“It’s self-evident to anyone with a smattering of economics that the UK’s prosperity and economic success is very heavily tied to access to European markets.”
Philip Hammond was a UK Cabinet Minister and key member of the British Government for almost a decade. Leading four departments over nine years and rising to the second most powerful job in government, he is one of only three people to serve continuously in the UK cabinet from 2010 to 2019, serving under Prime Ministers David Cameron and Theresa May.
Hammond explains his decision to leave his cabinet role as Chancellor of the Exchequer when Boris Johnson became Prime Minister because of Johnson’s openness to a no-deal Brexit. Hammond explains the economic, cultural and political factors that combined to bring about Brexit, and its consequences. “There's been a lot of resentment in the U.K. at the creeping encroachment by Brussels over our everyday lives… And it was really a reaction to that, a feeling that people wanted to restore sovereignty to our own parliament, make our own decisions, and control our own borders.”
Like the United States, Britain was likely a week or two too slow in shutting down the economy out of fear of the economic impact from lost business. Hammond offers his thoughts on the pandemic fallout and the economic outlook for Britain and the world.
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SPEAKER
Philip Hammond
Chancellor of the Exchequer
(2016-2019)
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie (00:07):
Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the Managing Director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and politics. As we've been doing during this entire work-from-home period, we've been bringing you these SALT Talks, which are digital conversations with leading investors, creators, and thinkers. What we try to do in these SALT Talks is provide you a window into the minds of subject matter experts, the same way we do at our in-person SALT conferences, as well as provide a platform for big, important ideas that we think are shaping the world.
John Darsie (00:39):
Today, we're very excited to welcome the right honorable Philip Hammond to SALT Talks. Mr. Hammond was the former chancellor of the Exchequer in the United Kingdom, a role that he's served in from 2016 to 2019 when he was a close political ally of Prime Minister Theresa May. Prior to that, he was a Member of Parliament for 13 years for Runnymede and Weybridge, from 1997 to 2019. He also served in the Shadow Cabinets of Michael Howard and David Cameron as the Shadow Chief Secretary to the Treasury, and the Shadow Secretary for the State of Work and Pensions.
John Darsie (01:15):
As chancellor, Mr. Hammond pushed for an end to austerity measures. And in 2019, he spoke of his intention to tender his resignation, should Boris Johnson, the current Prime Minister, be announced as Prime Minister, due to the fact that he couldn't support a no-deal Brexit. Today, he serves as an advisor to several businesses, including in the investment management and FinTech arenas.
John Darsie (01:36):
If you have any questions for Mr. Hammond during today's talk, please enter them in the Q&A box at the bottom of your video screen. And conducting today's interview will be Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. And he is also the chairman of SALT. So Anthony, I'm going turn it over to you for the interview.
Anthony Scaramucci (01:56):
Okay, terrific, John. I appreciate it. Of course, I have to let everybody know on the call that the duck that John used to have behind him was removed by his mother-in-law. So she came over to the house and said, "The duck is not working for him." I just had to bring it up before we get this thing started.
Anthony Scaramucci (02:10):
So Mr. Hammond, it's great to have you, sir. Philip, tell us a little bit about your background, for Americans that don't realize who you are and what you've done, and the great impact you've had on the British government in the Parliament.
Philip Hammond (02:28):
Well, I left Parliament last December at the general election, when I didn't stand for reelection following the takeover of the party by Boris Johnson. Prior to that, I was three years as Chancellor of the Exchequer, effectively equivalent of the U.S. Treasury Secretary. Before that, I was the Foreign Secretary, Secretary of State in U.S. terms. And before that, Defense Secretary for three years. So altogether, I was nine years at cabinet level government under David Cameron and Theresa May.
Philip Hammond (03:02):
Now I'm out, as John said, advising a number of businesses, but also still taking part in the ongoing public debate, of course, now about COVID and how we manage the effects of COVID on the economy. But also, right here in the U.K., we still have running the ongoing discussion about our future relationship with Europe, something that's kind of dropped onto the back burner over the last few months, but will come right back into prominence again, as we get towards the 31st of December, which is when, if no deal is made, the U.K. and the European Union will stop trading with each other at arms length, with tariffs and full border controls.
Anthony Scaramucci (03:48):
And so, I mean, take us back through the history of this. We're going to go back to June of 2016. Prime Minister Cameron decided to have a referendum related to the Brexit. And again, for our American friends on the call, why did Prime Minister Cameron do that? Did he need to do that? Was that part of your parliamentary system where it was necessary? Or is this a voluntary decision that he made alongside of his advisers?
Philip Hammond (04:18):
So it was a political decision. We need to go back a little bit earlier to the general election of 2015, when the Brexit party, which was UKIP, the United Kingdom Independence Party, was making huge gains in the polls. And it looked like Cameron's administration would be turned out at the general election. And David Cameron decided that the only way to try to win that election was to head off UKIP by offering... By basically saying to the people, "You do not need to make this election about whether or not to stay in the European union. If you reelect me, I will give you a referendum on that question."
Philip Hammond (05:03):
And he was confident. I was confident. Most of the ministers around the cabinet table were confident that the British people, if faced with that question, would vote to remain in the European Union for the very simple reason that it's self-evident, to anyone with a smattering of economics, that the U.K.'s prosperity and economic success is very heavily tied to access to European markets. We've been in a close relationship for 45 years, and for better or for worse, much of our industry, much of our financial services, infrastructure in London is built up around serving those European markets, 500 million rich consumers.
Anthony Scaramucci (05:49):
And so the British people vote, and it's an upset more or less? Because I think even people here in the United States, certainly people in the capital markets, thought that it was going to go through. I think we would also point out... I think it was another... Did Scotland have a referendum as well, a year prior or something like that? And that-
Philip Hammond (06:12):
That was previously.
Anthony Scaramucci (06:15):
And that went well, and so there was a little bit of momentum for unity, and so the political decision. But had he not made that decision... I'm going to get to these other questions first, because I think it's elemental to what's going on, on your side of the pond and our side of the pond. I'll tie it together in a second. But had he not made that decision, what do you think would have happened to UKIP? And what do you think... Where do you think we would be right now, in terms of that populist movement in the United Kingdom?
Philip Hammond (06:44):
Well, that's a very interesting question. I'm pretty sure that what would have happened, if David Cameron had not made the commitment to a referendum in the 2015 election, is that we would have lost that election, because UKIP would have split off enough conservative votes to allow the Labour Party to win. And that would have meant a Labour Party under Ed Miliband, brother of David Miliband, who's probably known to some of the people watching this, would have taken over as Prime Minister.
Philip Hammond (07:14):
Now, Ed Miliband is, by my standards and your standards, a left-winger. But he's nowhere near as much of a left-winger as Jeremy Corbyn, who led the Labour Party in the meantime, between 2015 and the end of last year. So we would have had a labour government. That would have undoubtedly been a difficult time for business and for the financial sector in the U.K., but it clearly would not have been fatal. I mean, this would have been a labour government that squeezed business and squeezed the city, but wasn't trying to snuff it out. And I suspect in those circumstances-
Anthony Scaramucci (07:54):
And he was for remain as well? Not to interrupt you, sir. He was for remain?
Philip Hammond (07:57):
Absolutely, absolutely. Yeah, there would have been no question of a referendum. We would have remained in the European union, and we would have... COVID allowing, we would have just had a general election last month, which I expect the Tory party would have been... Win back in power again. The Brexit referendum would never have happened. Jeremy Corbyn leading the Labour Party would never have happened. So it would have been a very different story to tell.
Anthony Scaramucci (08:25):
So why are we Brexiting? You know it's economically not the best thing for the citizens of the United Kingdom. Most citizens now, and correct me if I'm wrong, sort of realize that it's creating a lot of problems. I know there's an immigration issue, and there's a fear-based issue, one that's somewhat xenophobic. But why are we Brexiting? Why don't we have leadership in the United Kingdom? We're going to get to United States in a second, because I want your opinion. That just says, "Okay, look, this is not the right to do. And so as a leader, I'm going to try to move the population towards that decision, versus where they are now."
Philip Hammond (09:04):
The problem, Anthony, goes back some way. The U.K. joined what was then the European economic community in 1973, on the basis of economics, that it was joining a common market. And the British people have never really been signed up. Even those who are enthusiastic for our relationship with Europe have never really been signed up to the idea of political union. European countries are too different, in many people's opinion, for a political union to work. And there's been a lot of resentment in the U.K. at the creeping encroachment by Brussels over our everyday lives, the increasing political union that the E.U. has become. And it was really a reaction to that, a feeling that people wanted to restore sovereignty to our own parliament, make our own decisions, and control our own borders.
Philip Hammond (10:04):
But underlying that undoubtedly, there was also a broader economic malaise born out of the crisis in 2008, nine, where many people, looking back over the last decades, feel that the rich have gotten richer and the poor have stayed put. Many ordinary working people who are not poor, but ordinary working people, feel that they don't see a way forward for themselves. They don't see their prospects and the prospects for their kids in the way they used to, and that the world has become somehow more unfair and biased against them. And I think, both in the U.S. and the U.K., populism has ridden that wave of sentiment that... I guess it was the quantitative easing, the inflation of asset values that that led to, that has upset the traditional balance between the different stratas of society, and created this populist strength.
Anthony Scaramucci (11:07):
And it's very well said, and I just want one more question on the Brexit. And then we're gonna switch to the pandemic, and I'd love to talk to you about some of your views on the macroeconomic situation. I guess the question I have... If I were a middle income person in Great Britain or the United Kingdom, or lower middle income person, am I better off in a Brexit? Or am I better off tied somehow to the European economic union?
Philip Hammond (11:34):
So there is no doubt in my mind... Although this is disputed, but there's no doubt in my mind, having run the U.K. treasury for three years, that you will be better off if we remain closely linked to the European union, closely trade linked. The fact we have actually now already left the European Union, in political terms, doesn't mean that we couldn't continue to have a very close trade relationship, which will salvage most of that advantage. That would mean having to align a lot of our economic regulations, environmental labour market regulations, and so on with the European union. But it's clear that if we were prepared to do that, European Union would be willing to continue to have a free trade area in Europe, which would allow us, for example, to continue to serve as Europe's financial markets from London, in the way that we've done so successfully over the last couple of decades.
Anthony Scaramucci (12:38):
Okay. So at some point, your prediction is that it gets resolved with some kind of deal, and cooler heads prevail? Or Great Britain or United Kingdom will not be part of your... What's your prediction?
Philip Hammond (12:52):
So we're at a tipping point right now, because the U.K. government has made it clear it will not ask for an extension of the current transition period, which comes to an end on 31st December. So absent a deal done over the next six months, we will crash out of the trading arrangement we currently have, and stop trading on WTO terms. That is to say, full arms length with a hard border between the U.K. and the European Union. This, by the way, is particularly tough for Ireland, because nearly everything getting to Ireland, between Ireland and E.U., passes through the U.K., and a full set of tariffs.
Philip Hammond (13:37):
But there is still time to negotiate, probably, an interim agreement, with a fuller and more detailed agreement later. But there will have to be a significant political shift, because at the moment, the position of the U.K. government is that they would like a deal. But they will not concede anything on equivalence of regulation. They insist on retaining complete freedom to regulate how they wish, and they will make no commitment to align with the E.U. E.U.'s position is the exact opposite. Without alignment of regulation, the U.K. can have no preferential access to European markets. So unless somebody gives way there, isn't going to be a deal.
Anthony Scaramucci (14:22):
Okay. Well, I certainly hope there is a deal, Philip, because I think it'll be in the best interest of the of your people.
Anthony Scaramucci (14:30):
I want to shift gears and talk a little bit about the pandemic, and your opinion of your government's response to the pandemic. We both see the per capita incidents and the case risings. Where were we? What did they do right and wrong? And where are we now? And where do you think we're going?
Philip Hammond (14:51):
So there will be a postmortem in time on the way different governments responded to the challenge. I think that the general prevailing thought here is that when the government finally decided to lock down, it probably did it a week or two later than it should have done. And that has caused us some greater level of-
Anthony Scaramucci (15:22):
Why do you think that happened? Why did it take longer? It certainly took longer in the United States, as well. I'm just wondering, from the inside, what do you think was going on to cause the delay in that decision?
Philip Hammond (15:35):
I think there was a genuine concern about shutting... The economic impacts of locking down. We'd seen what had happened in... Italy, in particular, was the example we were all watching. And there was a desperate desire to try and avoid that. And also, a little bit of hubris, frankly. The British people are very used to being told that we have a great healthcare system in the U.K., state-run healthcare system. And frankly, the evidence is probably... That may have been true 60 years ago, when it was first invented, but it slipped behind many of its European comparators now. And there's still a bit of hubris here, people thinking somehow, we've got a better structure. We'll be able to manage this better. And on the evidence we see at the moment, it doesn't look like that was the case at all.
Philip Hammond (16:34):
One of the things that I take away from the differential handling in the U.K. and some of our European neighbors and in the United States is the degree of centralization. This, the U.K., is a very centralized country. Things are decided centrally in London, and they're run from London. Germany, for example, is a very decentralized country. And even in the United States, we saw the president making various announcements and statements. But in the real world, those were not his province. The governors of the States were able to make their own decisions, and some of them clearly made better decisions than others. But the over-centralization of the UK, I think, is going to come under very heavy scrutiny in the period after this epidemic.
Anthony Scaramucci (17:29):
But I think we recognize in a democracy, it was a problem. I also, frankly, think it was a cultural issue for the United Kingdom and the U.S., having not experienced a pandemic in 100 plus years. It seemed like the Asian nations were more prepared than we were culturally. You could just fly to Asia and see the number of people wearing masks prior to this pandemic to get that feeling.
Anthony Scaramucci (17:54):
I want to switch gears to your opinion on the economy. And so our economy's been hit. Your economy's been hit. The global economy is basically in recession as a result of the pandemic. Where do you think we are now? Where do you think the United Kingdom is? And what policies would you recommend to help dig us out of where we are?
Anthony Scaramucci (18:14):
And then the last question tied to all of that, of course, is, are the Europeans and the men and women of the U.K. doing the right thing from a policy perspective? And what about the U.S.? It's a long-winded question, Phillip, I'm sorry. But you get the gist of where I'm going. It's an economic macro question.
Philip Hammond (18:32):
Yeah. I think where we are, as the lockdown is easing across Europe and beyond, the economy is gradually coming back to life. And clearly, some of the demand suppression that has existed will disappear, and that demand will bounce back. But people can't go eat in restaurants and drink in bars if the bars and restaurants are closed. So for the moment, at least in the U.K., the services sector continues to struggle to maintain any reasonable level of output. And of course, all the while, structural damage is being done to the economy. Businesses are failing. Particularly, over-leveraged businesses are struggling with a lack of cash flows, or reduced cash flows over a relatively long period of time.
Philip Hammond (19:31):
So we have in place here, as you do in the U.S., all sorts of government sponsored arrangements to disguise unemployment, by paying people's wages to support businesses with liquidity problems, all of which will have to be unwound over the next six, nine months. And I think domestically, that is going to be a very, very difficult period for politicians in the U.S. I guess it won't happen until after the election is out of the way. Here, we've just had our election, December last year. So there's no obvious point to work to.
Philip Hammond (20:12):
But withdrawing that money, and recognizing that many people, who were told that they were furloughed and their wages were being paid, are actually now going to be redundant, and their wages will not be paid, is going to be a politically very difficult moment. But I think our experience from past recessions is that where structural adjustments are needed in the economy, trying to mask that need and delay the action only makes things worse and recessions deeper. We need to get on. We need to let the businesses that are going to fail, that have to fail, fail. We need to release the resources from them, the labour and the capital. We need to retrain and re-equip labour where necessary. And we need to get those people turned around and back into work as fast as possible. And that would be my recommendation to the U.K. government. Do not try to mask the scale of the problem. Do not try to delay the restructuring of the economy.
Philip Hammond (21:21):
I think the difficulty is that we're going to be doing this against, I suspect, a backdrop of stagnant or even shrinking world trade, which, for an economy like the U.K., which is very, very open to global trade, is going to be a very difficult backdrop.
Anthony Scaramucci (21:41):
I want you to weave into this, some of the racial tension and the racial anxiety, but that both of our nations are feeling. And so you have the combination of people dislocated from work and the issues around race. What are your feelings about that? And what kind of policy initiatives can be put in place to try to calm those things down?
Philip Hammond (22:08):
Yeah. Well, I think the trigger for this outbreak of racial demonstration has been things that happened in the U.S. And from where we sit over here, it does continue to astonish the degree of racial imbalance in policing techniques, and the aggression that is often shown. And not just shown, but captured on video. And that's an issue that I think is... I wouldn't say it's unique to the U.S., of course. But I don't think we have that problem in quite the same way here.
Philip Hammond (22:51):
But what it did, of course, the demonstrations in support, in solidarity with what was going on in the U.S., led to a sort of wider review of race relations here, and a general feeling that many years on from the last time we had this sort of soul searching and decided that we needed to do more, to become a more racially equal society, not enough progress has been made, and more progress needs to be made. And I sympathize with that. I understand that. I think it's the same strand of thinking that informed what I described earlier around the Brexit decision, that people feel that they don't have opportunity, that they can't see the ladder for them and their kids, in the way that perhaps they used to think it would be there. And we need to create that sense of opportunity for all. And there's a big review at institutional level going on here in academic institutions, in businesses, in charitable organizations and schools about the way they manage these things and how they can do better.
Anthony Scaramucci (24:08):
I think it's very well said. Before I turn it over to John and questions from our audience... Last week, we had a professor from Stony Brook University, Stephanie Kelton. She just wrote a bestselling book called The Deficit Myth, Phillip, and she is a modern monetary theorists. And she sort of believes that deficits do matter, but there's a lot of wide latitude that currency-issuing nations, like the United Kingdom and the U.S., have in terms of managing their budgets, and that ultimately, large deficits can be maintained and sustained by places like the United Kingdom and the U.S.
Anthony Scaramucci (24:53):
And what are your thoughts on that? Richard Nixon once said that we're all Keynesians now, Philip. He said that after he took us off the gold standard in 1971. Are we all Keynesians, or all modern monetary theorists, now?
Philip Hammond (25:07):
Well, I spent much of the last three years trying to reduce the size of the U.K. deficit. And we finally got to the point, just before I left office, where our debt was shrinking from a very high level, but shrinking as a share of GDP. And I'm very proud of that. Not because I believe that we should slavishly astrew deficits and reduce debt, but because I think that common sense tells you that in times when the economy is doing relatively well, you shouldn't be running very large deficits, so that in times when the economy runs into trouble, you have the capacity to respond.
Philip Hammond (25:48):
So what my successor has done... One level is disappointing for me. Having got the deficit here down to a mere 24 billion pounds a year, he's now taking it back up to more like 100 billion. But of course, I recognize that that's something he had no choice about. He had to do that in the circumstances, and precisely the reason we were trying to control the deficit was to create that space, should we ever need it. Nobody knew we were going to need it in 2020.
Philip Hammond (26:21):
But I would draw a distinction between the United States and other currency-issuing countries. I mean, the U.K. has the privilege of borrowing in its own currency. And of course, one is in a very different position if one borrows in one's own currency, than if one borrows in U.S. dollars, as a non-dollar area country. And the challenges that some of the emerging markets are facing around their dollar denominated debt is evidence of that.
Philip Hammond (26:54):
But the U.S. has the privilege of knowing that however irritated people, markets might be with U.S. government policies, or even monetary policies, the Fed's monetary policies, in the end, the dollar is the backbone of people's reserve holdings. And that gives the U.S. quite a large amount of leeway, which frankly we in the U.K. do not have. The pound sterling is a minor reserve currency now. The Euro, also a reserve currency, but not on the scale of the U.S. dollar. So I think these things are calibrated to the extent to which third parties are forced to hold your currency, whether they like what you're doing or not.
Anthony Scaramucci (27:47):
Well said. Listen, I read through her whole book. As a conservative and a lifelong Republican, there are issues that I have with the book. Probably, perhaps, you have the same issues. But the flip side is, she said something to me that was very compelling, is that, "Well, we're doing it anyway. The United States is going to issue three or $4 trillion of debt. So spare me the sanctimony about all of this conservatism." And so I thought her discussion and her intellectual gravitas was fascinating, so...
Philip Hammond (28:20):
Yeah, I still remember from the early days of the administration, when they were assuring everybody, including me, that all the stimulus programs were going to be self-financing and wouldn't lead to any increase in the U.S. public bear.
Anthony Scaramucci (28:38):
Right. Well, yeah. I mean, well, okay, well... Anyway, I have a bridge in Brooklyn I can sell you, Philip, if you can ever get back over here to this side of the pond.
Anthony Scaramucci (28:46):
Let's switch it over to John Darsie, John Duckless Darcy, without the little mallard duck behind him. Go ahead, John. I'm sure you've got some questions here-
John Darsie (28:58):
Well, speaking of the duck, I need to start with a comment that was submitted to the chat by Bill. He said, "For what it's worth, I liked the duck. But you should always agree with your mother-in-law." So I just want to have that on the record, that the duck might be making a return for our future SALT Talks.
John Darsie (29:12):
But the first question that we got from the audience is, "You touched a little bit on global trade, and how you think the pandemic is going to affect it, as it relates to the U.K. But generally, do you see any significant, longterm shifts in the way we look at supply chains and global trade as a result of the COVID-19 pandemic?"
Philip Hammond (29:30):
Yes, I'm sure that everybody will want to look at resilience of supply chains, and that's obviously a sensible thing to do. There's clearly attention between efficiency, getting the lowest cost, and resilience, having the greatest security. And I think there are a lot of people out there who will be thinking that we got the balance wrong, that we were driving efficiency at the expense of resilience too far, and that we need to build more resilience into supply chains in the recovery.
Philip Hammond (30:05):
But there are also a lot of people who are going to try and use that argument to make populist driven, protectionist solutions. And we have to resist those. This is not a moment to dismantle global supply chains. It's a moment to try and reinforce the resilience of them. There are many ways that can be done, and I think we should be engaged at an international level, perhaps through the G20, in discussing how we can beef up the resilience of supply chains without dismantling the globalization agenda, which has so increased living standards around the world.
John Darsie (30:47):
The next question is in regards to the U.K. government's response to the pandemic. "If you were still the chancellor of the Exchequer, what would you be doing differently than your successor, Rishi Sunak?"
Philip Hammond (31:02):
Okay. I don't want to criticize Rishi at all, because obviously he's facing some very, very difficult challenges. If I just tell you the areas where I am perhaps a little uncomfortable... I am nervous about having extended the government financed furloughing of employees through to the end of October. I personally think we should have tried to wean ourselves off that a little earlier. I think we are disguising some unemployment there, which we know is going to come through. And this is not necessarily good for the economy, to continue to disguise that.
Philip Hammond (31:43):
I think we have to take a sectoral approach. The British government, the Treasury rightly hates having to take a sectoral approach, but it's so obvious that this pandemic is affecting some sectors much more than others, that we inevitably will need to deal with aviation, hospitality in a different way, from the support we give to manufacturing, for example, often actual services. So I think over the next month or so, Rishi Sunak needs to start spelling out what the recovery path is going to look like, including the tough measures. So far, it's all been about additional support to the economy. But he needs to be explicit that these measures will have to be time limited, and we will have to face up to the real consequences of this crisis, in terms of higher unemployment, lower output.
John Darsie (32:43):
The next question has to do with the negotiations between the U.K. and the E.U. "What timeframe do you see a deal eventually occurring? And when that deal comes to fruition, do you see a devaluation of the British pound on the horizon?"
Philip Hammond (32:59):
Well, there are two scenarios here. Either we reach a deal by the end of this year... But if we do, I would expect that to be a very light touch framework deal, that probably won't be ideal from the point of view of either parties, but will be acceptable as a temporary arrangement, following which there will be a longer term negotiation of a more comprehensive agreement. Or we fail to reach deal during the course of 2020 because of the political challenges around that, in which case we would leave with no deal in December 2020. And there will be a period of time before the parties get back to the table, as I'm sure they eventually would, to negotiate a future deal.
Philip Hammond (33:50):
Now clearly, from where Sterling is at the moment, I guess quite a lot of the potential for no deal is already baked in there. So if a deal were announced, if a deal were done, I would expect that to be positive for Sterling. If it becomes clear later in the year that the deal won't be done, I would expect there is some element of no deal that isn't yet discounted in the price of Sterling. And so I would expect to see a negative movement, if that becomes the most likely outcome.
John Darsie (34:26):
"You've talked a lot about the need for a global digital services tax. Please explain what that means, and why you think it's something that the world really needs."
Philip Hammond (34:37):
So for many, many years, for the last 100 or so years, we've taxed international businesses on the basis of physical presence. So when Ford Motor Company came to the U.K., they built factories here. They built dealerships. They had a physical presence which could be taxed in the U.K. But increasingly, in the digital economy, the services that generate huge amounts of value do not require a physical presence in the marketplace country. And therefore, the taxing authorities in those countries have nothing that they can levy attacks on. And increasingly, they see digital business being done from tax-haven countries into their own jurisdictions, and the taxable earnings from that business leaking away.
Philip Hammond (35:33):
So for example, in the U.K., most of the big digital companies do deliver their business in the U.K. via the Republic of Ireland, which has a very favorable tax regime. They have no physical presence in the U.K. to support that business. That is clearly not a sustainable model for the future, as more and more business becomes dominated by digital content. And we have to find a better way of taxing international businesses that don't have a physical presence in the marketplace.
Philip Hammond (36:10):
And pretty much, the world is agreed on a solution, with the exception of the United States. And the United States takes the view that because, at the moment, many of these digital companies are U.S. companies, that this digital tax initiative is discriminatory against U.S. companies. And the U.S. is holding out. Personally, I think that's a rather shortsighted view. I suspect we're going to see, over the next decade or so, more and more of the key digital players being domiciled outside of the traditional developed countries, and more and more of them coming from Asia. And I think we do have to tackle this problem. And ultimately, it will be as much of a problem for the U.S. as it is for the Europeans now.
John Darsie (37:05):
"You touched on Asia a little bit. What is the relationship right now between the U.K. and China? And as tensions continue to rise between the United States and China, how does the U.K. fit into that? And what type of stance they take in relation to the U.S.-China relationship?"
Philip Hammond (37:21):
Very good question. So the U.S.-China relationship, and the difficulties with it, are a real challenge for the European countries in particular. Nobody in Europe wants to be stuck, forced to choose sides between the world's largest economy and the world's second largest economy. In the case of the U.K., we have a very open trading economy. We need to have good trading relationships with both the U.S. and China, although there will never be any doubt where our strategic partnership is. We've been strategic allies of the U.S. for... Well, certainly since the Second World War, and that isn't going to change. Nothing is going to change it. But in terms of trade, we have an important trade with China, as well as a very important trade with the U.S.
Philip Hammond (38:14):
So that tension between the U.S. and China is spilling over and challenging the Europeans, who are increasingly being asked by both the Chinese and the Americans to take sides, to choose whether they're for or against one or the other on a particular issue. And we've seen this most graphically in relation to Huawei.
Philip Hammond (38:39):
The U.K. relationship with China is further complicated by the U.K.'s particular position with regard to Hong Kong. And as the former colonial power in Hong Kong, we have certain obligations and certain rights under the agreement that we made with China back in 1994, which survive right away through until 2049. So we have a specialist interest in Hong Kong. We have millions of people with British passports living in Hong Kong, Hong Kong citizens. And therefore, the tension in Hong Kong is another source of friction between the U.K. and China. And in my time in government, we were very careful to try to balance our relationship with China, and to try to manage these difficulties and differences. The current administration under Boris Johnson is very keen to be close to the Trump administration, and to my mind, that has encouraged them to move decisively to the U.S. side of this argument, and to be prepared to take bigger risks in the U.K.-China relationship.
Philip Hammond (40:00):
That's where I think we are now. Quite a difficult period.
John Darsie (40:04):
Well, Chancellor Hammond, I want to thank you for all your very thoughtful answers, and for joining us today on SALT Talks. Anthony and I were in London in early February. We got to see you. The world's a little bit of a different place since we saw you in February, but we're hopeful that soon, we'll be able to get back to the U.K. and get to see you as the world opens up a bit.
John Darsie (40:23):
So Anthony, do you have any final thoughts before we let Chancellor Hammond go?
Anthony Scaramucci (40:26):
I wish you great health, sir. And I hope I can get you here to North America for one of our SALT conferences which, hopefully, John and I are looking forward to starting again. We'll have more information out about that once we can figure out and allay everybody's health concerns.
Anthony Scaramucci (40:42):
But Chancellor Hammond, thank you so much. And hopefully we'll see you soon.
Philip Hammond (40:47):
Thank you. Look forward to it.