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Ahead of the first Labour budget in 14 years, speculation is rife and anticipation is high. We walk you through what we know, what to watch and why it matters with Bloomberg's Chief UK Economist and former HM Treasury economic adviser Dan Hanson. Hosted by Lizzy Burden and Caroline Hepker.
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I was really clear during the election that everything that we put forward, whether that is on the NHS or on defense or on tax policy, will always be fully costed and fully funded. That's very different. So what we've had these last fourteen years with decisions with no regard to where the money's going to come from. And I'm going to be different.
Rachel Reeves there speaking to Bloomberg in her first interview as Chancellor. She has promised to be different. Now's the time to deliver. Hello, you're listening to Bloomberg UK Politics. I'm Caroline Hepka and.
I'm Lizzie Burden. Welcome to the program. We're in countdown mode to the first labor budget in fourteen years, the first as well from a female chancellor. Rachel Reeves dropped her official promotional Instagram reel for the event on Wednesday, something that's become sort of a chancellor tradition leading up to a fiscal announcement. It means things are getting serious, Caroline, but many already touting this as historic, and there have been, of course weeks of leeks. We thought it would be helpful today to synthesize them all for you in one bite size show to get you ready for Wednesday.
Yeah.
Absolutely, it's been a total whirlwind. Many of our guests say that the speculation has been far greater now than it has been in previous budgets. Bloomberg's had a number of big scoops. Rachel Reeves expected to hike taxes on entrepreneurs selling their businesses. The letters for ministers to the Prime Minister worried about departmental budget cuts and then CGT Cattle gains tax Would it go up to thirty nine percent wide of the mark? Was what the Prime Minister told Bloomberg. So Rachel Reeves has a lot on her plate. But as the final costings are calculated by the Office for Budget Responsibility and the red briefcases being polished, not actually sure if it is physically polished, but anyway, we will look at the potential scenarios for the twenty twenty four autumn budgets.
Well, who better to do that with Caroline than our chief UK Economist, Dan Hanson, who actually previously spent seven years inside the Treasury working on a variety of UK macroeconomic issues. Dan, Welcome to the podcast.
Thanks for having me.
I know that you have many nuances and important pinpoints to make on the spending, debt and borrowing, but I want to cut to the chase. Let's do a quick fire around when it comes to taxes, because that's really what we all want to know. Which taxes are going to go up? Are we going to see, for example, an extension of the freeze on income tax thresholds?
I think so yeah. I think that's very likely.
Inheritance tax, I think.
There'll be some scrapping of some of the reliefs. The Agricultural and Business release probably going.
What about National insurance not for employees but employers.
That looks very likely. It raises quite a bit of money. So and it's a tax on wages remember ultimately as well.
V eighty and private school fees.
Then I think, so yeah, it's.
Going to be imposed non doms who don't pay UK taxes on their overseas earnings. Tweaks there definitely. And lastly, taxes on entrepreneurs when they sell their businesses.
That's what the bloomberg scoop said, wasn't it.
Yeah exactly.
Well, well, look when you compare all of those done, what is actually significant because if they're not going to raise the main levers of tax, are these just drops in the ocean.
No, they're not. I mean, we we've put a note out this morning that that says, if you do it's a lot of small things you have to do, and the most significant of which is the one you mentioned about making employer pension contributions subject to employer NIX. So it's a bit of a mouthful, but that can raise you depending on what tweaks she makes to make allowances for public sector workers, that can raise you somewhere between sort of twelve to seventeen billion pounds. So if you're talking about let's say a forty billion pound black hole, that gets you gets you a long way there. And the freezing of the threshold as well, that gets you seven to eight billion, so you're over sort of over halfway there, you like, if you like with those two measures. Obviously, there are a lot of questions about whether that contradicts what was said in the manifesto.
Yeah, so on employer NIXT to what extent is that passed on to employees and therefore is a manifesto breach.
So, I mean, the economic evidence and the academic evidence is that does get passed through to wages. So the answer is it is a breach. I mean, I was looking at the manifesto last night and.
As you do before bed, done, as you do.
Yeah, and it wasn't quite before bed. I'm not saying it was. I was reading it to put myself to sleep, but it was one of the I was reading it to just see what they said about it. And it does say it doesn't specify between employee and employer NIXT. It just says national insurance contributions.
Rachel Reeves called Rishie Sunk or Jeremy hunt out for picking the pockets of working people for doing the very same.
I don't know. When I read it, I thought that there was actually quite a bit of wiggle room in that manifesto. Politician, I would not. Right. Let's so then, so in terms of the overal burden of taxation that's obviously going up, but the issue is also around what that's gonna in terms of the plan for how the departmental budgets are then going to be filmed. That's also the main question that she's going to have to answer for ministers and for the people who are going to be listening actually in Westminster and whether it feels like austerity.
Yeah, well that's actually when you when you break it down, that's why taxes are going up because she wants to deal with that that issue. We've known for some time that there's there are sort of two issues on there. One is that in the medium term there are a lot of departments that were going to be under very very tight running very very tight budgets. On the on the plans that we're set out in March, we've obviously had this black hole it was found over the summer. So it's those two things she's going to have to deal with, and that's why taxes are going to rise because in the backgrounds she's going to say, I want to balance taxes with day to day government spending. That's going to be her I think she's actually said it's her golden rule, sort of taken from what Gordon Brown did back when he was chancellor. So that is why taxes are going to rise. It's to balance those two things. So you're going to get a big increase in spending, but you're also going to get a big increase in taxation. To go to your point, Liz, either sort of ending austerity. The amount of money needed to do that, it's you know, it's a lot of money. It's study. That's why we're talking about a forty or thirty to forty billion pound black hole. Is to sort of not have austerity in the plans for any government department, it requires a lift to spending by that.
Amount in terms of investment. That's also that the goal isn't it to change the narrative because what the Labor Party inherited is the idea that in the longer run the UK government would be investing less. She also wants to change that balance too. Will she be able to?
Will she be able to if she's raising taxes?
Yeah, I mean she will. So the way to think about that is that we've sort of had We've got one fiscal rule that looks at balancing day to day spending with taxes that doesn't take into account investment spending. So that's some that you can think about that separately. And the way it looks like she's going to get around that and we might get some we've sort of had some sort of scoops and news on this overnight, is to change the debt target that she focuses on so she moves away from targeting what we call public sector net debt to something called public sector net financial liabilities. And it's a lot of accounting involved, but the bottom line is it frees up about fifty billion pounds of money to pay for investment. So I think, just to go to your point, Caroline, one of the really important things here is if she's going to set out a budget that not only deals with the inheritance but also goes for growth, the sort of forward looking element of the budget, she's going to have to basically change the investment plans that she's inherited, put them on a trajectory where I think it's only reasonable to say they're flat as a share of investment is flat. Public investment is flat as a share of GDP. At the moment, it's falling quite considerably as a share of GDP, and that would cost something in the region of twenty five billion pounds to do that. So I think the investment bid is a sort of separate part of this. It's not really part of the tax conversation.
But we were speaking to Leslie McLeod Miller, who is the CEO of Foreign Investors for Britain, who was arguing, as I think he'd argue two number ten, that if you change the non dom rules and tax breaks, you will lose investment and these people, these wealth creators, will go to other countries. So it seems he's like he's losing the political argument. Would you say he's lost the economic one too.
So there was an interesting shift under the Conservatives before the pandemic struck. If you cast your mind back, Richie Sunak was set out plans to lift public investments the share of GDP to three percent of GDP. So there was this big shift on the concert in the Conservative Party to focus on public investment. The pandemic struck, a lot of things changed, but then that within then Sunac himself changed to focus on private investment, so that the Conservatives argument would be, look, yeah, we've got public investments the share of GDP falling, but we've taken measures are to boost private investment, particularly business investment, in terms of the allowances they put in place. Labour obviously flipping back and are saying, look, the public sector needs to send a signal to the private sector, and that's why we need to boost public sector investment because that will lead private sector investment and create the sort of the conditions where private sector follows. And we've heard a lot about crowding in this idea about you spend the government spends this money and it crowds in private investments. So I think one thing particularly to watch next Wednesday will be what the OBL says about that in terms of how much you know there's going to be more investment spending from the government. What does the OBR say this does to private investments.
The other thing that we have to think about is how well is tone from Rachel Reeve's and sentiment, because that does have an impact too on what is kind of taken away from this budget and what investors actually think about it and whether you can tread the line of increasing taxes but also trying to spend more in terms of investment and crowd money in as you say, and change the fiscal rules. How is that going to be taken on board by investors, let's say, who might buy guilts which are UK government debt bonds or sterling or UK stocks.
So I think it's a really interesting one. So that the point about sentiment, I think is going to be key because we've seen a lot of surveys deteriorate. It saw the PMI today that I mean it's above fifty, which means that it thinks the economy is expanding, but it's only just above fifty. So there has been this sentiment here and it seems to me that if sentiment has deteriorated because people are worried about tax rises, those tax rises are almost certainly coming. So there is a bit of a concern I think about the near term outlook about whether this sort of hits momentum in the economy. If you're an investor, I think Reeves has done, at least in my view, everything she can do to tee up and use all the right structures to make sure that this is the right This sends the right message about growth. And if you're an investor, yes, you're going to worry more about issuance, if you're investing in guilts, you're worry more that the government is going to issume more debt. But the fact that that money is going towards investment, which everyone agrees the UK needs. It's very hard to make the sort of you know, go everyone goes to it. But the Liz Trust argument, you know, which was very very different. It was in the context of not using the OBR, the UK's fiscal watchdog. It was in the context of tax cuts rather than investment spending, and it was in the context of double digit inflation, and inflation currently is one point seven percent, so it's a very different environment as well. So I think so far everything, everything has sort of moved in the right direction for there not to be this sort of knee jerk reaction on the day and you know, potentially announcing it the IMF today or in the next few days about what will happen with the fiscal rules, you know, doing that in the IMF at the IMF sends a very strong signal. It's very different to what happened at the end of twenty twenty.
Two, so when Quasi Kratan came back on that plane to find out that he'd been fired exactly.
So it's very different. So in the in the sort of I don't want to say the home of sort of fiscal responsibility, but the IMF very sort of make a lot of sounds about making sure, you know, we saw with the WHIO about fiscal responsibility. So making that announcement there it sends a pretty strong signal.
The fact that Rachel Reeves looks like she's about to get away with tax hikes and moving the fiscal rules, changing the goalposts, and all of this without a huge market reaction, without it being a Liz Trust moment, seems an incredible feat Politically.
Yeah, but we go back all the way to the manifesto. They were elected on a plan for change, for something different, for stability. That's what the British public in a way wanted. Does this qualifiers change? I suppose we have to wait to see if it delivers economic growth.
All right, Dan Hansen, our chief UK economist, Great to have you with us in the preview for the budgets on Wednesday. We'll have full coverage for you right here on Bloomberg. But that's it for us four on us for today.
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This episode was produced by Tia Adabaio and our audio engineer was short Busterback here, I'm Lizzie Burden.
And I'm Caroline Hepget and we'll be back with more on Monday. This is Bloomberg, Bloomberg UK Politics.
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