Merryn Talks Money: The UK Government Must Cut Spending – Here’s Why

Host: Merryn Somerset Webb (Bloomberg)
Guest: Kallum Pickering (Chief Economist, Peel Hunt)
Date: November 24, 2025

Episode Overview

In this episode, Merryn Somerset Webb speaks with Kallum Pickering, Chief Economist at Peel Hunt, about the state of the UK economy, the recurring fiscal credibility crisis, and the urgent need for government spending cuts. Pickering argues against the prevailing narrative of UK economic stagnation, highlights the roots of sluggish growth and rising inflation, and outlines both short- and long-term policy solutions. The conversation is analytical yet relatable, explaining complex economic dynamics and their real-world impacts, with a particular focus on the upcoming UK budget.

Key Discussion Points & Insights

1. Is the UK Economy Stagnating?

Timestamp: 02:45–06:32

• Not True Stagnation: Pickering insists that the UK economy isn’t truly stagnating; annualized growth is around 1.7% since late 2023, mainly driven by domestic services (03:41).

  “This is not stagnation over say a full business cycle… what you see is a big expansion in government spending and declines in cyclical sectors like new housing.” – Kallum Pickering (04:12)

• Flat White Economy: Growth is ‘steady state’—service sectors are steady, but interest-rate sensitive sectors (housing, durable goods, construction) are in decline (04:25).

• Root Issue: The problem is an absence of economic cyclicality due to high interest rates, which Pickering attributes to damaged fiscal credibility (05:23).

  “Policymakers fundamentally are lacking the credibility to get benchmark interest rates to where economic fundamentals need them.” – Kallum Pickering (05:45)

2. GDP Per Capita & Living Standards

Timestamp: 06:06–07:17

• Per Capita Stagnation: Merryn raises the point that, while headline GDP rises, GDP per head has barely increased—indicating effective stagnation for individuals (06:06).

• Participation Problem: Pickering argues real incomes and wages for workers have “been growing at a nice clip,” and the main issue is non-participation—new immigrants and others are not integrated into the workforce (06:32).

  “For workers, living standards are rising… for people not participating in the labor market, living standards are declining.” – Kallum Pickering (06:54)

3. Savings Behavior and Net Wealth Shock

Timestamp: 07:55–14:42

• Saving Rate Doubled: UK household savings rate jumped from 5% to 10% since 2022, not justified by differences in confidence or uncertainty versus the US (08:20, 09:16).

• Net Wealth Decline: Huge drop in UK household net wealth (about £1 trillion), especially in pensions, post-2022 “Truss budget wobble” (10:57).

  “Households are actually poorer in net wealth terms… they've responded by saving more.” – Kallum Pickering (12:28)

• Asset Price Sensitivity: Most people feel this primarily through their pensions and bond exposure; house prices, especially in London and the southeast, are down when adjusted for inflation.

  “People on a Friday night at their dinner parties like to say, oh, I’m feeling frightfully well off... This is not happening in the UK.” – Kallum Pickering (14:20)

4. Generational Differences in Confidence

Timestamp: 14:42–20:05

• Young vs. Old: Since 2022, consumer confidence among under-50s is near all-time highs, but it’s declining for over-50s (16:15).
• Drivers: Younger groups benefit from rising real wages but aren’t sensitive to asset prices (they have little); older groups are more exposed to falling assets and thus feel less confident.

5. The UK’s Cycle of Fiscal Credibility

Timestamp: 20:05–25:03

• Policy Mistakes & Credibility: Historically, UK alternates between periods of market credibility (strong policy moves like inflation targeting, operational central bank independence) and lost credibility (high inflation or fiscal chaos).
• Key Turning Points:
  • 1981: First issuance of index-linked gilts.
  • 1992: Introduction of inflation targeting.
  • 1997: Bank of England independence.
  • Post-GFC: Office for Budget Responsibility and fiscal rules.
  • 2022: Loss of credibility after Truss Budget.
• Rachel Reeves’ Missed Opportunity: Current government has not introduced a “fresh new commitment to credible money,” failing to reassure markets (24:38).

  "She is the first Chancellor following a significant period of damaged credibility… that has not tried to introduce some fresh new commitment" – Kallum Pickering (24:21)

6. Why Are UK Interest Rates So High?

Timestamp: 25:10–29:42

• Above Fundamentals: UK 10-year bonds yield about 4.5%, but fundamentals suggest it should be closer to 3.5% (25:44).

• After the Truss Crisis: The gap emerges right after the autumn 2022 budget crisis; markets remain unconvinced by government commitment to low inflation (26:13).

7. Fiscal Policy, Crowding Out, and Asset Sensitivity

Timestamp: 32:34–35:16

• Crowding Out Effect: Persistent deficit and high spending drive up interest rates, crowding out private sector investment and cyclical sectors (32:34, 34:10).

  “The government, when it spends, strips away scarce resources… from a private sector which is… still growing its productivity and towards a public sector where productivity has been stagnant for more than two decades.” – Kallum Pickering (34:32)

8. What Should the Government Do?

Timestamp: 37:45–50:05

Budget Outcomes – The Traffic Light Analogy

• Green (Best): Cut spending to close the borrowing gap—depress demand and inflation, “get markets onside” (38:17).
• Amber: Considered but dropped—raise income taxes to demonstrate immediate fiscal responsibility, allowing for Bank of England rate cuts (39:33).
• Red (Worst): Patchwork of anti-growth, fiddly taxes—likely to provoke lobbying and not solve core problems (41:33).

  “We’re now in what I would consider to be the red zone again… where we have this horrible patchwork of anti growth tax measures...” – Kallum Pickering (41:30)

Problems With Capital Spending Narrative

• Merely raising capital spending isn’t sufficient without deregulating and allowing the use of domestic resources (47:06).

  “You can't have a proper productivity revolution… unless you permit yourself to use your own domestic factors of production.” – Kallum Pickering (48:17)

9. The Looming Debt Crisis & Solutions

Timestamp: 50:05–62:31

• Aging & Health Costs: Public debt will surge as pension and health obligations grow—a chronic, not immediate, crisis (52:40).
• Policy Paralysis: Governments don’t distinguish between chronic dysfunction and crisis, overestimating the positive effects of spending during ordinary times.
• Predicting the Next Crisis: The bond market could soon force the government’s hand if credible action isn’t taken.

  “At some point these bad policy choices… will erupt into another bout of inflation and the bond market will say that's enough…” – Kallum Pickering (55:04)

Clever Long-Term Fixes

• Personal Asset Accounts: Offer new entrants to the workforce a tax cut invested in personal pension/healthcare funds (60:20–61:50).
• Transferable Health & Pension Pots: Encourage self-provision and inheritance, reducing public liabilities and aligning incentives.
• Market Reaction: Credible long-term reform could bring down yields and revive the private sector.

Notable Quotes & Memorable Moments

• On Aggregate vs. Per Capita Growth:
  “What we have is a problem integrating new immigrants into the labor force… For workers, living standards are rising…” – Pickering (06:32)
• On Asset Wealth and Spending:
  “Households are rational, they are reacting to being poorer by saving more.” – Pickering (12:28)
• On Fiscal Policy Solutions:
  "You need such a big policy change to re-establish your commitment to sound money." – Pickering (25:10)
• Merryn’s Frustration:
  “All the solutions are there… but no one in government is listening and there doesn't appear to be any political appetite at all in the UK to shift on any of these things.” – Merryn Somerset Webb (50:05)
• Pickering’s Hope:
  “If we can get one or two things right, suddenly this gloomy narrative will turn positive.” – Pickering (63:35)

Timestamps for Key Segments

• “Is UK Growth Truly Stagnant?” – 03:29–06:06
• GDP Per Capita & Living Standards – 06:06–07:24
• Savings Behavior and Net Wealth – 07:55–14:42
• Generational Consumer Confidence – 14:42–20:05
• Fiscal Credibility Historical Cycle – 20:05–25:03
• Interest Rates & Market Confidence – 25:10–29:42
• Crowding Out and Structural Weaknesses – 32:34–35:16
• Budget Policy Choices (Traffic Light) – 37:45–47:06
• Myth of Capital Spending Fixes – 47:06–50:05
• Looming Debt Crisis & Long-Term Fixes – 50:05–62:31
• Closing Reflections & Quotes – 63:28–63:49

Tone & Takeaways

The episode balances rigorous economic analysis with plain English, using relatable analogies (diet and inflammation for policy/ inflation) and practical historical examples. Pickering’s central argument is that the UK’s economic dysfunction is a result of persistent fiscal credibility issues and crowding out by government—problems that can and must be fixed, even if political will is currently lacking.

Final Hopeful Note:
“Fear not, there's a great deal of ruin in a nation. If we can get one or two things right, suddenly this gloomy narrative will turn positive.” – Kallum Pickering (63:35)

Recommended For:
Listeners wanting a clear, nuanced understanding of the true roots of the UK’s current economic malaise, and what it would take—for both markets and ordinary people—to turn things around.