November 4, 2025 • 18 mins
Chancellor of the Exchequer Rachel Reeves declined to reiterate Labour’s manifesto commitment against broad-based tax hikes, as she made an unusual appeal to the British public to support her upcoming budget.
In a rare pre-budget speech in Downing Street carried on national broadcasters, Reeves argued she would prioritize bringing down borrowing costs and inflation, and blamed the previous Conservative administration for putting lasting pressure on the public finances.
In the clearest hint yet that the Labour government will compromise on its commitment to avoid lifting the UK’s main tax levers, Reeves said the world had changed since it came to power in July 2024.
In this special episode of the Bloomberg Daybreak Europe Podcast, Stephen Carroll and Caroline Hepker discuss with UK Correspondent Lizzy Burden, Bloomberg Opinion columnist Marcus Ashworth, and our Chief UK economist Dan Hanson.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Hello.
Speaker 3 (00:10):
Welcome to this special episode of the Bloomberg Daybreak Here podcast.
I'm Caroline Hepga in London.
Speaker 1 (00:16):
And I'm Stephen Caroll in Brussels.
Speaker 3 (00:18):
The UK Chancellor Rachel Reeves has laid the groundwork for
tax increases in her upcoming budget this morning, blaming the
previous Conservative government and global trade frictions for harming the
UK economy. In an unusual speech at Downing Street just
weeks ahead of the budget, she said she was determined
to bring down inflation and keep a lid on the
(00:40):
government's boring costs.
Speaker 4 (00:42):
Inflation is already much lower than the double digit scene
under the previous government, and the choices I make in
this budget this month will be focused on getting inflation
falling and creating the conditions for interest rate cuts to
support economic growth and improve the cost of lid.
Speaker 1 (01:00):
Reeve's added that previous policies around austerity, brags it and
the handling of the pandemic left the UK with a
worse inheritance than previously taught. She was determined that her
budget would be focused on reassuring markets and reducing the
government's debt pile market.
Speaker 4 (01:15):
No, my commitment to the fiscal rules is ironclad. Some
people say that we should just sidestep those rules, that
we can borrow more without consequence by simply reclassifying areas
like defense or education. But no accounting trick can change
the basic fact that government debt is sold on financial markets.
(01:39):
There are a limit on the price that banks, hedge
funds and pension funds are willing to pay for our debt,
and we are competing constantly with other countries also selling debt.
Speaker 3 (01:50):
Well, as the Chancellor Aha Reeves spoke, the yield on
UK thirty year guilds hit their lowest level since April,
the pound or so weakened before later pairing those.
Speaker 1 (02:02):
Moves, Well, let's bring you someone alysis now of what
we've been hearing from the Chancellor Rachel Reeves warning of
the worsening economic situation ahead of her budget later this month.
We have a trio of top Bloomberg voices in the
UK economy to discuss. We've got a UK correspondent Lizzie Burden,
with US Bloomberg opinion columnist Marcus Ashworth and our chief
UK economist Dan Hansen as well. Lizzie, I'd like to
start with you, how should we interpret what we heard
(02:24):
from the Chancellor? Is it now certain that income taxes
will go up on the budget?
Speaker 5 (02:29):
I wouldn't say it's certain that income taxes would go up.
Powd to say that she's rolled the pitch for tax rises,
and I'd note that it's highly unusual, Stephen, for a
Chancellor to make a speech like this in the weeks
up to the budget. She wanted to emphasize she wasn't
going to announce individual measures, but it was a strong
suggestion that she is going to build more headroom than
(02:49):
she's left in the past, and that's been nine point
nine billion pounds. And we know that there's been so
much speculation in the markets about what would come at
the next fiscal event as a result of leaving such
raizor thin margins. So perhaps she'll go further than that.
This time. She's talked about seeking fiscal headroom to withstand
global turbulence, her commitment to the fiscal rules being ironclad,
(03:12):
and the limits to the price investors are willing to
pay for UK debts. So she set out the narrative
of who to blame here for the tough but fair
Starmer's words, decisions that were expecting at the budget, and surprise, surprise,
it was the Tories tariffs, austerity, a quote rushed, an
ill conceived Brexit, and the pandemic. But what she didn't
(03:33):
talk about was the inflationary impact of her first budget,
the promise not to come back for more tax rises
after the forty billion of tax rises the last budget,
and the manifesto commitment not to raise the three levers
of tax, income tax, the payrolls tax or V eight.
She had reiterated that promise at Labor Conference, but the
other options on the table Stephen might not be enough
(03:56):
to fill the fiscal gap. Interestingly, though, the last point
I just want to make here, yeah, is she said
we were elected on a commitment to put country before party,
the national interest before political calculation. So I wonder whether
this was Reeve's asking permission to break that manifesto Manifesto commitment.
Speaker 3 (04:17):
Dan, can I bring you in at this point? Does
this mean that the Bank of England meeting is now
live this week? Because that's the next thing that we have.
We have a Bank of England meeting right ahead of
the actual budget. We don't have the details you Rachel
Reeves didn't give any specifics, but is that meeting now live?
(04:37):
I was speaking to Jeffrey U of bn Y earlier.
He seemed to think so because Rachel Reeves cited high inflation,
high interest rates, and she was very specific about the
level of UK interest rates.
Speaker 6 (04:52):
Yeah, she was.
Speaker 7 (04:53):
I noticed that. But I think it's live definitely. I
don't think they will cut, but I think it's going
to be a tight decision between a cut and a
hold the bank tends. I think the bank will want
to know what exactly is in the budget, and they
don't know that yet. They can assume, as we've all
(05:14):
been assuming for the past, coming on for six months now,
what may or may not be in the budget, but
and they can obviously make assumptions, but they will want
to know because there are a lot of different variables
that matter for them, the most significant of which is
whereabouts does the tax rice's land and where do the
(05:35):
spending cuts land? And that's what matters for the bank.
If it's early on in the forecast period, there'll be
a good case for them, you know, moving interest rates lower.
But I think they'll just want to be sure, you know,
there's been a lot of promises about not doing anything
to stoke inflation, but nothing in the budget.
Speaker 6 (05:55):
Does that.
Speaker 7 (05:58):
You know, things that they would be worried about, rising
fuel duty, rising vehicle exercise duty. They're sort of syntaxes,
but they're actually inflationary. They feed into the CPI basket,
so I think they'll just want to be sure of that.
I also think, you know, bigger picture, inflation's nearly four percent.
It's it's quite a difficult backdrop for them to cut
(06:18):
interest rates. It doesn't feel like there's any need to
rush rush the next move. They've got December, They've got
February if they want to wait to get it into
their forecast. So yeah, I think it is. It is live,
but I don't I don't think they will.
Speaker 1 (06:31):
Let's bringing a bit recompending colum As Marcus Ashworth. Now, Marcus,
I wonder what you made of the Chancellor's comments that
were directed at the Bank of England. Do you think
that she'd been reading your calum as many chance Well,
I just think.
Speaker 2 (06:41):
I'm semi joking here, but I don't think I've ever
seen such political interference into a so called independent central bank.
Speaker 6 (06:48):
You know it's happening everywhere these days.
Speaker 2 (06:49):
But now this is a commentary design to put front
and center to audiences, one of which is very much
the Bank of England. She is essentially saying, I'm going
to do everything I can can in my power and
this budget to be as uninflationary as possible. You need
to do your act. I'm getting try and get out
of your way. We all know she's been getting in
their way for last year, but she's at least it
(07:11):
seemingly learned that lesson. So a lot of pressure on
the Bank and I agree with that. I don't think
they'll probably go this Thursday. They do, then we really
have got political interference. But they are probably going to
set up for one definitely by by February, possibly as
early as as December. Bear in mind the Fed already
(07:32):
cut once again and probably probably will cut again in December,
and also are doing stuff on you know, stopping all their.
Speaker 6 (07:39):
Constantive tightening programs.
Speaker 2 (07:40):
There's a lot of pressure anyway on the Bank of
being coming from the Fed.
Speaker 6 (07:44):
But the other audience is very much the bomb market.
The guild market.
Speaker 2 (07:47):
Is you know, this is what she wants to get down.
She's emphasized, you know, very much where the cost of
debt and very very clearly if she can get in
debt interest rates down if guilt yield full.
Speaker 6 (08:00):
So they have.
Speaker 2 (08:01):
Already substantially I mean, looking at how far guilt yields
have fallen in the last few weeks, it's quite substantial.
Not all of that possibly will show up as much
as should have hoped in the obr's assessment because they
think their their window closed, probably before the last big
drop in the yield. Nonetheless, she clearly wants the vote
(08:23):
of the guild market please, that's her key constituency.
Speaker 3 (08:28):
Yes, Lizzie in terms of what she was talking about
more broadly then talking about how she knows that real
progress takes time, but taking credit for last year's budget
for fixing the foundations, having said that there was blame historically,
There was blame for different political parties for different choices
(08:50):
in the past that the UK has made. There was
a lot of blame for why the UK's in the
situation that it is now, and that pushing for easy
answers is irrespond is that blame for the toy government
for tariffs, for Brexit all sorts of things. Is that
going to work with voters with her own parliamentary Labor Party.
Speaker 5 (09:11):
Well, I almost felt like we were at the autumn
budget in twenty twenty four because that was the moment
when she could blame the Tory legacy and say we're
going to make difficult decisions, and of course she did.
She made forty billion pounds of tax rises, hence some
of the inflation, a lot of the inflation that we've
seen over the past year, and hence the situation that
the Bank of England finds it in now. In terms
(09:33):
of that market reaction, I was watching that thirty year
old tumble it thirtye yearld tumbling during her speech to
the lowest level since April. It's gone back up again
now and wondering was this the Chancellor trying to speak
to the bond market to try to buy herself some
more headroom at the budget. And I was messaging Dan
(09:53):
as she was speaking and asking is that how it works?
Is the OBR going to be able to take account
of this done? It seems like we just don't know
what the window is going to be, right.
Speaker 6 (10:03):
No, we don't.
Speaker 7 (10:05):
And I'd also focus slightly shorter because of that's where
the UK issues its debt now, So sort of ten years,
probably a slightly better one to use. But yes, we
don't know, but I think in the pre measures forecast
the OBR will have used the window, probably to the
middle of somewhere to the middle of October. What they
(10:28):
might do, though, is once they see the policy package,
they may choose to lower that path of guilt yields
in anticipation of how the Bank of England might respond
and how markets might respond. They did something similar in
the October budget last year where they took in a
path of guilt yields and then they subsequently raised it
because it was a big fiscal giveaway. So the OBR
(10:52):
they take their interest the path of guilt yield into
their debt interest forecast mechanically, but then they've also there
is unprecedent for them making adjustments subsequently, so they might
effectively give reeves some benefits if you like, if you
want to call it a benefit of shoring up the
public finances, taking account of the fact that there'll be
(11:14):
a lower risk premium on the UK debt and also
because it will give the Bank of England space to
lower interest rates.
Speaker 3 (11:20):
Just one point, Anne in terms of the whole how
big the fiscal hole is for Rachel Reeves right now.
There's also a question about that. The Resolution Foundation has
come up with a much smaller number. A lot of
economists sort of think it's twenty to thirty five billion pounds.
What does she actually have to make up with these
potential tax increases and maybe some spending cuts. We just
(11:43):
don't know yet.
Speaker 7 (11:44):
Yeah, so it's very uncertain, and there are two elements
to it. One is the degree of the downgrade from
the OBER and the impact that has on the fiscal hole.
And it's quite possible that they downgrade their productivity forecasts
but upgrade their wage for wage growth forecast, and the
(12:04):
net impact of those two things means that the hit
to the public finances is smaller, even if the hole
is smaller that Rachel Reeves has to fill. And when
we talk about the whole, we're talking about the amount
she has to tighten fiscal policy to get back to
where she started, which is with nine point nine billion
pounds of headroom. I think if she has a smaller
(12:27):
fiscal hole, she will just increase the headroom by even
more if you like. I think there's a minimum amount
she wants to increase the headroom, probably by five to
ten billion pounds. But if the OBR gives her a
like the resolution poundations suggesting she'll still increase taxes by
a chunky amount to increase the headroom that she has,
(12:49):
and it will be an even bigger increase in the headroom.
And I think that's the challenge with this is that
you are increasing taxes not to spend it on anything.
You're increasing taxes to put it to one side, which
is what the head room is. It's money you put
aside and you can commit later to what you can say. Look,
you know, if things go well, I can cut taxes
in the run up to the to the next election.
(13:11):
But what you're what you're not doing is saying I'm
increasing taxes, but I'm also spending more money, say on
the NHS or on pensions or something.
Speaker 6 (13:18):
So it's a hard sell to do this.
Speaker 7 (13:21):
And I think that's part of this narrative as well,
is to say, you know, the line in there we
all need to contribute to this.
Speaker 6 (13:29):
That was quite an interesting line.
Speaker 7 (13:30):
And you know, it wasn't specific to working non working people,
non working people, It wasn't specific.
Speaker 6 (13:35):
To any group.
Speaker 7 (13:36):
It was everyone needs to contribute. Which sort of you know,
potentially speaks to the income tax point again.
Speaker 1 (13:42):
Marcus Will investors have taken heart from what they heard
from Rachel Reeves in terms of her sticking to the
fiscal rules and you know, noting the importance of bond
markets and what their tolerance will be. I mean, is
this a helpful strategy for guild market investors to have
this sort of signings and the Chancellor.
Speaker 2 (14:02):
Yes, I think it is, And I think the important
point here is if it's credible, if you can wrap
it in the overall package she delivers on number twenty six,
is actually makes some sense. She has learned her lessons
that whacking out the minimum wage by more than is above,
way above inflation, increasing civil service pay arises, et cetera,
et cetera, was actively disadvantageous to her and prevented the
(14:26):
Mank of England from cutting into threads as much as
they could have done, and indeed pushed up guilt yields
far higher than they ought to be. But she has
a win win here if she gets us right. She
kitchen sinks, she takes the political hit. The market sees
she's taken the political hit, but she put it in
a context which is goes forward to April where we
(14:46):
have this sort of strike strange thing in our economy
where everything resets as far as where various different benefits
and different things which are set on inflation, government payouts
are ratcheted from she can have a sharp fall of
inflation going into the second quarter, which will should spur
on further banking and the rate cuts. And this is what
(15:08):
it's all about. She needs to get not one or
two rate cuts out of the banking, but probably more
than that to make some significant difference in her debt
interest costs and indeed.
Speaker 6 (15:18):
The guilt yields to fall.
Speaker 2 (15:20):
The key thing here, I would suspect is that she
was now mentioned of increasing debt. The guilt market will
like that very much. Hence we're seeing and edging down
and yields here seeing is believing. But we may not
get a rate cut in November, but we're teeing on
them up clearly for next year and several of them,
and I think that's what she needs to see happen.
(15:42):
That's very much what this is all as I said,
delivered all but you know next in the spring, this
is where she needs to get an extra win the
base effect of the ratching up last year, so we're
ratching down in benefit costs and overall sort of set
price throughout the economy, not just on energy but across
(16:02):
the whole. After them, things could give the bagging in
further excuses to cut igistrates throughout the sort of first
half certainly of the second half of next year.
Speaker 3 (16:12):
Lizzie wrap things up for us, because the other point
that Reeve's made was that this is a budget for growth,
a budget for business. Wasn't much mentioned of a wealthy people,
and that's been something that we've been tracking carefully that
there's a lot of thought about actually who the broad
shoulders are, who are going to you know, withstand maybe
(16:33):
higher taxes. That's a big question for the budget now.
Speaker 5 (16:38):
No, and at the Labor Party conference she told me
there wouldn't be a wealth tax. She didn't think it
made sense. But she doesn't need to use that particular
word to tell us that it might be the rich
who pay. Here she talked a lot about fair tax
rises and there's been a lot of speculation about options,
including an exit charge on wealthy Brits leaving the country.
(16:58):
We know that many of them have been because of
the changes to the non doms rules that she's already implemented,
and there could be a higher tax on the most
expensive homes. We don't know how that would be implemented.
But the problem still remains, how do you fill that
hole in the public finances with measures like these? If
(17:19):
it's just kind of tinkering around the edges, is it
enough unless she goes back to those three main leaders
of tax and that's what's going to be so difficult politically.
Speaker 1 (17:29):
Okay, Lizzie Burden are UK correspondents Bomber Commanding Columbist Marcus
Ashworth and our chief UK economist Dan Hansen. Thank you
all for your analysis of the comments that we've had
from the Chancellor Rachel Reeves this morning as we're counting
down to the budget in twenty two days time. This
is Bloomberg Daybreak Europe, your morning brief on the stories
making news from London to Wall Street and beyond.
Speaker 3 (17:51):
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Speaker 1 (18:12):
I'm Stephen Carol. Join us again tomorrow morning for all
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on Bloomberg Daybreak Europe
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:10):
Hello.
Speaker 3 (00:10):
Welcome to this special episode of the Bloomberg Daybreak Here podcast.
I'm Caroline Hepga in London.
Speaker 1 (00:16):
And I'm Stephen Caroll in Brussels.
Speaker 3 (00:18):
The UK Chancellor Rachel Reeves has laid the groundwork for
tax increases in her upcoming budget this morning, blaming the
previous Conservative government and global trade frictions for harming the
UK economy. In an unusual speech at Downing Street just
weeks ahead of the budget, she said she was determined
to bring down inflation and keep a lid on the
(00:40):
government's boring costs.
Speaker 4 (00:42):
Inflation is already much lower than the double digit scene
under the previous government, and the choices I make in
this budget this month will be focused on getting inflation
falling and creating the conditions for interest rate cuts to
support economic growth and improve the cost of lid.
Speaker 1 (01:00):
Reeve's added that previous policies around austerity, brags it and
the handling of the pandemic left the UK with a
worse inheritance than previously taught. She was determined that her
budget would be focused on reassuring markets and reducing the
government's debt pile market.
Speaker 4 (01:15):
No, my commitment to the fiscal rules is ironclad. Some
people say that we should just sidestep those rules, that
we can borrow more without consequence by simply reclassifying areas
like defense or education. But no accounting trick can change
the basic fact that government debt is sold on financial markets.
(01:39):
There are a limit on the price that banks, hedge
funds and pension funds are willing to pay for our debt,
and we are competing constantly with other countries also selling debt.
Speaker 3 (01:50):
Well, as the Chancellor Aha Reeves spoke, the yield on
UK thirty year guilds hit their lowest level since April,
the pound or so weakened before later pairing those.
Speaker 1 (02:02):
Moves, Well, let's bring you someone alysis now of what
we've been hearing from the Chancellor Rachel Reeves warning of
the worsening economic situation ahead of her budget later this month.
We have a trio of top Bloomberg voices in the
UK economy to discuss. We've got a UK correspondent Lizzie Burden,
with US Bloomberg opinion columnist Marcus Ashworth and our chief
UK economist Dan Hansen as well. Lizzie, I'd like to
start with you, how should we interpret what we heard
(02:24):
from the Chancellor? Is it now certain that income taxes
will go up on the budget?
Speaker 5 (02:29):
I wouldn't say it's certain that income taxes would go up.
Powd to say that she's rolled the pitch for tax rises,
and I'd note that it's highly unusual, Stephen, for a
Chancellor to make a speech like this in the weeks
up to the budget. She wanted to emphasize she wasn't
going to announce individual measures, but it was a strong
suggestion that she is going to build more headroom than
(02:49):
she's left in the past, and that's been nine point
nine billion pounds. And we know that there's been so
much speculation in the markets about what would come at
the next fiscal event as a result of leaving such
raizor thin margins. So perhaps she'll go further than that.
This time. She's talked about seeking fiscal headroom to withstand
global turbulence, her commitment to the fiscal rules being ironclad,
(03:12):
and the limits to the price investors are willing to
pay for UK debts. So she set out the narrative
of who to blame here for the tough but fair
Starmer's words, decisions that were expecting at the budget, and surprise, surprise,
it was the Tories tariffs, austerity, a quote rushed, an
ill conceived Brexit, and the pandemic. But what she didn't
(03:33):
talk about was the inflationary impact of her first budget,
the promise not to come back for more tax rises
after the forty billion of tax rises the last budget,
and the manifesto commitment not to raise the three levers
of tax, income tax, the payrolls tax or V eight.
She had reiterated that promise at Labor Conference, but the
other options on the table Stephen might not be enough
(03:56):
to fill the fiscal gap. Interestingly, though, the last point
I just want to make here, yeah, is she said
we were elected on a commitment to put country before party,
the national interest before political calculation. So I wonder whether
this was Reeve's asking permission to break that manifesto Manifesto commitment.
Speaker 3 (04:17):
Dan, can I bring you in at this point? Does
this mean that the Bank of England meeting is now
live this week? Because that's the next thing that we have.
We have a Bank of England meeting right ahead of
the actual budget. We don't have the details you Rachel
Reeves didn't give any specifics, but is that meeting now live?
(04:37):
I was speaking to Jeffrey U of bn Y earlier.
He seemed to think so because Rachel Reeves cited high inflation,
high interest rates, and she was very specific about the
level of UK interest rates.
Speaker 6 (04:52):
Yeah, she was.
Speaker 7 (04:53):
I noticed that. But I think it's live definitely. I
don't think they will cut, but I think it's going
to be a tight decision between a cut and a
hold the bank tends. I think the bank will want
to know what exactly is in the budget, and they
don't know that yet. They can assume, as we've all
(05:14):
been assuming for the past, coming on for six months now,
what may or may not be in the budget, but
and they can obviously make assumptions, but they will want
to know because there are a lot of different variables
that matter for them, the most significant of which is
whereabouts does the tax rice's land and where do the
(05:35):
spending cuts land? And that's what matters for the bank.
If it's early on in the forecast period, there'll be
a good case for them, you know, moving interest rates lower.
But I think they'll just want to be sure, you know,
there's been a lot of promises about not doing anything
to stoke inflation, but nothing in the budget.
Speaker 6 (05:55):
Does that.
Speaker 7 (05:58):
You know, things that they would be worried about, rising
fuel duty, rising vehicle exercise duty. They're sort of syntaxes,
but they're actually inflationary. They feed into the CPI basket,
so I think they'll just want to be sure of that.
I also think, you know, bigger picture, inflation's nearly four percent.
It's it's quite a difficult backdrop for them to cut
(06:18):
interest rates. It doesn't feel like there's any need to
rush rush the next move. They've got December, They've got
February if they want to wait to get it into
their forecast. So yeah, I think it is. It is live,
but I don't I don't think they will.
Speaker 1 (06:31):
Let's bringing a bit recompending colum As Marcus Ashworth. Now, Marcus,
I wonder what you made of the Chancellor's comments that
were directed at the Bank of England. Do you think
that she'd been reading your calum as many chance Well,
I just think.
Speaker 2 (06:41):
I'm semi joking here, but I don't think I've ever
seen such political interference into a so called independent central bank.
Speaker 6 (06:48):
You know it's happening everywhere these days.
Speaker 2 (06:49):
But now this is a commentary design to put front
and center to audiences, one of which is very much
the Bank of England. She is essentially saying, I'm going
to do everything I can can in my power and
this budget to be as uninflationary as possible. You need
to do your act. I'm getting try and get out
of your way. We all know she's been getting in
their way for last year, but she's at least it
(07:11):
seemingly learned that lesson. So a lot of pressure on
the Bank and I agree with that. I don't think
they'll probably go this Thursday. They do, then we really
have got political interference. But they are probably going to
set up for one definitely by by February, possibly as
early as as December. Bear in mind the Fed already
(07:32):
cut once again and probably probably will cut again in December,
and also are doing stuff on you know, stopping all their.
Speaker 6 (07:39):
Constantive tightening programs.
Speaker 2 (07:40):
There's a lot of pressure anyway on the Bank of
being coming from the Fed.
Speaker 6 (07:44):
But the other audience is very much the bomb market.
The guild market.
Speaker 2 (07:47):
Is you know, this is what she wants to get down.
She's emphasized, you know, very much where the cost of
debt and very very clearly if she can get in
debt interest rates down if guilt yield full.
Speaker 6 (08:00):
So they have.
Speaker 2 (08:01):
Already substantially I mean, looking at how far guilt yields
have fallen in the last few weeks, it's quite substantial.
Not all of that possibly will show up as much
as should have hoped in the obr's assessment because they
think their their window closed, probably before the last big
drop in the yield. Nonetheless, she clearly wants the vote
(08:23):
of the guild market please, that's her key constituency.
Speaker 3 (08:28):
Yes, Lizzie in terms of what she was talking about
more broadly then talking about how she knows that real
progress takes time, but taking credit for last year's budget
for fixing the foundations, having said that there was blame historically,
There was blame for different political parties for different choices
(08:50):
in the past that the UK has made. There was
a lot of blame for why the UK's in the
situation that it is now, and that pushing for easy
answers is irrespond is that blame for the toy government
for tariffs, for Brexit all sorts of things. Is that
going to work with voters with her own parliamentary Labor Party.
Speaker 5 (09:11):
Well, I almost felt like we were at the autumn
budget in twenty twenty four because that was the moment
when she could blame the Tory legacy and say we're
going to make difficult decisions, and of course she did.
She made forty billion pounds of tax rises, hence some
of the inflation, a lot of the inflation that we've
seen over the past year, and hence the situation that
the Bank of England finds it in now. In terms
(09:33):
of that market reaction, I was watching that thirty year
old tumble it thirtye yearld tumbling during her speech to
the lowest level since April. It's gone back up again
now and wondering was this the Chancellor trying to speak
to the bond market to try to buy herself some
more headroom at the budget. And I was messaging Dan
(09:53):
as she was speaking and asking is that how it works?
Is the OBR going to be able to take account
of this done? It seems like we just don't know
what the window is going to be, right.
Speaker 6 (10:03):
No, we don't.
Speaker 7 (10:05):
And I'd also focus slightly shorter because of that's where
the UK issues its debt now, So sort of ten years,
probably a slightly better one to use. But yes, we
don't know, but I think in the pre measures forecast
the OBR will have used the window, probably to the
middle of somewhere to the middle of October. What they
(10:28):
might do, though, is once they see the policy package,
they may choose to lower that path of guilt yields
in anticipation of how the Bank of England might respond
and how markets might respond. They did something similar in
the October budget last year where they took in a
path of guilt yields and then they subsequently raised it
because it was a big fiscal giveaway. So the OBR
(10:52):
they take their interest the path of guilt yield into
their debt interest forecast mechanically, but then they've also there
is unprecedent for them making adjustments subsequently, so they might
effectively give reeves some benefits if you like, if you
want to call it a benefit of shoring up the
public finances, taking account of the fact that there'll be
(11:14):
a lower risk premium on the UK debt and also
because it will give the Bank of England space to
lower interest rates.
Speaker 3 (11:20):
Just one point, Anne in terms of the whole how
big the fiscal hole is for Rachel Reeves right now.
There's also a question about that. The Resolution Foundation has
come up with a much smaller number. A lot of
economists sort of think it's twenty to thirty five billion pounds.
What does she actually have to make up with these
potential tax increases and maybe some spending cuts. We just
(11:43):
don't know yet.
Speaker 7 (11:44):
Yeah, so it's very uncertain, and there are two elements
to it. One is the degree of the downgrade from
the OBER and the impact that has on the fiscal hole.
And it's quite possible that they downgrade their productivity forecasts
but upgrade their wage for wage growth forecast, and the
(12:04):
net impact of those two things means that the hit
to the public finances is smaller, even if the hole
is smaller that Rachel Reeves has to fill. And when
we talk about the whole, we're talking about the amount
she has to tighten fiscal policy to get back to
where she started, which is with nine point nine billion
pounds of headroom. I think if she has a smaller
(12:27):
fiscal hole, she will just increase the headroom by even
more if you like. I think there's a minimum amount
she wants to increase the headroom, probably by five to
ten billion pounds. But if the OBR gives her a
like the resolution poundations suggesting she'll still increase taxes by
a chunky amount to increase the headroom that she has,
(12:49):
and it will be an even bigger increase in the headroom.
And I think that's the challenge with this is that
you are increasing taxes not to spend it on anything.
You're increasing taxes to put it to one side, which
is what the head room is. It's money you put
aside and you can commit later to what you can say. Look,
you know, if things go well, I can cut taxes
in the run up to the to the next election.
(13:11):
But what you're what you're not doing is saying I'm
increasing taxes, but I'm also spending more money, say on
the NHS or on pensions or something.
Speaker 6 (13:18):
So it's a hard sell to do this.
Speaker 7 (13:21):
And I think that's part of this narrative as well,
is to say, you know, the line in there we
all need to contribute to this.
Speaker 6 (13:29):
That was quite an interesting line.
Speaker 7 (13:30):
And you know, it wasn't specific to working non working people,
non working people, It wasn't specific.
Speaker 6 (13:35):
To any group.
Speaker 7 (13:36):
It was everyone needs to contribute. Which sort of you know,
potentially speaks to the income tax point again.
Speaker 1 (13:42):
Marcus Will investors have taken heart from what they heard
from Rachel Reeves in terms of her sticking to the
fiscal rules and you know, noting the importance of bond
markets and what their tolerance will be. I mean, is
this a helpful strategy for guild market investors to have
this sort of signings and the Chancellor.
Speaker 2 (14:02):
Yes, I think it is, And I think the important
point here is if it's credible, if you can wrap
it in the overall package she delivers on number twenty six,
is actually makes some sense. She has learned her lessons
that whacking out the minimum wage by more than is above,
way above inflation, increasing civil service pay arises, et cetera,
et cetera, was actively disadvantageous to her and prevented the
(14:26):
Mank of England from cutting into threads as much as
they could have done, and indeed pushed up guilt yields
far higher than they ought to be. But she has
a win win here if she gets us right. She
kitchen sinks, she takes the political hit. The market sees
she's taken the political hit, but she put it in
a context which is goes forward to April where we
(14:46):
have this sort of strike strange thing in our economy
where everything resets as far as where various different benefits
and different things which are set on inflation, government payouts
are ratcheted from she can have a sharp fall of
inflation going into the second quarter, which will should spur
on further banking and the rate cuts. And this is what
(15:08):
it's all about. She needs to get not one or
two rate cuts out of the banking, but probably more
than that to make some significant difference in her debt
interest costs and indeed.
Speaker 6 (15:18):
The guilt yields to fall.
Speaker 2 (15:20):
The key thing here, I would suspect is that she
was now mentioned of increasing debt. The guilt market will
like that very much. Hence we're seeing and edging down
and yields here seeing is believing. But we may not
get a rate cut in November, but we're teeing on
them up clearly for next year and several of them,
and I think that's what she needs to see happen.
(15:42):
That's very much what this is all as I said,
delivered all but you know next in the spring, this
is where she needs to get an extra win the
base effect of the ratching up last year, so we're
ratching down in benefit costs and overall sort of set
price throughout the economy, not just on energy but across
(16:02):
the whole. After them, things could give the bagging in
further excuses to cut igistrates throughout the sort of first
half certainly of the second half of next year.
Speaker 3 (16:12):
Lizzie wrap things up for us, because the other point
that Reeve's made was that this is a budget for growth,
a budget for business. Wasn't much mentioned of a wealthy people,
and that's been something that we've been tracking carefully that
there's a lot of thought about actually who the broad
shoulders are, who are going to you know, withstand maybe
(16:33):
higher taxes. That's a big question for the budget now.
Speaker 5 (16:38):
No, and at the Labor Party conference she told me
there wouldn't be a wealth tax. She didn't think it
made sense. But she doesn't need to use that particular
word to tell us that it might be the rich
who pay. Here she talked a lot about fair tax
rises and there's been a lot of speculation about options,
including an exit charge on wealthy Brits leaving the country.
(16:58):
We know that many of them have been because of
the changes to the non doms rules that she's already implemented,
and there could be a higher tax on the most
expensive homes. We don't know how that would be implemented.
But the problem still remains, how do you fill that
hole in the public finances with measures like these? If
(17:19):
it's just kind of tinkering around the edges, is it
enough unless she goes back to those three main leaders
of tax and that's what's going to be so difficult politically.
Speaker 1 (17:29):
Okay, Lizzie Burden are UK correspondents Bomber Commanding Columbist Marcus
Ashworth and our chief UK economist Dan Hansen. Thank you
all for your analysis of the comments that we've had
from the Chancellor Rachel Reeves this morning as we're counting
down to the budget in twenty two days time. This
is Bloomberg Daybreak Europe, your morning brief on the stories
making news from London to Wall Street and beyond.
Speaker 3 (17:51):
Look for us on your podcast feed every morning on Apple,
Spotify and anywhere else you get your podcasts.
Speaker 1 (17:57):
You can also listen live each morning on London DAB Radio,
the Bloomberg Business app, and Bloomberg dot Com.
Speaker 3 (18:03):
Our flagship New York station is also available on your
Amazon Alexa devices. Just say Alexa play Bloomberg eleven thirty.
I'm Caroline Hepka and.
Speaker 1 (18:12):
I'm Stephen Carol. Join us again tomorrow morning for all
the news you need to start your day right here
on Bloomberg Daybreak Europe
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