A barely-known Prime Minister, a mysterious chancellor – and a plan with the feel of a 1980s fancy dress party.
It’s back to the future in Downing Street for the UK’s third policy reset in a decade.
The UK government’s 2022 Mini Budget cuts taxes and aims to boost growth even as the Bank of England is elsewhere applying the brakes.
Which is not to say that PM (and sometime royal stand-in) Liz Truss and chancellor Kwasi Kwarteng aren’t doing the right thing in cutting taxes now and putting off the bill for later.
Time will tell. But the UK economy was hardly humming under the prior plans, and there’s case for trying something different.
In particular productivity has been in a rut for a decade:
Source: LSE/ONS
Truly woeful, and there’s something for everyone when it comes to allocating the blame.
That LSE paper points to Britain’s exposure to financial services during the 2008-2009 crisis, the follow-up austerity drive, too little investment in infrastructure, and the ongoing drag from Brexit.
A right-wing perspective would foreground the relentless expansion of the State.
Others might blame UK PLC’s reliance on cheap labour rather than investing in technology.
More recently, the pandemic won’t have helped.
Pick your poison. There’s clearly a sickness here.
As for the cure, I’m sure there’s a political dimension to the bottle that PM Truss has reached for. But at least I’m heartened by her claim she’s willing to be unpopular. Her admission – six years after Brexiteers blathered that it would be an easy prize – that no US/UK trade deal is coming anytime soon is a start.
Populism has done great harm in recent years. The spell can’t be broken soon enough if we’re to make the best of where it’s left us.
The 2022 Mini Budget highlights
Which brings us to those tax cuts and reversals and the other just-announced measures.
Here’s a summary of Friday’s Mini Budget from the BBC:
– The basic rate of income tax will be cut by 1p to 19p from April 2023
– The 45p tax rate for top earners over £150,000 will be abolished, also from April next year
– The level at which house-buyers begin to pay stamp duty is doubled from £125,000 to £250,000
– First-time buyers will pay no stamp duty on homes worth £450,000, up from £300,000
– Planned rise on corporation tax from 19% to 25% is scrapped
– A 1.25% rise in National Insurance to be reversed from 6 Novemnber
– Cap on bankers’ bonuses, which limited rewards to twice the salary level, is axed
– Cost of subsidising both domestic and business energy bills will cost £60bn for the next six months
-Strike action: unions will be required to put offers to members during pay talks
– UK to introduce sales tax-free shopping for overseas visitors
Expect more to emerge as journalists and wonks dig into the detail.
Just one example – the controversial IR35 legislation is to be repealed.
The big picture take is the UK government is cutting its income even as its outgoings rise with inflation and the higher cost of servicing debt.
Oh, and the rich have just gotten richer.
Short-term this looks optically bad, but it isn’t entirely mad. You could even argue its conventional counter-cyclical Keynesian economics.
But it will be a tricky balancing act.
Singapore sling
The stated goal is growth. If one was to turn to the toxic B-word, it’s a tentative step towards the Singapore-lite model of a ‘business first’ post-Brexit Britain.
Lower taxes, lighter regulation, and a smaller state (/safety net) traded off for higher growth.
Let’s leave aside whether this is anything like what most disgruntled working class Brexit supporters voted for. Once you add up any small pros and take away the huge cons, I don’t see any economic advantage for Brexit. But in purely economic terms, I’ve long said diverging from the European model towards a more cut-throat US-style capitalism is the closest we’ll get to neutering the economic downsides
Again, it’s not what I voted for. But there is an economic logic to it.
Still I remain skeptical about how far Britain can go in this direction.
We’re not Singapore – demographically, culturally, or geographically. We don’t live in small apartments in a single city with our elderly parents. UK politicians can enable sewage to be dumped in the sea, but the EU won’t allow shoddy goods to be dumped on the continent. We’ll have to meet the standards of our largest trading partner and it will naturally resist regulatory arbitrage on its borders.
As for state spending? We’re getting older and sicker. The National Health Service is the nearest thing the UK has to a religion. And I’d argue the population’s sense that government should solve its problems has only grown under the years of populist magical thinking.
It’s hard for me to see growth coming wide and fast enough to offset the pain from really taking an axe to state spending, if that’s the follow-up punch to come.
There’s an election coming in 2025. We’ll get a verdict then I suppose.
Interest rates could spoil the party
Making life even harder is the macro-economic backdrop that’s (mostly) neither of the government’s making nor under its control.
Inflation is rampant, and Truss has already (rightly) signed up to borrow billions to ease the energy crisis for individuals and businesses.
We are more or less at war with Russia – and if a few hundred billion is the ultimate price of victory (or even a negotiated stalemate) then it’ll be cheap compared to the priciest charges on the menu.
Yet while energy price caps should curb official inflation figures in 2023, still more borrowing piles greater pressure on the UK’s creaking balance sheet. That could be longer-term inflationary.
Already the Bank of England hiked interest rates this week by another 50 basis points, to 2.25%.
That’s the highest level since 2008. But scarier still is this chart (courtesy of Ed Conway from Sky News) showing how expectations for peak rates have soared in just a few months:
The expected peak is up by 2% to 4.75% in just a matter of weeks!
And while that might not sound especially high to old hands, Conway correctly highlights we’re far more indebted than when higher rates last prevailed.
Indeed he calculates that if rates were to hit 6% – outside expectations but again look at the rate of change above – then the mortgage burden would be similar to that which precipitated the property market crash of the early 1990s.
Debt markets are also a downer
We can then see the contours of the economic struggle taking shape.
The Truss government has decided to go for growth, as we used to put it. Today’s tax cuts take tens of billions a year out of the Government coffers and puts it back into our hands.
But the UK State is hugely indebted. And the cost of maintaining that debt is already soaring with rising interest rates.
Indeed the 10-year gilt yield jumped nearly 0.5% higher following Kwarteng’s mini-budget:
Source: MarketWatch
Lower taxes and austerity out the window means less fiscal tightening – perhaps even fiscal easing – exactly when we face huge inflationary pressure.
Which – given the Bank of England’s inflation target – in turn means higher interest rates. And that will strain household balance sheets and even risk a housing crash.
It sets up a push me pull you between the Chancellor and the Bank of England.
Politically this takes some pressure off Truss. Her government will be tax-cutters, leaving more money in people’s pockets. The Bank of England can be the bad guys, taking money back with higher rates.
The hope must be that faster growth will – among other things – reassure the capital markets and keep a lid on borrowing costs.
The risk is it doesn’t.
The pound has dropped nearly 2% this morning as gilt yields have risen.
I wouldn’t say that’s a huge vote of confidence, although to be fair it probably more reflects a ratcheting up of uncertainty.
Giving to Peter to pay Paul
How the push me pull me will resolve itself is anyone’s guess.
A similar-ish Thatcherite direction in the 1980s did deliver a growth spurt. I’d also argue it helped wrench Britain out of secular decline.
But inflation was a fading threat by the time the Thatcher boom really kicked in. We also had the windfall of North Sea oil revenues to paper over the cracks.
Perhaps a better way to conclude is to ask what this means for the typical Monevator reader who is saving hard and aiming for financial independence?
Well, firstly I don’t think it should change anyone’s long-term strategy.
Again, UK governments come along like buses these days. The 2025 General Election could easily shift things again.
But in broad strokes I’d say it’s tactically advantageous for us – but strategically less certain.
From a personal point of view, it’s hard to argue with lower taxes. More money in your pocket means more to save and invest.
I’d also imagine ISAs and SIPPs are safe under Truss and Kwarteng. Perhaps savings allowances – particularly the Lifetime Allowance for Pensions – could even start to rise again.
In the best-case scenario the UK escapes its low productivity trap, GDP grows, and we manage our expanding national debt thanks to higher cashflows from a larger base.
But there’s definitely a downside scenario to this steady accumulation of debt combined with more polarizing economic outcomes. (Plus I don’t see much here for infrastructure).
Careful what you wish for
The UK FIRE1 movement is also a kind of two-headed beast.
We benefit from laissez-faire policies in the accumulation phase – especially our favourable tax shelters like ISAs.
But we implicitly lean on state support as we keep taxes low in de-accumulation and – crucially – assume the NHS will be there to take care of our health needs.
Very different from US FIRE-seekers. They can earn and save more but face huge health insurance costs. This may keep them in jobs long after their British brethren would have called it a day.
There’s also the State pension to keep in mind. It’s a huge boon for the typical UK FIRE-ee.
Hence most of us wouldn’t benefit from too-much rolling back of the state and its services. Let alone grimmer potential scenarios that I won’t dwell on today.
Of course there’s not much we can do about it individually – aside from saving more, investing sensibly, paying attention, and hoping for the best.
But what do you guys think? Let us know – focusing on the economics rather than the politics, as much as you can – in the comments below.
- Financial Independence Retire Early. [↩]
> then the mortgage burden would be similar to that which precipitated the property market crash of the early 1990s
Hmm. Would that really be such a terrible thing, you know, people actually being able to afford to buy somewhere to live?
The historical long-term interest rate for the UK is about 6 to 7 %. In the interregnum between the GFC and whatever is to come, a great variety of morbid symptoms have appeared. Sky-high house prices (and, to be fair, other asset prices like tech stock portfolios assuming astronomical returns) are one manifestation of morbidity.
> and – crucially – assume the NHS will be there to take care of our health needs.
Hmm. We had the discussion about whether it is time to consider health insurance recently. I am not sure I make that assumption any more.
There is something to be said for trying a focus on growth. I am not sure Brits are ready for the Singapore style of living, though there has been a trend towards increasing authoritarianism of late
The repeal of the IR35 changes combined with the drop in corporation tax makes IT contracting possible again.
The switch to umbrella companies ripped the profit out of it. Whether the big customers return will decide the matter. Several big banks blocked all contractors, so that work either went off shore or to large consulting firms (often the latter sub’ing out to the former).
I have been perm’ for three years now and the work / life balance is much better, but in compensation terms I am worse off than autumn 2017.
On paper I could contract six months a year and spend my Summers as I see fit. Not FIRE in the classic Ermine sense, but home paid for, pension pot pretty much there, working six months a year to top up the pots and minimise sequence returns risk.
Interesting times ahead.
While short-sighted and selfish, it’s hard not to rejoice in this mini budget. Truss just saved me £2,500 on stamp duty, put money back in my pocket every month with the NI cut, and will probably saved me a few grand per year from next April.
Of course, none of this makes sense when the government is being crippled by shielding everyone from the increased cost of energy and has its own index linked debt obligations… but, stupid or brave, at least it’s a move with conviction.
As an “ancient-76” with a same age ancient wife health figures large
The machines are wearing out!
A monthly payment for a dentist ensures prompt service and helps with expensive crowns etc
Having money gets you a physio instantly as required
Able to afford to keep warm and buy good food (+ exercise-paid for) keeps us healthy
Having a little (or more) money keeps you healthy
Not an option for us all unfortunately and -can only get worse going forward ?
Not needed new hips or knees but many friends have and pay £10-15000 to get sorted in reasonable time
Save those pennies!
xxd09
“There’s also the State pension to keep in mind. It’s a huge boon for the typical UK FIRE-ee.”
I suppose it is better than nothing but the UK State Pension is amongst the lowest in the OECD. Anyone on above average earnings would do significantly better for example in the US. The removal of the earnings-related element has compounded this.
It’s a joke. The tax thresholds are still frozen until April 2026 with inflation rampant. Most will pay more tax not less. This is a conjuring trick.
@badger
Given how little most people pay in tax/ni the state pension is amazing – what is the open market price of £10k index linked with no cap?
Any couple living together has £20k tax free – what a great Fire foundation
My instinctive reaction is that whilst it could succeed, the base case here is that the UK has again shot itself in the foot. I think we will see higher inflation due to the cuts but also due to the £ weakening.
So far, the £ weakening has mostly been a story really of a flight to the $, as the euro has fallen nearly as much. However, that shouldn’t disguise the fact that the BoE has raised interest rates far more than the ECB, and so all else being equal we should have a much stronger £ than is the case. I fear these substantial changes will only increase uncertainty and worsen the strength of the £ and inflation.
What does that mean for me personally? As a FIRE’ee with a balanced equities/bonds/cash/gold portfolio, as and when cash savings mature I’ll be thinking very carefully about just loading up with unhedged world trackers for the long term and going more equity heavy generally. I’m not sure holding Sterling for the long term is frankly a good idea anymore. It would be preferable if the $ could stop rocketing to the moon in the interim though 🙂
@badger @Bolt — Indeed. In very simplistic terms no State Pension would mean another £250K or more to find, just slapping a 4% rule SWR on to it.
Of course people could theoretically save more for themselves in a much lower tax regime, but the UK isn’t particular onerous tax-wise already, and the average private pension savings even for those that have them is from memory only something like £50,000. So I wouldn’t bet on it. 🙂
@TA — Truly the allowances are getting mulered. But I expect they will be advanced in the Spring budget. It’s pretty clear they are throwing the dice on this one, and they need to create at least the illusion of growth for political reasons.
Better yet real growth, which I expect it will do at least for a while, but at what long-term cost time will tell. Tory chancellors have a history of boom and bust.
> loading up with unhedged world trackers for the long term and going more equity heavy generally. I’m not sure holding Sterling for the long term is frankly a good idea anymore.
I’m with that. Having watched the £ fall against the $ at about the same rate as the markets fell, so the £ price of VWRL isn’t down that much. I get to force myself to buy more VWRL. Not because I think it won’t go down, but more that I think I will live long enough to see it rise in real terms, and I have less confidence in the same applying to the £. And there’s really only so much gold a fellow should hold. It’s not so much what’s best, as what’s less bad.
I’ve thought for some time that fiscal policy would have to do the heavy lifting and monetary policy will have to tighten to compensate.
I’d have preferred the fiscal loosening to be more concentrated on infrastructure (energy in particular) and lower to middle income households. Instead, not unusually for this goverment, we have more giveaways to wealthy pensioners (and Monevator readers ;-))
@Andrew… is that 2.5k to you and another to your partner ? The first time buyer rate has risen by £125k, I put 5pc of 125k as a lot more than 2.5k.
@TA – there is an election coming, I can see the higher rate threshold rising to 80k as the rabbit out of the hat before the next election ? Certainly this budget appears to set the direction of travel.
Does anyone know if the ‘reversal’ in the NI increase will also reverse the threshold ? I cannot see how that would be politically possible. If it doesn’t… I’m quite a bit better off from Rishi’s grab ! And I for one am perfectly happy to keep the money Im earning and not hand it over to the NHS.
@TI –
The coalition of people who voted for brexit included people, like myself, who believe shackling ourself to the slowest growing region of the globe is hampering our economic prospects. Fair to say, I recognise not all Leave voters voted on this basis. I’m not against economic unions or even free movement – but I’d rather do it with some of the turbo charged economies than based on who’s closest, especially when our export is high value weapons and services which can travel.
There is little point re fighting this now. What I will say is, I am very glad the kind of brexit I voted for will be trialled. The bonus cap is a red herring, a signal, but I’m hopeful the planning reforms, the regulatory reforms and incentive (tax) reforms will generate growth.
I’m not scared we’ll have to follow eu regulations – you accuse of us exceptionalism, but it’s simply a lack of fear. The EU hasn’t scared us into keeping its banking rules, let’s see how it works out*
*I’ll only find out IF the Tories win the next election… I think they will but If they don’t we’ll never know if the redwood brexit worked or not
@TA – I’m just about to turn 40, I do not see relying on NHS as part of my future. I’ll use it for emergencies, cancer the big things private coverage can’t cover, but I’d definitely rather work an extra couple of years than wait six months for scans that could save my life. Should everyone get those scans promptly ? Yes. Do I think the NHS is capable of providing a good service even if we keep shelling out money on it as it currently organised – I don’t. We spend more per capita than our peers and have worse outcomes… do they still use fax machines ?
I could argue it both ways but fundamentally I don’t disagree there’s a logic to this. I hope you’d agree I’ve been fairly even-handed in my post above, despite my extreme antipathy towards the Brexit project.
I’ve always said that ‘Singapore on the Thames’ was the only logic to Brexit from an economic perspective. It’s not what I’d want for Britain, but it may the best chance of repairing the damage from Brexit (presuming no reversal) and it’s only the only chance of it actually delivering any net economic benefits on a national scale, IMHO.
I imagine I’ll be alright Jack either way, but for the country’s sake I hope it works, without too much damage at the margin.
Whatever one’s personal feelings/choices the fact is a dominant proportion of population repeated their 2016 choice in Boris election. I suggest they are simply consistently demanding control of importing cheap labour they see as their need to ensure they get an increased share of the future. It seems Truss gets it, like Thatcher did. so business, state and electors must adjust – painful though it maybe. Surely looking around world a government actually responding to democracy in action is to be applauded. We need to make it work in face of constant negativity from so called celebrity commentators pandering to cheap appeals of you can have it all, all the time which when it patently doesn’t work stokes up frustration and then to populism and then autocracy and we are all f*****,
Makes me rather proud to be British, determined to follow our own heritage. There is never an easy fix or formula,
@ TI – I doubt the threshold freeze will be undone. My guess is it underpins this ‘giveaway’. Rishi introduced the freeze when inflation expectations were much lower. Now with better than expected wage settlements they realise they’re raking in more than they bargained for. Hence they can give some tax ‘cash back’ now.
Anyway we can keep an eye on it and I’ll celebrate with you if you’re right come Spring.
@BBlimp – I didn’t say anything about the NHS. Did you mean to hail TI on that one? But just a quick one, if our peers means the likes of US, Germany, and France then we spend less on health which is why our outcomes tend to be worse in some areas. The NHS does fine against similarly financed health systems – think Spain.
@ BBlimp – sorry forgot to add that I don’t think they’re undoing the new £12,570 national insurance threshold. I had a quick hunt for news on that and I think you get to keep that new rate 🙂
I’m kinda suprised by the level of equanimity here.
I can’t put it better than the IFS: “Mr Kwarteng is not just gambling on a new strategy, he is betting the house.”
Pound just fell 3% today, foreigners (who we will rely to buy the 200 bn of gilts issued next year) are not impressed.
It’s hard to avoid political comment but I’d just say a giveaway budget without the integrity to publish associated economic forecasts is just about populism at its worse. And the giveways come associated with a high cost of living/value of savings price in further erosion of GBP. I guess some economic growth might come from other nationalities coming over here and buying the stuff citizens can no longer afford because “it’s so cheap”*
* Much like I remember backpackers of yore used to live the high life in places like India and Thailand.
Personally as an additional rate taxpayer I’m loving this. Compensation based in dollars, defer bonus into next tax year to save 5%, NI cut now etc. A six-figure sum in my coffers. In Liz we trust.
For the average UK citizen, though, it’s pretty grim. The UK turning into Singapore on Thames is a pipedream. London yes, Clacton-on-Sea not so much. Nice growth boost in short-term but long term higher inflation. Once Liz is reelected expect the public sector cuts to come thick and fast. Instantly, people are comparing it to be Barber 1972 “dash for growth” budget. Ended all rather badly going cap in hand to the IMF a few years later.
@TA, apologies I did mean @TI.
But I should correct the record – the U.K. spends the third highest gdp per capita on health and has the second worst outcomes.
https://www.telegraph.co.uk/news/2022/07/23/uks-runaway-health-spending-costs-10k-per-household-produces/
Because of the wide array of different ailments treated I suspect we can both claim to be correct… but there’s certainly many many conditions that citizens in other countries will have better outcomes for, at a lower cost. That shouldn’t come as a surprise… if we taxed everyone and made supermarkets ‘free’ most people would recognise that when you came to get your food there wasn’t any left
@badger101
A reference point: my US Social Security (aka state pension) earned in 10 years of working in the USA is 20% larger than my full UK state pension after 36 years working in the UK
All: I don’t see the ‘money to spend to generate short term growth’ being real. Cancelling the NI increase means I’ve returned to the net income I had before the increase was announced. A 1% reduction in basic rate of income tax will put a few 100 pounds at most in anyones pocket by the end of FY2023/24 – but if I take the average household energy bill for 2021 as £1200 (ONS figure) and the energy cap at £2500, I will have to find an additional £1300 to cover the increase. The £400 contribution plus the effect of 1% income tax rate reduction doesn’t begin to cover that, let alone the inflated food and other prices we will experience over the winter.
So tell me again, how is this a stimulus to the economy?
@TI – I thought the above analysis was fairly even handed. You have said previously there was no economic case for brexit, only a sovereignty one, and I had to (mostly?) bite my tongue as Boris, after an easy early win of removing vat from period products, just seemed to stop divergence of any kind. So today, for the first time since Dominic Cummings exited, I have reason to be cheerful about the way things are going.
(Except I’m on holiday in the US and I never imagined the dollars I withdrew at 1.14 would be good value . Guess it’ll save the waistline ! )
@BBlimp
statistically proven fact that the volume of trade with a partner is directly correlated to the distance from said trading partner.
So the idea that we can increase global trade with the RoW to replace EU is mistaken – not that I am disagreeing with the unshackling of ourselves from Europe.
But the ability to replace that trade volume / Value is extremely challenging.
@Kami, this is not advice but there may be some circumstances I believe where pension contributions would be better made this year than next for additional rate taxpayers. Might be worth speaking to your financial adviser ?
@David Aislin – I’m sure people will use less energy this year than last, so the end result won’t be new unit cost multiplied by last years usage.
I barely touched the aircon this year, will try and be lighter touch with the heating as well, and I can only imagine many people will be doing the same.
Remember there’s counterfactuals.
If you were going to get 98% this year’s GDP next year and now you get, say 100.5%, then that’s a boost.
I tried to keep the heat out of my piece but I hope I was clear it’s gamble in the short term and there are long term ramifications.
I suppose I am not surprised to see a gamble because as I’ve been saying for years the U.K. is in a bad place.
I was accused of talking us down as recently as early 2022 but I guess everyone can see it now.
Given that belief, at least a plan to try to do something about the problem accepts there is a problem, rather than all the sunlit uplands and Brexit dividend nonsense of the past few years.
But absolutely the tails on the outcomes have fattened. I suspect that is what’s driving the capital market response.
The prospect of a run on the pound or a gilt buyer’s strike etc have gone up short term.
Again not a certainty or anything like it, but up.
For my part as much outlined I’d have preferred muddle through Blair/Cameron centrism into comfortable mid second tier table status befitting our size, demographics, and history.
But as others have said the voters chose otherwise.
And ultimately actions have consequences.
Not really much for me to complain about as I will be better off with the reduced NI and was advised this morning by my energy provider that with the government discount applied, my DD will drop to a mere £21 a month. I will double-check with them to make sure the smart meter hasn’t made a mistake!
@Notfiredyet – love the lack of citation. I suppose Australia and New Zealand both doing most of their trade with U.K. pre us joining the EEC didn’t happen? It changed to the US after we joined the EC btw. Think big, not small.
https://www.dfat.gov.au/sites/default/files/australias-trade-since-federation.pdf
Much as it was ‘fact’ that 200,000 banking jobs would be lost if we left the EU… let’s see how it pans out shall we
50 quid to who spots ZxSpectrum posting under a new name first! After being slapped in another post he returns under a new handle!
@BBlimp
The bottom nil rate band of stamp duty was raised from £125K to £250K but in doing so they eliminated the 2% band, so the saving on the bottom £125K is only 2%
@ TI – great piece so quickly, balanced and considerably more optimistic than my take, hope you’re right.
Most likely path for me is plenty of nominal growth… swamped by higher inflation… with interest rates at levels unimaginable to many … still not enough to support the debauched currency. Ouch.
The head of multi-asset at RL’s take is “with spare capacity non-existent, inflation at a 40-year high and the Bank of England trying to cool things down, we are likely to see a policy tug of war reminiscent of the stop-go 1970s. Investors should be prepared for a bumpy ride”
John Authers’ piece ahead of the announcement quoted 70’s Labour Prime Minister Jim Callaghan, “We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candor that that option no longer exists, and insofar as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step”
The response in the interest rate markets dwarfs anything I can remember since the craziest days of the credit crunch in 2008 (including the dreaded B word): SONIA rates are up 45-48bp across the curve. i.e market thinks the BoE will have to *smash* rates higher in very short order, currently pencilling in 4.4%ish by the end of the year and 5.4%ish by next summer.
Which would put mortgage rates at what, 7.5% or so? With the affordability per Ed Conway’s piece? Eek.
@Hak — Bit disturbed by the use of the word “slapped” as while I agree his disappearance seems to imply he took it harder than my comment intended, I really only meant it as a constructive defense of our editorial decisions / investing posture.
Basically he, an ultra high net worth individual who works at a hedge fund with extremely deep domain knowledge and by his own lights little need to take risk to grow his wealth (saving being far more important for him) compared to wealth preservation has repeatedly raised the issue of us not flagging up (/recommending) his preferred investment method, which is to put money into a sliver of market beating macro hedge funds, most of which are inaccessible to the average person even if it was a good idea for them to start getting involved with those sorts of funds, which all-in I’d strongly say they shouldn’t.
But personally I’ve always found his comments tremendously interesting, as did many other readers. Long may they have continued as far as I’m concerned. I had zero issues with him saying “this is what I do, here’s why”. The disagreement, as best I can tell, came from me saying that his investment method wasn’t relevant to most readers of the blog let alone something we could start to recommend.
I guess he took this as his comments not being welcome, which wasn’t the intention at all.
But as I said on that thread afterwards, I couldn’t fault anyone for having had enough of online discussions.
I’ve written nearly 6,000 comments on Monevator over the years and 75% of them have probably been misconstrued or were not as clear as I’d have liked them to have been. And that’s before you even get into the trolls and their shapeshifting and deliberately obfuscating antics.
It’s an unforgiving medium.
@ZX – I certainly didn’t agree with your politics but I did find your comments interesting.
What I was particularly interested in was your take on passive funds lending securities. One my funds has thousands of components but an OCF much lower than Vanguards. It’s always on my mind you only find out who’s swimming naked when the tide comes in. What’s the exposure ?
I’ve been on the receiving end of some fairly robust ‘constructive defence’ in my time (once being told jury was out if I was a troll !) but as in life, at monevator you’ve got to roll with the punches and enjoy the site ! I wish all my fellow brexiteers hadn’t been bullied off over the years, and cold light of day in retrospect might even been some of the culprits agree, the readers/ commentators and the site have been left the poorer for it.
Looks like TI is firmly in the traditional mould of old economics, that continual economic growth and productivity is the altar to worship at. I’m more in favour of New Economics, as described by Kate Raworth in ‘Doughnut Economics’.
Ronald Reagan’s policies, and what went with them ulimately led to the bank crashes of 2007/2008, in the same way as Thatchers me too deregulation did.
The reality of Conservative policies over the last 40 years, is that, when things look difficult, they are reckless in the pursuit of ‘new growth’. Not prudent, or considered. Just reckless.
Interesting the references to Singapore. 40 years ago, I did a few long weekend stopovers in Singapore. Unlike many of the other places in South East Asia, I had little desire to spend more time in Singapore. It appeared to be a place completely given over to Mammon, a cultural desert.
And could barely be described as a democracy. For me, a good shorthand for the health of a country’s democracy is where it sits on the Index of Press Freedom.
Norway, Finland, Denmark and Sweden are the top 4.
Britain comes in at No. 35.
Singapore is 158th.
Not at all the kind of place I’d want live. The future for Britain, or rather , England ?
@Andrew – I guess this may be an example of where the tax distorts the market (further). If I was a FTB I would buy a home for £625k to avoid the higher rate of stamp duty. I wonder if this will create a ‘cliff edge’ of £625k flats in London ?
@trufflehunt and @TI – I don’t think having similar policies on taxation, investment incentive and regulation etc will have a knock on into living arrangements and press freedom – surely the comparison to Singapore was only ever meant their economy and not their way of living ? Wouldn’t our history / immigration/ tv and movies we consume effect our culture more than solvency 2 regulations ?
@ BBlimp – I can’t read the Telegraph piece due to the paywall. I expect you’re right that much comes down to our respective sources. I respect the ONS as a pretty neutral observer though. They say:
“However, of the G7 group of large, developed economies, UK healthcare spending per person was the second-lowest, with the highest spenders being France (£3,737), Germany (£4,432) and the United States (£7,736).”
The equivalent UK figure is £2,913 per person. And we’re in 19th place on their table. Figures date to 2017 mind, but I doubt we’ve improved much on our ranking since then.
Figures are also available from the OECD and the World Bank.
The ONS piece also shows UK spending on healthcare governance and administration is low versus our peers, seemingly due to the relatively efficient structure of the NHS. Remarkable I know! The US system gobbles up an extraordinary amount of money on administration according to the chart (it’s quite a way down the piece).
Health outcomes are far muddier – which I’ve heard from other sources too. It’s not quite as simple as you get what you pay for, but there seems to be a lot of truth to that all the same.
This is the link:
https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthcaresystem/articles/howdoesukhealthcarespendingcomparewithothercountries/2019-08-29
Personally speaking, I respect anyone’s right to spend additional resources on private medical care but I do want a well-funded NHS to be available to everyone who needs it in the interests of the common good.
I think ‘private splendour and public squalor’ is the sign of a malfunctioning society.
For the avoidance of doubt, I respect your views. You’re centre-right and I’m centre-left. I think both sides have a partial claim to the truth and so need each other! 🙂
I don’t think I said anything about press freedoms so not sure why I’m being @-ed. 🙂
Nobody was bullied off this site over Brexit. Plenty did stop reading or unsubscribed, apparently because they only read the Telegraph, Mail, or Sunday Express and couldn’t take the heresy of an anti-Brexit position, especially on a financial site.
Most of these were the original Barry Blimp “let’s bring back shipyards to Tyneside and give Jerry’s grandkids a good whats for” clinking G&Ts in the golf club types.
Some were worse than others. Multiple times I had to close threads to all comments because Brexiteers wouldn’t stop writing rubbish (this is not to mention all the literally racist or anti-Muslim stuff that a minority posted or emailed that I deleted as soon as I could) and I didn’t have time to refute it all with facts/links for the benefit of innocent readers who didn’t know better, and believed they were reading robust ‘common sense’.
So on Mondays I’d tend to close threads, the Brexit defenders having bored/bludgeoned everyone else into submission by restating falsehoods and jingoistic platitudes.
The site isn’t the poorer for that in the same way that the BBC isn’t the poorer for no longer having a climate denier at the end of every global warming report, or the Catholic church poorer for not having someone sticking up for the flat earth.
I don’t believe you’re entirely even-handed with how you look at things to be honest (fulling hat-tipping the irony given my previous paragraph 😉 ) but who is and you fall on the right side of the terms of debate I think. You’re welcome to keep commenting, and I agree your support of the project despite 95% of the ongoing evidence does lend some balance to the comments.
Frankly you’re an intellecutal titan compared to most Brexit supporters on the Internet @BBlimp. Though it’s a very low bar.
They should make a statue of you and pay homage. 🙂
p.s. I am talking here mostly about the economic debate. People who said they wanted to leave the EU because they wanted Britain to be 100% independent on a constitutional basis have never had much push back from me. It’s a coherent argument; I just don’t think it’s worth it, or of much practical value. And at least the racists and xenophobes were honest, though I didn’t set up a website to host their views.
@TA – I’m fascinated that the centre left don’t think NHS spending has risen since 2017 relative to gdp or our comparators. Needless to say, my peers hear every announcement with gritted teeth ! It’s what made me think Theresa May and Boris got so wrong – they ruthlessly pursued votes they were never going to get.
The telegraph is likely using more up to date figures, but I won’t die in a ditch over it.
I respect your views. My best friend will be despondent his tax has been cut when the NHS is in such a state. I simply don’t agree giving them more money to buy more fax machine will help. You give them money to hire another ambulance crew, they’ll set them to joining the queue outside A&E. They need competition, not cash. I believe desperately in healthcare – just not the NHS.
@TI – I am definitely not even handed 😉
I, uh, will choose to take that as a compliment
(You were @ because of the inter generational living comment and the original bringing up of us actually becoming Singapore rather than ordering our economy similarly)
@BBlimp I would love to buy a place for less than £625K, but I want a house to grow a family in and a commute I can bare. So more it is
Just in the talk of gravity and trade.
I read an interesting report once by one of the economics consultancies/think tanks. Sorry I can’t remember which or find a link.
It wasn’t a defence of Brexit but it did critique the various impact assessments that were doing the rounds.
It argued that the gravity models’ overstated the impact because the coefficients used in the modelling were based on the imports/exports of every country in the world which is overwhelmingly made up of developing countries trading raw materials and low value added goods.
UK exports are more tilted to services and high value manufactured goods (think jet engines and pharmaceuticals etc.). These are much less price elastic and less susceptible to trade barriers. Plus the non-tariff barriers post Brexit are mercifully quite minor.
Obviously some firms and sectors will have suffered much more but these cases are relatively insignificant in a macro sense.
I look at the various trade figures published by the ONS and it’s hard to see much obvious effect but it’s also possible that the pandemic has disguised a lot of the disruption.
I take the view that most of the negative effects of Brexit are now behind us and firms have adjusted accordingly but others will take a different view.
@BBlimp — Okay, but my point about multi-generational living was exactly to point out some of the limits of ordering our business/economy like Singapore. Those Asian countries have a huge and deep tradition (and pride) in family support structures that just don’t exist in the UK, for example. Similarly, more limited public spending on infrastructure can have a bigger bang for the buck (/dollar) on a small island.
I’m not saying we should (or that Brexiteers say we should) copy all of Singapore’s mores. I’m saying some of the decisions they took were geographically and culturally specific to Singapore.
Personal freedoms aside the country is a marvel. And given the pragmatism of its ‘founders’ (modern builders?) I am certain if it had found itself a few miles off the coast of the Continent of Europe when it began its economic miracle, it wouldn’t have been wondering how to trade better with China and Australia. 😉
As others have said on this thread, all evidence is that geography matters hugely in trade. A little less as digital services etc grow, but not enough to change that fundamental fact.
Good article and i thought reasonably balanced. We have had a series of pettifogging Chancellors, all complication and tapers, so it is refreshing to think someone might be prepared to grasp the nettle and shake the whole rickety structure.
There are a lot of global strains out there thanks to imbalances, the USD and Russia. Cable might be in focus but look at the Yen and lets see if the unexplained ECB ‘ mechanism’ holds Italian bond yield spread after the election.
A couple of under the radar hits against the unions and universal credit, but not unfreezing the 40% threshold seems to have gone largely unnoticed, well not here maybe….
The market doesn’t seem to like the idea of funding tax cuts with yet more borrowing: cable is now below 1.09 and Sterling has gone down by around 1% even against the Euro!
At least I realised the way the wind was blowing, when I finally moved my DC company pension to a SIPP a week ago: I kept a bit more than half of the US Government fixed income part in USD unhedged 😉
@Far Wide – My strategy is the opposite, when GBP is this weak I buy most of my global/US funds in currency hedged form (IWDG/IGUS ETFs). It’s the only way to be sure of capturing the gains when global equities finally recover, regardless of what GBP does in the future.
I would be interested to hear other views on this.
@Mr Slow: I’m with you. I normally split permohold equities 50/50 GSPX/VEVE but in extremes sell VEVE and buy IWDG. My developed world chunk will be 100% IWDG when we hit dollar parity then wait for recovery to around $1.45.
https://thecritic.co.uk/its-trussonomics-and-you-aint-seen-nothing-yet/
On the rear rows of the backbenches, there were worried faces. They were like passengers on a flight who’ve just heard that the pilot has been replaced, and the new guy has come on the intercom to explain that he’s got an interesting theory about gravity that he’s always wanted to test.
…
In the Truss universe, what voters want is fracking and foie gras and tax cuts for the very rich. They will cheer as mortgage bills rise and the pound sinks, because they will recognise that just as you have to cut taxes to raise revenue, you have to get poorer to be richer. Down is up. Big is small. Cold is hot. Borrowing is saving. Trussonomics, baby!
“I can’t read the Telegraph piece due to the paywall”
https://12ft.io/
Handy page for removing paywalls.
@Vroom
Kidstuff, lets see what the FT (well know bastion of socialism) has to say:
“The UK, says Kwasi Kwarteng, chancellor of the exchequer, is now “at the beginning of a new era”. He is correct. It is new in his willingness to pour scorn on the past 12 years of Tory rule. It is new in the size of his gamble with economic stability. It is new in his promises for a transformation in the rate of economic growth. But the question is not whether this era is new. It is whether it will be an economic success, a failure or an outright calamity.”
“In sum, this mini-Budget will do nigh on nothing to raise medium-term growth, but risks serious macroeconomic instability. The failure to ask the Office for Budget Responsibility to assess its impact is simply scandalous.”
Link (should work): https://www.ft.com/content/52abf1de-10c2-4c15-a0d7-6f3f8f297fbd
Lets try this then: https://12ft.io/proxy?q=https%3A%2F%2Fwww.ft.com%2Fcontent%2F52abf1de-10c2-4c15-a0d7-6f3f8f297fbd
@Ken @Neverland thanx for the 12ft.io and the example in how to use it 😉
@Vroom I will cheer at mortgage bills rising. I don’t feel strongly about foie gras. Because firstly interest rates are still well below below the historical mean for the UK (~6-7%) and secondly because someone below 45 might actually be able to afford a house. And hopefully BTL landlords will be eliminated from front-running housing.
I am not below 45. Housing harmed 10 years of my early working life, and I still hold it against the shibboleth that higher house prices are A Good Thing
@Mr Slow #47
> (IWDG/IGUS ETFs). It’s the only way to be sure of capturing the gains when global equities finally recover, regardless of what GBP does in the future.
Eh? It’s the only way to be sure of capturing the gains when/if the GBP finally recovers, regardless of what global equities do in future
FTFY. There’s nothing wrong with taking the opinion that the GBP s overly beaten up and may one day recover due to the inherent strengths of the UK, but it’s always good to qualify the specific bet you are making 😉
@ermine – Not sure I follow – if you buy unhedged then you gain if GBP weakens further but lose if it strengthens. On the other hand buying hedged means you are taking only global equity exposure, without exposure to GBP movements in either direction. That’s how I understand it anyway!
Just a reminder that ‘keeping tax low for the rich does not boost economy’ – https://www.lse.ac.uk/News/Latest-news-from-LSE/2020/L-December/Tax-cuts-for-the-rich
and
‘cutting corporation tax is not a magic bullet for increasing investment’ – https://www.ippr.org/blog/cutting-corporation-tax-not-magic-bullet-for-increasing-investment
> On the other hand buying hedged means you are taking only global equity exposure, without exposure to GBP movements in either direction.
Put that way, maybe. I was more interpreting it as you placing a bet that the GBP is less valued in purchasing power now than it will be later. Let us say the GBP falls by 50%. You are paying twice as much for everything imported, which is Not a Good Thing for a Brit. So buying hedged is a fair bet against the £ falling further.
But yes. All other things being equal, and assuming you were in isolation, and Harold Wilson’s doctrine applied that the Pound in your Pocket was invariant, and Britain didn’t import most of what you consume, sure. All other things being equal, you are isolating global equity exposure.
I was a rugrat when I hear that statement on my mother’s vacuum tube radio in ’67, and the tone didn’t convince me then, despite being in short trousers. So good luck with the ‘all other things being equal’ part of the assumption. It wasn’t true in 1967 and it’s much less true now, because no man is an island. We grow less than 50% of our food, for example. Your material wealth s not determined in Pounds Sterling, even if it’s measured in them. You invited other views 😉
@Mr Slow @Ermine: As has been noted before, the £ tends to weaken against the dollar when the US market and therefore the global market is down, and back the other way in recovery. Most of the time I keep half my, largely US, equities hedged to GBP to capture a bit of a rebalancing bonus. For the third time since Brexit we have seen the £ fall from $1.4+ to under $1.2 and I have again increased my hedged portion substantially so that when the recovery comes I’ll get the biggest bang for my bucks. It is a bit active but having reaped the rewards in 2016 and 2020 I have some faith in the hedging bonus especially at today’s £/$1.09 although I have not gone all-in yet, but almost certainly will at parity. So I am banking on a recovery, but that’s what we all do in long run. If that recovery doesn’t also bring a weakening of the dollar, I will be a bit surprised – tho of course it may not happen as reliably as before.
@ermine looking at a bigger picture I reckon housing reverting to mean is more likely than the tech sector cycling out. Humans aren’t actually living or working much longer than they used to, so there’s a hard biological limit on how far financed housing can deviate from trend. (With the caveat that every conceivable financial stunt and regulatory flex in the book will be deployed to prevent a reset of home values – it won’t go peacefully.)
@David Aslin yes, that was eye opening when researched it. I’ll be eligible for a US and UK state pension, though one of them gets cut in half to prevent doubling up, and there are accounting overheads and obviously currency risks. Offset against that is the vastly different welfare situation of course.
As I’m now retired none of the tax changes affect me much. I’m worried about the direction of travel because I don’t see the changes as actually having the desired growth stimulating effect. And I’m currently visiting family in the US where my pound is not going as far as it used to.
I think there is an incoherence in dropping the 45% rate which affects about 625000 people and leaving the personal allowance clawback which creates a marginal rate of 60% for a larger number of people earning over £100000
I would love someone to tell me how removing the 45% tax rate and removing the cap on bankers bonuses stimulates the economy
@Onedrew My target allocation is similar, about 50% of my global/US funds in hedged form, and indeed it’s rebalancing that naturally means I am buying more hedged when GBP is weak.
I should highlight there was no advanced calculation to arrive at my 50% allocation- I can think of reasons to be fully hedged and also to be fully unhedged, such as described above by @Ermine. I know I’m not smart enough to figure out which will turn out to be the best strategy, but as my goal is not to maximise gains but to minimise tail risk (and stay in the safe withdrawal rate “safe” zone), I decided better to be partly right than risk being entirely wrong and lay my eggs in different baskets on this one.
@Bblimp #40
Please explain how you think competition will improve the NHS. Elective healthcare (hip & knee replacements etc) is easy to schedule and make money off. Acute healthcare (when you have a heart attack) is hugely expensive, unpredictable and loss making. No private provider will ever get into acute care – try phoning BUPA when youve got pneumonia. Or have a cardiac arrest. If NHS loses an increasing proportion of ‘profitable’ elective care to the private sector, it becomes even more financially unbalanced.
Aren’t people angry? We’ve spent the past ten years being told we ‘needed to balance the books’ and now it’s burrow, burrow, burrow. Showing that actually government debt is only important when the government wants it to be and all the pain and suffering due to austerity was a complete waste
@Mr slow @Onedrew – Absolutely can’t argue with running both sides with part hedging as part of a balanced approach. I’d read the OP as an attempt to insulate oneself from Crazy Kwasi’s shenanigans. Let’s hope around now is max future upside for the strategy 😉
As James Carville said – “I want to come back as the bond market. You can intimidate everybody. ” If I was the treasury, I’d be getting pretty nervous with 10 year gilts hitting 3.8% and the near/ medium term pathway from here.
I can’t really buy into hedging currency exposure. Most of us are highly exposed to the £ and having diversification is clearly proving a good thing. I’ve read all the arguments against and understand the rationale for it. I just don’t think I agree.
If anyone had said to me UK mortgage rates would be 4.5% for a 5 yr fix a year ago, I’d have laughed them out of court. They could easily be 5.5% by xmas. Surely this has got to put the skids on the housing market no?
Things I’ve got right – Global Equities, $TIPS, Gold, 5 year fix mortgage at 0.95% to invest the proceeds and not doing so
Things I got wrong – Buying FTSE 250 earlier this year. shocker. Buying TN24 earlier this week pre the GILT fall – not a major disaster at all but could have done better waiting till Monday!
I think I’m more tempted by UK assets now – appreciate this is active behaviour. FTSE 250 is cheap now on CAPE.
One more thing I’d say given the political comments. If 20k more people had been members of the conservative party and voted for the other candidate then none of this would now be happening. For right or wrong. Mad isn’t it….I continue to think the best way to have influence over govt is to be a member of the conservative party.
Personally I’m not convinced at all by all the policies. One thing which is definitely a blocker to working I think is the removal of the personal allowance at £100k and I reckon that should definitely go.
I’m not convinced around this trickle down economics. equally public services are unfundable based on our economy. So it’s all being privatised by stealth or just falling apart!
Reminds us all again that no one has a clue what’s going to happen.
Thanks for the all the comments, great discussion here. 🙂
Again I’m going to remind people I didn’t vote for Brexit, so hamstringing the economy and putting a Tory wrecking crew in power for the past five years. Defending a bold (/risky) move in the face of obvious problems for the UK is not the same as saying this is where I’d like the UK to be.
With that said…
To massively simplify…
Firstly, people at the margin may work harder or be more entrepreneurial if they feel they will keep more of what they earn. It’s not the difference between someone getting out of bed and someone working for a six-figure salary, as is stereotyped, it’s a marginal thing — putting in a couple of extra hours, taking out a loan to expand the business, and so on.
Secondly (and simplifying even more) if you leave more money in people’s pockets, it will be allocated according to their needs / capitalism, rather than according to the dictates of State / Central planning.
Businesses and services will cater to those needs, and these businesses will be more efficient than most State-run equivalents. Productivity could improve, the economy could grow as a result of the activity. This isn’t a net gain, as state spending produces economy activity, too, of course. But often private business has a strong incentive to do it better and more efficiently, and can respond quicker to change for instance (because its owners want to make more money, which takes us back to the first point again).
This sort of thing shouldn’t really be controversial, it’s one reason why Western capitalism — hideously imperfect though it is — won the Cold War, China is now de facto capitalist, and so on.
If course the market is far from perfect (in particular it needs regulation), there are somethings it can’t/shouldn’t do (police, army etc) and most of us nowadays don’t want to live in a society entirely built around its outcomes, where some potentially make unlimited amounts and others starve in the streets, especially as opportunity is far from evenly distributed and luck plays a huge role.
Hence the Welfare State, the NHS, government provision of other services, etc, and taxation to fund it.
The tension is between what creates the most wealth at a national level (GDP) versus what’s most equitable (GDP per capita) versus how much to tax and spend to do the stuff we want the State to do.
I won’t be dying on any hills to save the Truss administration, which I fully expect to be fairly awful (very happy to be confounded here) but I’m bemused by a lot of the response in the media and on Twitter.
Many people do not seem to understand, for example, that somebody earning £1million is potentially liable to pay over £400,000 in tax, whereas somebody earning £40,000 will be paying around £5,500 (ignoring reliefs etc).
Some readers might role your eyes — but I’ve stated this example to enough lefty pals after they have said “the rich should pay more” to me and I’ve noted their dumbstruck response to wonder if people really do understand this.
Now, you might say million-pounder earner should pay an additional rate, like the 45% instead of the 40%, so that for every £1 they earn they keep less than somebody earning the standard higher rate.
As currently, they pay 45p of every £1, versus max 40p of every £1 for standard higher rate tax.
Okay, but be ready to explain why that’s ‘fair’ or desirable. It might be — perhaps you believe it’s the best way to curb inequality for example — but don’t stand on a box and say “the high earners should pay their fair share and support those who have less” because they do already, to a massive degree.
And if you do believe 45% is ‘fair’ then why not 50%? Or 60%? Or a graduated scale?
Why not 95% over £500,000 a year? Who “needs” to earn that much?
If you have an argument as to why not 95%, then you see the argument for why not 45%, right? 🙂
The 45% is just in place because it was politically most expedient. It’s not a law of nature.
The top 10% of earners in the UK pays 60% of tax receipts according to the IFS.
(Source: https://commonslibrary.parliament.uk/research-briefings/cbp-8513)
As for banker’s bonuses, I assume they have done this to send a signal, it’s trivial in the grand scheme.
But with that said, it’s absolutely true that bonuses can be a better incentive system, with a logic most of us would applaud (you get paid if you deliver), and potential downsides (e.g. your incentives are too short-term so they take bigger risks).
Under the current rules, salaries were inflated to make up for bonuses being smaller, meaning a lower element of performance-related pay and higher running costs for banks that made their profit/loss less naturally responsive to changes in economic conditions. (i.e. Spending less on salaries in a downturn).
Of course bankers are paid too much in my opinion regardless of how they get the money, but that’s a separate discussion to *how* they are paid.
Hope this helps. 🙂
Just on the topic of private vs NHS, in addition to poor or no provision of acute care, no private health insurer covers reproductive (contraception and maternal care), early childhood health (vaccines etc) or menopausal health (HRT). This means not only are we all reliant on the NHS right from right at the start of our lives, the price those of us who choose to stump up for insurance are paying us heavily subsidised by all the things the NHS does do but which aren’t covered by insurance.
What is there 3 interest meeting’s left before year end? Gonna be some big rises to hit that predicted 4.4%
@ TI – Good comment. However, the evidence suggests that putting pounds back in people’s pockets makes more of a difference at the bottom end rather than the top. Economically and socially. Hence cutting taxes for the upper echelons of society – who are already doing extremely well, in a country known for income inequality – beggars belief as a political, social or economic remedy for our ills.
@ Bblimp – 2021 figures for health spending per country (GDP per capita):
https://data.oecd.org/healthres/health-spending.htm
UK is 14th. Way behind Germany but much closer to France than I thought. Interesting that Japan, despite that aging population, spends less. Must be all the fish.
Also interesting that the most famous example of a privatised health system – the US – is notorious for its terrible outcomes relative to spending. As the Telegraph article points out – thanks @Ken.
The Telegraph article says we have the third highest spending on health in Europe as a share of GDP – but that doesn’t tell you what we spend per capita.
From what I’ve read, our outcomes vary depending on the category examined. We’re poor in some areas and good in others. On balance, we seem to get what we pay for. Drop the myth that the NHS is pouring money down the drain and it becomes obvious the extra funds are needed to care for an aging population who demand treatment for a range of chronic conditions long after they depart the workforce. An excellent solution is to ensure we have plenty of productive taxpayers able to sustain them e.g. through a flexible labour market that’s open to the world.
Great article plus posts as always
My simple explanation
The top 10% of earners pay 60% of tax receipts
Tax receipts pay for costly items like doctors,teachers and health etc
This 10% therefore should be encouraged as much as possible to earn more and then will pay more tax
Unfortunately for us all especially Guardian readers some people (obviously the above 10%!) seem to have been blest /born with exceptional genes compared with the rest of us – it’s unfair but….
So “use” these lucky folk to make life better for all of us
Of course this is totally contrary to the current diversity inclusion and equality (DIE) agendas
Reality though is a hard taskmaster and this budget seems to be based on acknowledgment of this unpalatable but true fact?
Just my tuppence worth!
xxd09
Perhaps the real worry should be the effect of Sterling finding a bottom at some point and bouncing.
Suddenly our global fund portfolios (50% US) might not look so attractive.
Here’s hoping the S&P500 can grow faster than the £ when that happens.
to follow up on tax.
I’ve a work colleague who earns I think around £0.5 – 1m annually (I wish I did…) operating in financial services.
Post Brexit they’ve had to move due to working with continental European clients, which are very problematic now to do from the UK.
The person has therefore moved to Italy who have welcomed with open arms and kindly offered an effective 15% expat tax rate for ten – fifteen years.
Thats what the UK has to contend with.
https://expatra.com/guides/italy/italian-taxes-tax-advantages-for-expats-explained/#:~:text=Italian%20Non%2DDom%20Tax,a%20maximum%20of%20fifteen%20years.
My colleague likes the UK etc but it’s not really a contest is it. Can’t do your job here and pay a lot more tax……
I reckon the person was paying between £250k – £500k income tax in the UK annually.
If the average person is paying a £2k income tax a year that’s 125 – 250 additional people we need to shoulder the loss. Either people to take back up the arms of working who’ve retired or increased immigration.
For just one person…..
I recall the sage that is Right Hon. David Davies a few years ago presenting to all the banks and his message was…you’re a smart lot, you’ll figure it out. They did. They moved.
@TI #61
> The top 10% of earners in the UK pays 60% of tax receipts according to the IFS.
While I don’t disagree with the general sentiment, on a technicality, that should be 60% of Income Tax receipts? This fellow makes a coherent argument, with an extract from the same document, that income tax is 25% of government revenue, indeed, VAT + NI together make up a bigger slice of the revenue pie than income tax. At a guess the burden of those two are probably more broadly distributed, because the marginal rate of NI falls significantly above the HRT threshold, and because VAT is a consumption tax.
@ermine — Yes, it is income tax receipts (and I think they call it “general income tax” at that, which probably hides some more nuance).
As we were talking about income tax I think it’s excusable sloppy shorthand. However you’re quite right, it’s a worthwhile clarification, and I’ve been more specific in my post today.
@Prometheus #
> Here’s hoping the S&P500 can grow faster than the £ when that happens.
Why hope when you can do something about this 😉 Mr Slow #62 and Onedrew earlier show you the way – hedge to GBP
IWGD and IGWD at your service, Sir. Curiously the distributing IWGD is somewhat cheaper than the accumulation. You can take the future appreciation of the £ along for the ride, indeed, unlike straight FX you can also be holding a productive asset at the same time.
Politicians are saying that workers can’t ask for a pay rise as it will contribute to inflation but now bankers can get bigger bonuses? Should everyday workers demand a bigger pay rise to make them happier and more secure and therefore more productive? People who don’t have money worries have more energy to spend at work
@Mr Slow #47 – Nothing at all wrong with a bit of IWDG, have made the same purchase in the past. Until yesterday, my investment plan said in fact exactly that for next month, as I had no reason to be particularly concerned about the £ – I fully expected it to recover just as promptly as the stock market.
But yesterday was a bit of a shock. For better or worse, I have to wait a month to buy now so we’ll see what mood I’m in by then ( passive investing by mood, definitely not recommended!)
@Francis Roe — I take the point but as I said above I’m not sure (especially short term) that this will result in much higher banker pay. (There’ll take home more due to the tax cuts).
I used to spend a lot of time a few years ago studying U.K. bank earnings reports, when I thought they might follow the US banks in strongly recovering. They didn’t for various reasons and I gave up on them.
However one thing was clear which was that they all had enormous problems with their enormous cost base (made bigger by all the new regulation).
At the same time a minority of staff made a disproportionate share of the profits, but to make things even more difficult the small minority often changed Year to year (so M&A bankers one year or quarter, credit the next and so on).
So banks have to pay high compensation to compete with US and Asian rivals (I think they all pay far too much personally but that’s different issue).
Under the current rules they must pay a relatively high fixed salary and a capped bonus, irrespective of their performance.
With uncapped bonuses banks can revert to paying low salaries and paying higher but variable bonuses linked to earnings generation.
I don’t want to oversell my defence of bankers. Dig back to 2007 / 2008 / 2009 and you’ll discover even pre crash I thought they were egregiously overpaid for what they do.
However on balance I’d prefer they were egregiously overpaid via a bonus structure that gives the parent companies (which most of us are invested in via funds and which generate stacks of U.K. tax) much more flexibility in hiring and growing without nailing on even more massive fixed overheads.
First time poster, hi everyone.
I finally decided to jump in a discussion as I have the impression that the healthcare debate seems to always be stuck in the “NHS vs US model”, but there are actually many alternatives. In fact, some of the most effective healthcare systems (France, Germany, Netherlands, Norway) are actually hybrid systems with a lot of provate sector on the delivery side, and a heavy state intervention on the regulation side.
So while I think the NHS as it is is unsustainable (mainly for organisational reasons), I don’t think we’ll go towards a US system. I imagine a higher and higher prevalence of private workplace insurance, paired with regulations to guarantee access (e.g. pre-existing condition). Overall not so pessimistic if the system converges to something like the French one.
The main thing I am worried about is the lack of reasonable debate that will result in last minute emergency interventions, rather than slow and well thought reform.
@ermine @prometheus: iShares’ pricing policy on £ hedged ETFs is curious. Reversing the IWDG/IGWD relationship, it is GSPX -the distributing version of their hedged S&P 500 ETFs – that costs half that of the accumulating IGUS. I like the accumulating XDPG which is a point cheaper than GSPX and seems the closest tracker to its index. The premium for hedging seems vanishing small to me.
>Inflation is rampant, and Truss has already (rightly) signed up to borrow billions to ease the energy crisis for individuals and businesses.
We have a price rise in energy because there is a shortage of gas, creating funds to buy that gas to subsidise users will just further inflate the price of gas (no pun intended) as the UK, EU and other major users engage in a bidding war to buy the limited amount of gas available. These government created funds will end up on the balance sheets of the gas producing companies, it may be a good reason to buy their shares but will not end well for consumers.
@maurice — I’ve been advocating for a massive renewable push for years, several times have called out the order paper waving when the fuel duty escalator is frozen, and so on.
I also flagged up managed demand destruction as something that should be in the mix way back when prices first spiked on Ukraine.
However the situation has escalated, inflation is off the charts, bills were set to come in at £5-6k next year, and many households have less than £500 in savings.
This is not to mention the impact on businesses.
Do nothing and we’d probably have seen a depression level economic drawdown. Plus old people dying in cold homes etc.
I suppose a Labour government might have nationalised the firms but they would still be in hock via a different mechanism.
Targeting assistance creates massive bureaucracy and the potential for fraud.
The energy companies are mostly crappy businesses these days (I spent years studying Centrica for my own reasons) and I’d be very surprised if they turn out to be good investments based on this relief package.
Perhaps the destruction of weak competitors we saw last year might make a difference though.
The new marginal tax rate for a university graduate on £27k is 40%, rising to 50% at £50k (income tax + NI + student loan).
Marginal tax rate at £150k is 42%.
Bonkers.
@Onedrew #81
> Reversing the IWDG/IGWD relationship, it is GSPX -the distributing version of their hedged S&P 500 ETFs – that costs half that of the accumulating IGUS.
Seems to be the same direction to me – the distributing variant is cheaper than the accumulating. Either this is a systematic thing, perhaps it’s dearer to operate the acc version. Or Ishares knows people prefer acc and the price reflects that?
GSPX has a lower TER than IWDG, which sort of goes with the patch of the SPX. I’m mulling this over, this would be in a GIA so I definitely favour distributing units in that because I am not clever enough to compute the gnarled mess of tax liabilities for accumulation units.
I’m not yet sold on the idea, but every so often one has to consider something one doesn’t believe in. A forex bet while carrying a slightly beaten up foreign asset, hmm…
My view on the budget is that, whether it happens in the end to work or not, it is a reckless set of measures.
Do I think that there should be a party in government which is prepared to act recklessly with the country’s future? No, I do not. Will I aim to change them at the next election? Yes, I certainly will.
As regards my own financials, I fortunately de-emphasised UK holdings a while back. But in the name of diversification, I am beginning to buy a little UK debt for the high yield.
The more I think about it the more it just doesn’t compute. Something will have to give, though don’t know what? Sense the BoE will do their best to lag as much as they can for as long as they can, but eventually they will *have* to get base rate above the rate of inflation (no period of inflation has ever ended without that being the case)?
@ermine re 6-7% mortgage bills and ‘Affordability’. Per the excellent Ed Conway Twitter thread the piece referred to, we can’t compare interest rates now to those in the past alas. The country (and indeed the world) is hocked to the eyeballs on house prices at 8-9 times earnings (the joys of 0%). If you put rates up ‘to where they used to be’, in very short order you’ll end up with house prices at 4-5 times earnings (back where they used to be). As you say that might not be totally undesirable in the long-term, but there would be an enormous amount of pain on the way (early 90’s on steroids?)
Likewise equities, REITs & everything else would need a major reappraisal down in price. If we do end up in a world of 6% premium bonds and 7% Al-Rayan instant access etc, investments will clear at prices where their yield compensates for their higher risk. Even bulletproof defensive shares are going to need to be offering 8-9%. The history of recessions suggests that they’re unlikely to be doing that by increasing their dividends alas.
@SeekingAlpha – I looked to buy a little TN24 this week, and thankfully failed. The bid-offer seemed wide in yield terms at HL, ii and Lloyds and there was no liquidity on Interactive Brokers (unlike in $ bonds and bills incidentally). HL offered to let me leave a bid (limit order) via their phone service, but the £50 charge for that seemed steep. Please tell me you’ve found a better way..
Great thread and a tribute to our host and those commenting that it remains civil.
One thing I’ve not seen mentioned much is that the fiscal loosening being followed by monetary tightening from the BoE is deliberate.
Truss has referenced Patrick Mingford.
He believes argues higher rates are a positive:
“It’s crazy to try to begin getting the debt-to-GDP ratio down five minutes after Covid. Borrowing is actually something that allows you to pursue the right policies and not be blown off course by temporary shocks.”
“If you’ve got incredibly low interest rates you kill off savings and create febrile markets with a lot of zombie companies surviving because it costs them nothing to borrow.”
“It’s right that a healthy economy should have a decent interest rate. That’s certainly one thing I want to see.”
“I’ve rarely seen an economic policy that is as uniformly panned by economic experts and financial markets,” said Harvard professor Jason Furman, former chair of the U.S. Council of Economic Advisers during Barack Obama’s presidency. Hi, here is something I thought you might find interesting: – https://uk.investing.com/news/economy/analysisbritains-new-vision-leaves-onlookers-with-nightmares-2760643
Patrick Mingford has been the go to economist for Brexiters as he is literally the only one who believed there would be benefits…. History has not been kind to this lone wolf.
He may be right that interest rates are too low but to argue that to reduce debt to GDP you need to (checks notes) increase borrowing suggests he has lost the plot
Some of us remember Patrick Minford from the first time round. (Thatcher.) He was widely thought to be a bit of a nutter even then. And as far as I’m aware there’s been a dearth of commentary over the last forty years about what a genius Minford proved to be.
Didn’t mean my comment to sound like I was going in to bat for Minford as it happens.
But.
@TI’s chart of productivity is so important. I suspect I am preaching to the choir on this given the readership here, but it really is a slo-mo disaster. London and the SE may be ok, but the rest of the UK is eastern european (not the criticism it once was of course) in terms of GDP per capita. Is Minford’s argument that zombie companies are kept alive by low interest rates controversial? I think the productivity puzzle is more complicated than attributing it to a single factor, but zombies are surely an element and it is an element that the powers that be have some control over.
Context wise, either the ‘left behind’ areas are built up (either through sustained investment or through allowing them to better compete), or we will all see ongoing political shocks like Brexit as people express their dissatisfaction via the ballot box.
Anyway, here is some good news on manufacturing:
“The evidence is not easy to spot, but it is there. It shows up most dramatically in what’s being built. Britain has been quietly building factories faster than commercial premises for the last five years at least. Since mid-2021, private factory construction is up 73%, whilst construction of commercial space is up just 2.6%. But as the chart shows, although the post-pandemic explosive recovery is remarkable, it merely accelerates a trend of factory construction outpacing commercial space which has been constant since 2017 at least.”
https://mtaylor.substack.com/p/lazarus-stirs?utm_source=profile&utm_medium=reader2
I think it is difficult not to make political comments regarding this particular budget. I think The Investor is being rather kind to the government.
Even Boris would not have allowed such a massive giveaway to the top 1% while those on lower incomes and the squeezed middle are chucked crumbs in front of a steamroller of rising interest rates and inflation.
I’m with The Accumulator on the impact of the frozen Personal Allowance and 40% income tax thresholds. Raising both of those would have been a much better approach for 95% of people. Certainly the former.
Get the Personal Allowance up to at least £15k, preferably more like 20k, and then do away with tax credits.
It was always ridiculous taking money through tax only to give it back to the same people.
The 40% threshold could be raised to £60k or £70k.
I remain hopeful the threshold freezes are undone in the next proper budget, because, if not, the Conservatives won’t have a hope in hell of winning the next election on top of everything else.
Investment wise gilts and corporate bonds are at last becoming tempting again in yield terms, and I will be loading up on up to 5 year maturity over the next year as (purposely) very under allocated at present.
It was certainly an odd way to present a new government. No statement of principles, no strategy papers, no reasoning behind the risk/ reward balance.
I wonder how much explanation was given to the Conservative MPs beforehand. If they lose confidence in the prospects at the next election Ms Truss won’t last long.
If it was an electioneering budget then it was an odd one but the new approach will take time to show any effects and in that time inflation will hardly cheer the electorate up. I can only think there will be an election soon.
@ermine: You’re quite right. I think my brain’s running in reverse
I think you’ll find the statement of principles in Britannia Unchained. Those Tory MPs really can’t say they weren’t warned. I haven’t been able to find a library with a copy of Britannia Unchained and I’m not paying £16 for this sort of piffle. It is authored by no less than our Dear Leader and Crazy Kwasi. It’s been out since 2012, so there’s been plenty of time for MPs to read the 151 pages 😉 Tory MPs really can’t complain about a lack of explanation or strategy papers.
The wikipedia article gives a little more insight, and the takeway quote which is particularly apposite for all you lazy layabout readers aspiring to retire early is that you are a big part of the problem
I thought the UK is actually rather good at pop music, and not terrible at football, but there you go.
Time for an article on buying hedged versions of trackers?
I have seen one on currency risk on the site, but not necessarily one covering the points ermine etc al have been discussing above.
An excellent thread showing rare support for the invention of mass ‘unauthorised’ communication. Just a couple of potentially naive thoughts from me below.
The interesting thing for me is what @TA pointed out: tax thresholds. It seems that the rate of inflation increase has been encouraged. It also seems that the BoE will increase rates in an attempt to counter this inflation. A decrease in headline income tax rate suggests lower income tax revenue but, with fixed thresholds, how will tax revenue really change? Where the main media is concerned, thresholds hardly ever get a mention.
How many buy to lets are going to be sold? How many of these are owned as second homes (CGT), how many within companies (corp tax), and how many within tax wrappers such as pensions? With rates higher, house prices are encouraged to fall but encourage BTL selling. For a second home owned for more that a few years, the CGT allowance is negligible. Stamp duty rates are decreasing but how much more will be generated from increased house hand over? So how much tax will be produced from this?
The biggest gov revenue categories appear to be income tax, NI, VAT and ‘various’. How many earners are getting close to the higher rate threshold and what increase in higher rate revenue will there be due to inflation related salary increases? How will tourist VAT relief be implemented or abused? We used to have it but it was intentionally awkward and, if memory serves, retailers were not obliged to implement it.
I am told there is something like a 15% excess death rate at the moment. (As an aside, who is dying and what is that really due to? Unhealthy lifestyle, long term COVID or vaccine related, not bothering to fight tooth and nail to see a doctor, untreated cancers during COVID, or something else?). House prices have increased a lot. Family home allowance has a major effect on IHT but how many divorcee boomers own their homes outright? How much more IHT is all that or has everyone discovered equity release?
How many more wealthy invested pensioners are being forced to crystallise LTA excesses? LTA being another unadjusted threshold I suspect a number of readers are well aware of.
Business asset disposal relief is another threshold that is historically low and not very clear with regards to overall incentive and benefit. It is probably pretty minor on overall revenue, though.
It seems to me a really big unaddressed question is, will the thresholds be changed? I am lazy and have not bothered to research the above so I apologise to the more dilligent readers.
Can someone also tell me if gov debt really does erode with inflation?
Just watched Kwasi Kwarteng on the Laura K show expecting to be somewhat unsettled, but I thought it was a good showing. He dropped a strong hint IMHO that tax thresholds are indeed probably going to rise, most likely as I said earlier in this thread with the Spring Budget. “More to come” he said.
Starmer was also very good I thought, and I like his green energy plan obviously.
Early days, but perhaps we finally have the start of a proper political debate in this country based around issues that actually matter.
@Always late – I don’t think you & TA have it right on income tax bands. This isn’t a sleight of hand to say they are cutting tax when they aren’t – we have an ideological government. As ideological as Corbyn I believe.
Those bands, the removal of the personal allowance, the removal of child benefit … I’m convinced they’ll be in the next budget.
As an aside… of the estimated £45bn of tax cuts, £37bn werent instituting tax rises… certainly very welcome as a direction of travel but not rising tax isn’t tax cutting in the traditional sense.
As regards stamp duty… I’m not sure an 18k bill will be much less discouraging than a 20k one ? Stamp duty is ok for people substantially upsizing or downsizing but for moving to a different area it’s very off putting
@always late
I thought the 2022 excess deaths v last 5 years was 1.4% from ons, 3848 ytd June. 14% sounds enormous, but I may have misread the report.
More in today’s Telegraph about further tax reform/cuts coming..
https://www.telegraph.co.uk/politics/2022/09/24/liz-truss-plans-cut-taxes-new-year/
-review of pension tax
-removal of the 60% tax rate (on income 100k – 1205k, via the removal of the personal allowance)
-removal of the removal of child benefit (on income >50-60k)
Forgive me, but what am I missing here? We have lots of expensive tax cuts announced and apparently more to come.
On the other side, there either needs to be an awful lot of borrowing done at increasingly poor rates (I assume, as if there’s no plan of spending cuts the market won’t like it), or they pretty sharpish need to annouce huge public spending cuts.
They’re already apparently going to increase the defence budget, so that leaves what to be hugely cut – Schools? The NHS?
@TI: I tried to post a link to the mainly macro blog this morning but it seemed to auto-reject. Is posting URL’s not allowed? Anyway, it’s a good post for the discussion.
Re: the Telegraph article (unusually paywall free for me, oh what a treat). So again looking at whether these policies generate growth.
– LTA / annual allowance: Only again impacts the very top earners who will sock yet more away into global trackers. No growth there. OK, a few doctors and the like will work a year or two more maybe, but this is pretty marginal stuff surely.
– Personal allowance for workers on >£100k. I understand the 60% tax trap problem, but I can’t believe any Govt would have the cojones to give this set of people a £5k tax bung in these circumstances. Extraordinary. Anyway, it won’t add to growth surely, again just will be saved/invested.
– Child Benefit changes: Not the worst idea here by any means, but I would dispute the idea that the current setup seriously discourages people from earning more. Ever heard of an IT consultant refusing a payrise due to child benefit tapering? No, me either. So again growth impact in my view, slim to none.
Supermarkets/ Sugar tax – seriously? In any case, the long term cost to the NHS in terms of increased diabetes will be greater than any revenue gained from this.
Planning reform – would love to see it, won’t happen, for the same set of reasons as it hasn’t happened before. No growth.
Change visa rules for more immigrants – the only good idea here, which of course wouldn’t be necessary if they hadn’t stopped them all coming in the first place for no particularly good reason.
It will be fascinating/mortifying to see how this all pans out I have to say.
–
@Boltt. No, I expect you are correct, sorry. It was a senile alcoholic obese diabetic with a urinary infection who told me the number. I think he was a bit biased.
That Telegraph article Jon shared is interesting, essentially round 2 of a giveaway to the wealthy.
They might have got away with removing the Personal Allowance taper in the Mini Budget instead of binning the 45% tax rate.
It would still be viewed as a bung to the rich by Labour, but at least could have been explained as removing an anomaly giving rise to a 60% marginal rate that most avoid using pension contributions, so would probably be tax neutral or even positive in revenue.
Does anyone else find it amusing when excuses for dropping things like that and the LTA are framed purely in terms doctors and senior policemen?
e.g. it is fine for everyone else to pay more tax.
Maybe we could have different tax rates and pension rules for evil bankers vs doctors/NHS executives. Actually in pension terms that is probably already true, even if the public sector is completely oblivious to this (sorry I’m clearly trolling here).
The tories could have framed the 45% income tax rate removal as a boon to encourage surgeons to carry out more operations and reduce the NHS backlog, just to shut Labour up.
@Far_wide, re “Ever heard of an IT consultant refusing a payrise due to child benefit tapering” actually quite a lot of people salary sacrifice down to £50k using pensions to avoid not just the loss of CB but also paying 40% Income Tax plus NICs. As with the £100k PA tapering thing, it does influence behaviour.
So raising the 40% threshold may result in more spending in the economy and less pension saving for people impacted – I wonder if they factor that into their calcs? Or am I giving them too much credit?
Anyway, you make a great point on where is the money coming to pay for all this. Defence spending going up to 3% of GDP – and don’t forget it was nearly 6% at the height of the Cold War in 1982 so could increase further.
Presumably the aid to Ukraine is in addition to that.
Any other “Scottish taxpayers” reading this? Is this budget ignorance of the fact Income Tax rates and thresholds an Stamp Duty are devolved (wilful blindness) or a deliberate decision to needle Scottish voters for not voting Tory?
@Badger101 – Yes, another “Scottish Taxpayer” here. My understanding is that even though the income tax changes and stamp duty (SDLT) changes dont take effect in Scotland, the Scottish government will, through the Barnett formula, get an equivalent amount of money to spend how they like. Given that, I don’t think it’s wilful blindness or needling Scottish voters. The fact that their government might have different spending priorities to Westminster is not Westminster’s fault. The Scottish government could use that Barnett money to match English tax rates, but I doubt it. The government in Scotland has shown pretty clearly that it is (a) anti English, (b) anti business and (c) anti capitalist and in addition, has a penchant for nationalising things at great expense, and making a complete pigs ear out of them (Prestwick airport, kept afloat only through American military flights (oh the irony!), the ferry company (need I say more) and most recently, the railways (not yet had enough time to mess those up properly).
The Scottish tax system was already diverging quite significantly from England before this “not a budget budget”, and there is another “tax trap” for Scottish taxpayers, much further down the scale than £100,000.
This is because, although the Scottish Government has control of income tax, it doesn’t have control of NI.
Now, in England, higher rate tax at 40% starts at £50K. In Scotland, the higher rate of 41% kicks in at £43,663.
Now, because the Scottish government doesn’t have control of NI, Scottish taxpayers are paying basic rate NI of 12% all the way up to £50K, instead of the 2% they’d be paying in England as higher rate taxpayers.
So in Scotland, you’ve got a tax trap where you’re paying 53% tax (41% income tax and 12% NI) on the £6337 of income between £43,663 and £50K.
That starts to look quite perverse, because it starts to catch a whole lot of “good” people (as they’re called up here (i.e. not those “thieving” “profiteering” etc etc people in the private sector)) like teachers, senior nurses, mid-level local authority workers, etc who suddenly find that a payrise starts to get swallowed up by a tax rate which they thought and were told that only the “wealthy” or “rich” would be paying. If you compound that with the effect of things like child benefit tapering, someone earning close to £43,663 could see themselves suddenly a lot worse off with a relative modest “increase” in their basic pay.
There is always a lot of talk about people in Scotland being prepared to pay “a bit more tax to live in a fairer society”, but I think that is going to get tested pretty thoroughly soon. With e.g. the NHS in Scotland already facing a recruitment issue with people in England not wanting to come to Scotland due to the anglophobic messaging from the Government here, if you compound it with a message saying “you’ll also be paying more tax and be worse off than if you had the same job in England”, then things could start to get interesting.
If the basic rate threshold in England leaps up to £60K, £70K or more, then you’re starting to get to a level where this starts to become a serious question for people as to where to base themselves as the potential tax saving starts to look significant. Could Scotland face a brain drain in this scenario? I don’t think you could discount the possibility.
I also suspect that property prices in places relatively close to the border like Carlisle, and down to The Lakes, could start to rise further. Might be worth a punt? 🙂 After all, if people have a job where they can “work from home”, then they can also work from “across the border”.
All that then starts to erode the Scottish tax base further if there is even a relatively small movement of higher to medium earners from Scotland to England…
@Far wide – the child benefit taper kicks in at 50k. I’d suggest that is hardly IT consultant mega bucks ?
@Dragon
Thanks for the full reply. I am just surprised that every “UK” media outlet I have accessed in the last few days without exception has barely mentioned the situation furth of England. More and more since Covid the UK Government presents itself as an English Government. Nearly every reference to “this country” grates because they can only be referring to England (education, health, tax, environment, schools, housing…) The fracking announcement is just another example. I’m bitter because I am in the lower middle class tax trap Dragon describes…
@Bblimp , not all IT people earn megabucks y’know (source: my old career!), but yes I could probably have chosen a less variably salaried career as an example you’re right.
@SemiPassive, fair point re: child benefit. Though I’m still sceptical about the extent to which that suddenly spare non-pension fund money will end up creating growth in the economy.
I’m far from sure if they’ll make it to the next round of tax cuts anyway. It seems more than plausible that they’ll be forced to volte-face (or at least just cease and desist) because of the pure cost of borrowing/weakness of Sterling, or instead be forced to show how it’s funded, which will likely involve politically unacceptable swingeing cuts on much beloved institutions. Unless they are very fortunate and financial conditions improve rapidly.
On that, the words/phrases I’ve seen crop up most frequently in pieces this weekend have been ones like “if they are fortunate”, “hope”, “gamble”, “casino”, “go for broke”, “unorthodox”. These are not words I find encouraging.
The Economist certainly didn’t mince their words though. “Mr Kwarteng’s desire to boost growth is laudable, but his plan is not going to work economically”
Good thread on Twitter by Paul Krugman about this by the way. Quite a balanced opinion as it goes, concluding:
“at a guess, the moron risk premium has now been priced in. I guess I don’t see the mechanism for a continuing sterling crisis”
It does cheer my Sunday night thinking of Truss/Kwarteng possibly reading a nobel laureate (with 4.3m followers) tweets pondering about their deep revolutionary ideas and concluding that their leadership necessitates a “moron risk premium”. Wonderful stuff.
@far wide –
https://www.margaretthatcher.org/document/121217
Think the letter of 364 of the worlds leading economists kept Thatcher up at night ?
Me neither.
Some prominent names there… I suspect their replacements at various institutions were the same people who predicted 400k banking jobs would go when we left the EU
TDLR… fair to assume if they were bothered by his opinion they wouldn’t have done it ?
@Badger101
education, health, tax, environment, schools, housing…
All things which are fully devolved to the Scottish parliament (except tax, where it’s partly devolved to them). And all things which they’re making a right dogs dinner of all by themselves, with no need for any help from Westminster.
I think Truss is following through on her “Nicola’s an attention seeker, I’ll just ignore her” comment.
From Truss / England’s pespective, this makes perfect sense. After all, despite fire-hosing money at Scotland throughout the pandemic (and before), all Westminster/England has received in return has been abuse (and thatwas going on ever since the SNP came to power). I think Truss has simply realised that there is no point trying to court voters who are never, ever going to vote Tory (note: I’m not talking here of “swing” or “floating” voters). Expanding that theme into England, why also waste your time chasing the “guardianistas” and alienating your core vote, when you can focus on your core vote? Truss has probably realised that her government could come up with a cure for all cancers, make energy free, feed Africa etc etc and Sturgeon and the SNP, Labour and all the left of centre parties would still have a pop at them. So, Truss’ view is probably “might as well be shot for a sheep as a lamb” and is just going hell for leather now. Any why not.
I have to say, as a Scot, I get quite queasy listening to the SNP government talking of “Toaries” and “Westminster”. You know they really mean “English”. It’s like those who try to hide their anti-semitism by talking about “Zionism”.
Ultimately, the SNPs problem is that you can only base your policies around hatred, envy and negativity for so long. Eventually, the chickens come home to roost.
@BBlimp – I trust you saw the news articles which say that JP Morgan is now looking at maybe relocating from Frankfurt back to London? Ostensibly, the reason is that they’re concerned about blackouts in Germany and the effect that will have on their trading / operations. No rolling 24/7 coverage of that little gem from the BBC, Sky, Guardian …
🙂
@Dragon – how dare you. You’ll be telling me Unilever chose to list in the U.K. next ? Or Facebook and Google are building huge European headquarters in London ? Sacrilege – the answer to all economic woes is membership of the single currency, works for Italy and Greece surely it can work for us ?
living in Singapore I was fascinated to see all of the comments about “Singapore-on-Thames” in the previous article. Also living here with the 7hr time difference the discussion had largely passed me by the time I read it!
I’ve been here a year now – there’s a lot to emulate but also a lot to be wary of in the comparison.
1) The economy is insanely micro managed, which is far easier to do in a city-state versus a middle size country. The monthly certificate for car ownership for example – imagine if your entry point for buying a car was £100,000 – that’s just the piece of paper, not the actual car!
2) Perhaps an uncomfortable truth for some – but 33% of the workforce are migrants. Not well known that Singapore charges us foreigners far more for local services / stamp duties / property tax – far higher than locals and PRs, with the understanding that most if not all will return to their countries of origin in 3-5 years. In return we get to keep most of our cap gains and income and are expected to maintain higher salaries / employ locals if we start businesses.
3) Political discourse here is pretty lively, the difference is that it’s all done over a beer and not on state media… definitely a lively and young society with opinions, not the censorship hellhole that some people believe. Society over all is more authoritarian and less tolerant (cf gay rights still being fought for), but that’s a bottom up phenomenon and certainly points to a government who aligns closely to its voters.
How much of this the UK can (or SHOULD) emulate is obviously up for discussion.
Where to start? Like others have indicated, regardless of what anyone thinks of the announcements, the lack of costings or even an attempt to show what a successful outcome will look like with estimated timescales, is disgraceful. I don’t have any clue whether this strategy could work, but I expect the people developing and proposing it to go through normal evaluation process, and if we accept that they are claiming this is not really about costs, but future benefits, to present the assumptions and timelines and anticipated outcomes of the plan to be measured against/monitored.
Regarding the Scottish differences – yes, the system is very different now, and the NI rate agreement with England was why the Scottish government was initially unhappy with the raised NI rate that is now being reverted – health is devolved and Rishi basically used NI to implement a health and social care levy, which was then forced on Scotland. I doubt many folk in Scotland objected to additional money going to health but the mess of NI being matched to UK rates and this increase being marked as a health and social care levy (which is a develoved matter) was obviously a problem point. Other messy areas are the thresholds for the savings allowance which uses the English 40% tax threshold (>£50k) to determine whether you pay tax on >£500 or >£1000 savings, but in Scotland the equivalent rate (41%) threshold is ~£43k, so even that aspect is more complicated than it needs to be since the English rate is used to determine the tax free savings amount.
I really don’t care as much as I probably should about the mini-(non-)budget, however I am someone who expects a minimum of a coherent visible plan, so I am not impressed. Simply saying we need to change/grow so we are doing X with a hand waving justification, is not good enough, especially when the very same group of people were part of the very approaches they now have decided aren’t working. And if this fails what then? – they walk away with no consequence but the country is saddled with more debt?
I remain a boring moderate income person that in some years needs to up my pension contribution via salary sacrifice to avoid the 41% tax rate. Based on my situation, the new UK/English approach would not make me more productive if repeated in Scotland, and achieve the exact opposite to what they claim. I would salary sacrifice EVERYTHING over the 41% tax limit, but I don’t actually want to put that money in a pension really. The ‘savings’ in my pay packet that I would get from a tax and NI rate reduction such as proposed would just not go in my pension and instead in my ISA and maybe in a share account if need arose. The tax/NI reduction would simply move some funds from pension to ISA/shares instead, and I would get to FIRE EARLIER – I just can’t justify taking a 53.25% hit (41% tax, 13.25% NI) on my earnings over the 41% limit, when I can take a 0% hit via pension contribution. So, the net result in my case of the proposed mini budget would be I FIRE earlier, and in the process of getting to this, I also put less money in to growing the economy as the pension option puts more money (in absolute terms) into index funds whereas the S&S ISA approach puts less into index funds, but more into the government pots.
I might be far from the ‘normal’ case, but I feel it needs to be known that the principle of focussing on growth might be sound, but in cases such as mine, low debt, low expense base, living in a sane part of the country housing wise, with a moderate income, these sorts of changes would do nothing to make me want to earn more and actually could take me out of the workplace possibly 1-2 years earlier due to the change in allocation of earnings. Interestingly, my case above arguably could be an example supporting their aims if raising the 41% threshold happened? – it is true this threshold is the level I salary sacrifice to, so would things change if the 41% limit was raised? – yes, but the outcome would be the same, I would FIRE earlier.
I don’t know what people are doing with their money and it is not my place to judge, but in my case, giving me more money via reduced taxes and such will simply give me the option to leave the workplace sooner (with other comparables the same, the usual assumption), and I guess this will be the same for many readers of this blog. Hence, I take the position that this approach to the economy is built on shaky foundations – we are not all simple units trying to maximise our economic utility.
The only thing that throws me more than the non-budget announcements are the members of the FIRE community who cannot see the apparent contradiction of believing it will work and increase productivity, whilst simultaneously understanding that them keeping more of their income will lead to earlier FIRE. I don’t consider early retirees unproductive but in a pure GDP sense, I expect they are less productive. It is a hard argument to make that you believe lower taxes improves growth when your very own plans are responsible for the opposite. Maybe if we all cared about growth so much we should bin our thoughts of early retirement and get on that corporate rat wheel?. I purposely finished on this note semi-provocatively as we shouldn’t lose sight of FIRE and how our aims fit with this uncosted growth experiment with no timelines or outcomes specified. Will it make us much more productive over our lifetimes? I don’t know, but I am not convinced.
Well said, randomcoder.
Regardless of whether one thinks this policy direction is a good idea long term, it’s the execution that’s largely caused the damage so far.
Truss/Kwarteng seem to feel they can feed the markets BS just as they do the electorate, but the markets demand a coherent plan. I don’t think we’ll see a sustained recovery until that plan is apparent.
John Authers (was Lex on FT, now at BB) free morning email great on this as usual:
1. It was an active choice to structure these tax cuts in a way that was so much more beneficial to the better off than to everyone else. The Barber tax cut of 1972 was achieved almost entirely by raising thresholds before tax was payable; the total cut to tax revenue was GBP 1.2 billion, of which GBP 960 million came from raising allowances. The Lawson budget also involved raising allowances and closing loopholes that made it easier to get mortgage tax relief, so again it was less regressive. The UK levies plenty of indirect taxes on people when they buy rather than when they earn, and reducing those would have been less regressive while still providing a fiscal boost. So the way this budget stokes inequality was not inevitable, and will probably look like a dangerous judgement to many investors because of the second factor;
2. Inequality is high on the political agenda at present, and the current Conservative government won the 2019 election under Boris Johnson largely by convincing a swathe of traditionally Labour-voting working class people in the north of England that the Conservatives would help them by “levelling up.” The Brexit vote itself was intended as a step to reclaim control from elites. Announcing a tax package in this context looks almost like a declaration of class war. Currency traders may not mind that too much, but they definitely do mind that this is a dangerous step that could destabilize the government. This looks like terrible politics (particularly when the decision to remove the cap on bankers’ bonuses is thrown in) because it is. The markets don’t like that;
3. Classic economic theory suggests that poorer people are more likely to spend any money that comes their way. Thus if the aim of the tax cuts is to stimulate the economy, it makes sense to skew them toward people with lower incomes. That didn’t happen.
& to the conclusion:
The logic behind the Kwarteng budget, to the extent that I can find any, rests almost on a gambler’s calculation. The Conservatives are likely to lose the election in 2024; their best chance to win is to go all-out to stoke growth now, and hope it delivers well enough to win in 2024. If the gambit fails, the Conservatives were going to lose anyway. Responsible management wouldn’t deliver victory in 2024. Utter recklessness just might.
The currency market seems to find the UK’s new fiscal policy as reckless as I do.
@Vroom: Poorer people spending money might “stimulate” the economy but does consumption actually drive growth and prosperity if none of these revenues are being invested in novel and innovative ways? Does people spending more on nicer groceries really help Britains long term future?
Well the 10 year gilt yield has just blown past 4% this morning and the 5 year is nearly 4.5%. 2 yr is 4.35%.
I wonder if the Bank of England will have an emergency rate increase meeting prior to the scheduled one. Market pricing in a 1.5% increase by November.
Rishi will be saying “I told you this would happen”.
Vroom – Jeremy Corbyn was the head of the Labour Party during the 2019 election… you’re analysis of that election was that the Tories promised more subsidies than he did ?
A rewrite of history too far I’d suggest. I think you may have forgotten just how badly trying to overturn the vote to leave the EU went down.
Talk of levelling up came about after the 2019 GE. To keep hold of voters who ironically had just rejected large scale redistribution. The Tories won the 2019 ge because of a combination of brexit and Corbyn – not because they promised to out subsidy Corbyn.
This fiscal event wasn’t an election manifesto, wasn’t even a budget, there is still a year and a bit to go to the next election. Higher thresholds likely to come next time round… which I suspect will prove popular, especially if the removal of eu legislation leads to more investment and higher paid jobs.
Well TI may need to dust off rather quickly some posts about his ‘unthinkable’ scenarios, which seem to be emerging faster than most feared following this imbecilic budget. A run on the currency, speculation that the BoE will have to make an emergency intervention, gilt yields shooting up to Italian levels, all making the UK look rather like a Latin American banana republic.
Sunak must be enjoying a good dose of schadenfreude.
@semi passive – was more of the same working ? If interest rates do return to historical norms presumably labour and capital will move from unproductive firms to productive ones, in the painful but necessary way we all shop at Amazon rather than woolies. Current homeowners will feel the pinch – and their tax savings will likely go toward paying mortgage interest – but if you were starting from scratch would you have interest rates so low and house prices so high so as to create wealth inequality between homeowners and renters like it is ?
@Blimp
The collapsing pound will worsen inflation, and send interest rates even higher, making the voting public (99% of whom won’t benefit from the removal of the top rate of income tax) even poorer.
Yes a housing crash would be welcome on many levels, but crippling interest rates of potentially 10%, millions in negative equity, and homeowners feeling that they have lost 0000s on their main asset does not make for a happy public.
When we last had economic mismanagement of this magnitude under Lamont the results for the Tory party were not pretty.
@Faustus, we’ll see.
It’s easy to imagine the days after a budget like this will be the least popular the govt will poll?
If this is peak Starmer, I suspect the income rate changes to come in the pre election budget will carry the Tories over the line. It’ll be both the right thing to do and a huge trap – if the Tories put up the higher rate of tax to 80k what do labour do? Say they’ll match it in which case it’s legitimised, or say they’ll reverse it and hope the blue wallers are so interested in redistribution they want it to cost them from their pay packets. The 1992 exit polling indicates people are far more likely to virtue signal when there is no cost to it than when there is
To me it seems likely that houses will get *less* affordable as house prices fall, because they won’t fall enough to completely offset higher rates.
It seems like there no rays of sunshine at the moment
@Bblimp : It’s easy to imagine the days after a budget like this will be the least popular the govt will poll?
Well, I struggle to imagine this. All the general public are aware of at the moment is that this was a rich person’s budget and that the £ is in trouble.
What they now have coming as a consequence of this is some combination of huge and sustained interest rate rises and/or huge and sustained inflation.
As the markets are currently implying interest rates in the first half of next year of over 6%, it looks potentially more like the former at the moment.
In that context, I would say it’s rather easier to see current polls as a heady peak personally.
I suspect that markets will recover some poise. We as a country do after all still have some strengths.
But I hope the market reaction, the sense that the kiddies currently playing in the government paddling pool do not understand that the wider ocean they have floated into can be hostile and eventually overwhelming, will lead to a change in government.
The professional incompetence we have seen from Truss and Kwarteng is rare and must be dealt with.
@Hospitaller
The markets won’t wait 2.5 years until we are allowed to have another election. Unless there is swift action from the BoE or a significant change of course, the reaction to the Kwarteng/Truss idiocy will be swift and merciless. As we have seen with other basket cases like Greece and Argentina things can turn ugly rapidly and once damaged it is hard to regain the confidence of markets. As a nation you never want to find yourself in the crosshairs of speculators, standing out from the crowd as an example of economic incompetence. Unfortunately, that is exactly what the Tory party has achieved.
Given my notorious antipathy to the entire Brexit project (and make no mistake this is all a consequence of it) I find myself in very strange waters in being less furious about the Mini Budget than many. Perhaps I am just not surprised, having been warning that we were getting into an increasingly difficult position for the past six years.
That is not, as I said in my Weekend Reading post, the same as applauding it by any means — and certainly I think it’s a big gamble, whatever new potential positive outcomes it *may* bring onto the board, as I said in the original article.
Interest rates are the biggest deal here, not the additional rate tax cut. It took a couple of days but all the media now seems to have woken up to the interplay between the fiscal loosening and monetary tightening, as per my two headed dromedary analogy. In my opinion that is the real story, economically, in the short-term. (And who can talk long-term anymore about UK policy?)
If one wanted to be provocative, you could even argue that a 20% correction in house prices would hit the richest hardest 😉
The 10-year gilt yield is flying. Across the board yield rises nail-on more costly mortgages. And this in an economy that as others have said pretty much turns on the housing market. Things could get very ugly.
Again, all much more important (economically not ‘morally’ speaking) then who got the most out of the tax cuts, or why.
The bond market doesn’t care particularly about that, I believe. It cares about unfunded tax cuts and higher borrowing, and the seeming lack of a costed plan.
But also remember that the bond market has little concern about long-term UK economic growth. It doesn’t care if there’s a north-south divide, or if the 10% get richer and the 50% are on food stamps. Obviously it comes into the maths at some point — it would care if we’re on our way to being Zimbabwe or a kleptocracy — but it doesn’t care much about income or wealth inequality. The gold standard bond market is the US Treasury market, which is built on top of an even more winner-takes-most economic model.
What the bond market cares about is will it get repaid and what will it be worth in real terms.
There’s zero risk of it not getting repaid; we print out own currency. Mentions in the media of a euro crisis equivalent are very wide of the mark. Italy and Greece couldn’t print to meet their obligations. We can.
But what it will get paid in real terms is an entirely different matter. The risk is that inflation gets out of control. The compensation is higher yields sooner. Hence gilts are sold off so yields rise – now.
Beyond that it boils down to uncertainty. I haven’t read the Krugman Twitter thread cited above, but it seems to me broadly correct.
The UK bond market would like things to be dull and boring. Crucially, it has priced gilts as if things will be dull and boring. It doesn’t care about very low GDP growth or stagnant real wages or low productivity. It cares about getting repaid what it expects in real terms.
I’m stressing this point because I do not believe the gilt/sterling reaction is a verdict on the new approach’s alleged pro-growth ambitions.
From the perspective of a long-term investor in UK government debt, the UK shifting to a higher growth mode would be irrelevant if the gains are offset from higher inflation. And in the meantime the uncertainty of “if” looms large.
On the other hand, for the UK state I would say higher growth even with higher inflation is a benefit. It will erode the real terms value of borrowing, potentially help break us out of the productivity trap, etc.
Of course this is two ways of saying the same thing, which is that the UK government and the debt market ultimately prefer different outcomes.
We haven’t heard the ‘financial repression’ phrase much recently, but I suspect it will soon be making a comeback.
Two other quick points:
1) Of course what the government wants and what it can get are not the same. I’m not partial to frogs legs on toast, but as I understand it financial repression works best the same way as the optimal boiling of aforesaid unfortunate amphibians. Kwarteng’s mini-budget may have just woken up a lot of frogs, given the speed of the moves in the bond market.
2) Remember that ‘unfunded tax cuts’ is a big issue here. It’s possible that Truss and Kwarteng are already regretting their hints at further tax cuts to come (which I took to be raising bands / allowances). They may start to make some statements to that end to try to calm markets. Nevertheless, fitting right into this same ideological playbook would be cutting State spending to improve the funding picture.
Again the bond market doesn’t care if your gran (or my mum) can’t get an ambulance on time or a welfare claimant has to live on beans on toast or we scrap the overseas aid budget — at least not in the short-term.
I care, which is why I haven’t voted for this lot for many elections and opposed the economically-damaging Brexit that started all this. But the fact is there are multiple levers that can be pulled here, which will be palatable depending on your political tastes.
If you’re a ‘red wall’ Tory convert who voted Leave because you thought the right-wing of the Tory party was primarily concerned with getting more money for the NHS and your 21-year old unskilled cousin earning 30p more an hour due to lower competition from Romanian migrants, you can repent at your leisure.
@randomcoder
My sample size of one comment would be – if the 20% tax band increases to £70-80k I will unretire and start paying £14k tax rather than the current £1-2k as a very financially organised Fire-ee
Change incentives, change behaviour – hopefully
@Boltt
Agreed. However, this is mostly a FI aspiring blog though, so once FI has been achieved it does go back to behaviour/choice and how the individual wishes to spend their ‘retirement’. I was trying to be non political in my post as politics can detract from the matter at hand, but me and you have first world problems here – and some people will not be more productive was my point.
The politics I was avoiding is best neutrally explored by noting that me and you would have more choices and some of those choices coming sooner if we paid less tax. This situation does not automatically lead to higher productivity, but it might overall. Like some other contributers have hinted at, some more directly than others, economics is largely about the average or overall figures. I personally am not for giving those most fortunate (which includes me, although I never will earn close to £80k) more cards/choices when those less fortunate are potentially being trampled over in a live experiment that could go wrong. The only thing certain in this experiment is the debts will need to be paid in the future.
If this approach was a guaranteed win with no down sides, we (and other governments) would have implemented it sooner and the benefits being reaped all over the world, yet here we are, with a prime minister basically saying this should work, trust me, but don’t ask me for any timelines etc to be measured against, I will make that up as I go along. I suppose it is one of the benefits of being radical with no documented plan with expected outcomes, especially if you are so well off in the first place that if it doesn’t work out you (the people implementing it) will be fine anyway. I would rather most the consequences of bad decisions lie with the people making them, but here most the risk is on the less well off, and Liz and co. will all be just fine if this does not work out. I really am non political but this is my entire problem here – we are betting on a policy/strategy that might work. But it might not. Downside risk mitigation really should be a thing, or at least acknowledging it/measuring it.
I wonder whether the eye watering losses on gilts of late warrant another TA rallying cry akin to the do not sell of the COVID micro crash? My IGLT and the like are causing me much pain. I’m getting an absolute schooling in fixed income
@The Rhino — If you think your bond losses are bad, have you tried looking at them in inflation-adjusted terms? 😐
I am not convinced a similar ‘do not sell’ post is so applicable here. That’s not because I necessarily think UK gov bonds will continue to crash indefinitely but because the mathematics of bond and equities (and their overall return profiles) are very different.
With aggregate equities, you can be reasonably confident that over the long-term the earnings of companies should respond (go up) with inflation, and hence in aggregate share prices can rise, eventually.
It’s very different with fixed income. Inflation can destroy your returns, because (conventional) fixed income has no ability to raise coupon payments in line with inflation and the capital return is fixed when you buy. You get your all-in known nominal return, and that’s your lot.
All this is obviously obfuscated by funds of different durations holding and trading bonds over time, but that’s what’s happening under the lid.
Hence “Do not sell!” in bonds basically means “stick to your asset allocation for reasons!” rather than “it will probably all come good and profitable in the long-run”.
TA could well (and possibly would) write something like that (his last big post on the subject suggested maybe 50% split of fixed income allocation between bonds and cash for those who wanted to fiddle, from memory) but I’d argue that’s a somewhat different post.
Sorry I’ve probably not been clear above. Basically it’s a different call, and Do Not F-ing Sell was a rare timing intervention for his school of thought.
@The Rhino, sorry for your losses. I can recommend the Occam Investing website as being particularly good at explaining bonds.
The main aspect that might possibly help you is that, if I’ve absorbed the correct lesson (I’m sure I’ll be told here if I’m wrong), then regardless of what happens in the interim, you will by the very nature of them receive the ‘Yield To Maturity’ that your bond fund had at the time of purchase if you hold for the long term.
This works because if the bond fund price drops, your yield increases. I think the rule of thumb for a bond fund versus a straight bond was double the average duration of the bond fund, so about 18 years for IGLT.
Now of course depending when you bought it, receiving (I don’t know) 1% nominal per year for 18 years from this position may still be cold comfort. But by selling now, you’re receiving all the worst of the volatility and not the much juicier coupons ahead.
Cor dear, VGOV not content with being over 3% down for most of the day is now -4.24% down. That is absolutely stonking.
I’ve not even read it yet but I take it this is because of the Treasury statement just made. Looks like they’ve hit another home run.
Bank of England statement here:
https://www.bankofengland.co.uk/news/2022/september/statement-from-the-governor-of-the-boe?sf170856569=1
Quite. Some way from the boring non volatile part of your portfolio assigned to help you sleep at night;)
I think I may have to hibernate for a few years. Stop paying any attention.
..and GBPUSD dropping back sharply again after BoE statement.
Unless that reverses again, suggests to me that it’s a bit late for the ‘comforting words but no action’ stage, and that they’ll have to go for the ‘1% rise now-ish’ plan – ?
Though even then I think that really needs to be done in tandem with some actual non-waffly political change of plan.
I may be overinterpreting the market, but its reaction to them saying they’ll basically have a look in 2 months at “ensuring that debt falls as a share of GDP in the medium term”, is “ok, fine, take as long as you need and until then we’ll continue taking a baseball bat to your financial legs. Have a nice day”.
@ The Investor – my last post on the topic suggested diversifying a simple 60/40 portfolio more like this:
60% Global equities (growth)
10% High-quality intermediate government bonds (recession resistant)
10% High-quality index-linked government bonds (inflation resistant)
10% Cash (liquidity and optionality)
10% Gold (extra diversification)
https://monevator.com/60-40-portfolio/
We’ve been on the horns of a dilemma re: bonds for years but we’re seeing historically bad losses here and it’s hard to take.
The UK Government is shafting its bond holders (among many others) and I suspect this could be another ‘ERM moment’ for the Tory Party’s reputation for economic competence.
The only silver lining is that rising bond yields should mean better bond returns in the future. Warnings of unsustainable SWRs were based on historically low bond yields dominating the decades ahead.
If history repeats itself then the market over-reacts (as it did in the ’70s) setting up bond holders to profit from high yields thereafter (as in the bond super cycle starting from the early ’80s).
Personally I’d prefer a quieter life.
@TA — Oops, that’s right. It was me who was advocating 50% cash for those who want to tinker (I think-er). Cheers for chiming in.
FWIW (literally nothing) as @TA knows I’ve been incrementally adding UK gilts all-year. So far it’s been a terrible idea, so I share this not as a timing call but to say if you’re feeling bad, I feel your pain.
The good news is my gilt exposure is still much less than 10% all-in. The bad news is the other stuff I bought instead of gilts to be fancy has fallen a little or a lot now too (e.g. REITs, infrastructure, corporates, etc). I think I’ll probably roll it all into gilts eventually, especially if that sell off continues as remember there’s no credit risk with gilts.
A truly rotten year, and that’s coming from someone who warned very early it was likely to be a rotten year. 😐
But as @TA says, low returns set the stage for higher returns. 🙂 Don’t throw in the towel on your investing!
I did read that article TA, but didn’t action it. I’ve also read Naeclue’s various comments on the attractiveness of bonds and didn’t action them. My god I’m lazy.
But the schadenfreude of knowing TI has been buying these cursed gilts has cheered me no end.
It’s all largely a bloody nonsense isn’t it?
On the plus side I fixed the offset mortgage at 1.3 for five years, but I’m a bit annoyed I have to get a better job to make that inflation play pay, so to speak.
@far_wide #140
> some actual non-waffly political change of plan
Our Dear Leader styles herself on Mrs T, who very famously delivered herself of this when under fire
So I’d say that won’t happen for a while, and it certainly won’t happen electively. It may well happen, but at the moment Truss’s colours are nailed to the mast. You turn if you want to, indeed.
I confess a sneaking admiration. BoJo was blather and bullshit, he was too needy as well as unfit by nature, Dominic Cumming’s shopping trolley analogy was cruel but fair. This is a go big or go home approach. Yes, an awful lot of people are going to get hurt. But there is a certain purity in it, and it’s not cakeism.
We have seen some of this movie before.
Tory chancellor Norman Lamont, May 1991
@Bolt – the additional income tax you’d pay is only the beginning really – there aren’t a fixed amount of jobs, if you returned to the workplace the country would benefit from the additional activity you produce.
It’s like ‘free’ immigration – no additional schools or hospitals or gps required but more hours worked. Very similar to creating incentives for people on universal credit to earn more. I’m pro growing the workforce – pro immigration, and surely most people that are pro immigration are pro incentivising over 50s back into the workplace ? Or pro getting universal credit recipients to up their hours ?
Once things settle down I can see the Tories walking this;
1. Lower earners will be delighted those receiving benefits are getting to work ( it’s easy for the monevator remainer liberal elite crowd to talk about redistribution of wealth, if you’re working full time and overtime in low pay hard graft it’s less easy to see why people should have similar lifestyle for less work)
2. Higher earners will talk about how much they love paying more tax in public and at dinner parties… then walk straight into the booth and wonder if they actually want to go back to paying 42pc tax instead of 32pc on everything over 50k. There are millions of people will be in this situation by 2025
Pensioners will go tory and non-earners typically don’t vote…
I’m a homeowner, bought in 2007. House prices can fall a LOT before it effects me. Such has been the rapid price rises surely only people who bought past couple years will negatively effected by falling prices, and even then, not by much. I was in negative equity in 2009 with a 5.75pc fix… looking back I barely remember it. Still better than renting truth be told.
@BBlimp
Lets review your predictive powers
Friday
Comment #12 – “I can see the higher rate threshold rising to 80k as the rabbit out of the hat before the next election ? Certainly this budget appears to set the direction of travel.” – Market says no.
Comment #23 “So today, for the first time since Dominic Cummings exited, I have reason to be cheerful about the way things are going.” – Suffice to say, that didn’t age well did it?
Sunday
Comment #100 “Those [high marginal rate tax] bands, the removal of the personal allowance, the removal of child benefit … I’m convinced they’ll be in the next budget.” – Again, market says no, see #12 above.
Comment #113 “Think the letter of 364 of the worlds leading economists kept Thatcher up at night? Me neither.” – Seems the views of various gilt market participants just casting shade was enough to get an emergency statement out of the bank of england today and a hitherto unplanned “medium term fiscal plan” from the treasury backed up by an office of budgetary responsibility forecast on 23 November. Seems, sans pussy bow, truss is no thatcher?
We’ll see how those excellent perceptive powers work on today’s #145 “Once things settle down I can see the Tories walking this” ….
@neverland
1. I can see it going to 100k
2.Aged well for me ! I’m not at all bothered by the remainer panic – been there, done there, world didn’t end.
3. See one above.
4. Indeed we will ! I for one, can’t wait. Remainer echo chambers aren’t the general electorate I’m afraid – else the Tories wouldn’t have won in 2017 and 2019 and the brexit party won the European elections.
Hoping all these people keep their handles so we can see how many take back their doom and gloom predictions in 2030 . I’m guessing a bit like you can’t find anyone who thought banking would end if we didn’t adopt eu regulations now, lot of the above people will be quiet and remember the past quite differently
I just can’t see how Starmer frames the next election ?
‘let me put your taxes back up so people on universal credit can do ten hours a week less work for same money’
Once the changes have happened be hell of a sell to get back to where we are
@BBlimp
The bond market reaction to the mini-budget required an emergency bank of england statement the next business day and an unplanned “medium term fiscal plan” statement from the treasury on 23 November backed by an office of budget responsibility forecast – quite the humiliation for the new chancellor really
You are so right that some posters here are a living in a lala land echo chamber
Never land quickly google ‘front pages sky’
Do the express and the mail and the Torygraph have front pages that look like the world is falling in ?
The times and the sun are staying out of it for the time being.
Step outside the remainer bubble for one minute and see that some people like to keep the money they earn. If you need to keep the bbc or sky on repeat, or just talk to other remainers in an echo chamber below the line: don’t be surprised when people vote the opposite way to what you expect
( source; 2016 brexit referendum, 2017 ge, Eu elections, 2019 ge)…
@(bb)limp
Yes, lets read the telegraph shall we.
Sunday’s opinion piece from their “world economics editor” no less:
https://www.telegraph.co.uk/business/2022/09/25/kwasi-kwartengs-tax-cluster-bomb-risks-blowing-britains-credibility/
Headline “Kwasi Kwarteng’s tax cluster bomb risks blowing up Britain’s credibility” and it goes on…
…”This unflagged largesse injects demand into an economy already running at full capacity, constrained by a labour shortage and supply chain disruptions. It draws forward consumption in a nation living beyond its means, with a chronically low savings rate and a structural current account deficit of 4pc of GDP (8.3pc this year). “…
…”The Chancellor has over-egged the pudding.”…
…”The package is regressive in its distributional effects and needlessly provocative at a time of social convulsion.”…
…”Sterling behaved on Friday like a Latin American currency. If the Prime Minister is not worried, she should be.”
But prattle on, as you will.
@Neverland,
Was that the front page ? Funny you don’t seem to be replying about them ? Could it be you are wrong ?
I read it from cover to cover, especially on holiday – the vast bulk of the commentators are massively for it. There were pro eu articles before the referendum as well, but few would mark it as remainer paper;
https://www.telegraph.co.uk/business/2022/09/23/mini-budget-risky-breath-fresh-air/
https://www.telegraph.co.uk/opinion/2022/09/24/hysterical-over-reactions-budget-betray-ignorance-history-economics/
https://www.telegraph.co.uk/news/2022/09/23/kwasi-kwartengs-budget-moment-history-will-radically-transform/
https://www.telegraph.co.uk/news/2022/09/24/last-new-vision-prosperous-britain-not-one-hooked-handouts/
https://www.telegraph.co.uk/business/2022/09/24/business-chiefs-hail-first-conservative-budget-20-years/
Just spend a week outside the bubble Neverland. If it’s that scary in the outside would go back inside
A little disingenuous as the rest of the paper was full of pro budget articles. I had posted links but my comment was moderated away. I suggest you go and read them rather than presenting that one article as the opinion of the paper. Some papers allow outside views. If only so many of you could do the same.
Oh and Neverland… read those front pages – the Chancellor isn’t humiliated. You thought brexiteers were humiliated when the pound lost value in 2016 and the EU wouldn’t offer a trade deal… how’d that play out ?
@BBlimp — I appreciate you probably feel you’re fighting a one-man battle here but could you please try to keep your comments contained in one longer comment/reply, rather than all these additional extra comments as and when they come to you. (1) They each get emailed individually to people subscribed to comments and (2) it’s untidy and off-putting reading, IMHO. Probably don’t enhance the optics of your case, either. 🙂
Additionally to you and more so sometime auto-deleted poster Neverland who I seem to have let slip in again here, please keep the ad hominem attacks out of this. You can go anywhere else on the Internet for that, and I’ll delete as I see fit as always. Cheers.
This thread is a real tribute to the Investor
Both sides and more of the arguments being raised and allowed to be fully discussed in a civilised manner
This is especially impressive in this case as the Investors views are well known
Personally I happen to be with BBlimp but we have far too little of this sort of proper full blown long form discussion on what are serious subjects to us all
Please all keep it going as long as possible I and many others less well informed are learning a lot
xxd09
I see David Smith took up the same ‘push me pull you’ theme on Sunday as I did with this piece on Friday:
http://www.economicsuk.com/blog/002492.html
Great minds think alike, eh? Or maybe that’s just armchair pundits. 🙂
@BBlimp – “I just can’t see how Starmer frames the next election ?
‘let me put your taxes back up so people on universal credit can do ten hours a week less work for same money’”
How about: let’s ensure Britain is a place where everybody can benefit from high quality education, healthcare and police service.
Not to mention adequate national defence in the face of a rising China and belligerent Russia.
And investment in our national infrastructure including the energy transition and green jobs that will provide our future energy security.
@The Accumulator — As you can guess I’d be voting for your agenda here.
But if we look at how the country has voted since at least the EU Referendum, and arguably before that, then to @BBlimp’s perhaps unintentional point, it hasn’t exactly been in its own economic self-interest, in terms of the population as a whole.
Brexit was against a majority of people’s economic self-interest, although some uncertain number of them may have voted for it for other reasons of course. And we’ve had successive Tory governments elected despite the party presiding over a deteriorating economic backdrop on the back of waffley jingoism and a stagnant economy, albeit you have to cut them some slack for Covid.
In contrast, a majority of the population – though probably not the *voters* – would probably have immediately benefited, at least in the short-term and in terms of their economic self-interest, from electing Corbyn.
Which may be the clue to the riddle?
Outside of the EU Referendum, there’s a core of people who rarely or never vote, hugely skewed towards the young and the economically disadvantaged that your (in part our) preferred program might benefit from. But as @BBlimp and others on this thread say, there are plenty of *voters* who will benefit at least in a first-order sense from lower taxes. (i.e. Ignoring long-term consequences, good or ill).
It’s also very true that the UK tax burden is very high at the moment as a share of GDP, and the base is narrow. (Re: the latter — in theory we’d probably both like to see for instance the personal starting rate for tax allowance raised further, but this also has the consequence of taking ever more people out of the tax system altogether. Which I don’t think is great for democracy.)
Which is another reason why I prevaricate a little here. I think the Tory party scraped the bottom of the barrel to come up with the relative dregs here, and after the purges of Tory Remainers from Johnson the barrel wasn’t exactly bountious. And little that Kwarteng or Truss have done so far inspires confidence, except perhaps Truss coming clean a little on the realities of Brexit (and that perhaps as political cover.)
I also don’t think these policies are well-timed whatever their merits, nor politically brilliantly delivered. (The 45% rate cut could certainly have been postponed or swapped for say a rise in the higher-rate band, if they had to signal ideological direction of travel.)
I also think it’s all of a piece of delivering the real aims of Brexit, which has little to do with at least 40% of the rhetoric of the Brexit Referendum.
(Seriously the number of Brexit voters in my wider family who said they voted for it at least in part because ‘the rich are too rich and London gets all the spoils’ was near-100%. This new administration’s policies will clearly make that worse, at least in the short-term).
But at the same time I don’t really see growing the tax take as a share of GDP further as desirable. You have a big shopping list, but the State already has a massive standing order.
I accept that’s a political preference. Moral, even, if you like. But some part of me remains economically to the right, as you know (https://monevator.com/margaret-thatchers-childish-children/)
The bottom line here is I think this is a political as well as an economic gamble by Truss et al. If (and it’s a big if) they can ride out this initial turbulence without a full-blown confidence crisis and/or Bank Rate over 6% this time next year then they may see an unwinnable general election as at least back on the table. Would three more years of dithering along and obfuscating have done that?
Who knows. At least (from their extreme perspective) their current sturm and drang has made everyone forget about Johnson’s mendacious regime, so perhaps there’s even some chemotherapy-like ‘detoxification’ of the Tory party going on, in a perverse way!
But that’s getting very political, albeit as unheated as I can manage.
For now all eyes should be on gilts, and its affect on rates, and the BoE of course. That’s what matters here in the short-term.
The pound’s collapse on Friday was exciting but it’s really a sideshow unless it goes fully into a tailspin. And it is true that the dollar has been exceptionally strong, murky-fying the picture.
@ TI – the point of my comment was to counter BBlimp’s characterisation of tax spending as a waste of money. Using tax to invest in the country’s future and security is a central pillar of successful economies.
The current crisis is born of a government spending big while eroding its own revenues. Fighting inflation by dropping more cash onto the problem. The reaction in the bond market is the market’s response to these contradictions.
Truss models herself on Thatcher. But Thatcher didn’t cut taxes until the house was in order.
It’s the same magical thinking over and over again. There’s no magic money tree except when we say there is. Leaving the EU won’t create barriers to trade. Other countries will be queuing up to do deals with us. Um, no.
It’s fairly obvious by now that successive Tory administrations do not have a plan but are just trying to get through the week.
Brexit was inflicted upon the country as a byproduct of Cameron’s attempt to save Tory seats from UKIP.
May tried to pilot a route through the factional warfare splintering her party but was fatally weakened by her own limitations as a leader.
Boris was an opportunist and a liar who made it up as he went along.
Truss is a dogmatist who told her membership exactly what they wanted to hear so she could gain the top job. A marvellous example of democracy in action.
They don’t have a plan. It’s the worst improv theatre I’ve ever seen.
The tragedy of it all is that this fiasco happened while the opposition was led by a man who the majority considered unelectable.
Now there’s a better choice.
Haha. I’m biased as you’re on Team Monevator but that’s the quip of the thread.
I obviously agree with you on the politics. People moan about returning to Brexit in the discussions all the time, but that was (a) the start of a set of consequences that (in part) brought us to this impasse and (b) was the first manifestation of what I’ll continue to call magical thinking on the right of the Tory party.
Economically I am not sure it’s quite so clear cut. Our national debt as a share of GDP is still pretty manageable (though less so after yields have spiked, raising borrowing costs). Even the much-missed @ZXSpectrum48K used to wave away concerns about the UK balance sheet, and he was no fan of the post-Brexit administrations or politics.
We all know austerity didn’t work post the financial crisis. Are we so sure the best way forward is again diddling around for a few years post-Covid and amid-energy crisis trying to get our fiscal house in order while the UK stagnation continues, made worse every year by Brexit frictions? I don’t think that’s an easy read.
I think on balance this package is more reckless and a gamble than a sober response to circumstances, certainly, and if I was forced to say whether I think it will work or not, I’d have to say “not”. But I don’t think it’s as completely barmy as most of the media seem to, and I suspect the market reaction was a bit overdone, partly due to illiquidity and amplifying factors such as $ strength and central banks everywhere hiking rates last week.
Politically I like it even less. There were better ways to signal a new direction for enterprise, tax, and spend then in particular the 45% tax cut. Getting rid of the personal allowance £100K quirk instead on the grounds of tax simplification would have helped. I understand why they’ve changed the banker bonus rules, as I said elsewhere on the thread, but I’d question if that’s really what has hamstrung British finance over the past few years. (Bankers say it is, but they would wouldn’t they?)
But to repeat myself, it’s not for me like Brexit (from an economic perspective) where there was more or less no positive case at all.
Here it’s a bit more nuanced. As a trader put it on Bloomberg, there’s a 10% chance it’s genius and a 50% chance it sends the economy off the train tracks. I wouldn’t know the numbers, but that’s kind of where I am in evaluating it.
I think we do agree it’s a gamble, anyway!
Edit: I meant it would have been better to do away with the £100K – £120K anomaly, not the additional rate, and have edited accordingly.
I have a question. I have Vanguard 60 LS. With bond yields going through the roof my fund balance is tanking, but are there any hidden benefits to me with bond yields being so relatively high? Thanks.
@Brian — In the medium to longer-term, reinvesting the income from bonds at these higher yields will deliver a higher return going forward. At the same time new government bonds will be issued at higher yields than the old ones that are redeemed. This will also raise expected returns medium to long-term.
However in the short-term that’s not a great comfort, as the re-pricing across all kinds of UK government bonds has been stark and very meaningful indeed.
This is a pretty much unprecedented crash for UK government bonds, as best I can tell, at least in terms of the speed at which it’s happened.
For more than 10 years we’ve wondered if this was the year the UK bond market would finally revert to normal yields. Every year somebody made the case that a correction was overdue but it never came.
It’s now finally happened in less than a year, and much of it in less than a week! 😐
Thanks Investor for your speedy and detailed response. There is hope then.
In the meantime, I’ll keep some cash aside and stop watching Jonathan Ferro on Bloomberg.
One can imagine a discussion with a financial adviser at the back end of 2021. Sir – You must get some index linked gilts to hedge against inflation. er 27% down nominal YTD equating to a negative 37% real return. major error.
Bonds starting to look quite good value? TN24 yielding 4.5%? The speed at which everything is being repriced is quite stunning.
It seems logical to assume the property market is next to be hit no? The correlation with the 10 year gilt yield has been high over the next couple of decades.
On the bright side investing now in bonds / equities gives a much better chance of hitting a +ve real return so if you are accumulating load up more not less. If you are nearer the beginning than the end, this is a great chance to accelerate your speed to FIRE.
It really does show how hard it is to time markets….
Regardless of whether one thinks the budget will work of not (I’m sceptical), I don’t understand too much the yapping about how it only benefits high earners?
scrapping the 45% rate costs £2bn – there’s hardly anyone who pays the additional rate?
reducing basic rate by a penny costs £7bn – seems to benefit basic rate tax payers?
the stamp duty cut benefits first time / lower value properties? – so lower incomes?
The banker bonus scrap is smoke and mirrors. Total comp won’t change – it’s just the make up between fixed and variable pay. Get over it. They’re over paid, just like footballers. Stop being jealous and be thankful the UK has at least one industry to pay for public services.
We’re desperate for more high earners to pay for the fact that the majority of people take out far more in public services than they put in. From memory the previous ONS stat was about 70%.
UK economy is currently on a road to nowhere and the trajectory is getting worse meaning public service cuts or higher taxation at all levels in the future. I’ve a sneaking admiration that at least they’re swinging the bat. I doubt it will have the desired effect as our productivity levels are so systemically weak but let’s see.
@TA – I genuinely believe that you can have lower taxes and better public services, ala the much referred to laffer curve.
For eg,
– if Bollt and the masses of over 50s who’d left the workplace post covid were incentivised to return, that wealth of talent would surely be good for the economy. I’m 100pc not criticising people for RE, I myself come here for the investing ( diversify, low cost, wrappers, platforms) chat, not because I want to RE, but if people do that’s their choice and you only get one go round. But from U.K. plc point of view, got to be good ?
-High earners (and medium earners lucky enough to have large pension pots) leaving the workplace due to the lifetime allowance is surely the best example of laffer one could possibly ask for.
-I really don’t think it makes sense from a county point of view for people who’s children have moved out to live in huge houses whilst families live in flats/ tiny houses. But we provide incentives for this in form of capital gains and inheritance tax exemptions, now a freeze on fuel bills. Undoing this if only ever so slightly with stamp duty changes is a start in getting people living in houses suited to them, in the right places.
-If people on universal credit do more hours (and anyone who manages, supervises or knows people on universal credit know there has been an hours ceiling people didn’t want to breach) that would be good for the company, worker, taxpayer and country.
-There is so much waste in parts of the spend that it loses legitimacy. Virtually everyone in the country has a great story and an appalling story about how they or someone they know has been treated by the NHS. I don’t believe all those appalling stories exist elsewhere. It’s well known, and has been for years, that ambulances stack up outside A&E because patients inside the hospital have nowhere to be released to.
I’m not saying privatise the NHS because if you give them more money they’ll just stack more ambulances up outside A&E (which based on their response to date I suspect they would) but keeping pouring more money in isn’t working.
There are people that believe this. John Redwood has believed this for decades and it’s his brexit I was voting for. Britannia Unchained would indicate to me that the PM and Chancellor believe it also, and we have conviction politicians in charge. At the time Britannia unchained was written (2012) a tac to the Tory right would be an odd play for someone only interested in power. The centre was very much in the ascension, and it was hard to tell Tories from Lib Dems in govt and the Tory party pre the 2019 ge couldn’t be won from the right.
@TI – you say there is no economic argument for brexit but you can at least see there is an economic argument for this project. The latter part of this project ( supply side reforms) require being outside the EU. I’m not saying that to try and convince of their merits, just that time and again you’ve said people didn’t vote to leave the EU for economic reasons or there is no economic argument for leaving the EU, but there is, and it’s being trialled now. I just hope they get the time they need to make a success of it.
As to trade deals – this seems to be a remainer politics – just repeat something that isn’t correct. All trade deals have been carried over, improvements made as regards Japan (worlds third largest economy), deals in progress with Australia and NZ, and likely ascertain to the CTTP. Some of us hope we get the protocol sorted in time for a republican presidency and tail back for a trade deal with the states in a couple of years but there’s more to brexit than a trade deal with the US.
@Rhino – I doubt you’ve read this far, BUT, if (when?) annuity rates rise above inflation is there an argument to annuitise some of your pot and then use a variable withdrawal rate for the rest ? This is a bit of a leap from your bonds question but kind of connected, and is ‘a’ solution to the sequence of returns dilemma
@Seeking-fire, it also presents an interesting conundrum with those near or at FIRE. I had largely been avoiding bonds until a couple of months ago, now have a small allocation (yes, ouch despite avoiding most of the fall).
So now what for the defensive part of one’s portfolio? The bond market is continuing to crash (I can’t believe VGOV is down a further 3.8% today), whilst cash savings rates are going up daily (over 3.9% for a 1 year fix now and rising fast). Meanwhile equities don’t feel like they’ve dropped much due to weakness of the £, but in reality they have of course.
I know notionally we’re all just meant to stick to the plan, and I’ve no real problem with staying invested, but I’m now somewhat wary of being invested in either UK cash or UK bonds. We seem to potentially be on a road towards permitting high inflation as a lesser evil than very high interest rates.
All of the above uncertainty makes me perhaps paradoxically more keen on focusing more on VWRP. In the long run 20%+/- with currency loss/gain doesn’t make much odds, it insures against the total collapse of this banana-ish republic, and after all, equities should do best in the long run as ever.
Sorry bit of a waffle there folks, but therepeutic for me to write it down. Lots to think about.
I think if you are nearing retirement and you are 60 or above then for most people bonds should or need to be a key part of your portfolio (Perhaps not if your SWR is 4% over the long term (who knows) so the prospect of making a real return has improved markedly although I appreciate the near term outlook doesn’t feel very excitedly. Remember though if inflation does dissipate then yields will fall.
I hold TN24 (UK Gilt Jan 24) and US$TIPS (unhedged). I don’t hold any medium / long term GILTS as it doesn’t fit my current profile to do so. I guess if it did I’d hold my nose and buy some.
—
I think if you are nearing retirement and you are 60 or above then for most people bonds should or need to be a key part of your portfolio (Perhaps not if your SWR is 4% over the long term (who knows) so the prospect of making a real return has improved markedly although I appreciate the near term outlook doesn’t feel very excitedly. Remember though if inflation does dissipate then yields will fall.
I hold TN24 (UK Gilt Jan 24) and US$TIPS (unhedged). I don’t hold any medium / long term GILTS as it doesn’t fit my current profile to do so. I guess if it did I’d hold my nose and buy some.
apologies. my comments seem to be corrupted.
@BBlimp — You write:
I think you might have meant to write (or ought to ) “but at least you can see there is an economic argument for these policies…” given that I’ve written it several times above and in the article itself. To me it’s not a hugely encouraging argument so far, but I have said there is an economic rationale here, which compared to most of the media and, apparently, the bond market, is quite supportive. 😉
I’d hope you’ll bank this as evidence that I say things as I see them, given my deep antipathy to Brexit and its enablers. If you’re waiting for me to gild the lily with stuff about the Blitz spirit and the East India Company you may be waiting some time.
What is perhaps causing confusion here is that to me and 99% of sensible economists, Brexit is a net cost, economy wise. (As ever, fine if you did it for other reasons).
So as far as I’m concerned, Brexit puts us in a hole. A negative GDP position. Stick with me…
What I’m saying is this approach is as far as I’m concerned probably the only way that we can climb out of the hole and get back to something like where we would have been if we hadn’t Brexit-ed at all. (Economically speaking. The cultural / personal freedoms etc we can’t get back.)
I don’t believe really that we couldn’t have gone more pro-capitalism without Brexit. We could have cut taxes and state spending and continued to enjoy London booming and the brightest and best in Europe flocking to work here and London being an English-speaking bridge into EU equivalence and all the rest that we benefited from for decades that Brexit shafted.
But back to today. There’s very little if anything in what has been announced so far that required Brexit. Obviously none of the tax stuff. The bankers bonuses, yes. A few micro bits and bobs.
The big ‘Brexit bonanza’ re: industrial / supply-side reforms has been penciled as I understand it for the Budget in November.
Let’s see then what the chancellor announces. I’m not holding my breath; at least part of it appears to be rolling back the consequences of Brexit! (E.g. enabling more immigration which I know you personally are not against but which is flatly against the repeated vox pops and surveys of the large proportion who said they were voting Brexit to curb immigration and competition to local workers. Not just to control it, which I know is your view).
I can’t criticize the government for trying to undo Brexit’s harms, but it is a tad ironic.
Re: Trade deals, I’m well aware that we’ve rolled over the trading agreements in most cases to replicate what we had in the EU. To state the absurdly obvious, however, we didn’t need leave the EU to have the same trade deals as when we were in the EU. 😉
The number of genuinely new trade deals is, as you know, vanishingly small and basically meaningless to-date in the grand scheme of things.
See here: https://www.bbc.co.uk/news/uk-47213842
In the meantime we have a worse trading arrangement with the EU, our major trading partner. So we’re net losers. This isn’t rocket science.
But again, since it’s unclear to me whether you’ve taken in what I wrote in my post and in these comments, I agree and have always agreed that there’s *potentially* a path to economic advantage outside of the EU with Brexit, which might eventually make up for the damage, at the cost of other stuff (again, for want of a better analogy, Singapore-lite. Or maybe Texas on the Thames would be better! 🙂 )
I think a very small proportion of Leavers voted for that, and I think many who did vote Leave will come to regret it.
I’d agree a disproportionate cohort of the Brexit firestarters were tilting in that direction, however. (I have some time in investing terms for John Baron MP. His Brexit position and rose-tinted glasses has dismayed me for years, but he’s not a total nincompoop and he represents the saner end of this Tory direction.)
@Brian — The commentators are understandably focusing on the UK bond market crash — it is one for the ages — but in time another story will emerge.
For example the real return (yield to maturity) on a 30-year UK gilt is suddenly well over 2% compared to negative 2% as recently as end of 2020.
Will a 2% real yield seem attractive in a couple of years time? I don’t know, things are moving very quickly. But it’s a darn sight more attractive than a guaranteed money loser.
(Remember, this is not personal financial advice, just my comments generally on the market as I see it. 🙂 )
Interesting debate. I don’t agree at all with Bblimp’s analysis but as a doctor a huge number of my colleagues have dropped their hours or retired early due to punitive annual allowance charges. ‘Fixing’ this problem, whilst it might appear unjust, would result in an immediate increase in medical workforce and productivity. So I suppose this is a good example of the Laffer hypothesis.
@TI/@TA as other posters have commented any chance of an article on the pros and cons of hedged equity funds for those of us tempted to dabble?
@all — The Bloomberg total return index for UK gilts is down 36% from the peak. Derivatives used by pension funds to hedge their massive gilt exposure now underwater in some cases, according to Reuters reporting.
UK pensions could be the next shoe to drop here.
https://www.lse.co.uk/news/britains-pensions-trustees-should-check-cash-flow-positions-for-market-stress-regulator-usqor0g3mwirqhw.html
@Jura — We are just putting the finishing touches on one by our all-star contributor Finumus. As ever remember it will be for info and as part of people’s wider reading, not personal advice. 🙂
To paraphrase Thatcher, you cannot BS the markets. A lesson Truss is now learning the hard way.
Markets price risk and only an idiot would deny that what Truss/KK have done is take a big risk. Unfortunately, if the market judges that a country is being run by muppets, as ours is, that will also be considered a risk and priced in. None of this is rocket science.
I am only a passive investor, but the antics of this government would not insentivise me to want to invest in the UK if I was active. Quite the opposite in fact.
On the tax side I am uncertain we will be any better off due to the non-PAYE nature of the income. Our income mostly comes from dividends, plus some interest on savings. Some of this is in SIPPs/ISAs and is extracted by selling equitiy ETFs in our unsheltered accounts and buying back inside SIPPs and ISAs, so that part is potentially taxed as capital gains. We are currently not drawing an income, in the conventional sense, from our SIPPs or ISAs.
CGT is unchanged, but stock markets are down, so we can potentially “bed and ISA” more shares without paying CGT and pay less CGT than previously should we choose to do that.
Dividend tax has been cut, but the biggest part of that income comes from a Vanguard US ETF. This is listed in the US and the dividends come with a 15% tax credit that can be used to offset against UK tax, so overall I am not expecting much reduction in tax. Due to the fall in the pound the dividends received next year could well be higher than this year, so maybe we will pay more tax?
Savings income is a small part, but taxed more heavily than dividend income. The tax rate has dropped slightly, but as interest rates rise, so will the income, unless I redirect more savings into short dated, low coupon, gilts.
So now the bank of england is doing additional quantative easing to buy gilts in the market to prop up the price. The bank of england is now officially buying gilts because the market won’t.
This is bit different from stepping in global panics – COVID, bank crisis, etc. – as this is just local to the UK
At any rate, difficult to argue its now not a crisis
All of the government’s making
Lets not forget the bank of england was talking about unwinding £40bn of quantative easing a couple of weeks ago
I’ve called the BoE move ‘quantitative delusion’ on Twitter, in a criminally underrated Tweet 😉
https://twitter.com/Monevator/status/1575076819669520386
Links to the BoE statement in full.
I get what they’re trying to do, and I’ve been trying to figure out of there was forced selling in the gilt market this morning by pension funds whose liability hedging is blowing up / need to meet margin calls.
It isn’t totally clear to me, but I think this BoE intervention is very likely about pensions.
However I don’t think you can buck markets, just as @Naeclue says, and it all smacks somewhat of desperation.
@Investor
You can’t buck the markets but you can sack a chancellor of the exchequer
Unfortunately the UK will pay a credibility premium for this debacle for at least the rest of this decade
@Naeclue – the budget and the tone appear to be about making work pay – not reducing income tax per se. The vast bulk of my income comes via work – a 1pc cut in basic rate and 1.25pc cut in NI is significant. A rise in the higher rate threshold even more so. I’ll admit, like most people in the country I haven’t bought a home in the last three years, so the additional income I’ll get to keep will cover any interest rate rise.
I wouldn’t consider myself an active investor exactly – I only buy passive funds and never sell – but I work off the theory that in developed markets the index will return and surpass all time highs (eventually). To that end I’ve bought the 250 today, and will do so again over the coming months if it drops further.
If anyone reading this thinks the ftse 250, and the U.K. will never recover, we’re not on the same page and in many respects I feel sorry for you. I suggest you take stock of what the bbc and sky told you was going to happen during brexit or covid and think… do I need to live in a constant state of fear? Will making work pay really end the world as we know it ? Was 10pc inflation and 2pc interest rates actually good ?
Interest rate rises will be painful, but surely not more painful than double figure inflation?
Or are we living in some kind of world view where interest rates and inflation were low, economic growth was good and KK has decided to alter that for no reason ?
@The Investor:
Where you say:
“I don’t believe really that we couldn’t have gone more pro-capitalism without Brexit. We could have cut taxes and state spending and continued to enjoy London booming and the brightest and best in Europe flocking to work here and London being an English-speaking bridge into EU equivalence and all the rest that we benefited from for decades that Brexit shafted.”
I’m not sure if that’s correct?
Bear with me. The EU was primarily about a common market for physical goods. This suited export oriented countries like Germany down to the ground, especially with a currency far below where the DM would be if it still existed today, all else being equal.
For better or worse though, the UK economy is more geared towards high end professional and financial services and certain types of very high end manufacturing – think Rolls Royce jet engines type of thing, and weapons.
Now, last I checked, there was (effectively) no common market for professional services in the EU – and deliberately so, given the UK’s lead in services. Finance was slightly different, but in the medium to long term, in the EU, the UK’s position was on a downward trajectory. How long would a member state which hadn’t adopted the Euro be allowed to remain pre-eminent in provisions of Euro financial services? Not long I suspect…
In terms of the possibility of cutting taxes whilst still within the EU, again, I remain to be convinced – especially given the direction of travel was (and is) in the other direction – the “harmonisation” of tax rates (i.e. raising them) – as Ireland is finding out to its cost. All this to say nothing of the (now off the front page) moves to harmonise global rates of corporation tax (i.e. again, raise them).
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As the (former) second biggest net contributor in the EU, I suspect we were never going to be “allowed” to seriously cut taxes. You just need to look at the demographics and welfare position in the EU to why not. I seem to recall a certain Mustelid encapsulated it quite neatly in one of his articles I read a while back – something to the effect of how the “west” could try to preserve its living standards in the face of the chill winds of relentless global competition, and he said something about Europe retreating into a “hive” like situation to try to “preserve the warmth for as long as possible”, or something to that effect.
As to “and all the rest that we benefited from for decades that Brexit shafted”, I’m not clear what those benefits actually were? Freedom to have 2 week holidays in sunny Spain? You can still do that. Or did you mean freedom to move and work in the EU? Hands up here who has actually lived, studied or worked in the EU, specifically in France or Germany? I have. You could never simply just rock up, buy a house and start work in those countries, as anyone who has any experience of French/German bureaucracy will tell you. Especially if there are German or French nationals who needed the jobs. “Freedom of movement” waasn’t quite in practice how it was billed. From the perspective of a manufacturing and export geared country (as we once were!), EU membership was basically a death knell for our industry and exports – what our own unions hadn’t already run into the ground, a system designed to preserve German manufacturing from any serious competition soon mostly killed off. If you’re meaning it was good for “the City” then yes, for a while. At the expense of the rest of the UK. Medium to longer term, I doubt it was going to be good for the City. And if the city was eviscerated, then the UK really would have had problems. So, our economic strengths are professional services and finance. No common market in the former, and the UK’s position in the latter under serious question in the medium term in the EU.
I’m sure you’ll disagree with some/all of the above, but I just don’t think that we could have gone “more capitalism/lower taxes” in the EU. It was all there in the treaties – ever closer union, ever more harmonisation. I think medium term, Brexit was always on the cards as we were already in a slightly “odd man out” club with a couple of the other nations – members of the EU, but not in the Euro. I think we really only ever had two options – go “all in” with the EU, including adopting the Euro (which I think a lot of people in the UK have / had serious reservations about (if the panic about sterling’s decline against the $ is giving you sleepless nights, as a member of the euro zone, you’d be having nightmares!)), with all the loss of control that would ultimately entail, or some form of “Brexit”.
@Dragon — Thanks for thoughts, which I’m afraid I do mostly disagree with. I just see hand-waving and Telegraph opinion column style warnings about the future.
The reality is that the UK grew faster than France, Germany, and even the US after joining the EU. And that is even on a per capita basis!
I could cite any number of sources but here’s the first, from some Oxford professors:
https://www.inet.ox.ac.uk/news/brexit/
As to services, the UK service sector and financial sector again boomed and indeed became dominant during the EU-era.
Frankfurt and Amsterdam et cetera became backwaters.
You warn ‘this wouldn’t have been allowed to continue’ but I’m afraid I just see unfounded pre-Brexit claims that are contrary to the pre-Referendum direction of travel.
The reality was that a combination of the English language being attractive to US banks and others, pass-porting rights, the Thatcher de-regulations, and the wider service and cultural support network made London the natural best-of-both-worlds for international finance in Europe.
The story of the City of London in the EU is a very happy one for the UK. It was a boon to the UK economy, especially with respect to Europe:
https://journals.sagepub.com/doi/10.1177/0032321720985714
That’s a lot of wealth being created, despite any shortcomings as to the nature of trade settlement within the EU.
One can argue that the dominance of London isn’t great for the UK, but I’d argue (a) that is in part a domestic political discussion and (b) it is rarely good medicine to chop off your nose to spite your face.
As ever I have no problem with somebody saying they voted for Brexit for cultural/sovereignty reasons (though I may disagree).
Nearly all the economic arguments though *net* out to at best ‘common sense’ style conjecture that melts under even skimpy scrutiny.
(Edit: Couple of typos, fixed on mobile just after posting. Out and about today!)
p.s. The suggestion that we wouldn’t have been “allowed” to cut taxes is particularly fatuous (sorry) in my view. It’s totally down to sovereign governments.
Ireland, for instance, has been running very low corporate taxes for years, often to the chagrin of other nations. Yet the EU is (of course) bending over backwards to support Ireland in its travails with the UK government over borders and trade.
@TI:
You did say you were out and about and on a mobile, so I’ll forgive the slip into easy tropes about “hand-waving and Telegraph opinion column style warnings about the future.” 😉
But it is beneath you. You’ve also failed to substantively engage on the actual points I was making, which are what is pertinent to the current government’s attempt to “dash for growth”.
Anyway, thanks for the links (first one now 6 years old I see). The devil is in the detail though, as always. If you’re taking your start point as the 1970s – with the winter of discontent, 3 day week, dead unburied and the IMF bailout, then *growth rate* is obviously going to look amazing comparatively when things start to recover. I see the first graph in the link was the GDP per capita *growth rate” – when you look at actual *GDP per capita” elsewhere though, America appears to come out well ahead?
The EU as such didn’t actually exist in the 1970s or 1980s, and you could argue that the “stellar” growth the UK saw in the 1980s was due to (a) starting from a ridiculously low point at the end of the 1970s and (b) the policies of the 3 Thatcher governments – note again, the “EU” was not around at that point so comparitively, we had more freedom of action under the older “Common Market” and “E(E)C”. So membership of the “EU” I don’t think can take the credit for the UK growth rate – it was going to happen anyway.
As to the rest of that first link, well, we always knew that income distribution was more even in the UK/EU than America.
The breakdown of export destinations was also interesting but nothing I hadn’t seen before – sure, big headline number for the EU, but once you discount Germany and the Netherlands, (and probably Ireland as well, given we were always trading with them anyway) exports to “rump EU” are (just) less than the level of exports to “Asia”. We’re not trading with the “EU” then – we’re trading with the Germans and the Dutch primarily. Did we really need everything which went with the EU for that?
Exports to America were more than any individual EU country, and Non-EU Switzerland was more than all but 2 EU countries – again, the Germans and the Dutch.
The other point is that the first link says nothing about our trade deficit with the EU – I wonder why? 🙂 (Yes, I appreciate there’s a whole separate argument about what our economy focuses on, but if you were wanting to make the economic case for the EU, I think you could have picked a better first link…)
As it happens, my Brexit vote was based on “cultural/sovereignty reasons” (i.e. the democratic deficit of its institutions).
Where I have to disagree with you though is the comment about “all the economic arguments though *net* out to at best ‘common sense’ style conjecture that melts under even skimpy scrutiny” for two reasons:
(a) you haven’t proven that,
(b) or at least chosen very carefully what evidence / arguments to present, and
(c) (and this is the kicker) ultimately, you can’t separate the sovereignty (politics) from the economics. The former will always impact on the latter (even if you’re reductio ad absurdum with “vote tory for lower taxes, labour for higher taxes”).
Be honest – if the EU was a trade/economics block first and foremost, the Euro and its economy would have collapsed under the weight of its own contradictions by now. But it’s not a trade/economics block (or not any more) – its now unashamedly a political union, where the politics comes first – hence Mario Draghi’s “whatever it takes”.
That’s not “hand-waving and Telegraph opinion column style warnings about the future” – that’s quoting from the EU’s foundational documents – ever closer union, removal of vetos and opt-outs, switch to QMV, all members ultimately to adopt the Euro. The French president Macron even made this clear in the most abrupt way he could – even if we had “rejoined”, we were not rejoining the status quo ante because the EU treaties were doing away with that.
So the politics of the EU sees e.g. interest rates set by the ECB to favour what the EU needs politically – but what is good/works for Germany isn’t necessarily good for France/Club Med. That’s not me taking a political stance, simply pointing out the obvious, in the same way what what is e.g. good for London is not necessarily good for Sunderland.
If we were in the EU, with interest rates and economic policy set elsewhere, where the overriding objective was to to facilitate the implementation of the EU treaties, how does that work for us?
@Dragon — Well we’ll have to disagree.
You’ll appreciate I hope that I have to answer potentially hundreds of reader comments and can’t go into as much depth as any one reader can in discussion with me. But still I think I did engage with the thrust of the facts you presented.
Firstly I provided evidence that the UK was doing plenty good in the EU, and had done since joining (joining, as you correctly say it’s previous incarnations, but I and I’m sure you haven’t got time to detail the entire history of everything whenever the discussion comes up. I repeat myself enough in all these discussions! 😉 )
Was it perfect growth? No. Was it on the measure that necessarily you or I would have particularly chosen versus another measure that may have presented us in a mildly better or worse light? Perhaps, but not enough to change the big picture.
The point is that the UK in the EU was working just fine. London was flourishing. Growth was more or less as good in the UK as anywhere in Europe (everywhere has had some form of secular stagnation for the past decade). The financial crisis upset the prosperity apple cart in London / the UK but you could never convince me that had anything to do with being in the EU.
You actually concede a lot of this, but then say (paraphrasing for time) well couldn’t we just have traded with the Germans for that (essentially). Well no. Because it was part of the EU and its a trading bloc. A choice it made. To have the seamless trade with Germany (or any other of these nations on our doorstep) that we enjoyed pre-Brexit required being in the EU.
When I look at the systemic problems in the UK, I would put it down to about 95% domestic politics (/historical baggage) and at most 5-10% being in the EU (e.g. a few years of excessively high immigration, some limits at the margin on State intervention, but the UK never intervened as much as it might have anyway for other ideological reasons).
Note: That is not saying “the EU is 5-10% of the problems” net. I would say the positives of being in the EU easily outweighed the negatives, as have the vast majority of economists ever surveyed on the issue.
Perhaps if I’d seen 20 years of would-be UK prosperity running into endless road blocks because of EU membership I might have had some more sympathy for the Brexit argument.
But I saw more or less no economic problems caused by EU membership.
(*Maybe* some excess supply of cheap labour that enabled under-investment by some companies at the margin, and maybe some excess demand on State services, all localized and in the early 2000s).
Set against that, a huge list of benefits.
No, the reason we have too many poorly educated and unskilled workers or a North/South divide or had to make a painful transition from an aging-out industrial power with three million coal miners within living memory or whatnot has little or nothing to do with EU membership.
Domestic politicians (and voters) could have made a vast array of different choices about tax / investment / spending that dwarf any fringe limitations from being in the EU. They didn’t. Other European countries (e.g. Germany) did. Germany basically merged with a developing world country in a decade while British tabloids waffled on about bendy bananas!
I’m afraid this then brings me to the hand-waving. Pundits hand wave about the decline of the UK (see above) and then mention the EU in the same sentence despite no causal connections. Secondly, they opine about some dark future of the EU and then say we have to get out while we can.
As I’ve said many times before I don’t have a problem with the sovereignty argument. That got me to about 20-30% for leaving (but other stuff kept me 70% against).
Sure at the time of the Referendum I’d have much preferred if the EU wasn’t doing the ever-closer political union. (Frankly, now I’m much more ambivalent, given the absolute horror show of British politics during the Referendum and since.)
But the Leave campaign was full of — literally — nonsense about an imminent waterfall of economic benefits, £350m a week for the NHS, instant trade deal with the US, Turkey about to join and so on. Naturally none of that has transpired, six years on.
Can’t you see even for a moment how incredibly frustrating that is?
As for sovereignty, when pressed to say which EU laws had to change, no leading Brexiteer politicians could really come up with anything except (again) hand waving about the bloke with the hook.
Maybe some people wouldn’t like to live in a politically unified EU superstate. But again many would (especially skewing younger) with all the benefits (size, stability, freedom to move, a sense of commonality). An increasing number of the young I suspect.
But who knows? We weren’t voting on that.
We were not (yet, if you like) in a politically unified superstate. We were voting mostly on economic misinformation allied to self-contradictory agenda of bluster (as the current incarnation of Brexit under Truss is showing, the ‘Singapore on the Thames’ vision the opposite you’d surely concede with a lot of the rhetoric that won the ‘red wall’) .
Finally you write:
Well again, you don’t like me suggesting you’re vague hand waving but this is what you’re doing again?
We had the pound. We could set our own interest rates.
Again, maybe if the Referendum had been because we were about to lose those economic virtues it’d have got my vote (again, that’s going back to 2016, I’m honestly not sure now given we don’t seem to be able to govern ourselves rationally).
But we weren’t about to lose those.
It’s just futuristic conjecture. I might as well make a platform that said “The EU in the future will find it cannot achieve ever-closer political union and return to a pre-Mastricht style trading arrangement”. Will it? Who knows. That’s the nature of conjecture.
Finally on this “how does it work for us” point, what Brexit supporters never seem to grasp is it’s the same for everyone in the EU. We’re not singled out as some special group giving up their control for a greater good (greater as I would say).
Other Europeans are just people like us, as I know you know. They work, eat, get married and divorced, cheat on their spouses, don’t save enough money or save too much.
They are Germans, French, Spanish, Italian. Half of these people have great grandparents who shot each other on each others’ land (which we never suffered).
To turn your phrase around, “How does it work for them?”
Are they all uniquely stupid not to realize it (supposedly) doesn’t?
Or is it some grand German plot? (You see why that trope is convenient to Brexiteers).
No.
Come to understand the only thing separating us really is a few kilometers of water (even the Empire is just a matter of time/scale, look at Spain) and you’ll see that what seems the strongest argument among Brexiteers is actually I would say one of the weakest of all.
Cheers.