slightly differently. So this wouldn't just raise money; it would create a more efficient way of running the economy.
[14:45] Ravi Gurumurthy:And—and if you had a sort of single rate of VAT across all products, do you think you could roughly halve the—the—the VAT rate if you wanted to be...
[14:53] Tim Leunig:Not quite as good as that, because you wouldn't levy VAT on things like um state schools, obviously, because the government would just pay it and that then becomes pointless. But it would come down by a third or so. Now, of course, if you bring it down all the way, you don't raise any money overall, and you would need a bit of money to pay those poor people who would be a little bit worse off.
[15:13]But they're not much worse off. Something like children's clothes, for example, relatively poor people buy their clothes in Primark, in Asda, and they buy secondhand clothes. Adding VAT to a babygrow from Asda, you're talking about perhaps 20-25p extra. You add one in John Lewis, you're talking about £2 extra. I found a designer babygrow online when I was doing research for £560. I don't know who buys these, but actually you'd be getting most of the VAT revenue from middle class and richer people. And if that's what the government wants to do, actually VAT on children's clothes would be very progressive.
[15:52] Ravi Gurumurthy:If you looked at the version where, okay, you—you cut VAT by I don't know, 5, 6, 7p, but then you maybe—which is the revenue-neutral version—and then you add back in one or two P and put that into Universal Credit or—or some other way of targeting um—and—and if you do do that, is it plausible that the winners and losers might be politically viable winners and losers?
[16:15] Tim Leunig:Well, they were in New Zealand. When New Zealand did it, they overcompensated people at the bottom so that no matter which way you look at it, people at the bottom were not hit by introducing an economy-wide VAT. And they made shifted—they made that shift. It was okay. In the early '80s, they made that shift, and 40-something years later, they still have VAT on everything. They haven't introduced loopholes, and they do have a really low cost of collection compared with us. They don't have bonkers court cases going on for years.
[16:44] Ravi Gurumurthy:And when you talk to people in the Treasury about this, or when you were in the Treasury, um, what was their response?
[16:49] Tim Leunig:Well, I was largely there during COVID, so let's be honest, we didn't discuss things like that. And even if we had done, the rules of the Civil Service are very clear that I can't answer that question.
[16:59] Ravi Gurumurthy:Yeah, yeah, okay. What—what do you think? What would you imagine they would say now if you talk to them?
[17:03] Tim Leunig:So the Treasury love the idea of tax simplification, but of course, as we saw when the Treasury did it with the pasty tax, a huge amount of unpopularity descended on George Osborne. And that's why if you do it, you've got to go big.
[17:17] Ravi Gurumurthy:Exactly, if you do it on an isolated product, it just doesn't have like a random weird...
[17:21] Tim Leunig:Yes.
[17:21] Ravi Gurumurthy:...um tax. Um, okay, so what about um the usual ones that are sized? Proportionate property tax, which you've written about.
[17:29] Tim Leunig:Yep, I've written about that. I think it will be very hard to introduce that this parliament, and it depends how purist you want to be. So one of the things I've argued is we should take smaller steps towards it. So we can make council tax more progressive if we lowered the ratio for Band A and Band B compared to D, F, G, etc. And that you could do within a...
[17:53] Ravi Gurumurthy:And how much money would that save for...
[17:55] Tim Leunig:As much or as little as the government wants. You can choose the ratio. We shouldn't go down too low, however, because places like Burnley, where the majority of houses are Band A and Band B, you don't want to deprive them of a tax base altogether. And that, you know, there's a—there's a limit to how far down you can go.
[18:12]I don't think we should ever have a fully proportional property tax with the same ratio across the country; otherwise, you'd have people in some places paying £100 or £200 a year to the council. It's just not viable to provide council services for a couple of hundred quid to a household, hence I suggest an £800-a-year minimum.
[18:30] Ravi Gurumurthy:Mhm. I know you're basically in favor also of um equalizing CGT...
[18:35] Tim Leunig:I am.
[18:35] Ravi Gurumurthy:...with income tax, as long as you index it and—and—and have a—a death tax, no tax, etc. What interested though is: Do you not worry about the signal that sends to entrepreneurial activity and investment, particularly with this government and how much taxes have gone up in the past? It's different when Nigel Lawson did it in 1988: it was part of a big tax-cutting budget, it was very... So the context matters.
[18:59] Tim Leunig:The context absolutely matters, and I would want to do it in a way that was revenue-neutral, even if that didn't mean I quite equalized the rates. I definitely don't think we should be charging people for gains on assets that are just inflation. It's pretty crazy that when Putin invades Ukraine and we get an 11% tax spike, a whole bunch of people whose assets have gone up in value just because of inflation are then hit by a tax wallop, and that's just madness.
[19:27] Ravi Gurumurthy:Well, what feels difficult is you've got almost three distinct problems. Suddenly you've got—you've got the people who are getting hit by inflationary gains that shouldn't be. You've then got the problem of people who are basically evading income tax.
[19:38] Tim Leunig:Yep.
[19:39] Ravi Gurumurthy:And then you've got entrepreneurial activity and risky activity that you want to encourage...
[19:43] Tim Leunig:Yes.
[19:44] Ravi Gurumurthy:...continuously. And the slight risk is that one policy...
[19:47] Tim Leunig:Yes.
[19:48] Ravi Gurumurthy:...is quite hard to make to solve all those three problems.
[19:50] Tim Leunig:There is no question that you can ask me that isn't hard, because if it was easy, it would have happened already. One mistake that politicians make—and I think the left made it three years ago—is to believe things were bad because the Tories, their opponents, were bad people who had therefore refused sensible advice.
[20:09] Ravi Gurumurthy:Mhm.
[20:10] Tim Leunig:And my experience of politicians of all shades is that that's just not true. Sometimes they will reject good advice, but for good political reasons, bad economic reasons, but they're not usually just fools. There are very few fools in government.
[20:23]But specifically, I want to help the group who are hit on inflationary gains and hit that group. And if the overall thing is revenue-neutral, I don't think we're going to be hitting entrepreneurs.
[20:33] Ravi Gurumurthy:And the revenue neutrality, you do that by lowering overall income tax, and there—and also therefore the top CGT...
[20:39] Tim Leunig:Ideally, ideally. But if necessary, in the short run, I would push the CGT rate up a bit, give you inflation allowance, make that revenue-neutral. If the CGT rate is still a bit lower than income tax, I can probably live with that, because if the margin's not very great, the incentive to avoid tax is lower.
[20:58] Ravi Gurumurthy:'Cause if we have a—a CGT rate of 45% for additional rate taxpayers, that would be unprecedented in...
[21:06] Tim Leunig:It would, and that's worrying, although with inflation allowance, you know, you have to be careful just comparing headline rates. But yes, if it went to 37%, people have then got an 8% incentive, but then the greater threat of the tax authorities coming along.
[21:23] Ravi Gurumurthy:Mhm. Yeah, it becomes—it becomes...
[21:26] Tim Leunig:I mean...
[21:27] Ravi Gurumurthy:Okay, so you'd prefer to basically, you know, raise taxes minimally for all the reasons that you've said, particularly that the—the amount of tax increases happened already. Uh, if he is going to do various things that he wants to do on, you know, making buses cheaper or uh nationalizing water, um he's going to have to find spending reductions elsewhere. Um, what would be your main areas, top five areas, where you could genuinely find spending cuts?
[21:56] Tim Leunig:Oh, it's not difficult to find spending cuts; it's difficult to find politically acceptable spending cuts, and that really is a political question, and you need a politician sitting here.
[22:06] Ravi Gurumurthy:I think he's boxed himself in. Let's—let's—let's push it. If you were talking about value for money from a sort of—if you were thinking about the various objectives, economic and social, where would—where would you—where would you get?
[22:18] Tim Leunig:So let me take as an example railways. Before the Beeching cuts, you can look up how many people used each station, and there's a whole long tail of stations that are very little used, and we shut them down. And everybody says, "Oh, I wish I still had my railway." But the truth is they didn't use the railway before it was shut down, and that's why it got shut down.
[22:41]Today, that long tail is even worse. There's a thousand or so stations, about 40% of them, that are really used by very small numbers of people. To me, as an economist, I think that's madness. When I took the train from London to Blackpool, they're very proud of their direct service. When we got off at Blackpool, I counted the number of people on the train: there were 11 carriages and 11 passengers. You're running this huge, great train for 11 people! That's crazy! It was even a diesel train. I mean, it—it would have been more environmentally friendly to put us in a Ferrari, because it's nuts!
[23:16]No, but almost all of that spending on the railways, on railways that are not well-used, is in the north of England, in Wales, and in Scotland. And I can't see Andy Burnham touching that, because where Andy Burnham is going to really hit a brick wall when he gets the details from the Treasury is the reality that almost all spending is subsidized by London and happens outside London. Even the NHS will spend more money in the north of England than the south of England.
[23:46] Ravi Gurumurthy:But from first principles, you would spend more on roads and extending car ownership, cut the subsidies that we put in for unviable trains,
[23:55] Tim Leunig:Yep.
[23:55] Ravi Gurumurthy:um, and possibly spend more on buses.
[23:57] Tim Leunig:Yep, absolutely. I'm something of a fan of buses, particularly in urban areas.
[24:01]Yeah, um, prescription costs. Uh, when you and I turn 60, we will not have to pay for our prescriptions. We will both almost certainly still be in work, will almost certainly still be in the top 10% of the income distribution, but we will get free prescriptions. That seems pretty mad. The Conservative government put in their manifesto that they would raise the free prescriptions to the pension age, which seems to be sensible. And they got more than 30,000, mainly postcards to be fair, at the consultation saying, "No, then people will have to choose between eating, heating, and medicine." That's nonsense, because people who are on Universal Credit will still get a free prescription. So a government that has a bit more guts to do that...
[24:45] Ravi Gurumurthy:How much would that really save, though?
[24:47] Tim Leunig:No idea, I can't remember. We can Google it afterwards. It won't be much, but you've got to do a lot of little things like that in government,
[24:53] Ravi Gurumurthy:Mhm.
[24:54] Tim Leunig:because a pound here, a pound there, it all adds up.
[24:56] Ravi Gurumurthy:Yeah, I just think you want, you know, you've got to think about the political efficiency of tax spending changes. And if you raise small amounts of money for a high degree of political pain, then it's—it's kind of not worth it.
[25:08] Tim Leunig:And that's also true of shutting down each individual railway line and station. But we subsidize the railways by £10 billion a year. That's a lot of money. It's—it's more money than the railways get from fares. And it's also quite regressive, in that people on lower incomes tend to walk and tend to get buses and tend to actually use cars as well and taxis, but they—the amount that they—they travel much less far.
[25:33] Ravi Gurumurthy:Yes. Am I right in saying that the majority of people on the railways are higher rate taxpayers?
[25:39] Tim Leunig:That certainly used to be the case 10-20 years ago, and I—I think it's still the case. So yes, it's a very generous subsidy to people like you and I who take the train and the tube pretty much every day.
[25:49] Ravi Gurumurthy:Okay. Um, any other cuts? Because what—what would you—what would you do that's big and even politically viable?
[25:57] Tim Leunig:So I don't think there is anything that is easy politically, or it would have happened already. I think we do need to think about the way the welfare system works, particularly for disability. It does seem crazy that you can do a disability assessment over a phone where nobody actually sees you walk around. Yeah, I think we do need to go back and reassess everybody who was assessed online, over the phone, particularly if it wasn't even a video call. And even a video call, if you hold the camera close to you, you blur it, you say you're out of data, your phone isn't working—I mean, this really is a farce.
[26:36] Ravi Gurumurthy:You would reassess everybody who was done virtually?
[26:39] Tim Leunig:Yes, um, yes, without exception. And I don't mean—I'm not saying those people have to come into the doctor; the doctor can come to them. There are some people—I think of my mother who got Attendance Allowance at the end of her life, and that was just filling in a form. Now, it wasn't a lot of money, but even then, I'm surprised that no one wanted to come around and just—I mean, you'd only need to see my mom for two minutes to work out she was as immobile as it said on the form, but I'm surprised that it's just a form you fill in, yes.
[27:09] Ravi Gurumurthy:Okay. And just on the sort of the usual one of the triple lock, um, I'm not even going to ask you whether you're in favor of reforming it. Um, I think my question would be: Would you peg it to inflation? Would you make it the—the average of the two or three? Would you have a target level so that there's some sort of anchor for where you want to be? Um, and—and what is your judgment on the political feasibility of it? Because I think it's different from winter fuel payments, in that winter fuel payments was a one-off loss of income, um, this is about saying your income will be raised slightly less fast than it would have done otherwise.
[27:44] Tim Leunig:So the triple lock was a really good idea when Steve Webb invented it, because when he invented it, incomes and—and inflation roughly went up parallel to each other. So although there would be some catch-up by being the best of the three, it was expected to be slow and steady, and the basic pension was quite low. Then what we've had since then is unprecedented volatility of one versus the other, which means when pensioners always get the best one, they end up shooting away from the rest of people.
[28:13] Ravi Gurumurthy:Mhm.
[28:14] Tim Leunig:And thus it's cost 10, 20—I think it's £30 billion more than expected. That was never the intention. So we—we should move back to what the intention was, which was that pensioners share in the growth of wealth.
[28:24] Ravi Gurumurthy:Mhm.
[28:25] Tim Leunig:So something like the Australian system, where they say the pension is a particular proportion of income: you get inflation every year, and if you're ever below that, you get a bit more; if you're ever above, you only get inflation. Or where we say, "We guarantee you inflation each year, but we guarantee you earnings over a parliament," so you always keep up with the general public.
[28:48]What I think would be harsh is to go back to the Margaret Thatcher system, and I say this to everyone who tells me they're a Thatcherite: You can't be a Thatcherite and support the triple lock; it's a contradiction in terms. Margaret Thatcher's biggest cut was to de-index pensions from earnings to inflation only. Pensioner poverty went through the roof, and she created a big pot of money for tax cuts for working-age people. That's what Thatcherism is: Thatcherism is being nasty to pensioners, nice to workers. I don't think we're in that space, I don't think we need to be in that space, but I think we need a more sensible approach to our pensioner generosity.
[29:22] Ravi Gurumurthy:Mhm. Okay. Um, any more cuts that you want to make?
[29:28] Tim Leunig:Well, they're not cuts I want to make. I mean, they're cuts that I think are—you asked me what were low-value items. Uh, I think some of the—the way we do childcare, we need to be clear about: Is this early years education? We know the value of that is very, very high. Or is it just a subsidy to encourage people to work, in which case it's not particularly efficient or fair? We would by and large do better just to give people money to sort out their own childcare arrangements. So if someone bluntly wants to take the money and stay at home with their own child, that's fine by me. If they want to pay grandma to come and look after the child, that's also fine by me. And cash payments, which could then be lower because some people would prefer them, would also be much more helpful to people doing shift work.
[30:15] Ravi Gurumurthy:Yeah.
[30:16] Tim Leunig:Because institutional childcare is terrible if you're doing shift work.
[30:18] Ravi Gurumurthy:I mean, historically, there's—there's been more pressure on revenue than capital budgets,
[30:23] Tim Leunig:Yep.
[30:23] Ravi Gurumurthy:but um particularly with defense and other things, that may not be true anymore. So where would you find cuts in capital budgets?
[30:31] Tim Leunig:Um, so I try not to find, yeah, cuts in capital budgets, to be honest, because there's a lot of evidence that investment is just too low in Britain. So would I be keener, for example, to continue some of the cuts that Labour have made in farming and the previous government, to say that we voted for Brexit, and a Brexit freedom is we really can spend less money on farmers? I've been surprised how cautious Labour have been on farmers. Farmers never vote Labour anyway, so when Rachel Reeves halved the big tax break that farmers get, why not just abolish it? You've raised twice as much money; you get the same...
[31:10] Ravi Gurumurthy:How much money would you raise?
[31:11] Tim Leunig:It's no good asking me one of those questions on the spot! If you're going to ask me those, you need to tell me in advance so I can Google it and appear cleverer than I am.
[31:21]Um, and people say, "Ah, there'll be no food without farmers." But the land remains there; its best use is farming. And actually, inheritance tax is one of those taxes—you—you may bankrupt the individual farmer, and that's not necessarily a good thing, I'm not saying it is—they don't want farmers to go bankrupt—but somebody else will buy the land, and they will farm it.
[31:44]For what it's worth on inheritance tax, by the way, I think the seven-year rule is really weird. I would make it inheritance tax-free if you leave things to people up to one year after the retirement age, because that way, people who are in a business will retire at a normal age; they will give the family farm or the family business to the next generation at an age where the next generation is in the prime of their life and capable of running it.
[32:08] Ravi Gurumurthy:Mhm.
[32:09] Tim Leunig:The idea that you're still going to be running Nesta at the age of 80 is just bizarre. But this is...
[32:13] Ravi Gurumurthy:Well, my dad is still a radiologist at 92, so I'm hoping to...
[32:16] Tim Leunig:Well, your dad is a hero, but he isn't actually running the show. He isn't preventing the next generation coming through. And we do see that in farming. It would be better if a lot of really quite older farmers gave the family farm earlier. So, I'd be much more generous on inheritance tax if you do it before your, say, one year after retirement age, but much harsher if you're just blocking the next generation.
[32:38] Ravi Gurumurthy:Okay. So, I mean, I want to sort of move on to: What would you actually spend the money on? Um, but I'm kind of not quite sure how much money is possible to even raise, either through the tax increases or spending cuts, because I think you're roughly saying, of course, from first principles, there are all sorts of things you could do, but you think both from what is sensible on the tax increases side and what is politically viable on the cut side, there's not huge amounts. Maybe the CGT change is the biggest source of revenue.
[33:05] Tim Leunig:Maybe, but I'd still do that on a revenue-neutral basis, because I do worry about entrepreneurs. I worry about Britain being seen as open for business. Remember, a lot of our tax revenue comes from immigrants. It's not that all immigrants are net payers into the economy, but there were a chunk of entrepreneurs that see Britain, particularly London, as a good place to set up a business. I wish the founder of Revolut had stayed in London even longer, but I am damn glad he came here at all: he created jobs, he paid a chunk of taxes while he was here, his employees are still paying a lot of taxes. I want people like him to come to Britain.
[33:40] Ravi Gurumurthy:And what about, you know, if you just took a—a sort of percentage cut across every single public service, um, which, you know, everyone will squeal about, but could potentially raise a decent amount?
[33:53] Tim Leunig:What you have to think about is whether the staff will quit and you will earn more money if you're a doctor in Australia. That's why we lose doctors to Australia. So you need to be really careful cutting wages across the public sector: they're not higher than they were. So in real terms, teachers' wages are barely higher than they were in 2010. Academic wages are really low at the moment, which is why top professors leave for foreign countries.
[34:23]I mean, to stop doing something, it's no good just squeezing things. So again, if we return to Margaret Thatcher, she got rid of free spectacles for everyone. Back in the day, you and I could have worn NHS spectacles for free, and some quite well-off people did, and she ended that. She really cut dental care for affluent people. You've got to be able to identify something and say, "Okay, no more."
[34:49] Ravi Gurumurthy:I mean, I—I normally think it's quite hard to find savings in workforce and administration and red tape,
[34:55] Tim Leunig:Yep.
[34:56] Ravi Gurumurthy:but what about AI in the next three years? It seems very plausible that a lot of case management, processing, and compliance, yes, jobs could—and it's a large—the sums could be quite significant. Um, do you have any sense of order-of-magnitude uh goals that the government should have on taking out those costs as a result of AI?
[35:19] Tim Leunig:So what you have to do to get those is think about which processes can be adapted. It—it won't be less than 20 billion, but it won't come overnight. Of course, all governments should be doing this: they should be thinking about scheduling; they should be thinking about, you know, "How do we run the court system better? Can we even assess the evidence base supplied by both sides, so we're more likely to get someone pleading guilty?" If someone pleads guilty—do we need to do—if they've already pleaded guilty, why does it take so long?
[35:54]I—I'm a historian. In the old days, if you caught someone who just murdered someone, they were usually tried the next day with the witnesses who were there, not least because people were much harder to trace and track in those days. Why does it take so long for some of these things? Can we, you know, just literally record an interview statement with equipment like we have in this room, get it transcribed by AI, summarized by AI, identify the points of agreement between all witnesses, and come up with an agreed statement that goes to a judge?
[36:20]If the person pleads guilty immediately, the only defense at that point is mitigating circumstances, if any. I really don't understand why cases like that can't happen within a day or two. And we know that something like a third, a quarter, something like that, of people in prison on remand are found not guilty. I mean, this isn't just cost-saving; this is life-changing! Someone who is not guilty should not be in prison: they've almost certainly lost their job, they may have lost their relationship, they've lost their status in the community. I mean, this is terrible! So getting AI to speed up justice isn't just about cost-saving; it's about better justice.
[36:58] Ravi Gurumurthy:Yeah. My perspective on this is that the savings could be absolutely enormous, but I'm sort of pessimistic that in the next two to three years they will materialize anywhere, just because government...
[37:08] Tim Leunig:And two to three years, it's really fast anyway. We're not seeing the private sector halving its admin costs in two to three years either. So it will come, but it will be steady and slow.
[37:19] Ravi Gurumurthy:Okay. Um, let's assume that you found some money somewhere. Um, what would be—what were your top three things where you'd actually invest more?
[37:28] Tim Leunig:So I'm sad that we have delayed a whole bunch of road schemes. We know there's huge congestion in Britain. We know that when you increase the number of roads outside of towns—we don't want more cars in towns, but outside of towns—when you increase roads, more people use them, and they're doing things that are socially valuable: they're traveling for business, they're traveling to see family, they're traveling to look after, or they're traveling to see our great and wonderful country. That's a good thing. So I'd definitely build more roads.
[37:58]I think it's pretty clear that increasing aviation capacity, which is mostly private sector investment, will indeed yield pretty big returns to Britain. So expanding Heathrow and Gatwick—the government has a part to play in that, it's limited, but it's a part.
[38:12]I would almost always increase education spending. There is no country in the world that has thought, "Oh no, we're poor because our people are too educated."
[38:22] Ravi Gurumurthy:Isn't the correlation between spend per pupil and results not very strong?
[38:26] Tim Leunig:It's not very strong, but it is there. But we can also think about increasing further education, having more opportunities that anyone who wants to go back to school to get their English and maths at any point to have really high-quality tuition. We know that retakes for English and maths post-16 have done terribly: they're being taught in big classes in FE colleges, and they're not working.
[38:49]But I am confident that most of those people who haven't passed, if they sat down in small groups with a proper tutor who could work out why they have these mental blocks—and a lot of it is just fear. I met a woman once who had an A in all her subjects except for maths, where she had a U. And she told me that was 'cause she'd been brought up—her dad had failed maths and so had her mom—to believe she was genetically bad at maths. I mean, there was no chance that you got an A in English and a U in maths. I said, "I bet you didn't turn up to the lessons." She said, "How could you tell?" It's because nobody is clever enough to get an A in English and get a U in maths if they turned up.
[39:24]And she was then sponsored by her employer—from memory, it was Whitbread Pubs; she'd worked behind the bar, they'd worked out she was clever, they wanted to fast-track her for management, but it was a requirement to have maths, and they'd sponsored—she had a maths tutor, she was doing her homework on the train sitting next to me.
[39:41] Ravi Gurumurthy:Okay, so education...
[39:43] Tim Leunig:People like that, people like that.
[39:44] Ravi Gurumurthy:...roads and education, there's two things.
[39:46] Tim Leunig:So in defense, I am in favor of spending more money on defense, but not in a way that I think the defense establishment who wrote the report that Labour commissioned want. I think what we've learned in Ukraine is what you need is flexibility to expand really, really quickly. So I would love us to spend much more money not on building up a sort of warehouse of 100,000 drones that will be obsolete within six months, but building up high drone capacity.
[40:14]So I would like to see us having four teams of drone makers who every—I don't know, two weeks, four weeks, month, I don't know—fight it out on Salisbury Plain, you know, who can down each other's drones. Not because we'll then give them a lot more money for their drone, but just—and I want [clears throat] to fight the French, and above all, once the war in Ukraine is over, I want to fight the Ukrainians 'cause they are really good at it! We can't distract the Ukrainians now, but I really want that expertise. But that would be a very—that would be building capacity. I don't think in the short run that would be as expensive as the defense establishment or Donald Trump...
[40:50] Ravi Gurumurthy:You need sort of dynamic capabilities.
[40:53] Tim Leunig:You need dynamic capabilities, and the biggest dynamic capability, at the risk of sounding like the chair of the OBR, is a smaller national debt.
[40:59] Ravi Gurumurthy:Mhm.
[41:00] Tim Leunig:Because if you can, tomorrow, borrow another 25-30 billion from the money markets quite cheaply, and you've got people who are capable of building up-to-date drones, then you go and build the equivalent of a Nightingale hospital.
[41:14] Ravi Gurumurthy:Yeah, we're seeing with Germany, aren't we?
[41:16] Tim Leunig:Yeah, because they—they're able to do that on defense
[41:19] Ravi Gurumurthy:Yes.
[41:19] Tim Leunig:because of their fiscal position. Fiscal position. So I actually think that reducing the deficit and then the debt is actually a good investment in defense, 'cause what you need, I think, is—to an economist—elastic supply: the ability that, on the day you need to go big, to go big. And if we think about how people have won wars in the past, that's how they won it. America didn't beat Japan because it had atomic weapons sitting in a locker.
[41:49] Ravi Gurumurthy:Mhm.
[41:50] Tim Leunig:We didn't beat Nazi Germany because we had, you know, thousands of planes and whatever sitting around. We mobilized.
[41:58] Ravi Gurumurthy:Um, can I sort of try and start to wrap this up with a bit of note of optimism? Because, um, John Van Reenen wrote something recently, suggesting that there's a high degree of uncertainty about productivity in the economy because they understand the actual employment level because of the Labor Force Survey. And actually, we could either—we could potentially be in a situation where productivity is really kicking in if, yeah, the assumptions are on one side of the—the—the argument. What—one: What is your read of—of—of the sort of—of those figures?
[42:25]Um, and then there's a related question, because one of his potential um explanations is the emergence of AI. And—and it is not—it doesn't feel ridiculous or um wishful thinking to say that AI pretty quickly is going to start generating significant productivity benefits over the next few years, which may make our economic discussion more about the kind of concern about jobs in five years rather than actually productivity.
[42:55] Tim Leunig:So I'm a historian of technology, and if I think back to the invention of mass production, uh the invention of electricity in the 1930s, and the first generation of computers, what we find is there's a long lag from invention to adoption, and then there's a second long lag from adoption to changing your processes to get the productivity gain. And that means that in the short term, I don't think we're going to get big gains. We're seeing AI beginning to be adopted, but what we're not seeing is it being adopted in a way that systematically changes the process. So, I...
[43:28] Ravi Gurumurthy:But on that, this is a sort of general purpose technology almost like no other, and it's got um the potential for adoption I think quite quickly, given just how sort of consumer-facing some of it is.
[43:40] Tim Leunig:Um, but looking back, electricity, when we replaced big machinery in factories powered by a steam generator at one side through a shaft with individual what is called unit-drive electric motors—so basically the thing in a hand drill—it still took a long time to work out what that meant in terms of new industrial structures.
[44:01]So if we took conveyancing to buy a house, could huge amounts of that be done by AI? Yes. Have we reached the point where someone has worked out how to do an AI-based conveyancing that then is actually reliable and shown to be reliable? Not yet. Might it take 3 months? Yeah. Might it take 3 years? Yeah. Might it take 30 years? No.
[44:20] Ravi Gurumurthy:So, but if we've got this potential incredible accelerant of productivity that's going to hit us at some point, once it—as—as you say, typically takes a while, should we not be doing something big on adoption? I don't know what that is, either in terms of incentives or an adoption agency or whatever it is.
[44:36] Tim Leunig:No, um, no, definitely not. The last thing government should do is get in the way. And the last thing we want is government propping up the loser firms that don't adopt it. What we need to do in government is say, "If you can create a firm that bankrupts every estate agent by using AI to find a person their perfect house, go for it! If we can find someone who will bankrupt big chunks of—of law, go for it!" We want Britain to be the country where if you invent something with AI, you can get to scale, you can take out the incumbents.
[45:08] Ravi Gurumurthy:So, but you think there's nothing that the government can do to accelerate the adoption of AI. It's just got to—there's nothing sensible, it should take its course.
[45:15] Tim Leunig:Uh, investment in AI is already 100% deductible against corporation tax, you know? We've done the things we need to do. So the things government can do, but we have done them already.
[45:25] Ravi Gurumurthy:And on that—that point, the sort of John—John Van Reenen point about, "Well, do we actually think productivity is happening, but it's been underestimated because of the—the—the—the jobs figures?" Where are you—what's your guess?
[45:36] Tim Leunig:So I don't have any information over and above what John has. I'd return to my earlier answer: If we could reduce the cash economy,
[45:45] Ravi Gurumurthy:Mhm.
[45:46] Tim Leunig:we'd be in a better position to know what's going on, because ultimately productivity either comes through in lower prices or higher earnings. And if we had much better data on higher earnings, which would mean a much better understanding of the self-employed sector above all—so we have very good information on your and my earnings because it's filed with the tax authorities every month—then I think we would be in a stronger position.
[46:09] Ravi Gurumurthy:So would you be saying to Andy Burnham, "Actually, you should shift to a cashless economy"?
[46:13] Tim Leunig:Yes.
[46:14] Ravi Gurumurthy:Or a near-cashless economy.
[46:15] Tim Leunig:I don't want to end the world where a child has 50p in their hand and can go and buy a Freddo the frog.
[46:21] Ravi Gurumurthy:I do! [laughter] I have this argument all the time!
[46:27] Tim Leunig:Of course Nesta is—of course prefers the child to go and buy a banana. Uh, and obviously I agree with that, but I was more talking from a parent perspective. So, there's a pestering, but not... Well, my child's 23, so she now has her own income, and if she wants to buy a Freddo Frog, she uses her own money, and your time will come on that, I promise you.
[46:46]But yes, an economy that is much less cash-based, where cash is the exception, not the rule. Because these little SumUp machines are what, £25 now? You see Big Issue sellers with them. When I open my garden to the public to raise money for charity, I have a SumUp for people to tap.
[47:04] Ravi Gurumurthy:And do you think if—if he, you know, if you said to him, "Look, this is a—a big idea," um, could you do this quickly? Could this be a...
[47:12] Tim Leunig:Yes.
[47:12] Ravi Gurumurthy:And—and you—and you think it would be—the kind of impact would be significant?
[47:16] Tim Leunig:Yeah, I do. I think it would be—I think tax revenues would go up. I'd be surprised if they didn't go up by 5 billion in the first year, by 25 billion within 5 years, I'd be very surprised. And some of that would come about in a way that's good for productivity, because some of these firms that are only viable at the moment because they're fiddling their taxes would go bankrupt, and that will be a good thing, because then the honest, more productive firms will take them on. Those people will then be in higher productivity workplaces. That will be good.
[47:45] Ravi Gurumurthy:Final question, Tim. Um, what's the thing Burnham should do in his first 100 days? What would you be...
[47:53] Tim Leunig:Above all, he needs to make it clear to the money markets that he and his Chancellor understand that 1 + 1 = 2, and that it's 2 in all circumstances. You can criticize Rachel Reeves for any number of things, but the money markets always believed that when push came to shove, she would put up taxes as much as she had to to prevent borrowing getting out of control.
[48:16]Chancellor should make a speech immediately pledging that in their next budget, they will have the same amount of fiscal headroom at least as Rachel Reeves had last year, come what may. And they should have a budget within 6 weeks, 8 weeks, something like that, whatever the minimum is you can do with the OBR, so that we don't have uncertainty, so that whatever tax rises are coming, entrepreneurs, investors, workers then know what is what, because otherwise the uncertainty is going to kill the British economy between now and late November when we might get a budget, or now and February when we might get a budget, and we cannot afford that.
[48:54] Ravi Gurumurthy:Tim, thank you very much. Great to—great to chat.
[48:57] Tim Leunig:Anytime.
[48:58] Ravi Gurumurthy:If you enjoyed this episode, please do like, share, and subscribe wherever you get your podcast. We've got more coming. For those of you who don't know us, Nesta is a research and innovation foundation based in the UK. We design, test, and scale solutions to the big challenges of our time. We're funded by a charity endowment and are politically neutral. For more, do visit www.nesta.org.uk.

[00:00] Tim Leunig:We have one of the narrowest bases of VAT in the world. New Zealand has the widest. New Zealand has VAT on approximately 99% of things, and as a result, they can have a lower rate, and they don't spend millions of pounds arguing on whether a Jaffa cake is a cake.
[00:18] Ravi Gurumurthy:Hello, I'm Ravi Gurumurthy. I'm the CEO of Nesta, and this is Policy Fix. It's a miniseries of the podcast focused on what should Andy Burnham do. Uh, everybody in Whitehall is currently scurrying around figuring out what is Andy going to do? Uh, how is he going to um get—get the sums to add up? And that's what we're going to be focusing on today: What tax rises could he introduce? What spending cuts? And what could he do with the potential money?
[00:44]And I've got a fantastic person to—to join me here to think about that—is Tim Leunig, our Chief Economist here at Nesta. Welcome, Tim. Um, looking forward to the show.
[00:50]Um, we're going to try and cover a few things: one, what are the tax uh increases that this government should do; what are the potential spending cuts; and then with the potential money they raise from either of those things, where could they actually have fun and have an impact?
[01:09]Um, but before we do that, I think I wouldn't mind starting with you. I mean, you've been not just um an economist in the Treasury, but in many different departments. So you've got a good sense of what you might call the cul-de-sacs—all the kind of um smart-ass common ideas that come from think tanks that once you're in government, you go, "Actually, there are 17 reasons why that's just not going to work." And I just wanted to sort of—I thought this could be helpful um to sort of kill off some of those obvious cults. What are your—what are your top five uh cults?
[01:38] Tim Leunig:So the first one I'd start with is the idea that it's cheaper to build council houses if you use public sector land. I mean, it seems obvious: you don't have to pay for the land. But at the moment, when, say, a hospital owns land and it sells it off to a builder, it gets top dollar for that land, and it puts the money into running the hospital. So, if it now has to give away the land for council housing, well, that means the hospital now doesn't have the money.
[02:04]Yeah. And that's why it never happens, because the NHS will turn around to the Treasury and say, "You forced us to give up this money in the form of land. Now give us the money in exchange." So, there's no real saving there. And I've seen so many governments say this; none of them have ever done it. And it's for a good reason.
[02:18] Ravi Gurumurthy:Yeah. MOD land is—is similar to it.
[02:21] Tim Leunig:MOD land is the same, except that MOD land is almost always in pretty wacky places. We don't really want to build 50,000 houses in the middle of Salisbury Plain.
[02:29] Ravi Gurumurthy:Mhm. It's just in the wrong place.
[02:30] Tim Leunig:Okay. Next, uh, another one would be um parity of esteem for vocational and academic education. Almost every government's committed to that. And what none of them seem to realize is that parity of esteem is not something the government controls. Parity of esteem is something that we, the public, esteem. And I'll tell you what, on the day that I have a blocked pipe, I really, really value a plumber much more than someone with a PhD. So that parity of esteem is not something government can do anything about.
[03:00] Ravi Gurumurthy:So do you think that other countries do have a different relative status of vocational and academic roles?
[03:06] Tim Leunig:No, I don't.
[03:07] Ravi Gurumurthy:Don't you think that—you think they're all the same?
[03:08] Tim Leunig:I think they're all the same. I think in every country in the world, if your child goes on to get a PhD from Harvard,
[03:15] Ravi Gurumurthy:Mhm.
[03:16] Tim Leunig:your neighbors are impressed, grandma is impressed, everybody's heard of Harvard. That's why if you get a PhD, you get the words "Doctor," the letters "Dr." in front of your name. It is a mark of esteem, and I think it always will be.
[03:28] Ravi Gurumurthy:But don't you think in Germany or Holland there are more well-respected structured apprenticeship routes that then carry a certain degree of status because those qualifications have value amongst employers?
[03:39] Tim Leunig:So sometimes they lead to better earnings, and earnings definitely give status. When you see that this qualification leads to good earnings, and your son, your daughter, your friends could go on a decent holiday, live in a decent house, that's definitely valuable. But no, when we look at international surveys, "Would you like your child to become a doctor, a lawyer, an accountant, etc.?" people around the world tick those boxes before they tick, "Would you like your child to become a plumber?" or something like that. I'm not saying that's right or wrong; I'm saying it is what it is, and there's not a lot the government can do about it.
[04:14]Next, number three, uh, on the NHS, "Prevention is better than cure." That's clearly true. Neither you nor I want to have an operation on our heart. So, it is sensible for you and I to eat healthily. And obviously, Nesta does a lot of work on that. But every government says that. It's really hard to do in practice because when you first move the money over, there's some poor person queuing up for a hospital operation: they're—they're on a trolley, they're in a corridor, or they're on a—a waiting list that is so long they might die. So, moving that money into prevention is very, very hard.
[04:48] Ravi Gurumurthy:So you don't think it's um it's possible at all to be disciplined with the acute sector and actually start shifting money into...
[04:57] Tim Leunig:I think it's really hard. I think if budgets were growing, putting more of it into prevention would be a good thing.
[05:03] Ravi Gurumurthy:Mhm.
[05:03] Tim Leunig:But I think it's very hard to do in a world of constrained budgets. Okay, very hard.
[05:09]The next one will be early years education. Everybody agrees it's really important, but moving the money from later on to earlier is difficult because then what about the kids who are already seven or 14? You're taking money out of further education and remedial education, maths and English retakes, those sorts of things, and you're moving it into early years. That seems pretty harsh on the person who's 14 or 17. So again, people talk a good game.
[05:36] Ravi Gurumurthy:Mhm.
[05:37] Tim Leunig:They do not do.
[05:37] Ravi Gurumurthy:I'll say at least if—if you are going to increase early years education spend generally, let's increase it more proportionately in the earlier years and rebalance across the life cycle so that over, you know, a longer period, you—you rebalance...
[05:50] Tim Leunig:You should, absolutely. The only thing I'd say is that most school funding goes on teachers' wages, and in the medium term, if you want to keep up the quality of teachers, teachers' earnings have to go up with other graduate earnings, or else people simply won't want to teach, or they won't be able to afford a house if they are to become a teacher.
[06:10]Okay, next one. Uh, modern methods of construction in uh—ministers always love modern methods of construction. But the idea that ministers should be deciding what sort of technology house builders use to build houses is just as silly as a minister who once told me they wanted to come up with a national uh consumer database that small companies could use, a CRM system, and they wanted to go out and tender for this, and then make it free for individual firms. I mean, the day that ministers think they know how to run a company better than the people running the company is usually the day the minister has lost the plot.
[06:45] Ravi Gurumurthy:So you don't think there's innovation potential in—in construction methods? You think...
[06:49] Tim Leunig:Oh, I do, but I think the industry should be leading it, not government. I don't think having—saying it should be easy to get planning permission if you use this technique, etc., etc., is a sensible way to do it.
[07:01] Ravi Gurumurthy:But are there not ways in which the market currently functions which are suboptimal that mean that they don't invest in new technology or new ways of working that government could potentially have an...
[07:10] Tim Leunig:Well, government can have an effect, but the best way would be indirect. So if we gave out a lot more planning permissions so that builders knew they could build a 1,000, 10,000 houses every single year in Perth, then I think we'll find they would scale up and be predictable.
[07:27] Ravi Gurumurthy:Okay. Um, let me throw one more—couple more in. One: social value. So I think Andy Burnham's talked a little bit about essentially trying to achieve double dividends when you're trying to achieve not just um build a nuclear power station, but make sure that the local labor force benefits. Um, and that's something that we've done a bit more in recent years; other countries do more. Um, but you think that's a gold-sucker?
[07:51] Tim Leunig:I think it's usually a bad thing to do. You want to buy a nuclear power station. What you're really then saying is, "We're going to tax the construction of a nuclear power station in order to deliver these other things." By and large, you're better off just paying for the other things explicitly, 'cause the danger is you keep adding one more, one more thing, and soon you've got what we've got in Britain, which is the most expensive nuclear power plant in the world, which then has other really bad effects: it means we use less electricity, we build fewer nuclear power stations, and we burn more gas.
[08:21]I am an absolute plain vanilla person. If you want more apprenticeships in the West Country, pay for more apprenticeships in the West Country. And you know what? If we built a lot more nuclear power stations, there'd be a lot more jobs, and a lot more young people would come up to their FE college saying, "I want to do a course in this, because I can see it'll lead to a good job."
[08:38] Ravi Gurumurthy:Mhm.
[08:39] Tim Leunig:So, no, I worry a lot about social value.
[08:43] Ravi Gurumurthy:Um, what about—so the big play that Andy Burnham's got is devolution, including um some talk of fiscal devolution. Do you think um do you think that is viable, um particularly given the concerns of inequity that that can potentially result in in certain forms of fiscal devolution?
[09:03] Tim Leunig:So I'm wildly in favor of devolution, and I say that not because I want a job in Andy Burnham's cabinet, uh, but because I always have been. So the line I usually run with is that any power available to the mayor of South Bend, Indiana—have you ever been to South Bend, Indiana?
[09:19] Ravi Gurumurthy:I have not been to South Bend. What can you tell me about South Bend, Indiana?
[09:21] Tim Leunig:Absolutely nothing! Absolutely nothing. Exactly, you and almost everybody else. Uh, it's where Mayor Pete—Pete Buttigieg—who wanted to be the uh candidate for the Democrats when Joe Biden won. And I met him when I was in the US in 2019, and my line is: any power that he had as the mayor of South Bend, Indiana, should clearly be available to the mayor of London, the mayor of Manchester, etc., etc. We are the most centralized country in the world.
[09:48]But that does have risks for local areas. Andy Burnham was only able to do his reduced fares on buses in Manchester because he got a block grant from London. It's not something he talks about a great deal; it's not on the side of buses: "Your bus is cheap because London gave us the money."
[10:03]Yeah, but it's true. And that does mean if we have proper fiscal devolution, mayors are going to have to change their tunes, and they're going to have to stop whining to London every time they want something, and have tough conversations with local people: "Do you want cheaper buses? If so, your rates are going up, or some other cost is going up locally. We will put in place congestion charges." Manchester said no. A ULEZ? Manchester has said no. Uh, workplace charging for car parks? Manchester has said no. Those are the sorts of conversations where they'd have to say yes to at least some of them if we have fiscal devolution.
[10:39] Ravi Gurumurthy:So you're in favor of it. You don't get to call this, but what—how would you do it?
[10:44] Tim Leunig:Oh, I would take every power literally that Mayor Pete—I would get one of those nice tables from the OECD that gives all the powers in different areas, and I'd say, "Anything that is devolved to a majority of places is now devolved to these places whether they like it or not." They don't have to use the power, but I'm giving it to them. Wales hasn't used lots of the powers we've given it; Scotland hasn't used some of the powers we've given them. You don't have to use the power because we've given it to you, but we will give it to you.
[11:10] Ravi Gurumurthy:Okay, let's go into: okay, what are the top five ways in which this government can raise money?
[11:16] Tim Leunig:So first of all, it needs to think very hard about whether it should be raising money. If we look at the opinion polling, uh, the British Social Attitudes survey shows a record number of people now say they would like lower taxes and lower spending. So I think you're being pretty brave, given that taxes are now at an all-time high, pushing them up even further. But that's a political decision for Andy Burnham.
[11:41] Ravi Gurumurthy:So we—we'll get into sort of—because I, you know, I think should look at tax, you know, spending reductions as well. I guess your first question that you should get to is: Would you do—would you finance all the things that need to be done, like defense or things that he wants to be done, by spending reductions elsewhere and actually have no increases in the overall tax burden, or would you have some?
[11:58] Tim Leunig:So I think in—it's harder to do spending cuts in the short run. So I think in the next year or so, Andy Burnham will almost certainly raise taxes.
[12:07] Ravi Gurumurthy:Mhm.
[12:08] Tim Leunig:But I think he is taking a risk there because economic growth has been positive since Labour got in. You know, hats off to Rachel Reeves: she has managed to put up taxes and have growth. That is more than her predecessors. I think history will judge her much, much more kindly than she's judged at the moment.
[12:26]But there aren't many good taxes to raise at the moment. So the best thing to do would be to actually enforce the taxes we have. We have far too many people who don't pay their taxes. They're mostly, the evidence suggests, small businesses, and that's unfair to other small businesses that are competing with them. I do not want a world in which the dishonest people have an advantage.
[12:49] Ravi Gurumurthy:The tax gap is what, 30-40 billion? Can you get 10 or 20 billion with a lot more enforcement?
[12:55] Tim Leunig:I would have thought so. So that is where I would start.
[12:58] Ravi Gurumurthy:And—and when you say a lot more enforcement, uh, just paint a bit more of a picture on how you could do that in a way that actually—because that's a huge amount of money.
[13:06] Tim Leunig:Huge amount. Um, why—why is no one—you must always think if there's money lying on the floor, someone must have picked it up. So we should audit a lot more people, go in and look at their accounts. We ought to get a lot more serious about sectors that use a lot of cash, right? I was talking to someone serious from the world of building trades merchants, these big sort of warehouses where you can go and buy as a trade a boiler. And I said, "What percentage of your sales are cash?" He said, "Oh, the majority."
[13:38]I mean, really? Do we really think people are handing over to someone who fits their boiler £1,000 in £20 notes for any other reason other than they've been offered a discount because the guy isn't paying cash?
[13:51] Ravi Gurumurthy:Mhm.
[13:52] Tim Leunig:He said, "Yeah, people always start with the VAT." He said, "They can count them really quickly. We've really got to get serious about that."
[13:58] Ravi Gurumurthy:Okay, so that's one. That's the...
[14:00] Tim Leunig:So that is the number one thing I would do, for sure. I am a good, proper economist and not a politician. So the other things I would do would be things that improve the workings of the tax system. So that means VAT.
[14:14]We have one of the narrowest bases of VAT in the world; New Zealand has the widest. New Zealand has VAT on approximately 99% of things, and as a result, they can have a lower rate and they don't spend millions of pounds arguing on whether a Jaffa cake is a cake. We don't have companies that are trying to design a product to be in a different VAT class in order to get an unfair competitive advantage over a rival who has designed it slightly differently. So this wouldn't just raise money; it would create a more efficient way of running the economy.
[14:45] Ravi Gurumurthy:And—and if you had a sort of single rate of VAT across all products, do you think you could roughly halve the—the—the VAT rate if you wanted to be...
[14:53] Tim Leunig:Not quite as good as that, because you wouldn't levy VAT on things like um state schools, obviously, because the government would just pay it and that then becomes pointless. But it would come down by a third or so. Now, of course, if you bring it down all the way, you don't raise any money overall, and you would need a bit of money to pay those poor people who would be a little bit worse off.
[15:13]But they're not much worse off. Something like children's clothes, for example, relatively poor people buy their clothes in Primark, in Asda, and they buy secondhand clothes. Adding VAT to a babygrow from Asda, you're talking about perhaps 20-25p extra. You add one in John Lewis, you're talking about £2 extra. I found a designer babygrow online when I was doing research for £560. I don't know who buys these, but actually you'd be getting most of the VAT revenue from middle class and richer people. And if that's what the government wants to do, actually VAT on children's clothes would be very progressive.
[15:52] Ravi Gurumurthy:If you looked at the version where, okay, you—you cut VAT by I don't know, 5, 6, 7p, but then you maybe—which is the revenue-neutral version—and then you add back in one or two P and put that into Universal Credit or—or some other way of targeting um—and—and if you do do that, is it plausible that the winners and losers might be politically viable winners and losers?
[16:15] Tim Leunig:Well, they were in New Zealand. When New Zealand did it, they overcompensated people at the bottom so that no matter which way you look at it, people at the bottom were not hit by introducing an economy-wide VAT. And they made shifted—they made that shift. It was okay. In the early '80s, they made that shift, and 40-something years later, they still have VAT on everything. They haven't introduced loopholes, and they do have a really low cost of collection compared with us. They don't have bonkers court cases going on for years.
[16:44] Ravi Gurumurthy:And when you talk to people in the Treasury about this, or when you were in the Treasury, um, what was their response?
[16:49] Tim Leunig:Well, I was largely there during COVID, so let's be honest, we didn't discuss things like that. And even if we had done, the rules of the Civil Service are very clear that I can't answer that question.
[16:59] Ravi Gurumurthy:Yeah, yeah, okay. What—what do you think? What would you imagine they would say now if you talk to them?
[17:03] Tim Leunig:So the Treasury love the idea of tax simplification, but of course, as we saw when the Treasury did it with the pasty tax, a huge amount of unpopularity descended on George Osborne. And that's why if you do it, you've got to go big.
[17:17] Ravi Gurumurthy:Exactly, if you do it on an isolated product, it just doesn't have like a random weird...
[17:21] Tim Leunig:Yes.
[17:21] Ravi Gurumurthy:...um tax. Um, okay, so what about um the usual ones that are sized? Proportionate property tax, which you've written about.
[17:29] Tim Leunig:Yep, I've written about that. I think it will be very hard to introduce that this parliament, and it depends how purist you want to be. So one of the things I've argued is we should take smaller steps towards it. So we can make council tax more progressive if we lowered the ratio for Band A and Band B compared to D, F, G, etc. And that you could do within a...
[17:53] Ravi Gurumurthy:And how much money would that save for...
[17:55] Tim Leunig:As much or as little as the government wants. You can choose the ratio. We shouldn't go down too low, however, because places like Burnley, where the majority of houses are Band A and Band B, you don't want to deprive them of a tax base altogether. And that, you know, there's a—there's a limit to how far down you can go.
[18:12]I don't think we should ever have a fully proportional property tax with the same ratio across the country; otherwise, you'd have people in some places paying £100 or £200 a year to the council. It's just not viable to provide council services for a couple of hundred quid to a household, hence I suggest an £800-a-year minimum.
[18:30] Ravi Gurumurthy:Mhm. I know you're basically in favor also of um equalizing CGT...
[18:35] Tim Leunig:I am.
[18:35] Ravi Gurumurthy:...with income tax, as long as you index it and—and—and have a—a death tax, no tax, etc. What interested though is: Do you not worry about the signal that sends to entrepreneurial activity and investment, particularly with this government and how much taxes have gone up in the past? It's different when Nigel Lawson did it in 1988: it was part of a big tax-cutting budget, it was very... So the context matters.
[18:59] Tim Leunig:The context absolutely matters, and I would want to do it in a way that was revenue-neutral, even if that didn't mean I quite equalized the rates. I definitely don't think we should be charging people for gains on assets that are just inflation. It's pretty crazy that when Putin invades Ukraine and we get an 11% tax spike, a whole bunch of people whose assets have gone up in value just because of inflation are then hit by a tax wallop, and that's just madness.
[19:27] Ravi Gurumurthy:Well, what feels difficult is you've got almost three distinct problems. Suddenly you've got—you've got the people who are getting hit by inflationary gains that shouldn't be. You've then got the problem of people who are basically evading income tax.
[19:38] Tim Leunig:Yep.
[19:39] Ravi Gurumurthy:And then you've got entrepreneurial activity and risky activity that you want to encourage...
[19:43] Tim Leunig:Yes.
[19:44] Ravi Gurumurthy:...continuously. And the slight risk is that one policy...
[19:47] Tim Leunig:Yes.
[19:48] Ravi Gurumurthy:...is quite hard to make to solve all those three problems.
[19:50] Tim Leunig:There is no question that you can ask me that isn't hard, because if it was easy, it would have happened already. One mistake that politicians make—and I think the left made it three years ago—is to believe things were bad because the Tories, their opponents, were bad people who had therefore refused sensible advice.
[20:09] Ravi Gurumurthy:Mhm.
[20:10] Tim Leunig:And my experience of politicians of all shades is that that's just not true. Sometimes they will reject good advice, but for good political reasons, bad economic reasons, but they're not usually just fools. There are very few fools in government.
[20:23]But specifically, I want to help the group who are hit on inflationary gains and hit that group. And if the overall thing is revenue-neutral, I don't think we're going to be hitting entrepreneurs.
[20:33] Ravi Gurumurthy:And the revenue neutrality, you do that by lowering overall income tax, and there—and also therefore the top CGT...
[20:39] Tim Leunig:Ideally, ideally. But if necessary, in the short run, I would push the CGT rate up a bit, give you inflation allowance, make that revenue-neutral. If the CGT rate is still a bit lower than income tax, I can probably live with that, because if the margin's not very great, the incentive to avoid tax is lower.
[20:58] Ravi Gurumurthy:'Cause if we have a—a CGT rate of 45% for additional rate taxpayers, that would be unprecedented in...
[21:06] Tim Leunig:It would, and that's worrying, although with inflation allowance, you know, you have to be careful just comparing headline rates. But yes, if it went to 37%, people have then got an 8% incentive, but then the greater threat of the tax authorities coming along.
[21:23] Ravi Gurumurthy:Mhm. Yeah, it becomes—it becomes...
[21:26] Tim Leunig:I mean...
[21:27] Ravi Gurumurthy:Okay, so you'd prefer to basically, you know, raise taxes minimally for all the reasons that you've said, particularly that the—the amount of tax increases happened already. Uh, if he is going to do various things that he wants to do on, you know, making buses cheaper or uh nationalizing water, um he's going to have to find spending reductions elsewhere. Um, what would be your main areas, top five areas, where you could genuinely find spending cuts?
[21:56] Tim Leunig:Oh, it's not difficult to find spending cuts; it's difficult to find politically acceptable spending cuts, and that really is a political question, and you need a politician sitting here.
[22:06] Ravi Gurumurthy:I think he's boxed himself in. Let's—let's—let's push it. If you were talking about value for money from a sort of—if you were thinking about the various objectives, economic and social, where would—where would you—where would you get?
[22:18] Tim Leunig:So let me take as an example railways. Before the Beeching cuts, you can look up how many people used each station, and there's a whole long tail of stations that are very little used, and we shut them down. And everybody says, "Oh, I wish I still had my railway." But the truth is they didn't use the railway before it was shut down, and that's why it got shut down.
[22:41]Today, that long tail is even worse. There's a thousand or so stations, about 40% of them, that are really used by very small numbers of people. To me, as an economist, I think that's madness. When I took the train from London to Blackpool, they're very proud of their direct service. When we got off at Blackpool, I counted the number of people on the train: there were 11 carriages and 11 passengers. You're running this huge, great train for 11 people! That's crazy! It was even a diesel train. I mean, it—it would have been more environmentally friendly to put us in a Ferrari, because it's nuts!
[23:16]No, but almost all of that spending on the railways, on railways that are not well-used, is in the north of England, in Wales, and in Scotland. And I can't see Andy Burnham touching that, because where Andy Burnham is going to really hit a brick wall when he gets the details from the Treasury is the reality that almost all spending is subsidized by London and happens outside London. Even the NHS will spend more money in the north of England than the south of England.
[23:46] Ravi Gurumurthy:But from first principles, you would spend more on roads and extending car ownership, cut the subsidies that we put in for unviable trains,
[23:55] Tim Leunig:Yep.
[23:55] Ravi Gurumurthy:um, and possibly spend more on buses.
[23:57] Tim Leunig:Yep, absolutely. I'm something of a fan of buses, particularly in urban areas.
[24:01]Yeah, um, prescription costs. Uh, when you and I turn 60, we will not have to pay for our prescriptions. We will both almost certainly still be in work, will almost certainly still be in the top 10% of the income distribution, but we will get free prescriptions. That seems pretty mad. The Conservative government put in their manifesto that they would raise the free prescriptions to the pension age, which seems to be sensible. And they got more than 30,000, mainly postcards to be fair, at the consultation saying, "No, then people will have to choose between eating, heating, and medicine." That's nonsense, because people who are on Universal Credit will still get a free prescription. So a government that has a bit more guts to do that...
[24:45] Ravi Gurumurthy:How much would that really save, though?
[24:47] Tim Leunig:No idea, I can't remember. We can Google it afterwards. It won't be much, but you've got to do a lot of little things like that in government,
[24:53] Ravi Gurumurthy:Mhm.
[24:54] Tim Leunig:because a pound here, a pound there, it all adds up.
[24:56] Ravi Gurumurthy:Yeah, I just think you want, you know, you've got to think about the political efficiency of tax spending changes. And if you raise small amounts of money for a high degree of political pain, then it's—it's kind of not worth it.
[25:08] Tim Leunig:And that's also true of shutting down each individual railway line and station. But we subsidize the railways by £10 billion a year. That's a lot of money. It's—it's more money than the railways get from fares. And it's also quite regressive, in that people on lower incomes tend to walk and tend to get buses and tend to actually use cars as well and taxis, but they—the amount that they—they travel much less far.
[25:33] Ravi Gurumurthy:Yes. Am I right in saying that the majority of people on the railways are higher rate taxpayers?
[25:39] Tim Leunig:That certainly used to be the case 10-20 years ago, and I—I think it's still the case. So yes, it's a very generous subsidy to people like you and I who take the train and the tube pretty much every day.
[25:49] Ravi Gurumurthy:Okay. Um, any other cuts? Because what—what would you—what would you do that's big and even politically viable?
[25:57] Tim Leunig:So I don't think there is anything that is easy politically, or it would have happened already. I think we do need to think about the way the welfare system works, particularly for disability. It does seem crazy that you can do a disability assessment over a phone where nobody actually sees you walk around. Yeah, I think we do need to go back and reassess everybody who was assessed online, over the phone, particularly if it wasn't even a video call. And even a video call, if you hold the camera close to you, you blur it, you say you're out of data, your phone isn't working—I mean, this really is a farce.
[26:36] Ravi Gurumurthy:You would reassess everybody who was done virtually?
[26:39] Tim Leunig:Yes, um, yes, without exception. And I don't mean—I'm not saying those people have to come into the doctor; the doctor can come to them. There are some people—I think of my mother who got Attendance Allowance at the end of her life, and that was just filling in a form. Now, it wasn't a lot of money, but even then, I'm surprised that no one wanted to come around and just—I mean, you'd only need to see my mom for two minutes to work out she was as immobile as it said on the form, but I'm surprised that it's just a form you fill in, yes.
[27:09] Ravi Gurumurthy:Okay. And just on the sort of the usual one of the triple lock, um, I'm not even going to ask you whether you're in favor of reforming it. Um, I think my question would be: Would you peg it to inflation? Would you make it the—the average of the two or three? Would you have a target level so that there's some sort of anchor for where you want to be? Um, and—and what is your judgment on the political feasibility of it? Because I think it's different from winter fuel payments, in that winter fuel payments was a one-off loss of income, um, this is about saying your income will be raised slightly less fast than it would have done otherwise.
[27:44] Tim Leunig:So the triple lock was a really good idea when Steve Webb invented it, because when he invented it, incomes and—and inflation roughly went up parallel to each other. So although there would be some catch-up by being the best of the three, it was expected to be slow and steady, and the basic pension was quite low. Then what we've had since then is unprecedented volatility of one versus the other, which means when pensioners always get the best one, they end up shooting away from the rest of people.
[28:13] Ravi Gurumurthy:Mhm.
[28:14] Tim Leunig:And thus it's cost 10, 20—I think it's £30 billion more than expected. That was never the intention. So we—we should move back to what the intention was, which was that pensioners share in the growth of wealth.
[28:24] Ravi Gurumurthy:Mhm.
[28:25] Tim Leunig:So something like the Australian system, where they say the pension is a particular proportion of income: you get inflation every year, and if you're ever below that, you get a bit more; if you're ever above, you only get inflation. Or where we say, "We guarantee you inflation each year, but we guarantee you earnings over a parliament," so you always keep up with the general public.
[28:48]What I think would be harsh is to go back to the Margaret Thatcher system, and I say this to everyone who tells me they're a Thatcherite: You can't be a Thatcherite and support the triple lock; it's a contradiction in terms. Margaret Thatcher's biggest cut was to de-index pensions from earnings to inflation only. Pensioner poverty went through the roof, and she created a big pot of money for tax cuts for working-age people. That's what Thatcherism is: Thatcherism is being nasty to pensioners, nice to workers. I don't think we're in that space, I don't think we need to be in that space, but I think we need a more sensible approach to our pensioner generosity.
[29:22] Ravi Gurumurthy:Mhm. Okay. Um, any more cuts that you want to make?
[29:28] Tim Leunig:Well, they're not cuts I want to make. I mean, they're cuts that I think are—you asked me what were low-value items. Uh, I think some of the—the way we do childcare, we need to be clear about: Is this early years education? We know the value of that is very, very high. Or is it just a subsidy to encourage people to work, in which case it's not particularly efficient or fair? We would by and large do better just to give people money to sort out their own childcare arrangements. So if someone bluntly wants to take the money and stay at home with their own child, that's fine by me. If they want to pay grandma to come and look after the child, that's also fine by me. And cash payments, which could then be lower because some people would prefer them, would also be much more helpful to people doing shift work.
[30:15] Ravi Gurumurthy:Yeah.
[30:16] Tim Leunig:Because institutional childcare is terrible if you're doing shift work.
[30:18] Ravi Gurumurthy:I mean, historically, there's—there's been more pressure on revenue than capital budgets,
[30:23] Tim Leunig:Yep.
[30:23] Ravi Gurumurthy:but um particularly with defense and other things, that may not be true anymore. So where would you find cuts in capital budgets?
[30:31] Tim Leunig:Um, so I try not to find, yeah, cuts in capital budgets, to be honest, because there's a lot of evidence that investment is just too low in Britain. So would I be keener, for example, to continue some of the cuts that Labour have made in farming and the previous government, to say that we voted for Brexit, and a Brexit freedom is we really can spend less money on farmers? I've been surprised how cautious Labour have been on farmers. Farmers never vote Labour anyway, so when Rachel Reeves halved the big tax break that farmers get, why not just abolish it? You've raised twice as much money; you get the same...
[31:10] Ravi Gurumurthy:How much money would you raise?
[31:11] Tim Leunig:It's no good asking me one of those questions on the spot! If you're going to ask me those, you need to tell me in advance so I can Google it and appear cleverer than I am.
[31:21]Um, and people say, "Ah, there'll be no food without farmers." But the land remains there; its best use is farming. And actually, inheritance tax is one of those taxes—you—you may bankrupt the individual farmer, and that's not necessarily a good thing, I'm not saying it is—they don't want farmers to go bankrupt—but somebody else will buy the land, and they will farm it.
[31:44]For what it's worth on inheritance tax, by the way, I think the seven-year rule is really weird. I would make it inheritance tax-free if you leave things to people up to one year after the retirement age, because that way, people who are in a business will retire at a normal age; they will give the family farm or the family business to the next generation at an age where the next generation is in the prime of their life and capable of running it.
[32:08] Ravi Gurumurthy:Mhm.
[32:09] Tim Leunig:The idea that you're still going to be running Nesta at the age of 80 is just bizarre. But this is...
[32:13] Ravi Gurumurthy:Well, my dad is still a radiologist at 92, so I'm hoping to...
[32:16] Tim Leunig:Well, your dad is a hero, but he isn't actually running the show. He isn't preventing the next generation coming through. And we do see that in farming. It would be better if a lot of really quite older farmers gave the family farm earlier. So, I'd be much more generous on inheritance tax if you do it before your, say, one year after retirement age, but much harsher if you're just blocking the next generation.
[32:38] Ravi Gurumurthy:Okay. So, I mean, I want to sort of move on to: What would you actually spend the money on? Um, but I'm kind of not quite sure how much money is possible to even raise, either through the tax increases or spending cuts, because I think you're roughly saying, of course, from first principles, there are all sorts of things you could do, but you think both from what is sensible on the tax increases side and what is politically viable on the cut side, there's not huge amounts. Maybe the CGT change is the biggest source of revenue.
[33:05] Tim Leunig:Maybe, but I'd still do that on a revenue-neutral basis, because I do worry about entrepreneurs. I worry about Britain being seen as open for business. Remember, a lot of our tax revenue comes from immigrants. It's not that all immigrants are net payers into the economy, but there were a chunk of entrepreneurs that see Britain, particularly London, as a good place to set up a business. I wish the founder of Revolut had stayed in London even longer, but I am damn glad he came here at all: he created jobs, he paid a chunk of taxes while he was here, his employees are still paying a lot of taxes. I want people like him to come to Britain.
[33:40] Ravi Gurumurthy:And what about, you know, if you just took a—a sort of percentage cut across every single public service, um, which, you know, everyone will squeal about, but could potentially raise a decent amount?
[33:53] Tim Leunig:What you have to think about is whether the staff will quit and you will earn more money if you're a doctor in Australia. That's why we lose doctors to Australia. So you need to be really careful cutting wages across the public sector: they're not higher than they were. So in real terms, teachers' wages are barely higher than they were in 2010. Academic wages are really low at the moment, which is why top professors leave for foreign countries.
[34:23]I mean, to stop doing something, it's no good just squeezing things. So again, if we return to Margaret Thatcher, she got rid of free spectacles for everyone. Back in the day, you and I could have worn NHS spectacles for free, and some quite well-off people did, and she ended that. She really cut dental care for affluent people. You've got to be able to identify something and say, "Okay, no more."
[34:49] Ravi Gurumurthy:I mean, I—I normally think it's quite hard to find savings in workforce and administration and red tape,
[34:55] Tim Leunig:Yep.
[34:56] Ravi Gurumurthy:but what about AI in the next three years? It seems very plausible that a lot of case management, processing, and compliance, yes, jobs could—and it's a large—the sums could be quite significant. Um, do you have any sense of order-of-magnitude uh goals that the government should have on taking out those costs as a result of AI?
[35:19] Tim Leunig:So what you have to do to get those is think about which processes can be adapted. It—it won't be less than 20 billion, but it won't come overnight. Of course, all governments should be doing this: they should be thinking about scheduling; they should be thinking about, you know, "How do we run the court system better? Can we even assess the evidence base supplied by both sides, so we're more likely to get someone pleading guilty?" If someone pleads guilty—do we need to do—if they've already pleaded guilty, why does it take so long?
[35:54]I—I'm a historian. In the old days, if you caught someone who just murdered someone, they were usually tried the next day with the witnesses who were there, not least because people were much harder to trace and track in those days. Why does it take so long for some of these things? Can we, you know, just literally record an interview statement with equipment like we have in this room, get it transcribed by AI, summarized by AI, identify the points of agreement between all witnesses, and come up with an agreed statement that goes to a judge?
[36:20]If the person pleads guilty immediately, the only defense at that point is mitigating circumstances, if any. I really don't understand why cases like that can't happen within a day or two. And we know that something like a third, a quarter, something like that, of people in prison on remand are found not guilty. I mean, this isn't just cost-saving; this is life-changing! Someone who is not guilty should not be in prison: they've almost certainly lost their job, they may have lost their relationship, they've lost their status in the community. I mean, this is terrible! So getting AI to speed up justice isn't just about cost-saving; it's about better justice.
[36:58] Ravi Gurumurthy:Yeah. My perspective on this is that the savings could be absolutely enormous, but I'm sort of pessimistic that in the next two to three years they will materialize anywhere, just because government...
[37:08] Tim Leunig:And two to three years, it's really fast anyway. We're not seeing the private sector halving its admin costs in two to three years either. So it will come, but it will be steady and slow.
[37:19] Ravi Gurumurthy:Okay. Um, let's assume that you found some money somewhere. Um, what would be—what were your top three things where you'd actually invest more?
[37:28] Tim Leunig:So I'm sad that we have delayed a whole bunch of road schemes. We know there's huge congestion in Britain. We know that when you increase the number of roads outside of towns—we don't want more cars in towns, but outside of towns—when you increase roads, more people use them, and they're doing things that are socially valuable: they're traveling for business, they're traveling to see family, they're traveling to look after, or they're traveling to see our great and wonderful country. That's a good thing. So I'd definitely build more roads.
[37:58]I think it's pretty clear that increasing aviation capacity, which is mostly private sector investment, will indeed yield pretty big returns to Britain. So expanding Heathrow and Gatwick—the government has a part to play in that, it's limited, but it's a part.
[38:12]I would almost always increase education spending. There is no country in the world that has thought, "Oh no, we're poor because our people are too educated."
[38:22] Ravi Gurumurthy:Isn't the correlation between spend per pupil and results not very strong?
[38:26] Tim Leunig:It's not very strong, but it is there. But we can also think about increasing further education, having more opportunities that anyone who wants to go back to school to get their English and maths at any point to have really high-quality tuition. We know that retakes for English and maths post-16 have done terribly: they're being taught in big classes in FE colleges, and they're not working.
[38:49]But I am confident that most of those people who haven't passed, if they sat down in small groups with a proper tutor who could work out why they have these mental blocks—and a lot of it is just fear. I met a woman once who had an A in all her subjects except for maths, where she had a U. And she told me that was 'cause she'd been brought up—her dad had failed maths and so had her mom—to believe she was genetically bad at maths. I mean, there was no chance that you got an A in English and a U in maths. I said, "I bet you didn't turn up to the lessons." She said, "How could you tell?" It's because nobody is clever enough to get an A in English and get a U in maths if they turned up.
[39:24]And she was then sponsored by her employer—from memory, it was Whitbread Pubs; she'd worked behind the bar, they'd worked out she was clever, they wanted to fast-track her for management, but it was a requirement to have maths, and they'd sponsored—she had a maths tutor, she was doing her homework on the train sitting next to me.
[39:41] Ravi Gurumurthy:Okay, so education...
[39:43] Tim Leunig:People like that, people like that.
[39:44] Ravi Gurumurthy:...roads and education, there's two things.
[39:46] Tim Leunig:So in defense, I am in favor of spending more money on defense, but not in a way that I think the defense establishment who wrote the report that Labour commissioned want. I think what we've learned in Ukraine is what you need is flexibility to expand really, really quickly. So I would love us to spend much more money not on building up a sort of warehouse of 100,000 drones that will be obsolete within six months, but building up high drone capacity.
[40:14]So I would like to see us having four teams of drone makers who every—I don't know, two weeks, four weeks, month, I don't know—fight it out on Salisbury Plain, you know, who can down each other's drones. Not because we'll then give them a lot more money for their drone, but just—and I want [clears throat] to fight the French, and above all, once the war in Ukraine is over, I want to fight the Ukrainians 'cause they are really good at it! We can't distract the Ukrainians now, but I really want that expertise. But that would be a very—that would be building capacity. I don't think in the short run that would be as expensive as the defense establishment or Donald Trump...
[40:50] Ravi Gurumurthy:You need sort of dynamic capabilities.
[40:53] Tim Leunig:You need dynamic capabilities, and the biggest dynamic capability, at the risk of sounding like the chair of the OBR, is a smaller national debt.
[40:59] Ravi Gurumurthy:Mhm.
[41:00] Tim Leunig:Because if you can, tomorrow, borrow another 25-30 billion from the money markets quite cheaply, and you've got people who are capable of building up-to-date drones, then you go and build the equivalent of a Nightingale hospital.
[41:14] Ravi Gurumurthy:Yeah, we're seeing with Germany, aren't we?
[41:16] Tim Leunig:Yeah, because they—they're able to do that on defense
[41:19] Ravi Gurumurthy:Yes.
[41:19] Tim Leunig:because of their fiscal position. Fiscal position. So I actually think that reducing the deficit and then the debt is actually a good investment in defense, 'cause what you need, I think, is—to an economist—elastic supply: the ability that, on the day you need to go big, to go big. And if we think about how people have won wars in the past, that's how they won it. America didn't beat Japan because it had atomic weapons sitting in a locker.
[41:49] Ravi Gurumurthy:Mhm.
[41:50] Tim Leunig:We didn't beat Nazi Germany because we had, you know, thousands of planes and whatever sitting around. We mobilized.
[41:58] Ravi Gurumurthy:Um, can I sort of try and start to wrap this up with a bit of note of optimism? Because, um, John Van Reenen wrote something recently, suggesting that there's a high degree of uncertainty about productivity in the economy because they understand the actual employment level because of the Labor Force Survey. And actually, we could either—we could potentially be in a situation where productivity is really kicking in if, yeah, the assumptions are on one side of the—the—the argument. What—one: What is your read of—of—of the sort of—of those figures?
[42:25]Um, and then there's a related question, because one of his potential um explanations is the emergence of AI. And—and it is not—it doesn't feel ridiculous or um wishful thinking to say that AI pretty quickly is going to start generating significant productivity benefits over the next few years, which may make our economic discussion more about the kind of concern about jobs in five years rather than actually productivity.
[42:55] Tim Leunig:So I'm a historian of technology, and if I think back to the invention of mass production, uh the invention of electricity in the 1930s, and the first generation of computers, what we find is there's a long lag from invention to adoption, and then there's a second long lag from adoption to changing your processes to get the productivity gain. And that means that in the short term, I don't think we're going to get big gains. We're seeing AI beginning to be adopted, but what we're not seeing is it being adopted in a way that systematically changes the process. So, I...
[43:28] Ravi Gurumurthy:But on that, this is a sort of general purpose technology almost like no other, and it's got um the potential for adoption I think quite quickly, given just how sort of consumer-facing some of it is.
[43:40] Tim Leunig:Um, but looking back, electricity, when we replaced big machinery in factories powered by a steam generator at one side through a shaft with individual what is called unit-drive electric motors—so basically the thing in a hand drill—it still took a long time to work out what that meant in terms of new industrial structures.
[44:01]So if we took conveyancing to buy a house, could huge amounts of that be done by AI? Yes. Have we reached the point where someone has worked out how to do an AI-based conveyancing that then is actually reliable and shown to be reliable? Not yet. Might it take 3 months? Yeah. Might it take 3 years? Yeah. Might it take 30 years? No.
[44:20] Ravi Gurumurthy:So, but if we've got this potential incredible accelerant of productivity that's going to hit us at some point, once it—as—as you say, typically takes a while, should we not be doing something big on adoption? I don't know what that is, either in terms of incentives or an adoption agency or whatever it is.
[44:36] Tim Leunig:No, um, no, definitely not. The last thing government should do is get in the way. And the last thing we want is government propping up the loser firms that don't adopt it. What we need to do in government is say, "If you can create a firm that bankrupts every estate agent by using AI to find a person their perfect house, go for it! If we can find someone who will bankrupt big chunks of—of law, go for it!" We want Britain to be the country where if you invent something with AI, you can get to scale, you can take out the incumbents.
[45:08] Ravi Gurumurthy:So, but you think there's nothing that the government can do to accelerate the adoption of AI. It's just got to—there's nothing sensible, it should take its course.
[45:15] Tim Leunig:Uh, investment in AI is already 100% deductible against corporation tax, you know? We've done the things we need to do. So the things government can do, but we have done them already.
[45:25] Ravi Gurumurthy:And on that—that point, the sort of John—John Van Reenen point about, "Well, do we actually think productivity is happening, but it's been underestimated because of the—the—the—the jobs figures?" Where are you—what's your guess?
[45:36] Tim Leunig:So I don't have any information over and above what John has. I'd return to my earlier answer: If we could reduce the cash economy,
[45:45] Ravi Gurumurthy:Mhm.
[45:46] Tim Leunig:we'd be in a better position to know what's going on, because ultimately productivity either comes through in lower prices or higher earnings. And if we had much better data on higher earnings, which would mean a much better understanding of the self-employed sector above all—so we have very good information on your and my earnings because it's filed with the tax authorities every month—then I think we would be in a stronger position.
[46:09] Ravi Gurumurthy:So would you be saying to Andy Burnham, "Actually, you should shift to a cashless economy"?
[46:13] Tim Leunig:Yes.
[46:14] Ravi Gurumurthy:Or a near-cashless economy.
[46:15] Tim Leunig:I don't want to end the world where a child has 50p in their hand and can go and buy a Freddo the frog.
[46:21] Ravi Gurumurthy:I do! [laughter] I have this argument all the time!
[46:27] Tim Leunig:Of course Nesta is—of course prefers the child to go and buy a banana. Uh, and obviously I agree with that, but I was more talking from a parent perspective. So, there's a pestering, but not... Well, my child's 23, so she now has her own income, and if she wants to buy a Freddo Frog, she uses her own money, and your time will come on that, I promise you.
[46:46]But yes, an economy that is much less cash-based, where cash is the exception, not the rule. Because these little SumUp machines are what, £25 now? You see Big Issue sellers with them. When I open my garden to the public to raise money for charity, I have a SumUp for people to tap.
[47:04] Ravi Gurumurthy:And do you think if—if he, you know, if you said to him, "Look, this is a—a big idea," um, could you do this quickly? Could this be a...
[47:12] Tim Leunig:Yes.
[47:12] Ravi Gurumurthy:And—and you—and you think it would be—the kind of impact would be significant?
[47:16] Tim Leunig:Yeah, I do. I think it would be—I think tax revenues would go up. I'd be surprised if they didn't go up by 5 billion in the first year, by 25 billion within 5 years, I'd be very surprised. And some of that would come about in a way that's good for productivity, because some of these firms that are only viable at the moment because they're fiddling their taxes would go bankrupt, and that will be a good thing, because then the honest, more productive firms will take them on. Those people will then be in higher productivity workplaces. That will be good.
[47:45] Ravi Gurumurthy:Final question, Tim. Um, what's the thing Burnham should do in his first 100 days? What would you be...
[47:53] Tim Leunig:Above all, he needs to make it clear to the money markets that he and his Chancellor understand that 1 + 1 = 2, and that it's 2 in all circumstances. You can criticize Rachel Reeves for any number of things, but the money markets always believed that when push came to shove, she would put up taxes as much as she had to to prevent borrowing getting out of control.
[48:16]Chancellor should make a speech immediately pledging that in their next budget, they will have the same amount of fiscal headroom at least as Rachel Reeves had last year, come what may. And they should have a budget within 6 weeks, 8 weeks, something like that, whatever the minimum is you can do with the OBR, so that we don't have uncertainty, so that whatever tax rises are coming, entrepreneurs, investors, workers then know what is what, because otherwise the uncertainty is going to kill the British economy between now and late November when we might get a budget, or now and February when we might get a budget, and we cannot afford that.
[48:54] Ravi Gurumurthy:Tim, thank you very much. Great to—great to chat.
[48:57] Tim Leunig:Anytime.
[48:58] Ravi Gurumurthy:If you enjoyed this episode, please do like, share, and subscribe wherever you get your podcast. We've got more coming. For those of you who don't know us, Nesta is a research and innovation foundation based in the UK. We design, test, and scale solutions to the big challenges of our time. We're funded by a charity endowment and are politically neutral. For more, do visit www.nesta.org.uk.