The message from the Budget: this one’s for the little people
The Budget contained very little of interest, says John Stepek. But it did point to where we’re heading politically – and that’s in a direction that should worry investors.
The jokes were worse than last year. The speech was longer. It was stuffed full of mini-measures and promises of consultations, but nothing that stood out as a genuinely bright idea.
In some ways we should be grateful. Boring is often good. Hyperactive meddling left us with a ballooning tax code, replete with loopholes.
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And yet, the most interesting thing that came out of it, is what it says about the direction we're heading in politically and that's not encouraging.
The change in political tone over the last decade is striking
The Overton window is a theory that originated with the late think tank executive Joseph P Overton. It refers to the range of ideas and policies that the public deems acceptable. Ideas in the middle of the range are popular those outside the window are deemed unacceptable.
Overton was American, and so framed the idea in terms of government intervention rather than a left or right axis. But the point is that the window can shift. So ideas once viewed as radical could become mainstream, and those once deemed received wisdom can be tossed into the ditch.
What yesterday's Budget demonstrated more than anything else is just how far the Overton window in the UK has shifted since the financial crisis erupted in 2008.
Before the crisis, one of the biggest complaints you heard about politicians was that they were all the same. The Labour party under Tony Blair had dragged the Overton window towards the centre, continuing the process that John Major had begun of moving away from free-market Thatcherism.
The idea under Blairite Labour was that you could enjoy all the benefits of ostensibly free markets, but also pay for a large public sector and welfare state.
It was capitalism but cuddly.
The problem is that it was, in fact, largely built on debt, fuelled by booming asset prices and the suppressed wages that went with globalisation. When that debt-based model collapsed in 2008, we were left scrabbling for a new one.
Populations immediately rejected the politicians who had been in power during the crash. Britain got its first coalition government since World War II it was the only sufficiently "different" option on the ballot paper.
The Overton window continued to drift towards a bigger role for governments in the case of the coalition and then the David Cameron government, a paternalism-tinged, "compassionate conservatism".
But the pace of change wasn't fast enough. First, Jeremy Corbyn became leader of the Labour Party. His colleagues nominated him as a joke candidate. The joke turned out to be on them. Then Brexit gave the establishment another unwelcome wake-up call, one from which many are still trying to recover.
In short, what was once deemed radical or even unacceptable is now well within the Overton window of today's British politics. And what was once deemed mainstream (providing an easy-going tax environment for wealthy foreigners and embracing offshoring) is now viewed as beyond the pale.
It's all about the little people and we're all little people
So that's the backdrop to Philip Hammond's third Budget. And that's what's informing his decisions now.
The man and woman in the street feel aggrieved. Both of the main parties are now competing to prove that they are the party of the little people. And we're all little people, unless you have a six-figure income, are a wealthy foreigner, or a multinational company, or are engaged in any sort of tax minimisation arrangement that isn't 100% government-approved.
Thus you have a Conservative chancellor spending all of his extra fiscal breathing room not on cutting the deficit earlier, but on giving more funds to the NHS, and on fixing the government's troubled flagship welfare reform, Universal Credit.
Meanwhile, all of the tax tweaks are aimed at making that aggrieved voter in the street feel a little less aggrieved.
You own a small business? Your rates will be cut and you'll be given tax breaks to buy intellectual property-rich companies. You own a big tech business? Britain is going to impose a unilateral digital revenue tax unless everyone else can agree on something more effective before then. Are you a working class or middle class earner? From April next year, you'll be able to earn £12,500 before you start paying income tax. And you'll be able to earn £50,000 before you start paying 40% tax. This was a year earlier than expected.
The chancellor (or his future replacement) will, of course, claw all of this back at some point through fiscal drag (ie, the thresholds will be frozen for an extended period). But I'm not going to complain about getting the tax cut now rather than later.
However, woe betide you if you're one of those self-employed people who only work for one employer. You're probably going to be forced onto the books and to pay the higher tax that goes with it. Never mind that this was encouraged under the New Labour government what one chancellor giveth, another (or the same one) can taketh away.
If you're a surprisingly wealthy first-time buyer, almost certainly living in London, then the good news is that you won't have to pay stamp duty on a home worth up to £500,000.
But if you're a landlord, or are thinking of becoming one, be aware that the rules on capital gains tax relief on a home you once used as your primary residence are being tightened up sharply.
In terms of good news, there were no changes that directly affect savers or investors. Pension tax relief stayed the same. There were no new varieties of Isa launched, thank the Lord.
And while it's easy to criticise Hammond for not grasping any serious reform nettles, that is understandable given the government's weak position and the urgent need to put Brexit in the rear-view mirror before the focus can shift to anything more significant.
However, it's hard to avoid the conclusion that we're now very much in an era where we can expect a lot more government intervention, regardless of which party is in charge. And while that's not always a bad thing, the reality is that more intervention means more complication, and more complication means more inefficiency and borderline corruption.
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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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