00:00It's clear there's a lot of uncertainty around this, probably more than we've had for most fiscal events in recent years.
00:06But I think where we think there's broad consensus is the Chancellor's going to need to find something in terms of 25, maybe 35 billion pounds of net consolidation
00:14if she wants to increase her headroom from where she was last time to at least 15 billion, which is what we think the market's looking for.
00:21Yeah. So anything short of 15 billion pounds on the headroom, you think, will spook guilt investors out?
00:30Is that your interpretation if 15 is sort of the line in the sand?
00:35Absolutely. So if you look back at previous budgets, normally chancellors have been able to have somewhere between half and one percent of GDP.
00:42And we haven't had this repeated conversation that markets have been obsessing about for weeks now of whether the chancellor is going to breach her headroom.
00:49And we did some work at Barclays with the Institute for Fiscal Studies and found that, you know, if she had 10 billion of headroom,
00:55that would give her maybe a one in three chance that at the next fiscal event, she'll have to come back and ask for more tax increases,
01:02which obviously, politically, that's bad from a market sentiment point of view. That's not a great look.
01:07So we think 15 billion is probably the minimum the market is looking for.
01:11Anything closer to 20, anything more like 25, that's harder to get, given the fiscal constraints the chancellor has put on herself.
01:17But actually, that would be a more positive reaction from the market.
01:22Yeah, my colleague, Anna Andrade, raised another good point as to whether the fiscal consolidation is front loaded or back loaded.
01:30How closely are you going to be watching that for?
01:33And again, you know, how closely will guilt participants be watching out for the timing of this fiscal consolidation?
01:39Yeah, I mean, I think there are a few things within that, Giovanna.
01:43The first is that actually we know that some of this will be back loaded or we have a good idea that some of it will be back loaded in the fact that we think that the freezing of income tax thresholds for another two years from 2028 onwards will raise maybe eight to 10 billion pounds of the gap.
01:57So obviously that doesn't kick in until the latter part of the parliament.
02:01And so to some extent there will be something back loaded in there.
02:04But actually for market credibility, the market is kind of a, you know, we'll see what you do rather than what you say.
02:09And I think that means that actually it's important that, you know, the rest of the consolidation is front loaded.
02:15Add into that, there's an important political economy consideration here, which is if their front loading comes in at this budget and is in the next year or two,
02:23the peak pain for the UK economy will be maybe on our model in early 2028.
02:28If you delay, if you muddle through this budget and you ultimately end up having to make another consolidation next year,
02:34then peak pain is really hitting the economy at the point that we go to the polls for the 2029 election.
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