When we're spending one hundred billion pounds a year on servicing government. Yet I don't think anyone could.

When we're spending one hundred billion pounds a year on servicing government. Yet I don't think anyone could.

Seriously argue that we don't need to get a grip of government borrowing and government debt.

Seriously argue that we don't need to get a grip of government borrowing and government debt.

The Chancellor Rachel Reeves, laying out the scale of the challenge she's facing as we count down to the Spring statement. Hello, you're listening to Bloomberg UK Politics. I'm Stephen Carroll.

The Chancellor Rachel Reeves, laying out the scale of the challenge she's facing as we count down to the Spring statement. Hello, you're listening to Bloomberg UK Politics. I'm Stephen Carroll.

And I'm Lizzie Burden. Welcome to the program. Now, Stephen, we love a fiscal event here on the UK Politics podcast. It's like Christmas for us, isn't it.

And I'm Lizzie Burden. Welcome to the program. Now, Stephen, we love a fiscal event here on the UK Politics podcast. It's like Christmas for us, isn't it.

But it's not a budget, to be clear, In case you should happen to to confuse, the two will be the judge of that.

But it's not a budget, to be clear, In case you should happen to to confuse, the two will be the judge of that.

Now.

Now.

The government says that they're only going to have, of course, one budget a year in October, which is why where there's some debate over it's meant to be just a presentation of the latest offers for budget responsibility, forecasts and no new policy.

The government says that they're only going to have, of course, one budget a year in October, which is why where there's some debate over it's meant to be just a presentation of the latest offers for budget responsibility, forecasts and no new policy.

Yeah, but the reality is that everything has changed so much since the October budget that the budgetary position may need to change as well. This spring statement. Borrowing costs have gone up because of global factors, which means that more money has to be spent on servicing the UK's debt, and we've already had announcements on cuts to welfare spending and shifting some of the international aid budget to fund defense. A big question though, is will the forecasts mean that Rachel Reeves has to make further announcements to stay within her fiscal rules.

Yeah, but the reality is that everything has changed so much since the October budget that the budgetary position may need to change as well. This spring statement. Borrowing costs have gone up because of global factors, which means that more money has to be spent on servicing the UK's debt, and we've already had announcements on cuts to welfare spending and shifting some of the international aid budget to fund defense. A big question though, is will the forecasts mean that Rachel Reeves has to make further announcements to stay within her fiscal rules.

Now.

Now.

I was speaking to her a few days ago. She emphasized the need to keep or grow her headroom, and the question is where's she going to get it because she's already ruled out tax rises and she's ruled out bending those fiscal rules.

I was speaking to her a few days ago. She emphasized the need to keep or grow her headroom, and the question is where's she going to get it because she's already ruled out tax rises and she's ruled out bending those fiscal rules.

And the latest public finance figures won't heelp either. They show the government borrowing is now going to overshoot what was forecast by twenty billion pounds. That's going to make meeting those fiscal rules even more difficult, and that of course has fiscal but also political consequences too. Labour's already had to make some decisions that aren't popular within the party or within the cabinet, so how much further would the chance they need to go?

And the latest public finance figures won't heelp either. They show the government borrowing is now going to overshoot what was forecast by twenty billion pounds. That's going to make meeting those fiscal rules even more difficult, and that of course has fiscal but also political consequences too. Labour's already had to make some decisions that aren't popular within the party or within the cabinet, so how much further would the chance they need to go?

Well, joining us now to talk through all of those issues are our UK Government reporter Joe Mays and our chief UK economist Dan Hanson, welcome both to the program. Just talk us through the numbers here, taking into account what we knew before and the increase in borrowing and the fiscal rules. How much money down the back of that? So for does Rachel Reeves actually need to find.

Well, joining us now to talk through all of those issues are our UK Government reporter Joe Mays and our chief UK economist Dan Hanson, welcome both to the program. Just talk us through the numbers here, taking into account what we knew before and the increase in borrowing and the fiscal rules. How much money down the back of that? So for does Rachel Reeves actually need to find.

Yeah, So I think the way to think about it is the starting point is to look at what she had in the October budget against her fiscal rule and her fiscal rule. Her main fiscal rule is to balance day to day government spending with tax receipts by the fifth year of the obi's forecast. So that is all the way out in twenty twenty nine, twenty thirty, so a long way away. She had nine point nine billion pounds worth of room against that. So she had a surtplus on the current budget current budget balance of nine point nine billion pounds. We think that surtplus is gone and she might actually be a little bit in the red, so maybe five six billion pounds in the red now.

Yeah, So I think the way to think about it is the starting point is to look at what she had in the October budget against her fiscal rule and her fiscal rule. Her main fiscal rule is to balance day to day government spending with tax receipts by the fifth year of the obi's forecast. So that is all the way out in twenty twenty nine, twenty thirty, so a long way away. She had nine point nine billion pounds worth of room against that. So she had a surtplus on the current budget current budget balance of nine point nine billion pounds. We think that surtplus is gone and she might actually be a little bit in the red, so maybe five six billion pounds in the red now.

So if after the announcements on welfare and.

So if after the announcements on welfare and.

Not no, that's so when you're when you're thinking about what the OBI will say, they will say that's the starting point, So that's the sort of deterioration if you like. So we think about seventeen billion pounds worth of extra borrowing she's going to do in the final year of the forecast. You then add back the welfare announcements, so that's five billion pounds by twenty twenty nine to thirty. There's also a bit of an accounting wheeze that can be done with the defense announcement. So the government cuts overseas developments spending to boost defense spending. But because some of that defense spending will go towards capital outlays, it doesn't affect her day to day her fiscal exactly doesn't come in back, it doesn't affect her fiscal rules, so they will save a little bit of money there. So maybe she needs to find if she wants to get back to where she was in October, she might need to find ten billion pounds of savings. Now, as Lizzie has said, tax rises her off, it seems very unlikely that she will borrow more. So it's possible she goes some more welfare cuts, but it seems unlikely. So again it comes down to day to day spending, and that where she's going to have to find the money from.

Not no, that's so when you're when you're thinking about what the OBI will say, they will say that's the starting point, So that's the sort of deterioration if you like. So we think about seventeen billion pounds worth of extra borrowing she's going to do in the final year of the forecast. You then add back the welfare announcements, so that's five billion pounds by twenty twenty nine to thirty. There's also a bit of an accounting wheeze that can be done with the defense announcement. So the government cuts overseas developments spending to boost defense spending. But because some of that defense spending will go towards capital outlays, it doesn't affect her day to day her fiscal exactly doesn't come in back, it doesn't affect her fiscal rules, so they will save a little bit of money there. So maybe she needs to find if she wants to get back to where she was in October, she might need to find ten billion pounds of savings. Now, as Lizzie has said, tax rises her off, it seems very unlikely that she will borrow more. So it's possible she goes some more welfare cuts, but it seems unlikely. So again it comes down to day to day spending, and that where she's going to have to find the money from.

Okay, Joe Mays, let's talk about the political side of this. What are people and the Treasury saying about what's to be expected. What are you hearing around Westminster in terms of what Rachel Reeves might actually announce in the spring statement.

Okay, Joe Mays, let's talk about the political side of this. What are people and the Treasury saying about what's to be expected. What are you hearing around Westminster in terms of what Rachel Reeves might actually announce in the spring statement.

Well, the expectation is that she will announce billions of pounds worth of reduction in her spending plans. So what she won't say is where specifically those reductions will fall, because there's a spending review going on and that will be released in June, and that's where they say what each government department is going to get. What we expect from Reeves is her saying the overall pot of money, what the size of that will now be, and we expect it to be billions of pounds low. I mean, the Treasury are at pains to stress kind of behind the scenes that this is still coming from a position of elevated public spending compared to what the Tories were previously planning. They're saying that at the October budget Richie Reeves did increase significantly funding for the NHS education, so they're saying it's from a higher position, but yet nevertheless to expect those billions of pounds of cuts to those spending plants.

Well, the expectation is that she will announce billions of pounds worth of reduction in her spending plans. So what she won't say is where specifically those reductions will fall, because there's a spending review going on and that will be released in June, and that's where they say what each government department is going to get. What we expect from Reeves is her saying the overall pot of money, what the size of that will now be, and we expect it to be billions of pounds low. I mean, the Treasury are at pains to stress kind of behind the scenes that this is still coming from a position of elevated public spending compared to what the Tories were previously planning. They're saying that at the October budget Richie Reeves did increase significantly funding for the NHS education, so they're saying it's from a higher position, but yet nevertheless to expect those billions of pounds of cuts to those spending plants.

So, Dan, how much headroom would be responsible in your view given the global uncertainty.

So, Dan, how much headroom would be responsible in your view given the global uncertainty.

Yeah, that's a really good question. I mean, if you look at so the ten billion pounds in October, if you compare that to history, so the average headroom a chancellor has left themselves against their fiscal rules since the OBR came into being in twenty ten, and obviously all the fiscal rules have been different. But if you do a like for like comparison, the average headroom is about twenty seven billion, so it's nearly three times what Reeves left herself in October. And then you have the added point which you've just made about wider volatility in financial markets, which of course affect the fiscal headroom directly through movements in market expectations of interest rates, so guilt yields, and also market expectations of what the Bank of England will do with interest rates, because that affects the outlays on the Bank of England's quantitative easing program. So you know, that feels to me like a reasonable starting point. Of course, getting there is extremely difficult because of all these choices we've just sort of laid out, and particularly if you're not willing to entertain the idea of raising the big tax levers. So when I say big tax leavers, I mean income tax VAT and employee national insurance. Of course, we had the big rise in employer national insurance in the October budget. So if you're not going to do those things, you're spending plans already very tight. Politically, welfare cuts are extremely difficult. We've we've found that out. It doesn't leave you many options and you obviously this is all coming against the backdrop, particularly at the start of the year where we had this this question marko the UK guilt market, UK borrowing costs, where we had this spike up in guilt, guilt rates, guilt yields. A lot of that was global, but there did seem to be a bit of a a question mark hanging over the UK. So I think this fiscal event is actually the stakes are probably a little bit higher than Rachel Reeves would like going into this fiscal event. I think she was ideally if you asked her back in October, this would be Stephen said at the start a forecast update, and that would be it, but it's become quite a bit more than that.

Yeah, that's a really good question. I mean, if you look at so the ten billion pounds in October, if you compare that to history, so the average headroom a chancellor has left themselves against their fiscal rules since the OBR came into being in twenty ten, and obviously all the fiscal rules have been different. But if you do a like for like comparison, the average headroom is about twenty seven billion, so it's nearly three times what Reeves left herself in October. And then you have the added point which you've just made about wider volatility in financial markets, which of course affect the fiscal headroom directly through movements in market expectations of interest rates, so guilt yields, and also market expectations of what the Bank of England will do with interest rates, because that affects the outlays on the Bank of England's quantitative easing program. So you know, that feels to me like a reasonable starting point. Of course, getting there is extremely difficult because of all these choices we've just sort of laid out, and particularly if you're not willing to entertain the idea of raising the big tax levers. So when I say big tax leavers, I mean income tax VAT and employee national insurance. Of course, we had the big rise in employer national insurance in the October budget. So if you're not going to do those things, you're spending plans already very tight. Politically, welfare cuts are extremely difficult. We've we've found that out. It doesn't leave you many options and you obviously this is all coming against the backdrop, particularly at the start of the year where we had this this question marko the UK guilt market, UK borrowing costs, where we had this spike up in guilt, guilt rates, guilt yields. A lot of that was global, but there did seem to be a bit of a a question mark hanging over the UK. So I think this fiscal event is actually the stakes are probably a little bit higher than Rachel Reeves would like going into this fiscal event. I think she was ideally if you asked her back in October, this would be Stephen said at the start a forecast update, and that would be it, but it's become quite a bit more than that.

Yeah, I mean when I spoke to her, she very strongly emphasized that she understood the need to rebuild that fiscal cushion, and Joe you've confirmed that with Phildrick in your story that at least that nine point nine billion pounds is going to be built back in. Given what Dan's just said, I kind of wonder whether she cares more about the bond markets at this point than upsetting the left wing of her party.

Yeah, I mean when I spoke to her, she very strongly emphasized that she understood the need to rebuild that fiscal cushion, and Joe you've confirmed that with Phildrick in your story that at least that nine point nine billion pounds is going to be built back in. Given what Dan's just said, I kind of wonder whether she cares more about the bond markets at this point than upsetting the left wing of her party.

Yes, I think that is a fair read, because she does have pressure from Labor, MPs and Eve from within the cabinet to relax her fiscal rules and to not build up that headroom to the extamement extent where it was before and therefore avoid having to go these spending reductions. Because these spending reductions will effectively mean a form of austerity for some government departments. Because we know that some compartments are protected in their spending pitments off from the NHS education, but that others are not, and therefore those departments should like to bear the brunt of these reductions, probably areas like justice, for example, and that will mean cuts to those services which otherwise wouldn't have occurred. So clearly that's something that many labor and peas labor cabinet ministers are uncomfortable with. But Rachel Reeves, as we say, is prioritizing fiscal discipline and her credibility with the markets by trying to rebuild that headroom. So yes, that is the position she's taking.

Yes, I think that is a fair read, because she does have pressure from Labor, MPs and Eve from within the cabinet to relax her fiscal rules and to not build up that headroom to the extamement extent where it was before and therefore avoid having to go these spending reductions. Because these spending reductions will effectively mean a form of austerity for some government departments. Because we know that some compartments are protected in their spending pitments off from the NHS education, but that others are not, and therefore those departments should like to bear the brunt of these reductions, probably areas like justice, for example, and that will mean cuts to those services which otherwise wouldn't have occurred. So clearly that's something that many labor and peas labor cabinet ministers are uncomfortable with. But Rachel Reeves, as we say, is prioritizing fiscal discipline and her credibility with the markets by trying to rebuild that headroom. So yes, that is the position she's taking.

Joe, could this potentially be make or break for the Chancellor? How much is is she under pressure in her position to get this right?

Joe, could this potentially be make or break for the Chancellor? How much is is she under pressure in her position to get this right?

I think make or break is perhaps maybe a little too strong, because what we expect is that Reeves will do as we've all been trailing. She will rebuild the headrooms, she will stick to her fiscal rules as she's been saying she will. And hence it feels like there's not too much jeopardy around this the moment because what she's planning to do seems to be the safe course of action. So I feel like that's what will get come the spring statement. And then obviously there will be an interesting reaction on markets. We'll all be looking to see does it do enough? Is there any kind of backlash from the bomb markets? That will be and she'll be very concerned and we'll want to see that reaction. But I think that Brian large Hubstition is safe. You know, we know that she is and Kiss Starmer have a very strong relationship and she's a driving force with this government, and having won a landslide election victory, you know, be very surprising if there was any kind of move to remove her. And she is wedded at this government's project in terms of the growth plans, the strategy. You know, this is as much of Rachel Reeve's government as it is a Kiss Lama government, and so I think that she's very much is safe. But the market the reaction will be one to watch after the Springs statement.

I think make or break is perhaps maybe a little too strong, because what we expect is that Reeves will do as we've all been trailing. She will rebuild the headrooms, she will stick to her fiscal rules as she's been saying she will. And hence it feels like there's not too much jeopardy around this the moment because what she's planning to do seems to be the safe course of action. So I feel like that's what will get come the spring statement. And then obviously there will be an interesting reaction on markets. We'll all be looking to see does it do enough? Is there any kind of backlash from the bomb markets? That will be and she'll be very concerned and we'll want to see that reaction. But I think that Brian large Hubstition is safe. You know, we know that she is and Kiss Starmer have a very strong relationship and she's a driving force with this government, and having won a landslide election victory, you know, be very surprising if there was any kind of move to remove her. And she is wedded at this government's project in terms of the growth plans, the strategy. You know, this is as much of Rachel Reeve's government as it is a Kiss Lama government, and so I think that she's very much is safe. But the market the reaction will be one to watch after the Springs statement.

Very interesting that she's so powerful within the government show. I'm going to put my cap at Hindsight hat.

Very interesting that she's so powerful within the government show. I'm going to put my cap at Hindsight hat.

On one of your favorites.

On one of your favorites.

It is but Dan, when I look back at the October budget, I think Rachel Reeves knew that there was a strong possibility that Donald Trump could be back in the White House in January. She knew the inheritance that she was getting from the Conservatives. Surely it was pretty easy to see that maybe that headroom, as small as it was, would be eroded. But my point is looking ahead could his tariffs now actually render whatever she does in the Spring statement redundant anyway.

It is but Dan, when I look back at the October budget, I think Rachel Reeves knew that there was a strong possibility that Donald Trump could be back in the White House in January. She knew the inheritance that she was getting from the Conservatives. Surely it was pretty easy to see that maybe that headroom, as small as it was, would be eroded. But my point is looking ahead could his tariffs now actually render whatever she does in the Spring statement redundant anyway.

So I think on the point about the October budget, I think you're right, But I think the mistake was made in the manifesto and being drawn into the battle with the Tories during the election campaign about not raising taxes, and it came down to really that the election campaign was just about Labor not making any mistakes because they felt like they were so far ahead in the polls they just needed to match the Tories with everything. They weren't actually freed, if you like, to just set out a plan that they thought was credible because everyone knew coming in they were going to be these really difficult not just the black hole that was found in the public finances, there's this broader point about the sustainability of the fiscal position. So I think that the mistake was made there, and basically because they weren't willing to pull those levers, the headroom was never going to be massive in the October budget because they just didn't have the levers to create significant headroom on Donald Trump. Possibly there is there's going to be a lot of sort of interesting questions around the Ober forecast this time. What they say about near term growth seems likely to me that they're going to slash their forecast probably in half. For twenty twenty five they had two percent growth, probably go down to about one percent. And then there's this question about the medium term picture. The OBR has been serially optimistic about the potential for a pickup in growth in the UK, particularly productivity growth.

So I think on the point about the October budget, I think you're right, But I think the mistake was made in the manifesto and being drawn into the battle with the Tories during the election campaign about not raising taxes, and it came down to really that the election campaign was just about Labor not making any mistakes because they felt like they were so far ahead in the polls they just needed to match the Tories with everything. They weren't actually freed, if you like, to just set out a plan that they thought was credible because everyone knew coming in they were going to be these really difficult not just the black hole that was found in the public finances, there's this broader point about the sustainability of the fiscal position. So I think that the mistake was made there, and basically because they weren't willing to pull those levers, the headroom was never going to be massive in the October budget because they just didn't have the levers to create significant headroom on Donald Trump. Possibly there is there's going to be a lot of sort of interesting questions around the Ober forecast this time. What they say about near term growth seems likely to me that they're going to slash their forecast probably in half. For twenty twenty five they had two percent growth, probably go down to about one percent. And then there's this question about the medium term picture. The OBR has been serially optimistic about the potential for a pickup in growth in the UK, particularly productivity growth.

Are you expecting a big down grade then so on?

Are you expecting a big down grade then so on?

In the near term. We think they'll downgrade quite significantly GDP growth. We also think they'll probably tweak their productivity forecast a little bit, but not a sort of whole scale rethink. But I think one thing to watch in this physclement, A big thing to watch will be whether they say something around what they're thinking with productivity and whether they say we're going to look at the supply side of the economy like the Bank of England does. They say we're going to look at the supply side of the economy in our next forecast. And I think that would effectively put Rachel Reeves on watch that a big downgrade is coming in the in the autumn budget.

In the near term. We think they'll downgrade quite significantly GDP growth. We also think they'll probably tweak their productivity forecast a little bit, but not a sort of whole scale rethink. But I think one thing to watch in this physclement, A big thing to watch will be whether they say something around what they're thinking with productivity and whether they say we're going to look at the supply side of the economy like the Bank of England does. They say we're going to look at the supply side of the economy in our next forecast. And I think that would effectively put Rachel Reeves on watch that a big downgrade is coming in the in the autumn budget.

So it would be a signal that perhaps the fiscal playing pitch, make some matter for us now would be completely shifted by the time October comes around and exactly present some issues down the line. Okay, well to consider as we go forward. Dan Hansen, our chief UK economist, and our UK government reporter Joe Mays. Thank you very much for joining us. That's it from us for today. If you like the program, don't forget to subscribe and give it five stars so other people can find it on Apple Podcasts, Spotify or wherever you listen.

So it would be a signal that perhaps the fiscal playing pitch, make some matter for us now would be completely shifted by the time October comes around and exactly present some issues down the line. Okay, well to consider as we go forward. Dan Hansen, our chief UK economist, and our UK government reporter Joe Mays. Thank you very much for joining us. That's it from us for today. If you like the program, don't forget to subscribe and give it five stars so other people can find it on Apple Podcasts, Spotify or wherever you listen.

This episode was produced by Tia Adabaio and our audio engineer was Peter Nicolino.

This episode was produced by Tia Adabaio and our audio engineer was Peter Nicolino.

I'm Lizzie Burden and I'm Stephen Carroll. We'll be back with more next week. This is Bloomberg.

I'm Lizzie Burden and I'm Stephen Carroll. We'll be back with more next week. This is Bloomberg.

Bloomberg UK Politics listen weekdays at noon on DAB Digital Radio in London.

Bloomberg UK Politics listen weekdays at noon on DAB Digital Radio in London.