Prepare for currency wars

The Institute for Fiscal Studies released its Green Budget this week. This is an annual survey of the state of public spending in Britain. It usually makes for miserable reading. This year, I’m sorry to say, it is even more depressing than usual.

It tells us that public spending in 2014-2015 will be £64bn higher than originally hoped; that despite the endless talk of benefits cutting, social-security spending will rise from 28.5% to 32.5% of all public spending by 2017-2018; and that the overall effect of the tax and benefit changes being introduced in the next tax year will not be a fall in spending, but a “small net giveaway”.

It also reminds us of the utter mess that is our tax system. Take the raising of the personal income-tax allowance. This has cost £9bn and involved much crowing about taking low-income people out of the tax system. But it has, of course, done nothing of the sort – low-income earners still pay national insurance (an effective income tax) at 12%. Here, says the report, as elsewhere, “a genuinely coherent tax policy is still lacking”.

We have a massive debt, an austerity plan that doesn’t go nearly far enough, and a tax system that doesn’t work. At the same time – as I have said before – none of the suggestions as to what we should do about it all (build more schools/cut red tape, etc) are anywhere dramatic enough to make a real difference. You can read the report at Otherwise, if you can bear it, you can read more on the failures of our economy in Matthew Lynn’s column: Slash taxes and sack George Osborne.

What can investors do about all this? You can come over all charitable and hope to make a return and help finance the state at the same time, via the likes of the social impact bond we discuss here (this is not my recommended route). You can stay out of gilts and other ‘safe’ sovereign bonds. And you can make sure that your investments come with a degree of currency diversification.

For years now, the consensus has had it that the key driver of returns is asset allocation. However, the escalation of the global currency wars (under which everyone fights to make their currency worth the least) and the ongoing slide in the value of sterling suggest that the real key to hanging on to your wealth over the next decade will be more the currency you hold those assets in.

With that in mind, you might not want to hold too much in sterling. The British economy is a mess; our public finances are a mess; and as one of this week’s Roundtable participants says of the currency that represents that mess: “it has to go down, it should go down, it will go down”.


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