00:00James, we had Reeves saying in her speech last week, or at least hinting, that she was going to break the manifesto.
00:06Then it seemed she wasn't going to raise income tax in the budget, and now we've got these latest developments on forecasts.
00:12What's going on? What's the thinking behind all of this?
00:15Well, do you want to understand the thinking? There are three constituencies you should bear in mind.
00:18The public, Labour MPs, and the markets.
00:21Reeves is trying to keep all of them happy.
00:24And so that was why two weeks ago she started saying tough decisions need to come.
00:27And that led to lots of speculation, even from her own backbenchers, that a manifesto break, a break of her election pledges was coming, and that would be income tax.
00:38Now, the markets and business took that very well.
00:42Her own backbenchers did not.
00:45And what can't be escaped here is this has been an awful week for the government.
00:49You have had rumours of plotting.
00:51We are now in a doctor's strike as of today.
00:53And the prime minister has seen a low, low, low polls, making one of the most unapproved of prime ministers in British political history.
01:02That led to this bombshell report we had last night that income tax was being dropped.
01:07Markets did not like that an hour ago.
01:10And within an hour, government sources have spoken to Bloomberg and saying the forecasts have improved,
01:15and they now are expecting to have between £15 billion to £20 billion of headroom at the end of the budget.
01:22This is a balancing act.
01:24As the government goes between those three constituencies I mentioned, trying to keep all of them happy.
01:29The question is, can it?
01:31And how is she likely to balance the books here?
01:34If it's what tax leavers or spending cuts are available to the Chancellor at this point,
01:39pleasing as many of those constituencies as possible?
01:42Well, we've got to see the markers at this point.
01:44Imagine the tank, if you will.
01:46We started with £10 billion headroom.
01:48We know the welfare backfiring over the year loses about £5 billion.
01:52We expected the OBR downgrade to lose somewhere within £20 to £30 billion based on our reporting.
01:59And now we're told that without income tax, she's still going to end up somewhere between £15 to £20 billion.
02:06That's according to our latest reporting.
02:07It all might change by the budget day.
02:09That leaves a roughly, give or take, a kind of £30 billion hole to fill.
02:15We are hearing that salary sacrifices and a cap on those, which has been reported,
02:20so that's how much employees can put in tax-free into their pensions per year,
02:24could be a good way of getting to that.
02:26There are others on the mix.
02:27You could imagine, say, an EV tax has been floated, a tax on limited liability partnerships,
02:32gambling and betting companies.
02:34At one point, a bank tax had been effectively ruled out.
02:37But it's worth saying, at this point, with the Treasury looking to raise money,
02:41a lot of these smaller, sort of low-digit billion-raising options are back on the table.
02:47And the focus for us and the team here is reporting what might be in the budget in two weeks' time.
02:53OK, Bloomberg's James Walcott.
02:54We thank you so much for breaking that down for us.
02:57We're looking at gilt yields still up six basis points on the 10-year.
03:00They were up about 13 basis points at the start of the session.
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