Banking

Weekend reading: How long, doc? – Monevator

What caught my eye this week.

I honestly don’t want to keep returning to the UK’s fiscal and political kerfuffle, week after week.

But like a newspaper’s travel correspondent who finds herself the only reporter in town during an air raid, the battle keeps thundering in.

This week was one of truth and reconciliation – in as much as the truth hit home and it had to be reconciled with a hostile political reality.

Most notably, with senior Conservative MPs openly stating that they wouldn’t support it, PM Liz Truss caved on scrapping the 45% tax band.

Instead it was her proposed tax cut that was scrapped. A twitch of fiscal sanity, sure, but from her party not her chancellor. And as it only saves a couple of billion pounds, the bond vigilantes’ Excel spreadsheets won’t have budged much anyway.

Indeed the Office for Budget Responsibility would likely confirm a black hole in the nation’s finances, were it to release its independent forecast today.

Bean counters

The Guardian quotes Sir Charlie Bean, an ex-member of the independent watchdog and a former Bank of England deputy governor:

“It will be in the order of £60bn to £70bn relative to its previous forecasts,” he said, adding that Kwarteng would face three options: further U-turns on his tax-cutting plans, deep cuts to public spending, or risking the ire of already rattled financial markets by substantially adding to the national debt.

“What he’ll be confronted with, and I don’t think to be honest most observers and MPs have really woken up to this yet, is the extent to which the public finances has deteriorated since the spring,” Bean said.

“It will be interesting to see what the chancellor comes up with, what rabbits he can pull out of the hat. They could U-turn on the tax cuts they announced a fortnight ago, but that of course I’d say would be politically terminal for the Truss government.”

I’m starting to suspect it was no accident that big concrete spending cuts – as well as the promised supply side reforms – were put off until November, even though this is what roiled the markets.

The tax cuts were perhaps meant to prepare the ground for future pain by obviously straining the country’s finances – in the same way that a patient is less inclined to complain about an imminent amputation if gangrene has already set in.

Create a frightening shortfall, then you’re swinging the axe not as a mad man but as a surgeon.

But if that was the idea, it looks a long shot now.

With her party in open revolt and many Tory MPs fearing for their jobs, the politically difficult decisions that Truss said she sought – some of which in isolation may be well-judged – seem as hard a sell to Parliament as to the country.

Bad medicine

Many Monevator readers might be sympathetic to those who suffered a real terms benefits freeze, but fewer would be directly affected. (State services such as a flailing NHS are another matter).

No, we’ll mostly feel the ongoing pinch at the tax rather than spend end of the equation.

And on that score it’s still widely under-appreciated just how static tax allowances – combined with raging inflation – amplify the tax take.

According to the Institute for Fiscal Studies, taxpayers are set lose twice as much from frozen allowances next year as they will gain under the promised tax cuts, writing:

Freezes to personal tax parameters alone will reduce households’ income by £1,250 on average by 2025–26.

Adding in freezes to benefits and gradual policy roll-outs brings that figure to £1,450, or 3.3% of income, and means a £41 billion boost to the exchequer.

That is double the £20 billion gain in household income (and loss to the exchequer) from the high-profile personal tax giveaways – the reduction in National Insurance contributions and 1p cut to the basic rate of income tax.

In other words, on average for every £1 households gain from high-profile cuts to rates of income tax and National Insurance, they lose £2 from the freezes and policy roll-outs.

My co-blogger The Accumulator has been banging this drum for months. He even made a rare foray off the fence in our comment thread on the Mini Budget to say:

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.

T.A. has had a draft article knocking about since early summer that tried to unpick very precisely how much not raising the various allowances would cost a person, versus a counterfactual world where allowances rose with inflation.

However I felt it was too confusing for readers. It also teetered on a vast and fairly unfathomable spreadsheet that underlined how difficult it is to do these sums for yourself.

My bad for not publishing it anyway, in retrospect, though like my warnings about imminent contact with sequence of returns risk and my urging readers to stress test their mortgages, it might have been a little early to truly hit home.

Here’s how the IFS sees the upfront damage in terms of where the various bands would be if they’d risen with inflation:

Source: IFS

Reading this table doesn’t really reveal how it all adds up for you, however. And you can try to do the sums like The Accumulator did, but it’s mind-bending stuff.

Which is why of course politicians prefer this conjuring trick to hiking tax rates directly.

First, do no harm

Sympathizers might ask who can blame them?

We have a perma-sluggish economy afflicted with poor productivity growth that – borrowing aside – must fund ever-growing commitments and a relentless string of one-off spending splurges, most recently the energy support measures.

Tax as a share of national income income is already getting on to its highest level since the aftermath of World War II.

The tax cuts may well been chosen for their political bite. But at least they take the edge off.

Look, Liz Truss and Kwasi Kwarteng have clearly bungled the delivery of their chosen hardcore medicine. And it certainly appears to be more from the chemotherapy end of the spectrum than a holistic retreat to the Alps to take in the air.

It’s not the treatment course I’d prescribe. The ordering has been back to front. You’d hope for more competent doctors.

But as I said in my ambivalent response to the Mini Budget, I don’t quibble as much as some do with the diagnosis.

Post-mortem

As has been the way of Tory politicians for half-a-dozen years though, they soon exhaust my short store of sympathy with their lofty disregard for the facts.

This time saw Truss and her followers claim the drama of the Bank of England having to intervene to shore up reeling pension funds was all down to global matters.

Ukraine was even mentioned a few times.

Luckily the Bank of England remains independent enough to shoot that down.

The Bank’s Deputy Governor Jon Cunliffe told MPs that some pooled investments in the now-notorious liability-driven pension investment funds would have been worth zero if it hadn’t acted by stepping in to buy gilts.

His letter to Parliament also directly linked the crisis to the Mini Budget (or fiscal event, as it was formally called), not Russia’s war or even the US Federal Reserve.

See if you can spot the correlation that Truss and Kwarteng strain to notice:

Weekend reading: How long, doc? - Monevator - american bankers association number - Banking - UK Prime News

Source: Bank of England / UK Gov

As I say, I’d love to talk about something else next week. But we can’t duck how this all impacts our finances in the here and now, let alone the never-never of future government borrowing costs.

There are links below to the ongoing stress in mortgages, for example, and to reports of a sudden nosedive in the housing market.

The big danger now is this administration doesn’t have any political capital left to push through the controversial cuts and reforms that are required even by its own lights.

That could leave our economy in an 18-month limbo, until the next General Election.

Better wrap up warm this winter.

Have a great weekend everyone.

From Monevator

The Slow & Steady Passive Portfolio Update: Q3 2022 – Monevator

Eat The Rich or die trying (a review, of sorts) – Monevator

From the archive-ator: Mortgage risk checklist – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!

Public won’t be told to curb energy use after No. 10 reportedly objects – BBC

Panmure Gordon: lower gas prices cuts 40% from cost of price cap [Graph] – via Twitter

Fitch cuts UK’s credit rating outlook to negative, citing fiscal risk – Business Standard

“Uninvestable” UK market loses £300bn in Liz Truss’s first month – Bloomberg via Yahoo

Property sales collapsing at the fastest rate since the pandemic – Yahoo Finance

Weekend reading: How long, doc? - Monevator - american bankers association number - Banking - UK Prime News

“Kicking myself I didn’t move faster”: fear and panic grips the house market – Guardian

Products and services

UK mortgage rates are soaring. What can you do? – Guardian

Time to give annuities another look as rates rise 50% – ThisIsMoney

Aldi was the cheapest supermarket in September – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

In the US, an Inverse Cramer ETF will enable you to bet against the pundit – ETF Stream

Do higher rates mean it’s time to switch to fixed-rate savings accounts? – ThisIsMoney

11 ways to save on heating bills this winter – Which

Pretty mews homes for sale, in pictures – Guardian

Comment and opinion

Time for investors to learn a new game [Search result]FT

Brighter prospects for bonds ahead – Vanguard

What the money is for – Of Dollars and Data

Terry Smith: who is to blame for the latest pensions debacle? [Search result]FT

Spending for happiness starts at home – Humble Dollar

Timing the stock market versus timing the bond market – A Wealth of Common Sense

All about TIPS: real returns and inflated expectations – Portfolio Charts

Avoiding failure versus achieving success – Banker on FIRE

The intersection of financial and longevity planning – Humble Dollar

The future of indexing, governance, and financial technology [Podcast]Morningstar

Equities: a wolf in sheep’s clothing [Nerdy]Elm Wealth

Building a better CAPE ratio [Deep, nerdy]Early Retirement Now

Invest now mini-special

The Investor Opportunity index hits a two-year high – The Reformed Broker

Rethinking risk – Jack Raines

Why fear is good – Compound Advisors

Was that the bottom? – The Irrelevant Investor

Hedge fund managers are feeling confident, especially in the UK – Institutional Investor

Naughty corner: Active antics

Weekend reading: How long, doc? - Monevator - american bankers association number - Banking - UK Prime News

Global venture capital pullback is dramatic in Q3 2022 [As expected]Crunchbase

Thinking about the next Warren Buffett – Neckar’s Minds and Markets

Growth investing ain’t about the rates [Free registration required]GMO

What are UK public market metrics signalling about our economic prospects? [Thread] – via Twitter

Fed ripping off the inflation band-aid – Investing Caffeine

Covid corner

More than one million in the UK report Long Covid a year after infection – Guardian

Who can get a booster jab this autumn? – BBC

Kindle book bargains

Mastering The Market Cycle by Howard Marks – £0.99 on Kindle

Go Big: How To Fix Our World by Ed Miliband – £0.99 on Kindle

Talking To My Daughter: A Brief History Of Capitalism by Yanis Varoufakis – £0.99 on Kindle

My Life, Our Times by Gordon Brown – £0.99 on Kindle

[Amazon is behind the progressive tilt this month, not me. Maybe it’s seen interest spike with the political travails?]

Environmental factors

UK defies climate warnings with new oil and gas licences – BBC

Want to save the oceans? Stop recycling plastic – i News

A moonshot for coral breeding was successful, but there’s a snag – Hakai

Off our beat

Five short stories about expectations – Morgan Housel

How Russia’s war in Ukraine might end… – The New Yorker

…and how it is continuing – BBC

Can longtermism save us all? – Slate

Lunch with Elon Musk: “Aren’t you entertained?” [Search result]FT

The 2022 crash has taken its toll on financial influencers, but spam has replaced them – M.I.

Why do you like the music you like? Science weighs in – The Washington Post

And finally…

“For all that has recently been said about ‘the wisdom of crowds’, the authors prefer to fly with airlines which rely on the services of skilled and experienced pilots, rather than those who entrust the controls to the average opinion of the passengers.”
– John Kay, Radical Uncertainty

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