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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.

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Speaker 2: Hello.

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Speaker 3: Welcome to this special episode of the Bloomberg Daybreak Here podcast.

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Speaker 3: I'm Caroline Hepga in London.

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Speaker 1: And I'm Stephen Caroll in Brussels.

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Speaker 3: The UK Chancellor Rachel Reeves has laid the groundwork for

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Speaker 3: tax increases in her upcoming budget this morning, blaming the

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Speaker 3: previous Conservative government and global trade frictions for harming the

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Speaker 3: UK economy. In an unusual speech at Downing Street just

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Speaker 3: weeks ahead of the budget, she said she was determined

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Speaker 3: to bring down inflation and keep a lid on the

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Speaker 3: government's boring costs.

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Speaker 4: Inflation is already much lower than the double digit scene

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Speaker 4: under the previous government, and the choices I make in

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Speaker 4: this budget this month will be focused on getting inflation

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Speaker 4: falling and creating the conditions for interest rate cuts to

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Speaker 4: support economic growth and improve the cost of lid.

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Speaker 1: Reeve's added that previous policies around austerity, brags it and

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Speaker 1: the handling of the pandemic left the UK with a

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Speaker 1: worse inheritance than previously taught. She was determined that her

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Speaker 1: budget would be focused on reassuring markets and reducing the

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Speaker 1: government's debt pile market.

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Speaker 4: No, my commitment to the fiscal rules is ironclad. Some

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Speaker 4: people say that we should just sidestep those rules, that

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Speaker 4: we can borrow more without consequence by simply reclassifying areas

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Speaker 4: like defense or education. But no accounting trick can change

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Speaker 4: the basic fact that government debt is sold on financial markets.

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Speaker 4: There are a limit on the price that banks, hedge

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Speaker 4: funds and pension funds are willing to pay for our debt,

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Speaker 4: and we are competing constantly with other countries also selling debt.

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Speaker 3: Well, as the Chancellor Aha Reeves spoke, the yield on

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Speaker 3: UK thirty year guilds hit their lowest level since April,

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Speaker 3: the pound or so weakened before later pairing those.

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Speaker 1: Moves, Well, let's bring you someone alysis now of what

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Speaker 1: we've been hearing from the Chancellor Rachel Reeves warning of

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Speaker 1: the worsening economic situation ahead of her budget later this month.

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Speaker 1: We have a trio of top Bloomberg voices in the

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Speaker 1: UK economy to discuss. We've got a UK correspondent Lizzie Burden,

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Speaker 1: with US Bloomberg opinion columnist Marcus Ashworth and our chief

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Speaker 1: UK economist Dan Hansen as well. Lizzie, I'd like to

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Speaker 1: start with you, how should we interpret what we heard

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Speaker 1: from the Chancellor? Is it now certain that income taxes

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Speaker 1: will go up on the budget?

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Speaker 5: I wouldn't say it's certain that income taxes would go up.

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Speaker 5: Powd to say that she's rolled the pitch for tax rises,

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Speaker 5: and I'd note that it's highly unusual, Stephen, for a

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Speaker 5: Chancellor to make a speech like this in the weeks

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Speaker 5: up to the budget. She wanted to emphasize she wasn't

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Speaker 5: going to announce individual measures, but it was a strong

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Speaker 5: suggestion that she is going to build more headroom than

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Speaker 5: she's left in the past, and that's been nine point

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Speaker 5: nine billion pounds. And we know that there's been so

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Speaker 5: much speculation in the markets about what would come at

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Speaker 5: the next fiscal event as a result of leaving such

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Speaker 5: raizor thin margins. So perhaps she'll go further than that.

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Speaker 5: This time. She's talked about seeking fiscal headroom to withstand

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Speaker 5: global turbulence, her commitment to the fiscal rules being ironclad,

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Speaker 5: and the limits to the price investors are willing to

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Speaker 5: pay for UK debts. So she set out the narrative

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Speaker 5: of who to blame here for the tough but fair

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Speaker 5: Starmer's words, decisions that were expecting at the budget, and surprise, surprise,

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Speaker 5: it was the Tories tariffs, austerity, a quote rushed, an

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Speaker 5: ill conceived Brexit, and the pandemic. But what she didn't

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Speaker 5: talk about was the inflationary impact of her first budget,

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Speaker 5: the promise not to come back for more tax rises

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Speaker 5: after the forty billion of tax rises the last budget,

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Speaker 5: and the manifesto commitment not to raise the three levers

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Speaker 5: of tax, income tax, the payrolls tax or V eight.

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Speaker 5: She had reiterated that promise at Labor Conference, but the

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Speaker 5: other options on the table Stephen might not be enough

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Speaker 5: to fill the fiscal gap. Interestingly, though, the last point

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Speaker 5: I just want to make here, yeah, is she said

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Speaker 5: we were elected on a commitment to put country before party,

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Speaker 5: the national interest before political calculation. So I wonder whether

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Speaker 5: this was Reeve's asking permission to break that manifesto Manifesto commitment.

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Speaker 3: Dan, can I bring you in at this point? Does

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Speaker 3: this mean that the Bank of England meeting is now

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Speaker 3: live this week? Because that's the next thing that we have.

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Speaker 3: We have a Bank of England meeting right ahead of

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Speaker 3: the actual budget. We don't have the details you Rachel

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Speaker 3: Reeves didn't give any specifics, but is that meeting now live?

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Speaker 3: I was speaking to Jeffrey U of bn Y earlier.

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Speaker 3: He seemed to think so because Rachel Reeves cited high inflation,

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Speaker 3: high interest rates, and she was very specific about the

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Speaker 3: level of UK interest rates.

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Speaker 6: Yeah, she was.

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Speaker 7: I noticed that. But I think it's live definitely. I

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Speaker 7: don't think they will cut, but I think it's going

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Speaker 7: to be a tight decision between a cut and a

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Speaker 7: hold the bank tends. I think the bank will want

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Speaker 7: to know what exactly is in the budget, and they

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Speaker 7: don't know that yet. They can assume, as we've all

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Speaker 7: been assuming for the past, coming on for six months now,

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Speaker 7: what may or may not be in the budget, but

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Speaker 7: and they can obviously make assumptions, but they will want

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Speaker 7: to know because there are a lot of different variables

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Speaker 7: that matter for them, the most significant of which is

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Speaker 7: whereabouts does the tax rice's land and where do the

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Speaker 7: spending cuts land? And that's what matters for the bank.

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Speaker 7: If it's early on in the forecast period, there'll be

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Speaker 7: a good case for them, you know, moving interest rates lower.

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Speaker 7: But I think they'll just want to be sure, you know,

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Speaker 7: there's been a lot of promises about not doing anything

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Speaker 7: to stoke inflation, but nothing in the budget.

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Speaker 6: Does that.

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Speaker 7: You know, things that they would be worried about, rising

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Speaker 7: fuel duty, rising vehicle exercise duty. They're sort of syntaxes,

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Speaker 7: but they're actually inflationary. They feed into the CPI basket,

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Speaker 7: so I think they'll just want to be sure of that.

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Speaker 7: I also think, you know, bigger picture, inflation's nearly four percent.

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Speaker 7: It's it's quite a difficult backdrop for them to cut

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Speaker 7: interest rates. It doesn't feel like there's any need to

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Speaker 7: rush rush the next move. They've got December, They've got

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Speaker 7: February if they want to wait to get it into

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Speaker 7: their forecast. So yeah, I think it is. It is live,

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Speaker 7: but I don't I don't think they will.

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Speaker 1: Let's bringing a bit recompending colum As Marcus Ashworth. Now, Marcus,

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Speaker 1: I wonder what you made of the Chancellor's comments that

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Speaker 1: were directed at the Bank of England. Do you think

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Speaker 1: that she'd been reading your calum as many chance Well,

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Speaker 1: I just think.

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Speaker 2: I'm semi joking here, but I don't think I've ever

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Speaker 2: seen such political interference into a so called independent central bank.

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Speaker 6: You know it's happening everywhere these days.

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Speaker 2: But now this is a commentary design to put front

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Speaker 2: and center to audiences, one of which is very much

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Speaker 2: the Bank of England. She is essentially saying, I'm going

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Speaker 2: to do everything I can can in my power and

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Speaker 2: this budget to be as uninflationary as possible. You need

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Speaker 2: to do your act. I'm getting try and get out

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Speaker 2: of your way. We all know she's been getting in

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Speaker 2: their way for last year, but she's at least it

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Speaker 2: seemingly learned that lesson. So a lot of pressure on

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Speaker 2: the Bank and I agree with that. I don't think

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Speaker 2: they'll probably go this Thursday. They do, then we really

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Speaker 2: have got political interference. But they are probably going to

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Speaker 2: set up for one definitely by by February, possibly as

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Speaker 2: early as as December. Bear in mind the Fed already

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Speaker 2: cut once again and probably probably will cut again in December,

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Speaker 2: and also are doing stuff on you know, stopping all their.

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Speaker 6: Constantive tightening programs.

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Speaker 2: There's a lot of pressure anyway on the Bank of

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Speaker 2: being coming from the Fed.

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Speaker 6: But the other audience is very much the bomb market.

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Speaker 6: The guild market.

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Speaker 2: Is you know, this is what she wants to get down.

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Speaker 2: She's emphasized, you know, very much where the cost of

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Speaker 2: debt and very very clearly if she can get in

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Speaker 2: debt interest rates down if guilt yield full.

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Speaker 6: So they have.

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Speaker 2: Already substantially I mean, looking at how far guilt yields

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Speaker 2: have fallen in the last few weeks, it's quite substantial.

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Speaker 2: Not all of that possibly will show up as much

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Speaker 2: as should have hoped in the obr's assessment because they

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Speaker 2: think their their window closed, probably before the last big

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Speaker 2: drop in the yield. Nonetheless, she clearly wants the vote

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Speaker 2: of the guild market please, that's her key constituency.

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Speaker 3: Yes, Lizzie in terms of what she was talking about

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Speaker 3: more broadly then talking about how she knows that real

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Speaker 3: progress takes time, but taking credit for last year's budget

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Speaker 3: for fixing the foundations, having said that there was blame historically,

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Speaker 3: There was blame for different political parties for different choices

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Speaker 3: in the past that the UK has made. There was

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Speaker 3: a lot of blame for why the UK's in the

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Speaker 3: situation that it is now, and that pushing for easy

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Speaker 3: answers is irrespond is that blame for the toy government

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Speaker 3: for tariffs, for Brexit all sorts of things. Is that

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Speaker 3: going to work with voters with her own parliamentary Labor Party.

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Speaker 5: Well, I almost felt like we were at the autumn

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Speaker 5: budget in twenty twenty four because that was the moment

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Speaker 5: when she could blame the Tory legacy and say we're

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Speaker 5: going to make difficult decisions, and of course she did.

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Speaker 5: She made forty billion pounds of tax rises, hence some

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Speaker 5: of the inflation, a lot of the inflation that we've

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Speaker 5: seen over the past year, and hence the situation that

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Speaker 5: the Bank of England finds it in now. In terms

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Speaker 5: of that market reaction, I was watching that thirty year

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Speaker 5: old tumble it thirtye yearld tumbling during her speech to

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Speaker 5: the lowest level since April. It's gone back up again

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Speaker 5: now and wondering was this the Chancellor trying to speak

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Speaker 5: to the bond market to try to buy herself some

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Speaker 5: more headroom at the budget. And I was messaging Dan

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Speaker 5: as she was speaking and asking is that how it works?

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Speaker 5: Is the OBR going to be able to take account

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Speaker 5: of this done? It seems like we just don't know

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Speaker 5: what the window is going to be, right.

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Speaker 6: No, we don't.

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Speaker 7: And I'd also focus slightly shorter because of that's where

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Speaker 7: the UK issues its debt now, So sort of ten years,

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Speaker 7: probably a slightly better one to use. But yes, we

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Speaker 7: don't know, but I think in the pre measures forecast

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Speaker 7: the OBR will have used the window, probably to the

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Speaker 7: middle of somewhere to the middle of October. What they

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Speaker 7: might do, though, is once they see the policy package,

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Speaker 7: they may choose to lower that path of guilt yields

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Speaker 7: in anticipation of how the Bank of England might respond

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Speaker 7: and how markets might respond. They did something similar in

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Speaker 7: the October budget last year where they took in a

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Speaker 7: path of guilt yields and then they subsequently raised it

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Speaker 7: because it was a big fiscal giveaway. So the OBR

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Speaker 7: they take their interest the path of guilt yield into

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Speaker 7: their debt interest forecast mechanically, but then they've also there

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Speaker 7: is unprecedent for them making adjustments subsequently, so they might

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Speaker 7: effectively give reeves some benefits if you like, if you

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Speaker 7: want to call it a benefit of shoring up the

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Speaker 7: public finances, taking account of the fact that there'll be

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Speaker 7: a lower risk premium on the UK debt and also

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Speaker 7: because it will give the Bank of England space to

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Speaker 7: lower interest rates.

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Speaker 3: Just one point, Anne in terms of the whole how

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Speaker 3: big the fiscal hole is for Rachel Reeves right now.

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Speaker 3: There's also a question about that. The Resolution Foundation has

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Speaker 3: come up with a much smaller number. A lot of

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Speaker 3: economists sort of think it's twenty to thirty five billion pounds.

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Speaker 3: What does she actually have to make up with these

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Speaker 3: potential tax increases and maybe some spending cuts. We just

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Speaker 3: don't know yet.

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Speaker 7: Yeah, so it's very uncertain, and there are two elements

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Speaker 7: to it. One is the degree of the downgrade from

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Speaker 7: the OBER and the impact that has on the fiscal hole.

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Speaker 7: And it's quite possible that they downgrade their productivity forecasts

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Speaker 7: but upgrade their wage for wage growth forecast, and the

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Speaker 7: net impact of those two things means that the hit

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Speaker 7: to the public finances is smaller, even if the hole

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Speaker 7: is smaller that Rachel Reeves has to fill. And when

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Speaker 7: we talk about the whole, we're talking about the amount

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Speaker 7: she has to tighten fiscal policy to get back to

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Speaker 7: where she started, which is with nine point nine billion

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Speaker 7: pounds of headroom. I think if she has a smaller

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Speaker 7: fiscal hole, she will just increase the headroom by even

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Speaker 7: more if you like. I think there's a minimum amount

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Speaker 7: she wants to increase the headroom, probably by five to

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Speaker 7: ten billion pounds. But if the OBR gives her a

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Speaker 7: like the resolution poundations suggesting she'll still increase taxes by

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Speaker 7: a chunky amount to increase the headroom that she has,

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Speaker 7: and it will be an even bigger increase in the headroom.

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Speaker 7: And I think that's the challenge with this is that

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Speaker 7: you are increasing taxes not to spend it on anything.

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Speaker 7: You're increasing taxes to put it to one side, which

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Speaker 7: is what the head room is. It's money you put

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Speaker 7: aside and you can commit later to what you can say. Look,

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Speaker 7: you know, if things go well, I can cut taxes

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Speaker 7: in the run up to the to the next election.

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Speaker 7: But what you're what you're not doing is saying I'm

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Speaker 7: increasing taxes, but I'm also spending more money, say on

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Speaker 7: the NHS or on pensions or something.

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Speaker 6: So it's a hard sell to do this.

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Speaker 7: And I think that's part of this narrative as well,

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Speaker 7: is to say, you know, the line in there we

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Speaker 7: all need to contribute to this.

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Speaker 6: That was quite an interesting line.

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Speaker 7: And you know, it wasn't specific to working non working people,

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Speaker 7: non working people, It wasn't specific.

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Speaker 6: To any group.

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Speaker 7: It was everyone needs to contribute. Which sort of you know,

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Speaker 7: potentially speaks to the income tax point again.

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Speaker 1: Marcus Will investors have taken heart from what they heard

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Speaker 1: from Rachel Reeves in terms of her sticking to the

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Speaker 1: fiscal rules and you know, noting the importance of bond

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Speaker 1: markets and what their tolerance will be. I mean, is

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Speaker 1: this a helpful strategy for guild market investors to have

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Speaker 1: this sort of signings and the Chancellor.

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Speaker 2: Yes, I think it is, And I think the important

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Speaker 2: point here is if it's credible, if you can wrap

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Speaker 2: it in the overall package she delivers on number twenty six,

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Speaker 2: is actually makes some sense. She has learned her lessons

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Speaker 2: that whacking out the minimum wage by more than is above,

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Speaker 2: way above inflation, increasing civil service pay arises, et cetera,

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Speaker 2: et cetera, was actively disadvantageous to her and prevented the

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Speaker 2: Mank of England from cutting into threads as much as

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Speaker 2: they could have done, and indeed pushed up guilt yields

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Speaker 2: far higher than they ought to be. But she has

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Speaker 2: a win win here if she gets us right. She

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Speaker 2: kitchen sinks, she takes the political hit. The market sees

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Speaker 2: she's taken the political hit, but she put it in

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Speaker 2: a context which is goes forward to April where we

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Speaker 2: have this sort of strike strange thing in our economy

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Speaker 2: where everything resets as far as where various different benefits

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Speaker 2: and different things which are set on inflation, government payouts

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Speaker 2: are ratcheted from she can have a sharp fall of

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Speaker 2: inflation going into the second quarter, which will should spur

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Speaker 2: on further banking and the rate cuts. And this is what

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Speaker 2: it's all about. She needs to get not one or

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Speaker 2: two rate cuts out of the banking, but probably more

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Speaker 2: than that to make some significant difference in her debt

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Speaker 2: interest costs and indeed.

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Speaker 6: The guilt yields to fall.

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Speaker 2: The key thing here, I would suspect is that she

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Speaker 2: was now mentioned of increasing debt. The guilt market will

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Speaker 2: like that very much. Hence we're seeing and edging down

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Speaker 2: and yields here seeing is believing. But we may not

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Speaker 2: get a rate cut in November, but we're teeing on

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Speaker 2: them up clearly for next year and several of them,

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Speaker 2: and I think that's what she needs to see happen.

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Speaker 2: That's very much what this is all as I said,

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Speaker 2: delivered all but you know next in the spring, this

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Speaker 2: is where she needs to get an extra win the

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Speaker 2: base effect of the ratching up last year, so we're

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Speaker 2: ratching down in benefit costs and overall sort of set

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Speaker 2: price throughout the economy, not just on energy but across

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Speaker 2: the whole. After them, things could give the bagging in

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Speaker 2: further excuses to cut igistrates throughout the sort of first

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Speaker 2: half certainly of the second half of next year.

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Speaker 3: Lizzie wrap things up for us, because the other point

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Speaker 3: that Reeve's made was that this is a budget for growth,

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Speaker 3: a budget for business. Wasn't much mentioned of a wealthy people,

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Speaker 3: and that's been something that we've been tracking carefully that

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Speaker 3: there's a lot of thought about actually who the broad

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Speaker 3: shoulders are, who are going to you know, withstand maybe

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Speaker 3: higher taxes. That's a big question for the budget now.

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Speaker 5: No, and at the Labor Party conference she told me

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Speaker 5: there wouldn't be a wealth tax. She didn't think it

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Speaker 5: made sense. But she doesn't need to use that particular

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Speaker 5: word to tell us that it might be the rich

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Speaker 5: who pay. Here she talked a lot about fair tax

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Speaker 5: rises and there's been a lot of speculation about options,

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Speaker 5: including an exit charge on wealthy Brits leaving the country.

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Speaker 5: We know that many of them have been because of

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Speaker 5: the changes to the non doms rules that she's already implemented,

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Speaker 5: and there could be a higher tax on the most

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Speaker 5: expensive homes. We don't know how that would be implemented.

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Speaker 5: But the problem still remains, how do you fill that

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Speaker 5: hole in the public finances with measures like these? If

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Speaker 5: it's just kind of tinkering around the edges, is it

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Speaker 5: enough unless she goes back to those three main leaders

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Speaker 5: of tax and that's what's going to be so difficult politically.

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Speaker 1: Okay, Lizzie Burden are UK correspondents Bomber Commanding Columbist Marcus

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Speaker 1: Ashworth and our chief UK economist Dan Hansen. Thank you

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Speaker 1: all for your analysis of the comments that we've had

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Speaker 1: from the Chancellor Rachel Reeves this morning as we're counting

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Speaker 1: down to the budget in twenty two days time. This

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