PIMCO UK Senior Advisor Rupert Harrison Talks Budget

Rupert Harrison · PIMCO

The UK budget is much smaller than 2024-25 and should be absorbed smoothly by markets.

The budget may meet short-term expectations because it is likely to be much smaller than the 2024 and 2025 budgets, which had very large tax rises and heavy pre-budget speculation. Moving parts are around £5bn up and down, against £20-plus billion before. Markets have largely absorbed this already, so Harrison expects a smooth ride for markets, though pressures building into next year raise questions.

“Well, it may meet short term expectations... it's gonna be a much smaller budget than 2024 and 2025, which had very, very large moving parts... sort of moving parts around the sort of 5,000,000,000 scale... that has been pretty well absorbed already by markets and I think should therefore be a pretty smooth ride for markets.”at 1:48

Rupert Harrison · PIMCO

UK spending pressures need roughly £20-25bn more, forcing another fiscal event next year, possibly in spring.

Defence spending rising to 3% of GDP by 2030 costs £10bn-plus on its own. Avoiding real-terms cuts to unproductive departments in 2027-29, as the IFS identifies, needs another £10-15bn. Together that is £20-25bn at least to make the spending review add up. The Treasury has pushed the spending review from spring into autumn, which Harrison reads as buying time. Revenue options keep shrinking, so he expects another fiscal event, possibly in spring, whether or not an election is called.

“So to get, for example, defense spending up to 3% of GDP by 2030... that is 10,000,000,000 plus on its own. ... you need probably 10 to 15,000,000,000 on top of that. So we're talking 20 to 25,000,000,000 at least to really make the spending review add up.”at 3:38

Rupert Harrison · PIMCO

UK tax base is near its limits; raising £20-25bn likely needs a big lever such as employer NI.

Capital gains and other mobile parts of the tax base are already taxed at high rates, so the OBR's modelling shows the UK is reaching the limits of what can be raised without fundamental reform. Raising £20-25bn needs one large lever, not many small taxes. That leaves either a return to employer National Insurance, or breaking manifesto pledges, which is very hard for politicians. Rachel Reeves already had to use employer NI in her first budget because it was the only large lever not ruled out.

“we are reaching the limits of what can be raised without much more fundamental reform. ... You can't do it with lots and lots of little taxes. So either you return back to employer national insurance”at 5:02

Rupert Harrison · PIMCO

UK policy's negative business narrative is hurting investment and location decisions; government wants to change it.

The government realises the narrative around business and wealth creation has been extremely negative. Investors pick this up around the world when judging UK policy direction, citing tax rises and labour-market regulation. Harrison says this is affecting investment and location decisions, which is why the government wants to change the narrative. He calls the weekend deregulation headlines small beer and classic pre-budget noise.

“the narrative around business and wealth creation has been extremely negative... they do realize that that is... having an impact on investment and location decisions”at 6:05

Rupert Harrison · PIMCO

Welfare costs are hard to cut; credible spending savings would surprise markets positively.

The government has found it very difficult to cut spending. The welfare bill is rising very fast, including working-age sickness and disability costs. Reeves and Kyle tried to address this but backed off under backbench pressure, and parliamentary dynamics limit the chancellor's control. Harrison says he is not holding his breath, but credible savings, on departments or more likely welfare, would be a big positive surprise and would address markets' doubts about fiscal slippage.

“The big difference is that this government has found it very difficult to cut spending. ... the welfare bill, which is rising very rapidly... So if the government could deliver some credible spending savings... I think that would be a big positive surprise for markets”at 7:49

Rupert Harrison · PIMCO

Rejoining the EU would trade economic gains for free movement and is not for this parliament.

Rejoining the EU raises the same political trade-offs debated since 2016. Any economic benefit would involve giving up some things on the other side, such as free movement, which Burnham appeared to raise as a possibility. Harrison says this is clearly not for this parliament, and even Burnham is framing it as one for the next parliament.

“the economic benefit that that could be claimed would involve giving away some things on the other side in terms of free movement... I think that clearly this is not something for this parliament.”at 9:34

Rupert Harrison · PIMCO

Burnham's post-election pledges look like groundwork for a Labour–Lib Dem coalition.

Andy Burnham's conference speech framed three big issues as post-election: electoral reform, social care reform (a priority of Ed Davey), and closer ties with the EU. Harrison says these are almost a love letter to the Liberal Democrats. He thinks the speech is preparing the ground for a possible Labour-Lib Dem coalition after an election, or as a fallback option. That in turn feeds investor interest in an early election.

“all of which are sort of almost like a love letter to the Liberal Democrats... it just feels a little bit like this is preparing the ground for a potential Labour Lib Dem coalition after an election or at least as a fallback option.”at 10:04

Rupert Harrison · PIMCO

UK early election is about 25% likely, most likely in May next year.

Harrison puts an early election at 25%, which he says is not his majority view but not impossible. Calling one right after the budget would be very unusual, since the government has just had good polling. Otherwise it would most likely come in May next year, as a fixed local-election cycle makes an off-cycle vote difficult. He sees the possibility as a reason investors are watching.

“Early election, 25%. ... That's certainly not my majority, but it's it's not impossible.”at 10:50

Rupert Harrison · PIMCO

A well-trailed UK bank tax is already priced into bank shares, and its cost will pass to customers.

The bank tax is a well-trailed measure that Harrison thinks is now largely priced into bank shares. Expectations are that hiking the rates back up raises about £2-3bn. That is the largest revenue item, outweighing the small capital gains and entrepreneurs-relief changes he expects. The tax is not costless: he expects it to pass through to deposit rates and mortgage rates.

“a pretty well trailed tax on the banks, that is now pretty much in the price, I think, for certainly bank shares ... That will get passed through, in terms of, you know, deposit rates and mortgage rates.”at 6:42