Pimco's Harrison on How Reeves Can Restore Fiscal Credibility

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00:00There's a bit of a risk premium priced into the bond market and probably the currency over the

00:04last few weeks because of all the speculation and particularly the U-turn on income tax. So

00:08I don't think she needs to do very much to see some of that sort of come out and a bit of relief

00:12in the gilt market. She needs to deliver on the fiscal plan. She needs to show that she

00:17has the political ability to raise taxes, maybe a little bit of spending cuts in the mix, but

00:22mainly tax rises, that she is going to deliver more headroom. I think the market is expecting

00:27a minimum of 15 billion headroom, ideally 20. Even that would be relatively small by historical

00:34standards, but it would be an improvement on 10. And then I think that the profiling of the

00:39consolidation is going to be quite important for credibility. So if it's all backloaded in

00:43those last couple of years, I think that might raise a few questions.

00:45Yes, similar numbers coming to us from the IFS earlier on when we spoke to them. They were

00:50talking about the 15, but also suggesting this in terms of the headroom, but also suggesting

00:54that this would be low by historical standards. I mean, wouldn't it just be a relief for everybody

00:59if it were substantially higher? And then the government wouldn't necessarily have to be

01:03whipsawed by daily moves in bond markets.

01:06I mean, completely, but it's a bit like that old adage of, you know, I wouldn't start from here.

01:10So, you know, the best decision would have been in that first budget to do more on tax and spend

01:16or whatever, you know, the mix that she'd chosen and give herself more like 30, maybe even,

01:20you know, 30, 35 billion. That would be more comparable with the previous after, you know,

01:25periods after previous changes in government. So after 2010 or the early Gordon Brown era,

01:30and gives you much more, you know, leeway against changes in the forecast. The problem when you're

01:35starting with minus 10, which is probably where she starts before any measures, is that, you know,

01:40every 5 billion is extremely politically painful. That's a lot of tax that you have to raise from a

01:45lot of people. And so what, you know, what we've heard in recent days is that, you know,

01:4915 billion, I think, is the bare minimum. And I think the Treasury would love to get to 20.

01:53And to be able to say, well, we've doubled the headroom, I think that has a decent ring to it.

01:59We had a conversation the other day with RBC Blue Bay. And the line there was that the guilt

02:03market won't believe anything this government says until it can credibly show that it can cut

02:08as well as raise. That's true.

02:11I'm not sure that's true in the short term, because I think the market has come to terms with the fact

02:15that serious spending cuts are really off the table while you have this Labour government,

02:20particularly because the Labour backbenchers are so influential, given the UTA we had on welfare.

02:25I mean, I think we will see a little bit on spending, we might see a tweak to the spending

02:29assumptions at the end of the forecast, that is probably on the less credible side. I think if

02:34we get some cuts to budgets over the next couple of years dressed up as if, you know, efficiency

02:38savings, that will add to the mix. But I think the market understands there's got to be tax.

02:44And I think the test will be, is it tax revenues that the OBR think are stable, predictable?

02:51And will these tax rises definitely get through the House of Commons, which I think is much

02:56more likely with tax rises through the Labour Party than spending cuts?