Transcript: Martin Wolf on the UK economy: ‘Why I’m worried’

This is an audio transcript of the Political Fix podcast episode: ‘Martin Wolf on the UK economy: “Why I’m worried”’

Lucy Fisher
Hello and welcome to Political Fix from the Financial Times. I’m Lucy Fisher. Now, as promised, we have an extra episode this week, and I’ve been really looking forward to it. In the studio, I’m joined by the FT’s chief economics commentator Martin Wolf for this pre-Budget special examining the UK economy in depth. Martin, welcome.

Martin Wolf
It’s a pleasure to be with you.

Lucy Fisher
Now, there’s a huge amount to discuss. But I thought, to begin with, I’d ask you a very broad-brush question. We know Labour came to power just over 100 days ago. A lot has been made about their fiscal inheritance and we’ll come on to that. But I wanted to start by talking about their economic inheritance. As we’re talking in autumn 2024, tell us about the state of the UK economy and how it compares to other major European economies and to, say, the US.

Martin Wolf
Well, I suppose the single most important fact, which was summarised very, very well in the latest Green Budget from the Institute for Fiscal Studies, is that productivity growth has been very close to zero for a very long time. And so over the last decade, or since roughly 2014, productivity output per worker has essentially stagnated. It looks as though this is the worst decade since the middle of the 19th century, except for the decade that included the first world war and the Spanish flu. So we seem to have gone ex-growth, and that is the single most important fact.

Now, there’s lots of comparisons to be made here. We are really bad in this respect, but there are one or two other countries which look about as bad. Italy is an obvious example over the longer run period. The US has done much better than other G7 countries. But Canada, too, looks very, very bad. So this stagnation is not unique to the UK, which doesn’t make me feel better because the absolute fact of stagnation is so frightening and it hasn’t happened to everybody. I think it is important. It’s the longer-run trend of stagnation that is really worrying.

Lucy Fisher
So it’s a pretty bleak picture you paint, and that shows why the stakes are so high for this new-ish Labour government. Now there’s been something of a lacuna in Sir Keir Starmer’s economic and fiscal policy because we’ve got to almost four months without a Budget.

We know that’s coming at the end of this month and we’re gonna come on to that in some detail — what we think they will do and what you think they should do. Before that, on Monday this week, we’ve got Keir Starmer’s first big international investment summit.

How much of a big deal is that? And Labour is obviously touting the fact that tens of billions of pounds of investment will be pledged at this summit. Does that prove in any way that Starmer’s policies are beginning to crowd in private investment, as he claims?

Martin Wolf
Well, I certainly don’t know what the promises will mean. In a way, people can promise all sorts of things, but they won’t actually do it until they’re absolutely convinced it’s gonna work out. I mean, they’re sober people.

I think what is important and significant, indeed, is that the Labour party, the Labour government, has gone out of its way to say to global business, we are open for business. We want you and we will offer a good environment. So words, gestures — more than gestures, in this case — do matter. But of course they have to be backed up ultimately by reality. Things have happened in Britain over the last eight years or so — Brexit, the mess after that, of course, Covid, which happened to others — which have naturally made people ask themselves, and the slow productivity growth, is this really a dynamic place? The place we want to be in? What markets will we be able to address from there? How is it gonna play out?

And so Keir Starmer is saying, we want you, but what they want to hear is, and yes, we are going to make it really rewarding for you. And there, the Budget will play a very big role.

Lucy Fisher
So let’s look at the Budget. And I also want to get into a bit the comprehensive spending review; we’re gonna see the first part of that on October the 30th as well. I mean, the stakes are high, clearly, but Rachel Reeves is in a very difficult position because she’s boxed herself in. You’ve called some of these commitments “foolish promises” in one of your recent columns. And remind us what those red lines are and whether you think, two weeks or so out, Rachel Reeves is going to stick very firmly to them all.

Martin Wolf
Well, as I understand it — this is the summation of it, again by the IFS — they have ruled out increases in taxes that amount to 75 per cent of revenue. So this is a pretty big constraint. And that’s basically income tax, VAT and national insurance. Now, there’s some questions about wriggle room, OK. For example, there is talk now about increasing employers’ national insurance contributions.

Now, I, like most economists, would say employers’ national insurance contributions are a bit of a shimmer, because really they’re always going to be paid by workers. There’s really no difference. It’s just which pocket it comes out of. So maybe there’s wiggle room elsewhere. It’s an interesting question whether there will be wriggle room in actually applying VAT the same rate, without changing the rate, to something that is now zero-rated. Probably that would not be regarded as acceptable. But if you’d . . . 

Lucy Fisher
That’s interesting. What kind of thing could that be?

Martin Wolf
Well, they’re famous children’s clothes, for example. Economists have long thought we have this, or that which is exceptionally full of holes. We apply it to a smaller proportion of spending than most other countries. And one thing we could do which would actually be more efficient is extend it more broadly. Of course, compensate the most obvious losers and lower rates. But those are the sorts of things that could conceivably be permitted, but I suspect they wouldn’t, because if you moved from a zero rate to 22 per cent or whatever it is now, it would seem like an increase in a rate.

I should have added, they’ve also ruled out increases in corporation tax. So they’re not left with very much. And that’s why we’ve had all this discussion of capital gains tax because that was not included in inheritance tax. It’s another possibility. I’ve talked about property taxes. I have talked about the possibility of replacing the fuel duty, which has been not increased for a decade, with a genuine general carbon tax, which would fit in with their plans. There are things they could do, but there’s no doubt that raising revenue is going to be much more difficult now.

Lucy Fisher
And a lot of those options you mentioned come with political jeopardy.

Martin Wolf
Of course.

Lucy Fisher
From your kind of economics background, what would you do if you were in charge in terms of raising taxes? What makes the most sense?

Martin Wolf
Capital gains tax is really quite a difficult tax to raise to very significant levels because it’s voluntary in the sense that people don’t have to sell things. They can just hold on, wait for the next government that will lower them again. And that’s happened before, so why not be quite reasonable? And of course, people can . . . wealthy people can avoid it by just going abroad, ceasing to be resident for tax purposes. So there are questions about capital gains tax and its use.

I tend to think that the thing that is most obviously undertaxed in the UK is property. And the great advantage — I’ve been arguing about this for decades now, got nowhere — but the great advantage of property is it can’t flee. It’s definitely here. And the houses are there and the land is here. And we are still operating with council tax, which is the main form of property tax, which was established in 1991 on valuations at that time, which itself is highly unprogressive. The really immensely expensive houses in London pay the same amount of council taxes as properties enormously much less valuable. So I think that’s an obvious thing for Labour to do and you can’t evade those taxes.

Lucy Fisher
Feels like it might need another manifesto.

Martin Wolf
That’s a problem. We’ve been discussing this for more than 100 years. Winston Churchill, of all people, was strongly in favour of this before the first world war.

Lucy Fisher
What’s interesting, all the parties have dodged that for a few years.

Martin Wolf
The point is that the way we talk about this is, given the constraints she’s been imposed upon herself and the political realities, as you said, raising really significant amounts of revenue is going to be very, very hard.

Lucy Fisher
Well, one thing we are expecting her to do, which feels quite heavily (inaudible), not least in the FT when she spoke to our colleagues George Parker and Sam Fleming a couple of weeks ago, is to change the definition of debt on the government books so she can borrow more to fund capital expenditure. Now, this is something you’ve long been calling for, isn’t it?

Martin Wolf
There are two ways of doing this, but I think one has to think about it conceptually. What are we trying to do? So I think there are two different things we’re trying to do. One, we are trying to ensure that we can pay our debts, that we won’t run out of credit. And for that purpose, I do think what is sometimes called public sector net financial liabilities . . . 

Lucy Fisher
PSNFL.

Martin Wolf
Yes, exactly. Is a better measure than public sector net debt because it includes assets which will definitely accrue, I think, bound to accrue, like repayment of student loans. I mean, unless the economy completely collapses, we have a pretty good idea of when that will happen over the next 20, 30 years.

And we have long-term debt, too. We borrow for 30 years, too. So if we include the debt for 30 years, I see no reason why we shouldn’t include these sorts of payments and other assets that the state has, which are . . . so if it borrows, as it’s being proposed with the wealth fund idea, to acquire real assets which will have a value, it’s perfectly reasonable, it seems to me, to include the assets. It’s what a private equity business would do. It’s quite normal to do that. And these are financially valuable and they are pretty directly relevant to solvency.

So that’s a simple one. So I’m not . . . I actually think that if we looked at public sector net worth, we wouldn’t necessarily conclude at all that we’re in better shape than just looking at public sector net debt. On the contrary, we would . . . but we would start thinking about what is our true long-term position. Can we afford our commitments and what can we do to afford them better? And the conclusion we would necessarily reach is the most important thing to do is accelerate our growth.

Lucy Fisher
What’s really interesting, and so we know that one of the reasons that Rachel Reeves in the short term wants to make this change is to turbocharge her capital expenditure budget. Of course, there is a downside to that, which is that for every 1 per cent of GDP extra spending on capital budget, a recent Treasury analysis suggests that interest rates will go up between 1.5 percentage points and 1.25 percentage points. Can she afford to see interest rates go up or perhaps stay higher at a time, you know, over the next year or so when they’re expected to fall, if she does decide to go for this extra capital spending?

Martin Wolf
I have to say that I’m not completely convinced by those numbers, those relationships, though this is subtly uncertain. That sounds like a big impact to me.

But the truth is — and one of them, we haven’t really discussed the weaknesses of her position — but obviously she starts off, the country starts off with much higher interest rates than 4 or 5 years ago. We’re deciding to go and borrow to invest when the economy is fairly close to full employment. So there’s not a lot of slack resources. We run a very large current account deficit that’s not really trained, which means we will borrow even more from abroad. We’re very dependent on foreign lending. That’s clearly, clearly right. And we recently had the Truss experience, which frightened the hell out of people.

And so anything that suggests that the debt will continue to rise and that our borrowing requirements, even for these purposes, will be higher than people thought a few months ago is risky. There’s no doubt it’s risky. And it’s . . . nobody can say with confidence that this is what should or should not be done.

On the other hand, if there isn’t improvement in the investment — we have far and away the lowest investment rate, public and private of the G7 — we’re not gonna grow faster. So we need to do the public sector investment that will leverage in the private sector. So I’m very clear that that is necessary.

And we do need to think about how we are going to be able to afford higher levels of investments, which means we’re gonna have to save more. We are a very low savings country, the lowest gross in terms of gross savings, again, of the G7 by quite a long way. So though we have the lowest investment because we have the lowest, even lower savings, we have a huge current account deficit, which is structural, all these are real weaknesses. So there are risks in what she might plan to do. And I think the only way she can hope to deal with this is to show why the investment she’s going to go for will accelerate growth. That’s quite difficult to prove.

And as I argued in my most recent column, to go for the sorts of policy changes that might accelerate growth without a lot of investment. And then in the longer term, as I said, she is going to have to think, the government is gonna have to think about how we raise savings in this country. If we want higher investment, we are gonna have to save more because our savings really are so extraordinarily low.

Lucy Fisher
Well, let’s unpick a couple of the things you’ve mentioned there. In terms of the investment that will turbocharge growth, where should that be landing?

Martin Wolf
I would suspect that the most important things will be in infrastructure. And for that, you need to be confident that we’re doing really a first-rate cost-benefit analysis. I think part of the reason that we got into this mess over HS2 is obviously it all cost vastly more than anyone expected.

And that’s the other big thing that has to be done. If the first thing is to choose the right project and the second, of course, is to deliver them far faster and far more cheaply than we have, it’s just we’ve got this completely clobbered up planning system and we don’t seem to be able to build stuff properly. So that has to be fixed. And that might be a very big task. Otherwise those won’t happen.

The other things that I suggested in this, and you can deregulate relatively easily and I think planning is part of that. But there are other areas we should really be looking at our regulatory systems and say, where are they really creating problems for investment and new entrepreneurs, new entrepreneurship. And we really have to look at them ruthlessly. The sort of thing that Mario Draghi looked at in Europe, we should be doing the same, perhaps even more ruthlessly. And so a massive impulse to deregulate — and Labour, in a strange way, should find that easier than the Conservatives because people trust them more.

Now here I’m a bit concerned about the new employment regulations. I think they might create problems in, particularly for dynamic enterprises and that think then goes to my third area. Infrastructure deregulation is getting new entrepreneurial businesses and we have the, it seems to me, like the innovative capacity. We have some first-rate universities. We could create and we should create the sort of not quite Silicon Valley, but the equivalent. You need to look at planning controls. Again, it’s very difficult to build new stuff around Oxford and Cambridge, for example. We have to accept that a lot of this will be in the south-east because that’s where the innovation is occurring, but not only. I think we can look elsewhere, too.

And the government, I think, will have to be thinking about public-private partnerships to generate venture capital. We need to look at the way our pension system works. They’re doing a review of pensions and I think that will be very important. Something to replace the defined benefit scheme pensions we lost.

So that’s a third area which we should be focusing on. So infrastructure, but getting it actually built, is crucial. This deregulation just has to be looked at and trying to see whether we can start really creating dynamic new businesses.

Lucy Fisher
That’s a very comprehensive three-point plan the chancellor can pick up if she’s listening.

Martin Wolf
It is. That’s what an investment growth plan might look like.

Lucy Fisher
Yes. We’ve talked about infrastructure investment and things like road, rail. Of course, the state will be looking at things like hospitals, which have been starved of investment, perhaps the prison estate and so forth.

Let’s move to talking a little bit about the government’s day-to-day spending. We know that public services are in dire straits. As you mentioned, the spending plans pencilled in by Jeremy Hunt in which unprotected departments would get a 1 per cent increase were always fanciful, most people felt, because that would mean very severe real-term cuts. And we also know Rachel Reeves has made a big song about saying there will be no return to austerity under Labour. So altogether that sounds like there’s going to have to be quite a lot of cash funnelled in to public services at this Budget.

Martin Wolf
Yes, and I understand that’s what she’s promised, and it’s probably a lack of imagination on my part, but I simply have no idea how she’s going to deliver.

Lucy Fisher
OK.

Martin Wolf
Because . . . 

Lucy Fisher
You’ve anticipated my next question. How does how does she afford all that?

Martin Wolf
Well, to govern is to choose. If I’ve been asked a year ago, before the election and before they made these promises, I would have said the reality is that because of ageing, we’ve known about for a long time, because of low growth, because of the state of our public sector that you described, both in terms of capital investment and running spending, things are not working. So at a big-picture level, the government either has to say we’re not gonna do this anymore . . . 

Lucy Fisher
Difficult for a Labour government in particular.

Martin Wolf
Or they continue with where we are, which is basically fail to deliver what people expect while pretending they are going to, which is I think a long-run catastrophe, will raise taxes. So my view has been that there’s no surprise we have the highest tax ratio that we’ve had in peacetime because we have a far older society. And that’s gonna get worse. And the result is that many of the major spending requirements can only increase — most obviously, pensions and health and social care and all these things.

And in addition, we’d spend more on education, in fact, because quite rightly, children stay in school til they’re 18 and then they go to university. And ultimately, a lot of that’s gonna be borne by the public sector. And then we’ve got a colossally bad infrastructure. So all this indicates they’re gonna have to spend more. They can’t borrow without limit, as we’ve discussed, given the public state of the public finances. We haven’t even discussed the fact that ratios are about 100 per cent of GDP, which is very high by peacetime standards, except immediately after the second world war.

So I think logically, they should have said, look, we know that it’s tough, but we’re gonna have to raise taxes if we’re going to meet these obligations. So they basically said rule out all the obvious ways of doing that. I don’t know what she’s going to do. I really don’t. I fear that it will be more fudging. And, you know, the last government pretended it was going to provide these services while quite obviously not funding them or hiding away what they weren’t going to fund — most obviously, local authority spending, which is what happened, particularly in the austerity period, which led to the collapse of quite important local authority services like social care.

But you can blame that on local authorities. But the truth is, I don’t know how she’s going to square the circle. And it is, I mean you have to admit, very, very difficult.

Lucy Fisher
Very difficult. And we should also say she’s got another fiscal rule regarding the day-to-day budgets, hasn’t she?

Martin Wolf
She says the current Budget should balance, or should move towards balance. That basically means that revenue will cover spending other than investment. And that also will require some tightening over time. And that would mean that either spending will grow more slowly than GDP, which would be essentially not at all, very unlikely, or again, revenue has to rise.

Lucy Fisher
Looks like we’re in for some big tax rises.

Martin Wolf
That’s the logic. But the government has shied away from it for very understandable reasons. But I think they should have set out a completely different story in the manifesto. Might be more honest, but maybe they wouldn’t have won. But the British people don’t seem to want politicians who will be honest with them. And that’s a problem.

Lucy Fisher
That’s an interesting way of looking at it. Where will future foreign investment come from? It feels like the US is becoming increasingly isolationist. China may become an increasingly difficult prospect. Is the Gulf looking promising?

Martin Wolf
Well, it depends partly on what you want foreign investment to do, and you have to distinguish two things. The first is simply the supply of funds. Buying UK assets, equities, bonds, property — basically filling the hole in the current account which I described. We need 2 or 3 per cent of GDP every year to be supply net from abroad in order to balance our accounts. And they can come from anywhere.

But wealthy people who think Britain is a safe place and like holding British assets or think that the government is soundly managed are an obvious source for that. So why not the Gulf or other places like that?

But there’s another reason for trying to look for foreign investment, which is quite different, which is to get foreign entrepreneurship. A very large part of the British private sector is foreign, foreign businesses, and has been so for a very, very long time. And it’s very well known, been known for a long time, that a lot of our best businesses have been foreign. Going back to when Ford came here a hundred years ago or so.

So then we need to attract foreign entrepreneurs. We need to attract businesses, the big tech companies and so forth, but lots of others to set up subsidiaries here, to use British skills as inputs into their business. I think DeepMind is part of Google, but it’s actually located here and employs some very successful people, two of whom just got a Nobel Prize. So that’s a very good example of foreign investment in Britain, and we want that.

Now, the former can be supplied, as I said, by wealthy people all over the world; the latter need will come from countries with dynamic private sectors. The US is an obvious example. Unless something very dramatic happens, which at the moment we can’t predict — Trump obviously — Americans will continue to be able to invest abroad, and particularly in a friendly country like Britain. So I’m not very concerned about political constraints on investing in Britain. That will constrain a little of what the prime minister can say about President Trump if that happens, God forbid.

But Europe is still a source, though obviously that’s a problem because of leaving the EU. And of course, the European private sector is not that dynamic anymore. But there are some bits that are filled up in Scandinavia and so forth. Dynamic and successful business exist in the Netherlands and still important ones in Germany. And I think we should be so hoping that they will come.

And then there’s the whole of Asia, not just China. I believe it’s the case that one of the most significant foreign owners and investors in British manufacturing is Tata, which is Indian. I don’t know whether it’s the biggest, but it’s certainly very big. And India is a rising country. I expect it to continue to rise. They’re very comfortable with being in Britain.

So I wouldn’t be at all surprised if India is going to be a much more promising supplier of investment funds and particularly business investment than China, where the future of business is at least somewhat uncertain at the moment. And of course the future of our relations with China are also somewhat uncertain.

Lucy Fisher
I’m always struck by the factoid that when Tony Blair came to power in 97, the UK’s economy was bigger than China and India put together. And of course, the world has changed a lot in just over a quarter of a century. Some of that is due to other countries going through their own industrial revolutions. Some of it perhaps is down to the UK’s own choices, including Brexit.

Looking ahead, you’ve made clear, Martin, you’re worried about the sort of the recent decade, or perhaps decades, plural. What’s happened with Britain’s economy? Do you feel pessimistic looking forward? Is decline inevitable?

Martin Wolf
Well, it depends what you mean by decline. I think relative decline is inevitable. Absolute decline is not. What worries me about the last appearance since 2008. If we get absolutely poorer on a per-head basis — which will be consistent with some productivity growth because the proportion of the society that is inactive is likely to rise unless we take enormous number of immigrants, and that seems unlikely — if that continues, then managing our society becomes very, very difficult.

In a society where the pie isn’t growing and you end up with a struggle over the distribution of the pie and struggles over the distribution of the pie tend to be intensely political and intensely unpleasant. So that’s the absolute stagnation problem to me. The fact that we’re growing more slowly than India or China doesn’t really worry me because it was inevitable. Come to that in a second. But that’s the most important thing. The absolute decline.

But if you look at where Britain was 30 or 40 years ago, as you said, an economy bigger than China’s and India’s together, a world economy that the West utterly dominated. So the major Western countries generated something like three quarters of all world output 35, 40 years ago. Now, but they only had about 15 per cent of the world’s population.

If you think about it, human beings are human beings everywhere. It’s ridiculous to think there is some innate superiority that guarantees this stupendous inequality, which grew up in the industrial Revolution up to about 30, 40 years ago. That will continue forever. So what’s happened? To my mind, the rise of Asia above all. Half of humanity is in developing Asia, dominated by China and India, but lots of other huge countries there. Indonesia. Asean as a whole is 600 or 700mn people. So of course, these intelligent, hard-working people, they’ve acquired knowhow, they’ve developed their own knowhow, knowhow tends to spread anyway, so their return to more normal relative size is inevitable. 1.4bn Chinese, middle falling, 1.4bn Indians and rising — of course, they’re gonna produce more than 70mn British people. I mean, it’s just inevitable.

So we have to get used to the idea we can get richer, but we are going to be in relative decline. I think that is very probable over the next 40, 50 years. And the West with it will have a different role in the world. I think we just have to live with that and adjust to that. Unfortunately, I fear that while we will, the Americans won’t. And that could lead to many, many decades of bitter conflict. But the reality is absolute decline is not inevitable. Relative decline is. And of course, all this assumes that we do manage the huge global challenges and don’t completely destroy our climate.

Lucy Fisher
And just to touch on conflict, I mean, how much of your time do you spend thinking about the sort of known unknown of the current war in Ukraine, conflict in the Middle East and the kind of febrile situation there spiralling into an all-out world war and what that could do to the global economy?

Martin Wolf
Well, I worry about these issues on several levels. The old hegemonic West led by the US is in decline, no doubt. And its domestic politics have also become very febrile and deeply divided between people who believe the way we used to run the world and our place in it was basically right, and people who think we should be closing the doors. Very crudely, but you can see that rising everywhere.

So the old hegemonic order is breaking down, as in a values terms, and then it’s breaking down in terms of relative power. Because as we’ve already discussed, 25 years ago, China was nothing, and now it’s a superpower on all round. And I wrote a column not so long ago arguing that by the middle of this century, it would be really surprising if India, for then have a population of 1.7 or 1.8bn people, would not be a superpower. And people will say, why is Britain a member of the Security Council and not India? I mean, it’s absolutely ridiculous, isn’t it?

So that’s the second big point. And when hegemonic order and great power relations are changing so dramatically and with it, of course, also values systems, and because they, particularly China and the US are very different in terms of the underlying values, political values, that leads to conflict. When Britain’s power, relative power, declined and the Americans weren’t involved, the problems of stabilising Europe in the first half of the 20th century became unmanageable. The British couldn’t do it, and the British and French couldn’t do it. And they had been the dominant powers through different ways in much of the 19th century. That’s happening now on a world level.

So you’ve got these three things happening together, changing order, changing power relations and massive friction, if you like, at the frontiers between the new powers and the old. And all we can say from past history is when those sorts of changes happen, great power conflict is very likely. So far, it’s all being through proxies as it was in the Cold War. And that’s really quite important. But with Russia, Ukraine, it’s pretty close to the core because Ukraine is very strongly supported by Western powers, and Western powers have at least hitherto thought it’s really important to defend it. And that may be changing now.

So there is clearly a possibility that at some point, that sort of war on the frontiers of the two worlds that are emerging — three, depends on how you count them — will lead to direct conflict between the great powers, between the superpowers. And Taiwan is an obvious possibility, which everybody will discuss. The Middle East, it’s looking very likely that now that Israel and Iran will be at war and the United States will support Israel. And Russia and/or China might well support Iran. Once that’s starting to happen, it becomes very difficult to control the consequences, as the first world war tells us.

So all I would say is, with nuclear weapons around, there’s probably a pretty good chance, hopefully a very good chance, that it won’t lead to direct conflict, actual armies fighting one another, because it’s so terrifying. And that’s the optimistic side. But things can go wrong.

Lucy Fisher
I don’t think we have enough time on the podcast to really get into climate change, and that’s effect on the global economy. That would be a subject for a whole other hour-long special, I think.

But just a word from you on the UK government’s green investment plan. I mean, how convinced are you of that plan? Is it a good idea? And how kind of productive do you think a lot of this spending will be? Does it just replace kind of existing investment with kind of green investment, or do you think it will have a growth effect?

Martin Wolf
I’ve tended to the view which diverges a little from some of my friends that we have to regard at the global level, the green investment as defensive to prevent something worse. And whether it will be growth promoting in a way that we can measure is not clear because basically we’re replacing an existing system which has some advantages with a new system which will have costs.

Now, some people are much more optimistic about what those costs will be. But I think it’s perhaps too optimistic to insist that this is going to be massively growth promoting, but it will be very valuable defensively. And for many countries that don’t really have an electricity system, doing this well could give them something very important — electricity and clean electricity — and they will avoid a lot of the problems that we have, not just in climate, but local pollution. So there are very powerful reasons not measured in GDP why you want to do this.

Then you get to the question that’s a global point. And what Britain does from that point of view in terms of the global climate is almost neither here nor there. We generate about 8 per cent of emissions directly; leave aside what we do in consumption so it’s not big enough to make a difference. So the question is, are we really going to show a new way of doing these things that works very well for us and is a model for the world? That’s the way I see this. So I think if we can show we can do it effectively and we’ve done much better than many people thought — we did get stop coal, for example. That’s a big, big achievement that most people didn’t think was feasible when it was announced.

So the commitment to do it, the willingness to invest in it, showing you can make it work is, I think, a great contribution. But it’s gonna be tough.

Lucy Fisher
And just to end on an optimistic note, what reasons should we have to feel positive about the future of our economy, specifically in the UK? You mentioned DeepMind earlier. The government likes to talk up the expertise in artificial intelligence. Life sciences is another sector where they feel there’s a lot to shout about. What do you think we can feel positive about?

Martin Wolf
Well, those are the sorts of things that we have to go for. I still think more than I did 30 years ago that losing most of our manufacturing and then losing more indirectly through Brexit, which was obviously going to undermine the investments we made, which had the EU as a market, is a pity.

So we have to rely on financial services, other services, which were really very good when we have huge assets, obviously, language and skills and so forth. Innovation, technology and so forth. We do have some of the great universities of the world. That’s an extraordinary asset. And we’ve never been very, very good at harnessing those skills. But we really have to; it’s a matter of life and death, I think. And it’s the most obvious place where we can develop. Life sciences is part of that, another area where Britain has been extraordinarily strong. I am a bit concerned that this pattern of growth promotes human skills, basically.

And so that raises the question, well, what do people with less highly developed skills do? What is their role in this new economy? And the other thing that sort of worries me is, is AI gonna be a net positive for this or substitute? Complement or substitute? And there’s a huge debate about this. But these are clearly the things we’re gonna have to do well.

And to support that, we’re gonna have to move people around. That’s why we need better infrastructure. We need cities that people really want to live in, which is why we do have to worry about the highest rates of tax and the and we have to worry about things like local pollution and the environment. And I think with all these things, we at least will be doing our best. And I hope very much that that will generate some more dynamic growth. I don’t see really why we can’t — on a much smaller scale because we’re much smaller — replicate at least some of the innovation that we are seeing in the US. And I can think we can identify some of the reasons we haven’t done it, particularly capital market failures and so forth. And we’re in a better place in many ways than the other large countries in Europe in these respects.

So that’s my source of optimism. And ultimately, one is obliged to be optimistic. But optimism has to be grounded in realism. And the reality is we do have a lot of pretty big problems, which are pretty obvious, and we have to recognise them.

Lucy Fisher
Well, that’s a tempered, uplifting note to end on. Martin It’s been so interesting to hear all your views on these subjects. I wish we had more time to ask you further questions. But thank you so much for joining.

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Martin Wolf
It’s a pleasure.

Lucy Fisher
Well, that’s it for this special of Political Fix. Just a note to say you, too, can step into the chancellor’s shoes and find out if you can run the UK economy with the FT’s new Budget Game. Go to ft.com/chancellor-game to play now. There’s a link in the show notes. Political Fix was presented by me, Lucy Fisher, and the executive producer is Manuela Saragosa. Breen Turner is the sound engineer. Broadcast engineers are Andrew Giorgiades and Petros Gioumpasis. Cheryl Brumley is the FT’s global head of audio. We’ll be back on your feeds as usual on Friday. 

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