Margaret Thatcher was no ordinary leader. She lost popularity as fast as she had gained it, which eventually led her to resign in 1990, after holding the top spot for 11 years.

Her challenging tax policies, taming unions and in her coldest moment, removing free milk for school kids, left her infamously labelled as ‘Thatcher the milk snatcher’ and the ‘Iron Lady’.

Her Victorian family values also added to the controversy – she wasted no time introducing section 28, a law that passed in 1988, which prevented schools from promoting homosexuality or LGBTQ+ related education.

Thatcher also refused to relax divorce laws and wanted to reinstate capital punishment.

Yet, she was the longest serving prime minister in the 20th century.

She served as prime minister between 1979 and 1990 and was the leader of the Conservative party between 1975 and 1990. Thatcher was also the first woman to become the UK prime minister.

Born 13 October 1925, the late Thatcher would have been 100 this month.

While her social policies may have divided the country, it was her economic policies that made the biggest impact. Thatcher changed the City forever and her policies continue to shape finances today. But what did she achieve and does ‘Thatcherism’ still live on today?

Thatcher’s ‘Credit Crunch’

Purse strings were tight for households as high inflation and unemployment gripped the UK in the 1980s, but Thatcher wanted them to spend. To encourage this, she relaxed rules around borrowing, making it easier for households to get credit using credit cards, hire purchase arrangements and even mortgages.

There was an overall reduction in government regulation of financial services and ultimately, people borrowed more than they could afford.

Did Thatcher’s credit boom lead to the financial crisis that followed almost 30 years later? One of the main reasons behind the 2008 financial crisis was the high risks banks took, which included dishing out risky loans and taking high risk investment opportunities.

‘The Big Bang’

‘The Big Bang’ in financial markets refers to the sudden deregulation of financial markets in the UK, when the London Stock Exchange became a private limited company.

The deregulation in 1986 removed restrictions that would then enable the UK to compete globally. Face-to-face trading was replaced with electronic trading instead, fixed commissions on trades were removed, and foreign firms were allowed to own UK companies. Thatcher changed the City forever.

But in doing so, she raised concerns that the ‘Big Bang’ would lead to ‘boom and bust’. Leaked memos almost 30 years later revealed that Thatcher’s move possibly contributed to the 2008 financial crisis. The memos, now moved to the National Archives, were reported in the Financial Times.

Pensions mis-selling

Personal pensions were launched in 1988 under Thatcher, giving people another way to save for retirement if they did not have access to workplace pensions, or just didn't want to be part of one. The idea was to reduce the burden on the state and tax liabilities.

Under the 1986 Financial Services Act, employers were unable to force employees into workplace pension schemes. Adverts were released encouraging people to ‘break the chain’ of compulsory membership.

But, her plan backfired and it led to a major pensions mis-selling scandal in the 1980s, as people opted to leave their ‘safe’ workplace pension move into arrangements with lower contributions and higher risks.

Savers had no experience of managing a personal pension, yet commission-driven advisers pushed them into these plans, where they would also not benefit from employer contributions and face higher risks.

Around two million people were advised to switch out of occupational schemes. Compensation from misselling claims are estimated to have cost the industry over £11 billion.

Right to Buy

If there was one policy that gained Thatcher popularity, it was the Right to Buy policy, allowing tenants to buy the properties they lived in.

It was part of the Housing Act 1980 which enabled people to buy the house at a discount from the market value, depending on the length of their tenancy.

The policy is still in place today in England, but discounts are smaller, slashed by Labour to between £16,000 and £38,000, down from between £102,400 and £136,400.

Over two million people have used the scheme to date, but experts believe the scheme is adding to the social housing emergency and driving shortages.

Labour has said it plans to add restrictions to the scheme by excluding newly-built social housing.

Tenants will also be required to live longer in their property to qualify to buy at a discount.

Taxes

Thatcher believed tax cuts were vital to build a healthy economy and as such, in the 1979 Budget, the then chancellor Geoffrey Howe slashed the basic rate of income tax from 33% to 30% and the top rate from 83% to 60%.

The basic rate eventually fell to 25% in 1988.

But indirect taxes went up, up from between 8% and 12% to a single rate of 15%, meaning consumers had to pay more for goods and services.

But this drove inflation to as high as 21%, which then saw the government set interest rates at 14%. It was the government that determined the base rate back then.

The poll tax was perhaps the most awful tax ever to be applied in British history, requiring everyone to pay a fixed domestic tax. Rates were set by local authorities. It started riots and a protest in London in March 1990 attracted over 100,000 people.

It’s now been replaced with council tax.

Privatisation of state-owned companies

It was under Thatcher when many people became shareholders for the first time, when she decided to privatise a number of state-run companies in the UK.

In the 1980s, Thatcher privatised a number of state-owned companies which include British Telecom, British Airways, British Aerospace and Rolls-Royce.

The idea was to make them more efficient, reduce government debt, but also enable people to hold a stake in these companies by becoming shareholders.

Many may remember the ‘Tell Sid’ campaign when British Gas shares went public.

While supporters of privatisation saw this as a positive move that would lead to reduced costs and stronger profits, it also drove prices higher for consumers, and services were driven purely by markets.

Margaret Thatcher eventually resigned in 1990 after her leadership was challenged and her support ebbed away. She was succeeded by John Major.

Thatcher passed away at the Ritz in London in April 2013.

The state pension could rise by 8.5% in 2024 thanks to the triple lock policy. 

However, Prime Minister Rishi Sunak has refused to commit to keeping the triple lock in the next manifesto, despite it being Conservative party pledge as the cost spirals. Work and pensions secretary Mel Stride has also said the triple lock is not sustainable long term. 

Even Labour Party leader Keir Starmer has refused to commit to the policy. 

Amid this confusion, there have been reports suggesting the government may use a lower figure to calculate the state pension’s increase in 2024. 

The state pension increased by 10.1% in 2023, in line with inflation, a far above-average boost compared to previous years. The triple lock ensures the state pension goes up by average wage growth, inflation, or 2.5% – whichever is highest. 

Inflation has fallen to 6.8%, meaning the state pension will likely go up in line with the 8.5% wage growth recorded in the three months to July.  

But will the government really scrap the policy as its cost spirals? 

Will the government keep the triple lock next year? 

Inflation is expected to fall in the coming months, but average earnings growth is on an upward trend and could continue to grow as public sector pay deals are reflected in the figures. 

In light of the rise in wages, there have been reports the government is considering using a different figure to calculate the increase to the state pension next year.  

“Given the impact of one-off payments to NHS and Civil Service workers in swelling the figures, rumours are swirling that the government may opt to use a smaller number instead,” says Helen Morrissey, head of retirement analysis at Hargreaves Lansdown. 

“For instance, stripping out the effect of bonuses could leave the increase at more like 7.8% rather than the current 8.5%.” 

The cost of sticking with the triple lock would be “huge and unpredictable” says Steven Cameron, pensions director at Aegon, but by “twisting” the policy both parties “risk losing the support of swathes of older voters”. 

The cost of the state pension is expected to outweigh combined spending on education, policing and defence over the next two years. 

 Rising cost of the state pension triple lock  

According to the Institute for Financial Studies (IFS), increases to the state pension could cost the government up to £45bn per year by 2050. 

The 8.5% rise in the full new state pension would take it to £11,500 per year – currently it stands at £10,600. 

This increase would cost the government £2bn more than budgeted in 2024-2025, the IFS said.

Calculations from interactive investor II’s show the cost of the state pension triple lock could hit £10bn 2024 - based on the latest wage and inflation figures. This is £4bn higher than the DWP forecast in March.

“The DWP March forecast expected the total state pension cost to rise to £135 billion in the tax year beginning April 2024. But a bumper wage bill for employers has a knock-on impact on the state pension bill which could rise to a total cost of around £138 billion next year. The cost of the triple lock could hit over £10 billion next year, based on ii calculations. The final bill could be lower if inflation or wages fall during July,” says Alice Guy, head of pensions and savings at interactive investor. 

The cost of the state pension triple lock is growing for the government as the population ages. “The current government and Labour party have both committed to the triple lock next year. But the cupboards are bare, with the tax burden at a record level. With an aging population, the triple lock promise is becoming increasingly expensive,” Guy adds. 

Already the state pension age is predicted to rise to 68 by 2040. 

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Despite being built of bricks, a house is, in many ways, a financial asset. This is because, for the most part, we use finance - debt - to buy real estate. And debt has been propping up the UK housing market since the 1950s. 

The influence of mortgages on the housing market

Mortgages, aka “death grip”, have been around for hundreds of years. Indeed debt has been around since before human beings settled on the fertile plains between the Tigris and the Euphrates. But mortgages in the UK only hit the mainstream in the 20th century. First, after WWI, following Prime Minister David Lloyd George’s 1918 promise to build “homes fit for heroes”, and then, probably more so, in the 1950s as the Tory government reduced Stamp Duty and lent money to building societies as part of its pledge to create a “property-owning democracy”. In the 1950s and 60s home ownership went from below 30% to above 60%.

On the one hand, the mortgage enabled many people to get on the housing ladder in the first place. The financing will have enabled more properties to be built. But on the other hand, by introducing debt into a market, you introduce more money into that market and the consequence is usually higher prices (See student loans for more details). If house prices were determined only by the amount of available cash, they would be lower and more in line with earnings.

But house prices are determined by the amount of debt that is available, which in turn is determined by the cost of money (interest rates), general risk appetite and so on. That is why prices are now so out of kilter with earnings. Once upon a time, and not so long ago, house prices were three times earnings. Now in London, they are north of 10 times.

It’s credit, not supply that matters

The widely accepted view is that houses are unaffordable because we do not build enough and this has led to a shortage of supply. The stats I would always call on to counter this argument are that between 1997 and 2007 the housing stock grew by 10%, but the population only grew by 5%. 

If house prices were a function of supply and demand, they should have fallen slightly over this period. They didn’t. They rose by more than 300%. The cause of house price rises is the unrestrained supply of something else: money. Mortgage lending over the same period went up by 370%.

Some might argue those numbers are out of date, but the latest numbers tell a similar story. In the ten years to 2021, the housing stock in England and Wales has grown by just above 6%. The population by a similar amount - 6.5% in England and quite a bit less - 1.4% - in Wales. 

But average UK house prices over the same period went from £167,000 to £270,000 (more in England). Mortgage lending, meanwhile, more than doubled (from £153bn to £316bn) over the same period. The relationship between money supply, aka credit, and house prices is obvious.

Research by thinktank Positive Money shows that over 50% of the money created by banks when they lend now goes into mortgages. All that newly created money going into a market where supply is constrained by planning laws will inevitably push up prices.

These two charts from Positive Money illustrate the relationship between credit creation and house prices.

Here is London.

I’m not saying population growth doesn’t affect house prices. It does. But not as much as money or credit supply.

Even the Telegraph admitted this yesterday, albeit accidentally, saying: “The jump in house price cuts corresponds directly with a doubling of mortgage rates”.

The Bank of England has allowed the bubble to grow

The Bank of England does not factor money supply or house prices into its measures of inflation. It only includes a basket of consumer goods and services. These are prone to the deflationary forces of globalisation and increased productivity: that is to say, the shirt on your back has got a lot cheaper because it is now made in Bangladesh where labour is a lot cheaper than it was in Manchester, or wherever it was made a few decades ago.

Thus, the Bank has been able to say inflation is low for decades, it has kept interest rates too low for decades, money has been too cheap for decades, people have borrowed for decades and house prices have risen for decades.

Of late, we have hit something of a deflationary limit, albeit a temporary one. First, Covid hit supply chains and that has pushed up prices. Second, the trend is towards more not less government intervention, regulation and taxation, which also put upwards pressure on prices. Third, where does the world now go to find cheaper labour than in Bangladesh and China? Africa, maybe, or machines. Still, for the time being, we have hit peak cheap labour.

Thus has inflation spread, even by the Bank’s measures, and it is forced to raise interest rates. Rising rates push up the cost of borrowing. Many that have borrowed can no longer service their debts, and so look to reduce their debts or offload the assets they have borrowed against. This puts selling pressure on the market.

Rising rates reduce people’s appetite to borrow, the amount they can afford to borrow and banks’ willingness to lend. This takes buying pressure out of the market.

The result is the panic we now have in the housing market. Falling prices, bearish sentiment and more. A third of all listed homes are now discounted. 

But, at 5%, the Bank of England base rate is still too low. Its own measures say inflation is 8.7%. Truflation has it at 11%. If you can borrow at 6%, in a way you’re making 5%, though few will see it like that.

What happens if rates go to 8.7% or 11%? It’s not like this hasn’t happened before.

I’m now 53. I’ve watched and been dumbfounded by the UK property market for too long. It is awful what it has done to this country, in my view, pricing out an entire generation, reducing family size and all the rest of it. For years every other government policy, it seems, is aimed at propping up the market, rather than letting it correct. That makes me reluctant to go all-out-bear in the way that many have done and call for 35% corrections in the housing market. 

Time bombs in the housing market 

However, there are two ticking time bombs. 

First, if the Bank really does lose control of inflation and we get some kind of currency crisis. This would tie in with my cycle, Frisby’s Flux, which suggests we could see lows in sterling next year. 

Second, the sheer number of fixed deals that are coming up for renewal in the next couple of years. This will see something in the region of two million households at least faced with mortgage repayments at least double the level they were when the original deal was taken out (see chart). 

Many are not going to be able to meet those repayments. The Office for National Statistics (ONS) says 57% of UK fixed-rate mortgages were fixed below 2%. Forced sellers will quickly drive down prices. 

The government will no doubt find ways to prop up the market. It knows this is coming. But housing markets move slowly, and I think houses almost certainly get cheaper before they get more expensive again. If you are looking to buy a home, unless it’s really urgent, I would find an excuse to wait. 

This August Dominic will be performing one of “his lectures with funny bits” at the Edinburgh Fringe, at Panmure House, the room in which Adam Smith wrote Wealth of Nations. This one is about gold. You can get tickets here.

https://tickets.edfringe.com/whats-on/dominic-frisby-gold

The Close Portfolio Conservative, Balanced and Growth fund range seeks to achieve resilient returns over the long term through a company-led approach to investing in a multi-asset context. It acquires “cheap durables”: direct interests in predictable businesses purchased at attractive cash-based valuations that will appreciate and repay their debts.

The current economic backdrop requires a careful application of this long-term approach in the short run. Inflation has reached levels not seen for a generation and central banks responded last year by increasing interest rates.

Today the economy is decelerating, profit margins are being squeezed, and debt is more expensive and less readily available. As a consequence, we expect a recession in America and potentially in other developed markets. This is likely to entail a fall in corporate profits, which would put downward pressure on equities and corporate bonds as the risk of default rises. Fortunately, however, investors have recourse to the cross-asset toolbox.

A boost from bonds

Developed-market sovereign bonds were one of the worst-performing asset classes last year as the meagre starting yields were insufficient to offset the capital losses associated with higher interest rates. Any income from a bond with a duration of ten years, for example, was swamped by the 30% capital loss associated with a three percentage-point rise in rates. But looking ahead, we expect central banks to cut interest rates once inflation is under control and economies are in recession. Broadly, all sovereign bonds have the potential to reverse their recent losses, but the iShares USD Treasury Bond 20+yr UCITS Exchange Traded Fund GBP Hedged (LSE: IDTG) could be particularly attractive. The long duration adds leverage to changing interest rates: a shift in the base rate has more impact on the price of long-duration paper than on the value of short-duration bonds. And the hedging removes the currency risk of owning overseas bonds for sterling- based investors.

The yellow metal will shine

Gold is priced off the yields on cash and fixed income, which represent the opportunity cost of holding it. Investors will pay a higher amount for gold when cash yields nothing, but less when cash yields something. So as interest rates reverse and decline into a recession the gold price could experience a tailwind. The physical metal or any physically-backed gold exchange-traded commodity should benefit, including the Royal Mint Responsibly Sourced Physical Gold ETC (LSE: RMAU). Equities are also priced off the alternative yields available elsewhere in fixed income, but gold, unlike equities, doesn’t have earnings risk through a recession.

Resilience and reliability

If corporate profits are at risk then it makes sense to skew equity investments towards firms with defensive earnings streams that don’t fluctuate much with the economic cycle as well as possessing an attractive long- term growth outlook. The Swiss-listed multinational branded consumer goods manufacturer Nestlé (Zurich: NESN) could fit this description thanks to ongoing predictable demand for the group’s everyday essentials, while the portfolio has shifted towards categories with higher structural growth rates, such as pet food and confectionery. The stockmarket doesn’t award points for originality.

The Renters’ Reform Bill is expected to be introduced to Parliament today, 17 May, four years after a shake-up of the private rented sector was promised in the conservative party manifesto.

The government published a document in 2022 outlining the full extent of its plans and the current bill reiterates these commitments.

As it’s brought to MPs, we look into what the proposed changes mean for tenants and landlords and how they could affect the private rented sector.

What is the Renters’ Reform Bill proposing?

A ban on no-fault evictions

The bill would ban landlords from evicting tenants without a valid reason. The conservative party pledged to abolish no-fault evictions back in 2019.

Section 21 of the Housing Act has allowed landlords to break contracts without good reason, leaving tenants with two months to find a new property.

This will give tenants protection and security, but Matthew Lesh, Director of Public Policy and Communications at the Institute of Economic Affairs, pointed out this could make it harder to rent.

“Landlords will inevitably be more selective about who they offer properties to and charge higher rents when they cannot quickly evict bad tenants,” said Lesh. “That is likely to disproportionately hurt those who are poorer, younger, and from minority communities.”

The bill would also limit rent increases to once per year, and end the use of rent review clauses, as well as make it easier for tenants to challenge these.

Allowing tenants to keep pets

The bill will also force landlords to consider tenants’ requests to keep pets and forbid them from unreasonably refusing them.

Ban on refusing families or tenants in receipt of benefits

The bill will make it illegal for landlords to refuse families or tenants on benefits, and in future explore whether this can be expanded to other groups, such as prison leavers.

The government would “improve support to landlords letting to people on benefits”.

Introduction of a Private Renters’ Ombudsman

The bill will see the creation of a Private Renters’ Ombudsman, which would seek to resolve disputes between private renters and landlords “quickly, at low cost, and without going to court” as well as “strengthen tenants’ ability to hold their landlord to account”.

Landlords would be required to sign up to the Ombudsman, which will “have the legal authority to compel apologies, take remedial action and pay compensation”, explains Martin Lewis of MoneySavingExpert.

Changes to repossession

The bill would make it easier for landlords to evict tenants for anti-social behaviour or missed rent payments by broadening the meaning of anti-social behaviour.

The bill would also “expedite landlords’ ability” to evict antisocial tenants.

Introduction of a property portal

A property portal would provide rental information for tenants, councils and landlords, explaining obligations on all accounts.

Could the reforms push landlords away from the market?

Landlords are reportedly giving up on buy-to-let as higher interest rates on buy-to-let mortgages make it more difficult to earn a profit.

Reductions to tax allowances, as well as the government’s upcoming requirement for properties to be upgraded to an EPC rating of C, which will cost landlords a collective £18bn, have also deterred buy-to-let investors.

“New eviction rules, pet requirements, and higher standards will only worsen the rental property shortage and record-high rents,” said Lesh.

“The housing crisis won’t be solved by fiddling with rental rules. Britain needs fundamental housing reform to allow more homes to be built where people want to live – anything else will continue to see renters offered poorer quality homes at too high prices,” he adds.

But the bill will provide security and support to renters who are currently struggling with record rents.

“We have long needed a statutory single private rental ombudsman, so I'm pleased to see it in the legislative plans,” says Lewis. “The new Bill needs to pass through Parliament before it can become law and this can be a lengthy process – though the Government says it plans to do so "at the earliest opportunity".

It’s pretty hard to find any reason to be positive about the outlook for the UK economy. It’s plagued by high inflation, falling real wages, low capital investment, low productivity, staff shortages, high taxes, geopolitical uncertainty and high energy prices. That’s without mentioning the complete lack of a long-term economic growth strategy.

However, the outlook is becoming increasingly positive, as for the first time since 2006, policymakers have some breathing room to deal with the core fundamental issues hurting growth.

A series of economic crises

The UK economy has been hamstrung by a series of rolling crises effectively since 2007 when the pre-financial crisis boom years started to come to an end.

The UK was disproportionately affected by the financial crisis due to its large financial sector. It sucked money and confidence out of the economy and left deep scars, some of which are still present to this day.

But before the UK economy could recover, the European debt crisis in 2010 roiled international markets once again. Then, in 2014, the Scottish independence referendum caused further uncertainty.

The economy barely had time to catch its breath before the Brexit saga began in 2016, ushering in another period of uncertainty. And just as it looked as if there might be a light at the end of the Brexit tunnel in 2019 with the arrival of Boris Johnson and his large parliamentary majority, the coronavirus pandemic arrived. Nearly two more years of chaos followed, capped off by Liz Truss’ disastrous premiership at the end of 2022.

Combined, the UK economy has faced 16 years of perpetual crisis, hammering business and consumer confidence while stopping policymakers from, well, making policy. Chancellors have been preoccupied with firefighting short-term issues, rather than dealing with the long-term structural problems holding back growth.

Many of the problems the economy faces today are rooted in this extended period of uncertainty and unpredictability.

But, we now have some form of stability and predictability for the first time since 2007. There is a degree of uncertainty over who will be in office at the end of 2024, but whether it be the Labour or Conservative party, both sides have made it clear they want to prioritise stability.

At the same time, as the recent banking crisis has shown, the UK financial sector has put its problems behind it. And over in Europe, the UK is having conversations with European partners that were unthinkable just 12 months ago.

In the past week, it has been announced that the UK and Netherlands are going to work to build a new electricity interconnector, one of the most powerful in the world, to share renewable energy from the North Sea. This was announced at a European-wide energy conference.

There have also been rumours that Rishi Sunak is looking to convince the EU to reduce the burden on UK travellers crossing the EU border. Reports say this is still in very early stages, but it’s indicative of the change in mood.

This increased cooperation is a direct result of the so-called Windsor framework, which seems to have put to bed (and seen off a rebellion from the Tory right) some of the major issues surrounding Brexit.

Progress for the UK economy at home and abroad

As well as improving international cooperation, the current government is also working to improve its relations with the business community here in the UK – a sharp change from Boris Johnson's economic legacy of “f**k business”.

Jeremy Hunt, the chancellor, was criticised for not unveiling any big tax cuts in his Spring Budget, but he did announce some interesting changes around business tax relief, particularly full expenses for capital investment, and some streamlining of the tax system, notably the level of the lifetime allowance, which has reportedly driven experienced employees out of the workforce.

We’ve also seen Rishi Sunak present the broad outline of an industrial strategy, focused around science, technology, aerospace, and the creative industries.

These are not huge shifts, but they are the sort of small, reassuring changes the country has been lacking for the past two decades as policymakers have been dealing with fire after fire.

Despite these headwinds, the UK economy hasn’t done particularly badly compared to its European peers since the Brexit referendum. The economy has grown at roughly the same rate as Germany since 2016, according to figures for the Office for National Statistics (ONS).

Similar figures show business investment is up significantly since 2016. Meanwhile, the total employment rate (the percentage of people available for work in employment) of workers aged 16 to 64 has risen from around 70% at the beginning of 2012 to just under 76% at the end of February.

Stability is the base for growth

A stable policymaking environment should act as a launchpad for the business after nearly two decades of uncertainty.

Granted, I can’t claim there’s a clear runway ahead. Challenges such as high inflation, worker shortages, stringent planning rules and low levels of government investment will persist. Still, the government now has the time to deal with some of these issues head-on, and that’s a big positive.

On the inflation front, there’s already positive news. Wholesale energy prices, which affect everything from the price of bread to the heating bill for the NHS, have collapsed since the highs of last year. The UK wholesale gas price is now back to levels not seen since 2021. Food prices are also set to fall over the coming months according to the country’s largest food retailer Tesco.

No one can predict what the future holds for the UK economy, but for the first time in a long time, the foundations are in place to support a period of growth and recovery.

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Prime minister Rishi Sunak is mulling a cut to inheritance tax (IHT) rates ahead of the next general election, according to reports, in a move that could see fewer people paying the unpopular levy.

As it stands, the standard IHT rate is 40%, payable on parts of the estate that exceed the £325,000 threshold.

But, reports suggest that the government is seeking to potentially reduce the headline rate payable or even raise the £325,000 threshold at which the tax is currently paid, according to reports by Bloomberg.

It reported ministers saying the proposal could be a “pre-election giveaway”, designed to galvanise support from potential voters.

YouGov found that 63% of people support the inheritance tax threshold being upped - a move backed by 77% of Conservative voters.

The Treasury did not confirm or deny the rumours, saying it was unable to comment on speculation around tax changes outside of fiscal events.

Chancellor Jeremy Hunt froze the IHT threshold for two years in the latest Autumn Statement. But, since the £325,000 IHT threshold for individuals was set in 2009, it would be no surprise if this went up.

It’s a policy move that has been touted previously. Former prime minister Liz Truss pledged to oversee a review of IHT during the Conservative leadership contest in August last year - plans which did not materialise.

Who pays IHT?

The number of people who actually pay inheritance tax is very small, but every year more people fund themselves dragged into the net. According to the latest government statistics, only 3.76% of deaths in the tax year 2019 to 2020 resulted in an IHT charge - a total of 23,000 deaths. IHT receipts received by HMRC during the financial year 2021 to 2022 hit £6.1 billion.

In March, the Office for Budget Responsibility (OBR) upped the Treasury’s forecast for its IHT intake, projecting £45bn in inflows over the next six years - an increase of £2.9bn compared to the OBR’s previous statement in November.

The OBR forecasts that by 2027/28, 6.7% of deaths will trigger an IHT charge.

What is the IHT rate?

Inheritance tax is currently charged at 40% of a person’s estate above a tax-free allowance, but a reduced rate of 36% is triggered should the deceased leave a minimum of 10% of their assets to charity in their will.

You also don’t need to pay IHT if you leave your estate – or everything above the £325,000 threshold – to your spouse, civil partner, a charity or community amateur sports club.

Those with children or grandchildren that leave the family home to them benefit from what is known as a residence nil-rate band, which boosts the £325,000 allowance to £500,000. This means a couple could leave up to £1m IHT-free to their kids or grandchildren.

Can I reduce my IHT bill?

There are several ways to cut your IHT bill by gifting, which includes:

• Gifting up to £3,000 each year. This is called the ‘annual exemption’ and if you didn’t use your allowance last tax year you can also carry this allowance forward – so, you can make £6,000 as a gift.
• You are allowed to make gifts of up to £250 to as many people as you like if you haven’t made any larger gift to that person
• Each year the rules allow you to give a lump sum to someone getting married or starting a civil partnership. For children, you can give £5,000, for grandchildren and great-grandchildren the allowance is £2,500 and then £1,000 to anyone else.

We explain how to reduce your IHT bill by gifting in detail in our article on how to reduce your IHT bill by gifting.

There are a number of other ways reduce your IHT bill, but these can sometimes be complicated and it is always worth speaking to a financial planner to make sure your loved ones do not pay any more tax than they have to.

The pensions triple lock is here to stay, meaning pension will rise in line with inflation in the new tax year, chancellor Jeremey Hunt said in his Autumn Statement this week.

In its 2019 manifesto the Conservative Party promised to uphold the triple lock, which ensures the state pension is increased each year by either the rate of inflation, the rise in average earnings or 2.5% – whichever is higher. With inflation rising rapidly, the future of triple lock has been questioned over the years.

On 17 November chancellor Jeremy Hunt confirmed the party was keeping its promise and increasing state pensions in line with last month’s inflation figure of 10.1%. But even this figure is outdated now; the latest data from the Office for National Statistics showed UK inflation is running at a 41-year high of 11.1%.

So what does this mean for pensioners, and how much will the state pension rise by?

Pensions triple lock reinstated from April 2023

Much to the dismay of many pensioners, in April of this year the government suspended the state pension triple lock due to the impact of the pandemic, and increased the state pension by 3.1% instead of 8.3%, the rate inflation was running at the time.

There had been reports the government was considering scrapping the triple lock because of the cost to public finances, but it has now been confirmed retirees are getting a 10.1% increase to their state pension from April, which translates into an £870 increase a year. That’s the biggest ever cash increase to the state pension. It takes the annual pension to £10,600.20.

Pension credit, for pensioners on the lowest incomes, will also increase by 10.1%, worth up to £1,470 for a couple and £960 for a single pensioner. Finally, pensioners will receive a one-off £300 cost of living payment.

But the increase won’t come into effect until April 2023, “so there is a tough winter ahead”, says Helen Morrissey, senior pensions analyst at Hargreaves Lansdown.

“The reinstatement of the triple lock after its suspension last year will cool some of the discussion around its long-term viability for a while, but with a review of state pension age due to be published soon, now is the time to carry out a comprehensive review of the state pension to ensure it best helps those who need it most, both now and into the future,” Morrissey added.

However, pension increases coupled with tax freezes on income tax and national insurance might push pensioners over these thresholds and result in them paying more tax. Inflation is still on the rise, too, which will mean pensioners will continue to feel a squeeze on their finances.

Rishi Sunak has become the UK’s third prime minister in seven weeks. The former chancellor secured the top post after rival Penny Mordaunt dropped out of the race to become the leader of the Conservative Party earlier this week.

The new PM pledged to “fix” the “mistakes” made under his predecessor Liz Truss, who resigned after a turbulent 44 days in office.

In his first speech outside 10 Downing Street, Rishi Sunak acknowledged the country was in a “profound economic crisis” and that “difficult decisions” were going to be necessary in order to restore stability.

Markets reacted positively to Sunak’s appointment as prime minister; borrowing costs dropped and the pound strengthened against the dollar.

But what will his appointment, and his new cabinet, mean for your money?

When is the first budget happening under Rishi Sunak?

The Autumn budget was originally scheduled for the end of November, but when Liz Truss’ first chancellor of the exchequer, Kwasi Kwarteng delivered his so-called mini-budget at the end of September, this timeline was thrown into disarray.

The resulting market turbulence forced a rethink. The new budget date was pulled forward to the end of October.

However, the announcement has now been pushed back again to 17 November to make sure it reflects the most accurate economic forecasts.

It will be delivered by Jeremy Hunt, who replaced Kwarteng after he resigned following the mini-budget chaos.

Hunt, a previous contender for the leadership of the Conservative Party, retained his position when Rishi Sunak took over the top job.

How big is the challenge facing the new chancellor?

According to reports Rishi Sunak and Jeremy Hunt are aiming to bring in tax hikes and spending cuts worth up to £50bn a year to fill a hole in the public finances. That's roughly 2% of the UK's GDP.

Initial projections put the scale of the budget black hole at between £30bn and £45bn. However, it seems as if the Treasury is looking to free up more cash than required in order to provide fiscal headroom.

Reports had suggested the new PM was reconsidering tax hikes, but it does not look as if that's the case.

One of the biggest issues facing Hunt is the lack of room for further spending cuts. He has pledged to get "debt falling over the medium term", and has warned of "very, very difficult decisions" when it comes to taxes and spending.

But according to the Institute for Fiscal Studies most departments' spending budgets are still as much as 25% below their 2010 levels in real terms.

That suggests there are no easy options when it comes to spending cuts for the chancellor.

What is happening to our taxes?

The chancellor has promised that “protecting the vulnerable - and people's jobs, mortgages and bills - will be at the front of our minds as we work to restore stability, confidence and long-term growth”.

Rishi Sunak introduced a 1.25% increase to National Insurance, which was undone by Liz Truss shortly after she came into office, as a way to raise money. But it seems unlikely he’ll u-turn on this.

When he was running his initial leadership campaign over the summer following Boris Johnson’s resignation, Sunak had also promised to cut the basic rate of Income Tax to 16% from 20%. However, this now seems unlikely given he has a massive hole to plug in the government’s finances.

Instead, it looks as if the government will try to raise money by keeping tax bands and thresholds frozen, pushing people into higher tax bands as wages go up.

There's also speculation that the government could increase capital gains taxes so they're more in line with income taxes, and add a council tax surcharge to homes worth more than £2m.

Hunt's said multiple times that he's committed to helping the vulnerable, and this suggests he could place an emphasis on increasing taxes for the wealthy over cutting benefits.

One option that could be on the table is scrapping the non-dom tax status as proposed by Labour. That would bring in an extra £3bn and would likely go down quite well with voters.

Will Rishi Sunak scrap the pensions triple lock?

In its 2019 manifesto, the Conservative Party committed to maintaining the state pension triple lock, which guarantees state pension will increase every year along with the rate of inflation, the rate of wage growth, or 2.5%, whichever is higher.

But with inflation currently running at 10.1%, this promise could become too costly to maintain. Sources have confirmed pensions are under consideration ahead of the new fiscal statement.

Liz Truss promised the triple-lock was safe in one of her last weeks in office, but Sunak’s government has yet to make the same commitment.

The Policy Exchange think tank, where Sunak worked before he was a member of parliament, has encouraged the government to ditch the measure and raise pensions in line with earnings instead.

As well as the pensions triple lock other benefits could be in the firing line for below-inflation increases.

What other options are on the table?

As the government tries to find extra tax revenue it's looking increasingly likely energy companies are going to have to pay more tax.

When he was chancellor, Sunak introduced a 25% "energy profits levy" on the income of UK oil and gas producers. This windfall tax is due to expire in December 2025, but it now looks as if Hunt will extend the levy.

What's more, he could extend it to renewable energy generators and other power producers.

Another politically safe option available to Hunt is to increase taxes on banks.

At present banks pay an 8% surcharge on profits as well as corporation tax of 25% taking the overall bank tax rate to 33%.

When he was chancellor Sunak had promised to reduce the surcharge to 3%, but keeping it at 8% would be a quick and easy way to raise an additional £500m a year (according to current projections).

Hunt could also cut the amount of interest the government pays out to lenders which have deposits at the Bank of England. While such a move would be equivalent to a windfall tax, it could save a staggering £90bn over the next two years.

It was probably the shortest tax cut in history. A little more than a week after announcing the end of the 45% top rate of tax, chancellor Kwasi Kwarteng was forced into a humiliating U-turn. In reality, he had no choice. His mini-budget had been savaged by the markets, had put Labour 30 points ahead in the polls, and was likely to be defeated by Conservative backbenchers in the House of Commons.

With this rapid U-turn, the government’s “growth plan” – using supply-side reforms to improve incentives, and to make the UK more competitive, enterprising and efficient – has taken a huge blow. Perhaps something can be salvaged from the project. Perhaps. But Kwarteng and prime minister Liz Truss will have to change their strategy.

Here are three places they could start.

1. Assume the City isn’t on your side

First, don’t assume the City or Wall Street will be on your side. The financial sector has no special attachment to free market liberalism. Banking is one of the most heavily regulated, uncompetitive and state-dependent sectors of the economy, and most of the people working within the industry are hostile to any form of deregulation.

Nor are they very interested in the results. The currency traders and hedge-fund managers are not looking at overall growth a few years out. They are only looking at sentiment around the next bond issue. If they see a space to attack they will.

A reforming government looking to improve the supply side of the economy will have to assume the City will oppose it all the way. That means it will have to lock down its forecasts before it launches any new plans, as well as making sure the Bank of England is on board to deal with any fallout.

2. Stay away from the news

Next, avoid the headlines. It’s the big eye-catching measures – such as ending the bankers’ bonus cap or scrapping the 45% tax rate – that stir up real opposition. It is even worse when they suggest the government doesn’t care about equality or fairness.

In fact, the Truss government has already made some genuinely positive changes that will help boost growth significantly. Changing the ridiculous IR35 tax rules that allowed the Inland Revenue to hound many self-employed people out of work will make a big difference.

So will scrapping the data-protection rules that have dramatically reduced the number of tech start-ups. They are quite dull and technical changes, so no one really notices them very much, and hardly anyone gets upset aside from a few specialists. But they will make as much difference to growth as the top rate of tax.

3. Focus on the priorities

Finally, focus on key structural reforms. That means removing planning barriers that have stopped the UK from building enough homes; lifting the bizarre solvency rules that prevent pension funds from investing in infrastructure projects that would both make money and help the country run more smoothly; or removing the restrictions on fracking that have stopped the UK from supplying its own energy. The planned investment zones will be the most important component of that. If they are bold enough, and big enough, they could liberalise huge swathes of the country and generate lots of fresh investment.

In reality, there was lots of this good stuff last week – gritty, detailed measures that will make a real difference to growth. In the 1980s, the big wins of the Thatcher government were privatising the state-owned monopolies, taming trade unions, and selling off social housing to increase home ownership. Many of them, such as curbing union power, were done so gradually it was hard to oppose them.

Likewise, the big wins of the Truss government – if it survives for more than a few weeks – could be building new houses, restoring the incentives to work, re-booting the City and ending the EU’s crazily heavy-handed regulation of technology and science. If it focuses on those priorities, the growth plan can still work and supply-side reforms can still boost the economy. But the lessons of a bad week need to be learned or it is just going to end in defeat.

Today, Liz Truss and Kwasi Kwarteng made the first major U-turn in their government. The chancellor confirmed this morning that he will not be abolishing the top income-tax rate of 45p as he promised in his Budget two weeks ago.

The additional rate of income tax is paid by workers earning over £150,000 a year, and Kwarteng believed that by cancelling the top tax rate, he would be able to stimulate economic growth.

However, dozens of Tory MPs made it clear over the past week that they will not back the proposal, arguing it was unfair to be cutting taxes for the wealthiest in society amid the cost of living crisis. Even some of the highest profile members of the party, such as Michael Gove and Grant Shapps, publicly criticised the move.

“We get it and we have listened”, tweeted Kwarteng. “It is clear that the abolition of the 45p tax rate has become a distraction from our overriding mission to tackle the challenges facing our country. As a result, I’m announcing we are not proceeding with the abolition of the 45p tax rate.”

Removal of the top tax rate: how will it affect your finances?

While the U-turn on the top tax rate might not directly affect most taxpayers, it may have significant indirect effects on people’s personal finances.

When the chancellor announced the tax cut in his mini-Budget on 23 September, the financial markets panicked. The value of sterling slumped and gilt yields jumped as investors digested the impact the cuts will have on the public finances.

Markets also began to price in much more aggressive interest rate hikes from the Bank of England. At one point, markets were predicting rates hitting 6% or more next year.

The turmoil in the markets caused mortgage lenders to panic. Hundreds of mortgage deals were pulled in the days after the chancellor’s announcement on the top tax rate as lenders retreated to re-price their offers based on future interest rates. This sudden re-pricing of risk sent shockwaves throughout the housing market.

Even though most taxpayers will benefit from Kwarteng’s other giveaways, notably the reversal of the National Insurance increase his predecessor Rishi Sunak bought in earlier in 2022, and a potential cut in the basic rate of income tax from 20p to 19p (although I wouldn’t rule out another U-turn at this stage) rising interest rates will hit borrowers.

Sarah Coles, senior personal finance analyst at Hargreaves Lansdown, said, “The Truss tax U-turn was more about politics than personal finances. It doesn’t save enough cash to make a material difference to the government finances. It means those on the lowest incomes will still be paying a huge price for tax cuts.”

Interest rate projections have fallen back after the U-turn on the top tax rate. However, markets are still pricing in rates of 5% or more by next year.

Guy Foster, chief strategist at wealth manager RBC Brewin Dolphin, said, “The pound and gilts have reacted well to the U-turn on plans to scrap the 45p tax rate. The derivatives market is now signalling one less rate increase since this U-turn on additional rate tax. The move is symbolic more than fundamental with the tax cut making up around £2bn of about £40bn per year increase in funding requirement announced at the mini-budget.”

Liz Truss and Rishi Sunak would like to convince you that they are a breath of fresh air, despite both having served in Boris Johnson’s government. New policies are being thrown around thick and fast as they spend the summer sipping warm pink fizz and eating cheese canapes with the rather niche electorate of around 160,000 Conservative Party members. Polling of the membership has consistently shown Truss (pictured) to be ahead. We believe she will be announced the winner on 5 September for three reasons.

Firstly, she has chosen policies that appeal to members. Reversing tax hikes resonates strongly across a party that has become more and more perturbed by the tax burden rising to its highest level since the World War II. Truss’s tax cuts could be inflationary, but she is pointing the finger squarely at the Bank of England (BoE) taking its eye off the ball, promising to review its mandate.

She has also managed to reinvent herself as a Brexiteer, thanks to the endorsement of Steve Baker and Jacob Rees-Mogg, leading members of the European Research Group. In the culture wars she gains plaudits from Conservative voters for treading the “anti-woke” path. Truss wants to redress the balance towards what Conservative members might call common sense.

Another reason to expect Truss to prevail is that she has put in the hard yards to gain members’ approval. In the past few years she has been meeting activists in constituencies up and down the country. She knows it’s not just about a highly visible social-media profile, although she’s been putting effort into that too. A cursory glance at her carefully curated Instagram account reveals her in a tank, in Russia, in front of the flag at her desk – anything to remind you of her proto-Thatcherite expeditions to sign trade deals and defend Ukraine during her time as trade secretary and then foreign secretary.

Finally, her opponent has upset the membership on a number of levels. It’s not just that Rishi Sunak has raised taxes and is now trying to convince them he’s a tax-cutter. They feel he has no integrity following the furore over the tax status of his wife, his US Green Card and his Partygate fine.

In the regular monthly surveys conducted by the grassroots ConservativeHome website, Sunak’s score in approval ratings of Cabinet members has collapsed. Throw in the fact that his resignation triggered the fall of dominoes that removed Boris Johnson, and Sunak can be accused of back-stabbing to boot. Truss, rather conveniently, was out of the country while her colleagues were stepping down.

Taxes will fall; interest rates will rise

Once the woman who wants you to perceive her as a loyal, hard-working, Thatcherite Brexiteer gets to work, we can expect her to deliver a fiscal stimulus that will see monetary policy tighten in response. Higher interest rates and steeper yield curves will support UK banking stocks.

They will also bring about a stronger currency, with sterling benefiting from a boost to growth and a wider interest-rate differential. That will be particularly the case versus the euro, where the looming energy crisis over a protracted war with Russia will cripple an economy that was already structurally stagnant.

Truss’s tax cuts will also help the British consumer during the stagflationary period ahead, which should in turn bolster the consumer-goods sector and the leisure and travel industries. But there will be a divide between the luxury and budget ends of the market; the latter will struggle due to the high inflation rate for essentials, which hurts lower-income groups more.

But Truss is taking a gamble on her economic plan, as her opponent never fails to point out. She might simply stoke the inflationary fire, which the BoE now predicts will reach the incendiary level of 13% by the end of this year. Truss would argue that the five-quarter recession the BoE also predicts necessitates action now. And she plans to review the BoE itself.

With inflation now so far from the mandated 2% target, her ally and possible future chancellor Kwasi Kwarteng, the business secretary, warned that “something’s gone wrong” and “we’ve got to look at how [the Bank] is performing”. Rumours abound over what this might mean in practice, but with suggestions that the target could be shifted from inflation to GDP, or intervening in what attorney general Suella Braverman called “its entire exclusionary independence over interest rates”, we could be in for a radical new approach from a Truss government.

The next prime minister will have just over two years to convince the country to vote in the Conservatives for what will then be almost two decades in power. Truss has to go for broke. She will inherit a 71-seat working majority that is desperate for unity and vision after almost two years of directionless discontent. Her chief enemy will be vanquished and she will be almost unassailable, with the party unwilling to put its members – or the country – through yet another contest. She will put this power to work quickly, before the honeymoon dissipates. Get ready for the Truss revolution. The political risk premium on UK assets has just gone up.

Helen Thomas is the founder and CEO of Blonde Money, a macroeconomic consultancy (blondemoney.co.uk)

After two “excruciating” televised debates and five ballots of Conservative MPs, Rishi Sunak and Liz Truss emerged on Wednesday as the two final candidates to become the next leader of the Conservative Party.

The winner will become “the third prime minister anointed in the past six years without being voted into office by the general electorate”, says Hannah Jane Parkinson in The Guardian. The final say once again “has been given to the circa-160,000 members of the Conservative party”, with the result due on 5 September.

Trusting the membership

The fact that the Conservatives are placing their fate in the hands of the membership shows they have learned little from what happened with outgoing prime minister Boris Johnson, says Daniel Finklestein in the Times. Despite the fact that Johnson’s weaknesses were “well known” and his “failings as a minister understood”, MPs bowed to pressure from Conservative party members and choose him as one of the two to go forward to the final ballot.

The fact that someone so “obviously unsuited to the premiership” was selected “should prompt a rethink” – and not just for the Tories. The previous practice of MPs of both the two principal parties choosing their leader “would have prevented the twin fiascos” of Johnson and Jeremy Corbyn.

That said, Conservative party members are more “canny” than their MPs might think, says the Economist. Surveys suggest that the views of the Conservative rank and file are “roughly in line with bog-standard centre-right opinion”, and if anything slightly more centrist on economics than the typical Conservative MP. And MPs “do not have a monopoly on wisdom”, as shown by the subsequent failure of Theresa May, the overwhelming choice of MPs in 2016. Still, the process of creating a “de facto presidency” by having leaders directly elected by a party’s membership “is a recipe for constitutional stress”, and sits uneasily with the idea of parliamentary sovereignty.

A long process

A further anomaly is that the system “requires a lower threshold to win the leadership than to retain it”, says Daniel Hannan on Conservative Home. “You can become party leader with the support of a third of your MPs”, but require half to survive a subsequent vote of no confidence. Note, too, that the sheer length of the process encourages rival camps to “smear” each other with personal attacks thus “ensuring that the eventual winner makes enemies along the way”. It also means that “for the rest of this month, and all of next, Britain’s administration is paralysed” with “no new decisions made or announced”.

Still, having a genuine contest for Conservative leader that takes place over several weeks comes with several benefits, says Charles Moore in the Daily Telegraph. While some may have found the debates so far “ghastly”, they have least exposed some of the two remaining candidates’ weaknesses, while forcing them to “answer back” to their critics. This scrutiny has made them “better politicians”.

What are the odds on who will become the next prime minister?

Rishi Sunak may have got support from 137 MPs, compared with 113 for Liz Truss, but Truss is favourite to emerge as the next prime minister. With £2.98m matched on Betfair on the market for the next PM (along with a further £2.4m on the next Conservative leader), punters have Truss at 1.68 (59.5%). However, they still think the contest might not be a walkover, as Sunak is only out at 2.46, which means they still give him a 40.7% chance of winning.

My guess is that the contest is going to be a bit closer than the markets suggest. It’s true that Truss has a clear lead in the latest YouGov poll of members, with 54% of the vote compared with Sunak’s 39%, but this isn’t completely insurmountable, especially given that there will be now six weeks of campaigning and debates before the results are in.

You can expect the MPs who voted for Sunak, as well as most of those who voted for Penny Mordaunt – narrowly beaten by Truss, with 105 votes – to campaign on his behalf in the media. This should help sway some votes.

Sunak’s team will be hammering home the message that polls have consistently shown that the Conservatives will do much worse under Truss than Sunak.

While such arguments don’t always work, the fact that the Conservatives are in power, rather than opposition, might focus minds. As a result, while Truss just might edge it, I think the result is uncertain enough to make it worth betting on Sunak at 2.46 to be the next PM with Betfair.

Rishi Sunak says that if he becomes prime minister he will cut taxes as soon as he “has gripped” inflation. That would be nice. Over the past 12 years of Conservative government, middle- and high-income-earning households have become “significantly worse off”, says The Times. In 2010, tax freedom day (the day when you have earned enough to pay all your taxes) came on 30 May. This year it came on 8 June. You can thank the government for nine extra days working for the state (with, as far as I can see, no obvious improvement in the public services the state provides in return).

This is mostly about fiscal drag: if the threshold for paying the 40% rate of tax had risen in line with inflation since 2010, it would now be well over £58,000. The fact that it hasn’t will have cost those who pay it (an extra three million of them since 2010) £1,653 each. The threshold at which you lose your personal income tax allowance is currently £100,000. If it had gone up with inflation it would be just over £130,000. That bit of drag costs those who pay it more than £6,000.

A growing burden

I could go on. But you get the picture: the UK tax burden is now at a 70-year high, with taxes as a percentage of GDP at 33.8% (the last time that number was higher was in 1951). As the chancellor of the exchequer until just over a week ago, Sunak is very, very far from innocent in all this. He calls himself an instinctive tax cutter. But if that is so, he was clearly working hard to suppress his true self during his time in the Treasury.

Sunak oversaw three big tax rises. He raised corporation tax from 19% to 25% with effect from next April. He increased national insurance rates by 1.25 percentage points for all (and dividend taxes by the same amount, to catch people who mostly get paid in dividends through their own companies). A national insurance hike is an effective rise in income tax, whether you want to call it that or not. And he froze all allowances again – with inflation heading for 10% this represents another huge tax hike through fiscal drag.

Collectively, those measures should raise £50bn a year in extra revenue by 2024-2025, Sunak reckons. And the tax burden by then? A depressing 36.6%.

Time to change

There is some reason to hold off on tax cuts right now – and particularly to hold off on slashing corporation tax back to 15% as Sunak’s rivals seem to want to (all the chopping and changing is a nightmare for companies). It is a complicated and expensive time. But Sunak needs to be careful about how he looks at the numbers – and at those who pay the taxes his party demands.

He warns that the idea that tax cuts can work for the UK economy right now is nothing more than a “comforting fairy tale”. He also tells us that “it is hard to cut taxes when the demands on the state are growing” (public spending is forecast to hit 41.1% by 2026-2027).

But we do wonder if it might be better to look at this the other way around – and ask if perhaps taxes are too high because the state tries to do too much. We also wonder if the real fairy tale might be in the idea that the UK’s working population will put up with their tax freedom day extending any further into June. We may have our limits.

With the unfortunate exception of Rishi Sunak, who is boxed in by his record as chancellor, every candidate to take over from Boris Johnson as prime minister is promising spectacular cuts in tax. It is a little hard to work out what they have all been doing for the last couple of years while taxes were being raised to peacetime records, given how much they dislike them. But still, cynicism aside, it is refreshing to see that the Conservative Party still has some interest in lower taxes.

The trouble is, with an economy heading into recession and with huge demand for better public services, it does not sound very credible. We can’t cut national insurance, corporation tax, VAT, fuel duty or inheritance tax at the same time as spending record amounts of money.

With a recession looming, tax revenues will soon be going down and welfare spending up, putting even more pressure on the public finances. A winning candidate should choose one tax cut – and mean it. Halting the planned rise in corporation tax to 25% scheduled for next year is the best bet, for three reasons.

Hobbled competitiveness

First, it makes the UK uncompetitive globally. Corporation taxes have been steadily coming down around the world for the last decade, and the UK was quite rightly in the vanguard of that. In 1980, the average corporate tax rate was around 40%, according to figures from the Tax Foundation. By this year, it had fallen to 23%, and it is still coming down.

In the US, Donald Trump slashed corporate rates, and his successor has only partially reversed that. Sweden, Belgium and even France have all made significant cuts to their rates over the last few years. Over the last decade, the UK cut the rate by ten percentage points, and was set to bring it down even further, giving it one of the most competitive systems among the major developed countries.

Having left the EU and the single market, it was important to keep driving that down. After all, we need to make ourselves more attractive to global business, not less so. This is the worst possible moment to raise the tax rate businesses have to pay – and we will quickly pay a price for that as fewer companies decide to base themselves here.

Next, it will reduce investment. Firms don’t have many options when it comes to finding the money to pay for new product launches, extra manufacturing capacity, or setting up whole new units. They can try borrowing from the bank, although the answer is usually no, or they can raise capital from outside investors, although that is a lot of work. Usually they invest through retained earnings. If those are taxed more heavily, there will be less investment. Sunak did include a tax break for investment, but allowances are fiddly and hard to claim. They rarely work as well as the chancellor expects. The net result? Investment will be much lower than it otherwise would be – especially among small businesses.

The worst mistake

Finally, the Treasury gets the money anyway. Although it might come as a surprise to the people who constantly clamour for higher corporate taxes as if it were free money, companies don’t actually hold onto any cash. It all gets used one way or another, either to pay higher dividends to the shareholders or else higher wages to the directors or staff (and even if it is deposited in the bank, it will be lent out to someone else). When it is paid out, it will be taxed, and usually at a higher rate as well. One way or another the money finds its way into the economy and gets taxed. It just depends at what point, and at what rate.

The Johnson-Sunak government made lots of mistakes on tax policy. It was too quick to put taxes up, it didn’t put any serious thought into what to do with the money and it showed no real interest in controlling public spending. But of all of them the rise in corporation tax was by far the worst. It was too sudden a jump, taking the tax rate up by a third in a single step, it hit the sector we most need to grow, and it made the UK less competitive against its key rivals. The Tory leadership candidates are all keen on tax cuts. Make it that one.

The candidates for the Conservative leadership have been spraying around promises of tens of billions in tax cuts. In response, Conservative ex-chancellors and other grandees lined up to give the would-be new PMs a telling-off. Former chancellor Norman Lamont attacked the “Dutch auction” of unaffordable tax cuts. And William Hague said the promises would undermine the party’s “priceless reputation for disciplined economic management” – and were doubly dangerous in a prolonged period of “high inflation, a recession, or both”.

Is the UK facing a recession?

The country and its new prime minister are facing multiple serious economic challenges. Inflation is at a 40-year high and moving higher. The UK tax burden is rising from 33% of national income to a planned 36.3% in 2026-2027, according to the Office for Budget Responsibility’s spring forecasts – the highest level since the late 1940s. The public debt-to-GDP ratio is close to its highest level since the 1960s: 95%. Consumer confidence has slumped to a 50-year low amid the income squeeze. And there’s no sign of a solution to the UK’s productivity puzzle.

“Productivity growth in the years since the financial crisis has been weaker than at any time since the dawn of the industrial revolution,” notes David Smith in The Sunday Times. In the 30 years after 1945, it expanded by 3.6% a year, but has since slowed to 0.2%. Low business investment, poor infrastructure, low skills and over-centralisation are key reasons.

The last problem was supposed to be partly rectified by “levelling up” the regions to make the UK less London-centric, but there has been scant movement on that front. Meanwhile, the OECD, an association of developed countries, expects Britain to have the slowest growth and highest inflation of any major economy next year (zero and 7.3%).

Why so grim?

Much of the developed world is suffering from higher inflation and slowing growth, with higher energy prices, supply-chain problems and labour shortages colliding with the post-pandemic surge in demand. Meanwhile, our exit from the EU’s single market has hampered trade, while inconsistent policymaking and the recent political chaos are also weighing on the pound. Sterling has fallen from $1.39 to $1.19 over the past year, despite four interest rate rises since December. In the short term, Nomura forecasts sterling at $1.10 by September, the weakest level in more than 30 years, with currency strategist Jordan Rochester even mooting sterling parity for the first time, due to the UK’s heavy reliance on dollar-denominated energy imports.

Why does that matter?

A weaker currency could help exporters, but it reflects investors’ worries about the long-term structural weakness of the UK economy. And for a country so famously dependent on the “kindness of strangers” to service our ballooning current-account deficit, a weak currency makes us even more vulnerable if sentiment changes rapidly.

The overarching task for whoever replaces Johnson – the man who responded “f**k business” when challenged over concerns about Brexit – is to offer stability, competence, and to start rebuilding trust, said Ben Wright in The Daily Telegraph.

“The tragic irony of Johnson’s premiership is that so many of his big policies were only going to work if his administration worked hand in glove with business.” Private enterprise should have been at the heart of levelling up, investing in renewable energy, creating a scientific powerhouse and forging new trade deals. Instead, it has been traduced, mocked and ignored.

The most urgent job for the new PM will be to identify “the areas in which the UK economy lacks the skills it needs, work out how to train British workers in them and issue fixed-term visas to foreign workers” to fill gaps.

Do lower taxes boost the tax take?

If fiscal policy were so magically easy, the tax rate could get ever closer to nil and the Treasury’s coffers would be overflowing. Rishi Sunak is right that “tax cuts do not pay for themselves – at least, in the short run”, says Roger Bootle in The Daily Telegraph. But they will pay off in the long run if they give an incentive to “both businesses and individuals to base themselves here and to strive for success”.

Moreover, tax cuts are only modestly inflationary, and for all the damage that sharply rising prices cause, the current bout of higher inflation can do the new PM fiscal favours: it will boost government revenues more than proportionately (especially via ex-chancellor Sunak’s frozen income-tax thresholds) and will reduce real spending. The Treasury could easily hand back this unexpected windfall without threatening fiscal stability.

So tax cuts would be a good idea?

Contrary to much media coverage, tax cuts are not some “weird Tory fixation, utterly divorced from the real-world concerns of the British people”, says Robert Colvile on CapX. The country’s number-one political issue is the cost-of-living crisis – and tackling it might just involve letting us keep more of own money. In particular, taxes on business and investment have the worst impact on long-term growth.

The planned rise in corporation tax due next spring is a huge mistake. Whoever wins, it should be scrapped. Indeed, the UK is actually an exception in tightening fiscal policy in the face of the current crisis, says economist Julian Jessop in his Charter for Tax Cuts. A looser fiscal policy (tax cuts) could actually help control inflation, both directly (for example, by cutting VAT) and indirectly (by taking some of the pressure off wage demands). Easing fiscal policy should be pursued with a tighter monetary policy: higher interest rates would help support sterling, thereby also helping to keep a lid on inflation.

OK. So Boris Johnson is on the way out, and a replacement is on the way in.

As Conservative party leadership elections go, this is actually quite an interesting one (or maybe I’m just getting old). There’s no obvious guaranteed winner candidate, for a start.

But there’s also the fact that Johnson’s leadership style was so distinctive that there’s also no real “continuity” candidate; whoever comes in is going to be a new broom.

It’ll also suck up all the headline space for the next however many months it takes to sort out.

So here’s the really important question for us: how much does all of this matter for investors?

In the good old days, everything was a convergence trade

Broadly speaking, during the 1990s and the 2000s – ie, the investment life of most people reading (and writing) this, politics didn’t matter for markets. This is all tied up in Francis Fukuyama’s much-derided “end of history” quote.

That is, the Berlin Wall had fallen and China was opening up for business. It was just a matter of time before we were all free-trading global capitalists, and widespread democracy would surely follow swiftly behind.

The latter dream cracked a lot earlier than the former, but for much of the period, everything was a “convergence” trade.

Everyone agreed that a cuddly, New Labour-ish form of capitalism was the right way to go. The consensus was so great that political parties were briefly seen as virtually interchangeable.

It’s weirdly hard to remember now because things have changed so drastically, but there was a point in the 2000s where there were endless think pieces about how stagnant our politics was, and complaints about how both Labour and Conservative basically agreed on everything.

And it wasn’t just in the UK. The eurozone was a convergence trade. You took all those diverse member states at different levels of development, harnessed them together with a single currency and monetary policy, and they could all get Germany’s credit rating, because of course, no one would let the eurozone fall apart.

Emerging markets were a convergence trade (especially after the messiness of the 1997 Asian financial crisis and Russian default). The Brics (Brazil, Russia, India, China) were the big ones, but with capital markets opening up and deepening across the globe and money actively seeking risky opportunities, where you invested wasn’t as important as the story you could tell about the Westernisation of emerging-market consumers.

Obviously, a lot of this was surface. And, as ever, you had individual countries running into trouble. But it’s amazing how much money you can make from a surface story being believed by a lot of people for a long time. Just look at any bubble in history.

So that’s what we were used to for a while. Individual politicians could come and go. “Gridlock” (a common occurrence in the US) was deemed good, because it meant interfering politicians would stay out of the way.

But what really mattered in the end was that everyone agreed: globalisation (which I’d argue is a somewhat different thing to capitalism or even free markets, but that’s a can of worms to put aside for now) was an unalloyed good and anyone who objected was just a sore loser.

We’re diverging now – and that means anything could happen

Those days are long gone. It’s clear to me (though others may well disagree) that the consensus was wobbling badly, but was dealt a mortal blow by the 2008 financial crisis. In many ways, we’re still getting used to that idea. But this is why I think investors have to get used to the idea that politics matters again.

There is no consensus anymore; lots of things are up for grabs, so it’s worth remembering that there have been plenty of periods in very recent history in which the government made the running for huge chunks of the economy.

If you look back before the 1980s in particular, you’re looking at a UK where at various points, the government controlled everything from the amount of money you could take out of the country when you went on holiday, to corporate dividend policies, to businesses ranging from airlines to utilities to car manufacturing.

I suspect most of us don’t really think in our heart of hearts that this could happen again. But governments across the world are heavily indebted and already implementing various forms of financial repression (put simply, forced saving at below-inflation levels).

What happens when one of them ends up having some sort of crisis? Do we get more heavy-handed interventions? And what happens when our politics goes from a “growth” mindset towards a “redistribution” mindset?

I’m not talking here about any specific policies proposed by any of the new would-be prime ministers on parade. But you do have to remember that we have a general election coming up within the next couple of years and we have a very sticky economic situation.

Discontent is probable; scapegoating tends to be a go-to political strategy in those circumstances; and a lot of interventionist policy is the possible result.

And to be clear, this isn’t party political. I don’t think investors should be at all comfortable with the idea that a Labour Party still haunted by the spectre of Jeremy Corbyn might get into power. But Rishi Sunak’s last Budget also demonstrated that the unfortunate Gordon Brown / George Osborne tendency to showboat while making everything more complicated is still firmly intact.

I’ll cross my fingers and hope that the next prime minister will have a plan for reducing taxes (or maybe even looking at a land value tax? Too much to hope for), considering the role of the state and making sure that it is effective in that role (maybe scrutinising the third sector a bit more closely too?), and just generally getting things done rather than constantly relying on gimmicks.

But as an investor, I think it makes sense to prepare more generally just for chopping and changing and the occasional nasty surprise.

How? Diversification is boring advice, but there’s a reason people always say “diversify”. The range of politically sensitive sectors is likely to grow – it won’t just be the usual ones like oil and utilities. So it makes sense to spread your bets.

Use your government-mandated tax shelters (Isas and pensions), but don’t overly rely on one (history shows that pensions are easier political targets than Isas - at least, so far).

And keep your options open more than perhaps you normally would. In the investment world, that means hanging onto a bit more cash.

After weeks of speculation, the day of reckoning has come. UK prime minister Boris Johnson faces a no-confidence vote later today, after at least 54 MPs submitted letters requesting his removal from office.

Conservative MPs will vote in a secret ballot between 6pm and 8pm tonight to decide if they still want Johnson to serve as PM.

How did we get here?

A confidence vote was triggered after at least 54 Conservative MPs (the minimum number required to meet the 15% threshold) wrote to Sir Graham Brady, chairman of the 1922 committee of Tory backbenchers, requesting that Johnson be removed from office.

To stay in power, Johnson would need to win at least 50%-plus-one of MPs’ votes.

We’ll leave the politics to other commentators, but what does the vote on Johnson’s future mean for sterling?

Why has the pound moved higher?

The threat of the imminent removal of a leader might seem to be a bad thing for a country’s currency.

During the political upheaval that surrounded Theresa May’s efforts to push Brexit through, the pound swung violently, yet despite today’s vote, sterling has been trading higher against both the US dollar and the euro. So what’s going on?

Daniela Sabin Hathorn at spreadbetting group IG notes that today’s vote is very different to the vote against May, in that it won’t make a huge difference to the UK’s economic direction. “The positive momentum in sterling suggests that markets are not worried about the outcome of the vote… as the impact on the economic outlook is likely to be limited.”

Other analysts note that the pound’s move higher is nothing to do with the vote, and is much more the result of a weakening US dollar, as many central banks across the world embark on catch-up interest-rate rises to combat inflation.

What is the outlook?

Markets believe it’s unlikely that Johnson will lose, says Bloomberg: “Bookmakers are offering long odds on Johnson’s ouster, suggesting their belief that such a scenario is unlikely.”

If Johnson escapes eviction today, he cannot be challenged for another 12 months – in theory, at least. However, that doesn’t mean the rules could not be changed.

It’s also worth noting that while May survived her no confidence vote in 2018, she still stepped down less than a year later, so merely surviving the vote is no guarantee that Johnson will remain in power for the next election – or that the uncertainty will go away.

It is also worth noting that the pound had anyway been on a somewhat poorly trajectory and has recorded five consecutive months of losses due to Britain’s sluggish growth forecasts.

So the pound could see some further pain for reasons outside of the confidence vote. “The pound remains vulnerable in the short term given worsening growth prospects and a potential re-pricing of BoE rate expectations,” ING Bank Analysts told Reuters, adding that a fall below $1.25 could pave the way for further declines to $1.230-$1.235.

Rishi Sunak’s Spring Statement might be described as the “jam tomorrow” Budget. Analysis from the Office for Budget Responsibility (OBR) lays bare the effect of the cost of living crisis – real household disposable incomes will fall by 2.2% on average in 2022-2023, “the largest fall in a single financial year since records began in 1956-1957”.

But the chancellor’s most eye-catching offers of support will not be immediately available. Even Sunak’s marquee announcement, an increase in the National Insurance threshold to counteract higher National Insurance rates, doesn’t take effect until three months into the new financial year. And the first cut in the basic rate of income tax in 16 years won’t be implemented until 2024 (assuming it actually happens).

In the meantime, the chancellor will be hoping he has done enough to bolster the Conservative Party’s tax-cutting credentials, potentially in time for a general election once that tax cut comes into force. That might be a tough sell, given that the OBR’s analysis suggests Sunak has so far announced tax cuts that amount to just a sixth of the value of the tax rises he has announced since moving into 11 Downing Street.

Personal tax winners and losers

Having spent months defending his plans to raise National Insurance contributions in order to fund health and social care, the chancellor pulled a rabbit out of the hat in the Spring Statement to have his cake while eating it. National Insurance rates will still increase by 1.25 percentage points from 6 April – but low and middle earners will be cushioned from the blow with a higher National Insurance threshold.

By raising the level of income at which people begin paying National Insurance contributions to £12,570 – rather than £9,880 previously planned – Sunak will leave around 70% of people better off in 2022-2023, analysis from Hargreaves Lansdown suggests, even though the increase doesn’t come into effect until July.

The tipping point, it calculates, comes for those earning between £40,000 and £50,000. For someone earning £20,000, the effect of the higher threshold will cancel out the increased contribution rate next year, ensuring they end up £267 better off than in 2021-2022. By contrast, someone earning £50,000 will be £108 worse off.

Further out, the chancellor is promising an income tax cut in 2024, when the basic rate will fall from 20% to 19%. But it’s worth remembering the chancellor said last year that income tax thresholds would be frozen until 2026; “fiscal drag” will bring more people within the reach of the higher rate of income tax, which is staying at 40%. That will undermine their basic rate of income tax savings.

Cheaper fuel

With a sharp increase in the oil price following Russia’s invasion of Ukraine, petrol and diesel prices have spiked sharply higher in recent weeks. The chancellor offered some help with only the second cut in fuel duty in the past 20 years; the reduction is 5p a litre, introduced immediately, and available for 12 months.

The RAC says the reduction will reduce the cost of filling up a typical family car by around £3.30. Motorists will welcome that, though with petrol and diesel prices up by around 40p and 50p a litre over the past year, the reduction doesn’t go very far.

Cold comfort but help to go green

The chancellor resisted calls for further measures to help households with the soaring cost of gas and electricity bills. Sunak is allocating an additional £500m to the Household Support Fund, which provides local authorities in England with funds to support vulnerable households as they see fit – but that is it.

The chancellor points out that his Energy Rebates scheme (announced in February) provides households with help via a combination of council tax rebates and discounts on electricity bills to be repaid over the next four years.

Still, there is some good news for homeowners looking to move to greener energy solutions. For the next five years, there will be no VAT to pay on products such as solar panels, electric heat pumps and insulation – currently a 5% VAT rate applies to such equipment.

No respite for pensioners

With the Office for National Statistics announcing just hours before the spring statement that inflation had risen to 6.2%, the suspension of the “triple lock” guarantee on state pensions became even more expensive for pensions.

But while inflation is expected to rise even higher in the months ahead, Sunak did not deviate from the plan to raise state pensions by only 3.1%, rather than in line with inflation, as the triple lock would normally ensure.

Still, the government has also confirmed the triple lock is not being dumped permanently – it will return in 2023.

Support for small businesses

A rise in the Employment Allowance will help small business owners who are worried about April’s rise in National Insurance rates, which apply to employers’ contributions as well as employees’. The allowance currently enables eligible employers to reduce their annual National Insurance liability by £4,000, but this will now increase to £5,000 on 6 April.

The relief is targeted at the smallest businesses – to be eligible, employers’ Class 1 National Insurance liabilities must have been less than £100,000 in the previous tax year. But for those who qualify, this is valuable support – the Federation of Small Business had previously calculated that higher National Insurance would cost the average small company more than £3,000 a year.

Tax reform ahead?

In line with his jam tomorrow theme, the chancellor announced plans to consult on an overhaul of the tax system to boost growth and productivity – he plans to announce the results of his review at the Budget later this year.

One target is simplification – there are now more than 1,000 tax reliefs and allowances, Sunak pointed out – but the government is making no promises.

And future reforms won’t necessarily save money. One big question mark concerns the future of pension tax reliefs. The income tax cut due in 2024 means basic-rate taxpayers will from then on receive even lower tax relief on private pension contributions than higher earners. Might that be an excuse for a revamp of the whole system to reduce its cost?

Consumers are being hit by a double whammy to their cost of living this April, with a rise in National Insurance contributions and the energy price cap rise kicking in.

UK prime minister Boris Johnson has come under pressure to delay a rise in National Insurance at a time where inflation is spilling into almost everything. Many Conservative MPs have urged Johnson to delay the rise, but to no avail: from April 2022, class one National Insurance contributions (also known as NICs) will rise by 1.25 percentage points.

“We must clear the Covid backlogs, with our plan for health and social care – and now is the time to stick to that plan. We must go ahead with the health and care levy. It is the right plan,” Johnson and UK chancellor Rishi Sunak wrote in The Sunday Times last month.

What is National Insurance?

National Insurance (NI) is a tax paid by employees and by the self-employed on their earnings, and by employers on their employees’ earnings.

It was introduced in 1911 to set up a fund for workers in need of medical treatment or for those who had lost their job. NI contributions do still count towards state pension eligibility, but it has effectively become a second tier of income tax.

Employees currently pay at a rate of 12% on earnings above £184 a week (£9,568 a year – the ”primary threshold”) and 2% on earnings above £967 a week (£50,270 a year). Employees over the state pension age are not liable to pay (but employers’ contributions are still due).

Employers pay at a rate of 13.8% on employee’s earnings above £170 a week (the ”secondary threshold”) – there is no upper limit and all earnings over £50,270 a year are paid at 13.8%

Why are National Insurance contributions rising and what are the new rates?

National Insurance contributions are rising to raise more money for healthcare as the pandemic has put massive strain on the Treasury’s finances.

In a statement to the House of Commons last year, Johnson said the rise in NI will pave the way for “additional investment in health and social care”.

From April 2022:

The primary threshold will rise from £9,568 a year to £9,880 a year

NI contributions will rise from 12% to 13.25% for earnings between £9,880 and £50,270

NI will rise from 2% to 3.25% for earnings of more than £50,270

Employers’ contributions will rise from 13.8% to 15.05% on employees’ earnings of more than £170 a week.

Employees who earn less than £9,880 are exempt from NI.

Under the new rules:

• Somebody earning £10,000 will pay £36 less per year
• Somebody earning £20,000 will pay an extra £89
• Somebody earning £30,000 will pay an extra £214
• Somebody earning £50,000 will pay an extra £464
• Somebody earning £80,000 will pay an extra £839
• Somebody earning £100,000 will pay an extra £1,089

Source: Institute for Fiscal Studies (IFS).

How does the new Health and Social Care Levy tie in with this?

From April 2023, National Insurance rates will fall back to current levels. But you won’t be paying any less. Instead, the extra amount will be reclassified as a new Health and Social Care Levy.

A key difference between the levy and current National Insurance is that the former will also have to be paid by state pensioners who are still working.

The government estimates that the changes in NI will generate £12bn a year and will first be used to reduce some of the current pressure being faced by the NHS. Some of the funds will then be reallocated to the social care system.

The purpose of the increase is to ensure people in England spend no more than £86,000 in care costs from October 2023, but this excludes food and accommodation, reports the BBC.

The new rules mean that anybody who has assets with a value of less than £20,000, including savings, investments and the value of their home, will receive care that is fully covered by the taxpayer.

The taxpayer will subsidise rather than fully cover care for those who have assets in the range of £20,000-£100,0000.

Why is the NI rise controversial?

Critics of the NI rise stress that people on lower wages will be hit harder.

The logic for this is simple. From April, those who earn between £9,568 and £50,270 pay NI at 12%, but earnings above this threshold are paid at just 2%.

The rate may only be increasing by 1.25 percentage points, but that means that contributions are actually rising by more than 10%, says James Andrew, senior personal finance editor at Money.co.uk: “With National Insurance (NI) increasing by 1.25 percentage points in April, it’s no surprise that many UK workers think this means their payments are going up by only a fraction,” he said.

“However, that figure relates to the rate, and this means that for most people contributions are actually increasing by more than 10%.”

He added that the timing of the NI rise couldn’t be worse given research published last month also showed the average person’s debt in 2021 more than doubled to £25,879, with the rise in energy price cap only weeks away.

Does it apply to different parts of the UK equally?

Although the new social care levy will only apply to England, the tax changes will affect the entire of the UK in the same way. The income generated from the levy will be distributed across the four countries. For example, Scotland, Wales and Northern Ireland will receive an additional £1.1bn, £700m and £400m respectively by 2024-2025.

What’s happened?

After years of reassurances and manifesto pledges that High Speed 2 would be built in full – including the arm from Birmingham to Yorkshire as well as the one to Manchester – the current government has backtracked. Instead of heading to Leeds, there will be a much shorter spur north-east from Birmingham to East Midlands Parkway, a new station serving the region around Leicester, Derby and Nottingham. From there, high-speed trains will slow down onto existing lines.

If HS2 has always been a white elephant, quipped the Tory MP Sir Edward Leigh, then it is now “missing a leg”. In addition, Northern Powerhouse Rail (NPR), the proposed high-speed link connecting Liverpool to Manchester, Leeds, Sheffield, Hull and ultimately Newcastle, has also been scrapped. In its place upgrades to existing lines and full electrification of the Midland Main Line from London to Sheffield is promised. The government styles this as its “Integrated Rail Plan”.

Is HS2 a white elephant?

It’s certainly a very expensive way of achieving very little. England is a small country where the distances involved are short and the time savings minimal, and business travellers (the core market) can already work on trains anyway. The benefits in terms of “levelling up” Britain’s economic geography have always been overstated, since evidence (from France and Spain, for example) is that the dominant hub city (here, London) benefits far more from the high-speed links than the regional city. And to date the execution has been poor.

Last year’s Oakervee review, which convinced Johnson to press ahead, found that the economic benefits remained unclear, and that HS2, especially the phase one construction team, lacked “the level of control and management of the construction normally associated with big projects”. The National Audit Office judged that it’s impossible to predict the final cost; that the latest 2040 target for completion probably won’t be met; and that HS2 and the government had “not adequately managed risks to taxpayers’ money”.

So downsizing it is a good idea?

Shorn of its Leeds arm, HS2 “makes even less sense”, says Liam Halligan in The Daily Telegraph. The reasons the project is going ahead anyway are “inertia, the lobbying power of engineering conglomerates and property developers, and broader metropolitan bias”.

But the really “odd” part of the government’s latest plan is the scrapping of NPR. The high-speed trans-Pennine route was regarded by many voters and political leaders in the north as the centrepiece of the Conservatives’ levelling-up agenda. Moreover, “countless independent studies showing that the productivity gains of NPR far outstrip those of HS2”, says Halligan.

What’s the government’s rationale?

It’s partly about money, and partly about electoral politics. To see which department – Transport or Treasury – was in overall charge of last week’s Integrated Rail Plan, says Dominic O’Connell in The Times, take a look at page 24 of the document. “Commitments will be made only to progress individual schemes up to the next stage of development, subject to a review of their readiness.” In other words: if the costs start to run away, and threaten to breach the overall cap of 3% of GDP on capital spending, then think again.

However, the overall projected cost saving is not enormous: the government says its new plan (the “biggest transport investment programme in a century”) will cost £96bn, compared with £110bn, the previous latest estimate of HS2’s overall cost.

What about the politics?

The government hopes that voters in their northern “Red Wall” seats will be grateful for the absence of big construction disruption in recently won Tory seats such as Rother Valley, Bolsover and Ashfield – and also faster visible results in terms of upgrades to the lines between the East Midlands, Leeds and Manchester.

On the latter, they are likely to be disappointed, says Stephen Bush in the New Statesman. For one thing, the promised benefits will still take years to materialise, meaning that the dominant narrative will remain that the Tories have “betrayed the north” by reneging on their promises.

Second, due to capacity constraints, those promised improvements for local rail are unlikely to materialise without committing to a segregated service for high-speed and inter-city trains. Thus, the Tories may come to see the cancellation of the Leeds arm as a false economy and bad politics. Indeed, last week George Osborne predicted that Johnson would U-turn on his U-turn in the run-up to the next election.

Labour has already committed to reinstating the full HS2 eastern route, and the whole of NPR, and the Tories will be forced to match them, reckons the Tory ex-chancellor.

So the cancellation is a mistake?

The problem is that what the government has announced is not “a proper alternative”, says The Times. The crucial issue – which HS2’s proponents have always been bad at explaining – is not speed but capacity.

“Britain’s main rail arteries, especially the east and west coast main lines, are already operating at maximum capacity, with no room for growth.” HS2 had a crucial role in freeing up capacity to enable more standard-speed services and freight. Now that we’ve started, it makes sense for the full HS2 network to be built.

But it’s not about HS2, says John Ashmore on CapX. It’s about the inability of the British state to complete big strategic projects in a timely manner. Crossrail is years late and over budget and our aviation capacity is “full-to-bursting”. Add in the government’s net-zero commitments and “the can-kicking and foot-dragging that have long characterised our infrastructure policy only looks like getting worse”.

All of which adds up to a country that, HS2 or not, “risks being stuck in the slow lane for years to come”.

When chancellor Rishi Sunak was splashing the cash last year, he was cheered to the rafters and instantly catapulted to the status of next prime minister.

Only a few of us groused about the huge extravagance of the spending, wondered how cost effective it would prove and how much would be dissipated in waste and fraud.

Once started, Sunak seemed unable to stop increasing and extending his schemes.

It was reminiscent of the song in Evita; “when the money keeps rolling out, you don’t keep books, you can tell you’ve done well by the happy grateful looks, accountants only slow things down, figures get in the way…now cynics claim a little of the cash has gone astray, but that’s not the point my friends.”

Only in September, when both employers’ and employees’ national insurance rates were increased by 1.25 percentage points, did the penny drop that the Fundaçion Boris Johnson didn’t have all that money to spend...

Boris Johnson is rather too keen on splashing the cash

Rishi Sunak actually started to raise taxes to pay for his pandemic largesse last year, increasing corporation tax and freezing personal tax allowances, but few noticed. Corporation tax was increased again in March to 25% – but people think that a victimless tax.

Ostensibly, the £12bn national insurance increase was to solve the problem of the funding of social care, diverted in the short term to the NHS. Having closed operating theatres during the pandemic and left hospitals up to 40% unoccupied, the health service faces a huge and wholly predictable backlog. As Merryn pointed out, social care could more fairly have been funded by a national equity draw-down scheme from the housing wealth of those who moved into care.

So far, the government has broadly got away with it in electoral terms. Focus groups and opinion polls told the government that the public would support tax increases if the proceeds were spent on social care and the NHS.

But what, many Conservatives are now wondering, if they find out that it is really to plug the holes in the public finances caused by mis-spending? And what if people say they are supportive of tax increases only until they notice the hole in their monthly pay-checks?

Resistance to the Peronism of the prime minister is growing in the Conservative party, on the back-benches, in government and in the cabinet. They don’t want to see what they regard as the party of sound finance and low taxes, the natural party of government, hijacked, as the Republican party in the United States has been, by a leader who appears to take his inspiration from Latin America.

Things are better than expected, but the UK’s finances are still very fragile

Sunak’s latest budget shows that he can see which way the wind is blowing. He has been helped by public finances being less bad than expected – borrowing in the first half of 2021/2 was £108bn, half that of last year, leaving debt at 95.5% of GDP. Since 40% of this debt is held by the Bank of England, net government debt is less than 60% of GDP – though there is always a risk of the Bank having to start selling that debt to curb monetary growth.

Further help has come from the forecast of the Office for Budget Responsibility (OBR) that the economy will return to its pre-pandemic level by the end of the year and then continue to grow. The OBR expects government borrowing to drop to pre-pandemic levels, £41bn pre-additional spending, by 2024/5. With inflation persisting (4% in 2022), borrowing would be just 1.5% of GDP.

This allowed Sunak to indulge his Peronist boss with some extra spending and tax concessions to grab the headlines, appease the vested interests and impress the focus groups. Inevitably, extra billions are being thrown at the NHS and education in the probably futile hope that some of it sticks to services. The problem is that the extra spending is to be financed by revenue forecasts that could be fallible.

Many will be disappointed that the chancellor ignored the siren voices calling for higher capital gains tax, stamp duty and estate duty; the further erosion of tax breaks on pensions, an additional wealth tax and a special anti-America tax on tech giants. The chancellor presumably knows that these tax increases would raise far less than the Treasury estimates.

More importantly, the relentless rise of property valuations and stock markets means that receipts from existing wealth taxes will continue to rise exponentially. For example, the £6bn raised from death duties last year is increasing by 20% per annum.

Things could still turn out just fine – but there are serious risks ahead

Sunak seems determined to get the public finances back on a sound footing. Among the most interesting of his comments was “my goal is to reduce taxes. By the end of this parliament, I want taxes to be going down, not up.” If he succeeds in this, he may be able to reverse some of the tax increases and either secure the government’s re-election or give himself a chance of leading his party in opposition. There are, however, pitfalls ahead.

An economic slow-down next year could turn into recession, exacerbated by tax increases and productivity-sapping government spending. The funding of social care hasn’t been resolved; the problem has merely been postponed. The NHS consumes ever increasing amounts of taxpayers’ money with little to show in terms of improving outcomes. The funding of a bloated higher education sector through loans that will never be repaid has been a financial disaster. Badly-needed changes to business rates and housebuilding have been kicked into the long grass

The transition to electric vehicles means that the £37bn raised by fuel and excise duties will have to be replaced. A higher rate of VAT on electricity would be logical, but would break another election pledge. Finally, President Biden and the Democrats look unable to implement their plan to increase corporation tax from 21% to 28%. This makes the UK’s proposed increase to 25% counter-productive in terms of revenue.

All this has to be done through a spend-thrift Prime Minister and a civil service whose first instinct is always to raise taxes. As Sir Humphrey Appleby famously expostulated to his junior in Yes, Prime Minister, “it’s not taxpayers’ money, Bernard, it’s our money.” Sunak still has a mountain to climb.

Not so very long ago, the idea that fossil fuels might be replaced by hydrogen – which when burnt or used in fuel cells to provide energy releases no pollution, but water vapour – was for the birds. It was just too expensive to produce and inefficient when compared with the already-available alternatives, and hence all the investment needed to develop the technology and roll out the necessary infrastructure was unlikely to be forthcoming.

Today, hydrogen is rapidly becoming global policy, as Leigh Collins points out on Recharge, and set to become a multi-trillion-dollar industry. China recently approved a massive power project to produce hydrogen. Australia is planning to build a renewable energy hub ten times the size of Greater London to power electrolysers that produce hydrogen. Countries accounting for more than a third of the world’s population, including India, Russia and the EU, have hydrogen strategies in place. The US is introducing one “by the back door”, as Collins puts it, with a clause in the country’s giant infrastructure bill. And the UK’s long-awaited hydrogen strategy was finally announced in August. So when will Boris Johnson finally flip the switch on our greener future?

A blue bridge to a green future

Those nervous about the implications of our current energy crisis will be hoping that he treads carefully. Some will even be seeking to weaponise it to force a U-turn away from all the “green crap”, as David Cameron once called it. But that is unlikely, says James Kirkup in The Spectator. Sceptics of “net zero” – the legally binding commitment that Britain be carbon neutral by 2050 – are a small minority among Tory MPs, most of whom support the prime minister’s green ambition.

In a recent speech, Johnson talked passionately about the need to “grow up” and take responsibility for the kind of planet we will leave our grandchildren. It was the speech of a politician “burning his boats and giving himself no room to retreat on the environment”, says Kirkup. Besides, what our current energy crisis shows is that we rely too much on gas. Net zero is the answer to this problem, not a barrier to its achievement. Indeed, even as gas prices surge and winter looms, the government is pressing ahead with its plans to impose a green surcharge on household gas bills in an attempt to nudge them to lower-carbon alternatives.

Eventually, hydrogen may be one of those alternatives. The UK’s hydrogen strategy is part of the prime minister’s vision for a “green industrial revolution” and lays out plans for reaching 5GW of low-carbon hydrogen production capacity by 2030 – enough to power about 1.5 million homes – from around zero today, with a similar subsidy mechanism to the one used for the expanding offshore-wind sector. Billions of pounds of taxpayers’ money and from higher bills for consumers will be funnelled into the industry.

By 2030, the government hopes hydrogen will play an important role in decarbonising energy-intensive industries that could not easily be run on electricity produced by renewable energy – industries such as chemicals and oil refineries, steel and cement making, and in heavy transport such as shipping, lorries and trains. It might also heat our homes and fuel our cookers and even cars – the plan is to expand the infrastructure that’s needed for more people to switch to hydrogen-powered vehicles. Up to 35% of the UK’s energy consumption could be hydrogen based by 2050, according to the strategy document, and that changeover will be critical if the government is to meet its net-zero target.

The hope is that the subsidies will boost the industry and lead to a reduction in costs – currently one of the biggest barriers to the widespread adoption of the fuel, since hydrogen must itself be produced through energy-intensive, and often carbon-producing, processes. Most of the key decisions about the development of a broader hydrogen economy have, however, been pushed into the future, says Collins. Decisions about the extent to which hydrogen will be used in domestic heating, for example, and exactly how it is to be produced in a low-carbon way, have been kicked down the road.

That last point in particular sparked controversy. Most hydrogen is currently made using natural gas, so committing to a hydrogen-fuelled future is one way for fossil-fuel companies to cling onto a role for themselves in the energy transition, says Josh Gabbatiss for Climate Brief. The government has committed to pursuing a “twin track” approach, which will include the production of both blue hydrogen (made from natural gas with carbon capture and storage technology) and green hydrogen (made using renewable electricity and hence producing zero carbon emissions).

There is a risk that the strategy will cause Britain to commit too heavily to the blue stuff and so keep the country locked into fossil-fuel-based technology, says Jess Ralston of the Energy and Climate Intelligence Unit. But the thinking in government is that blue hydrogen could be a useful bridge, replacing fossil fuels while there is not enough green hydrogen available, and hence giving Britain a competitive advantage in the race to build the coming hydrogen economy and become a global leader in the industry. It will also, as an industry expert told the Financial Times, help break the Catch-22, whereby hydrogen supply remains low without sufficient demand, yet demand stays stuck until supply rises.

This “blue bridge” will help ensure the sector attracts the vital investment needed for the long term and create the scale necessary to build the ecosystem of a plausible hydrogen economy, says Ambrose Evans-Pritchard in The Daily Telegraph. The twin-track approach will also exploit Britain’s competitive advantage in the form of “pipelines and disused fields in the North Sea, half a century of offshore engineering skills and an oil and gas industry seeking a new purpose in life”.

Green hydrogen may well win out over blue in the long term. But “in the meantime there is a huge gap to fill and the lucrative hydrogen prize will go to those who move fastest, in the right sequence… Britain’s twin-pronged blue and green strategy is a calibrated hedge that plays to this island’s North Sea strengths. It is well-judged and legitimate.”

Despite all the announcements and excitement over new technologies and the shiny green future, it would be as well to remember that global production of green and blue hydrogen is currently minimal and not one single country has yet put policies in place that would help to make hydrogen cost-competitive with grey hydrogen (produced from unabated natural gas or coal), says Collins.

In fact, no nation has definitively decided what its policy should be, with every strategy published to date pushing key decisions into the future. The strategies thus “offer a direction of travel to potential investors that can encourage investment”, but so far represent “merely ambitions or wishful thinking”.

How to invest

Still, it’s hard to imagine that the political winds behind the sector will abate – the broad direction of travel is supported by all the main political parties – and investors remain excited by the story. Research group BloombergNEF says that last year investors poured more than $500bn into the so-called “energy transition” to greener tech generally, twice as much as in 2010. The PWC consultancy estimates that between 2013 and 2020 venture-capital investments in climate tech grew at five times the rate of overall global start-up funding, reports The Economist. This flood of green money has lifted hydrogen-related investments.

The hydrogen plays we suggested in the past – Ceres Power (Aim: CWR), ITM Power (Aim: ITM) and McPhy Energy (Euronext: MCPHY) – have all soared since, though have fallen back from their peaks since February of this year. AFC Energy (Aim: AFC) is another option. It remains likely that hydrogen will find some niche application within the overall transition away from fossil fuels– especially if, as expected, costs come down – even if the more ambitious visions of an entirely hydrogen-based economy don’t come to fruition. But buying hydrogen-related stocks is a gamble that you are getting on the right side of that transition and choosing the companies that will make progress (and hopefully profits) over the next 20 to 30 years.

There are a number of other ways to ride the boom while hedging your bets. One is to buy the bigger engineering groups whose fortunes are not entirely tied to the rise of the hydrogen economy, but which might profit from it should it take off at a later date – Siemens (Xetra: SIE), for example, which is a world leader in the manufacture of hydrolysis equipment for the large-scale production of hydrogen and has its fingers in many promising pies; and Johnson Matthey (LSE: JMAT), which has been investing to expand its exposure to hydrogen.

The second is to get exposure to green energy more generally. Hydrogen can only live up to the hype if it is able to ride the coattails of a more general transition to a post-carbon future, so the hydrogen we’re talking about will have to be of the “green” variety, which will in turn depend on the growth and development of renewable energy. You can play this theme with exchange-traded funds such as iShares Global Clean Energy (LSE: INRG) and the Lyxor New Energy (LSE: NRJL). Among investment trusts, consider the Renewables Infrastructure Group (LSE: TRIG).

But perhaps the most intriguing option is suggested by Evans-Pritchard, who says he owns shares in oil giants because he considers them hydrogen plays: BP has announced plans for the UK’s largest blue hydrogen facility; Shell has already opened Europe’s largest electrolyser to produce green hydrogen in Germany; all the other big oil majors have similar plans. And as Cris Sholto Heaton pointed out for MoneyWeek recently, markets are putting little value on the long-term prospects of Shell (LSE: RDSA) and BP (LSE: BP) in particular. With dividend payouts starting to rise, then “so long as the world doesn’t abandon oil faster than seems likely, both look extremely cheap plays in a cheap sector”. All the more so if they get a lift from hydrogen.

Over the last few months, I’ve been focusing my attention on boring funds. The equity bulls haven’t yet been reined in, but my hunch is that we are in for a more volatile ride and a small move to a more defensive position might make sense. That brings me to the capital of boring, Canada – apologies to all Canadian readers, but I hope you take it as a back-handed compliment.

Canada has just been beset by election mania, for the second time in two years. Yet despite the increasingly frenzied electioneering, the result was never on course to make much difference to investors. This makes it very different to Germany, where the swing leftwards at the weekend may have huge consequences.

A no-change election

The election ultimately saw Justin Trudeau’s Liberals return to power in another minority government. However, it’s worth noting that overlaps between the parties’ policies seemed more common than jarring differences.

Take climate change and the energy sector. Both the Liberals and the Conservatives backed federal carbon taxes and supported long-term incentives for electrification and clean fuels as part of the energy transition, but also supported expansion of a major pipeline to increase crude oil exports. Or consider real estate. House prices may be overvalued, but all major parties support high levels of immigration, which should in turn help drive them even higher. None have a problem with the current immigration target of 1.2 million people by the end of 2023.

There are bigger differences in areas such as finance: the Liberals plan to increase taxes (by 3%) for banks and insurers making over C$1bn (£583m) in net profits. But overall there was little proposed that would have resulted in major changes for investors –and that reinforces one central truth: Canada is a real safe haven.

A safer fund at a big discount

This brings me to a fund called Middlefield Canadian Income (LSE: MCT), which invests in largely (though not exclusively) Canadian stocks. Over 50% of the portfolio is in real estate businesses and financials. It has a strong income focus with the dividend yield of 4.7%. Crucially you’re buying into these equity assets at a double discount. The discount to net asset value (NAV) is 13.3%, which is high, by historic standards, and a bit peculiar as Canadian equities have rallied strongly. Yet Canadian equities also remain cheap compared to their neighbours across the border, because the US market is dominated by fast-growth tech businesses while Canadian equities look more old-world.

Sectors such as energy, real estate and financials are key – and these should still have significant upside, having lagged their US counterparts because the US vaccine roll-out started earlier than in Canada, argues Dean Orrico, the manager of the fund. He is in a good position to make that assessment: in the past, the trust has heavily invested in equally boring stocks in the US market. Total US exposure – especially to big banks – hit 36% in the portfolio in May 2020, but that has now been dialled back to around 8%.

I think that switch looks sensible. Canadian banks “are consistent dividend growers and possess high capital levels and low pay-out ratios, and trade at attractive valuations to US peers”, say fund analysts at Investec. They also see opportunities in industrial real estate investment trusts, where “e-commerce activity has increased as a result of the pandemic and continues to drive demand for industrial properties, with low availability rates in Vancouver, Toronto and Montreal”.

Middlefield Canadian will never seem terrifically exciting compared to a growth machine like Scottish Mortgage. However, for income-hungry, defensive equity investors, I think Canada looks a safer bet for riding through any imminent market volatility.

“We promise not to raise the rates of income tax, National Insurance or VAT. We not only want to freeze taxes but to cut them too.” That’s the Conservative manifesto in 2019. “I want to see... over time... lower rates of tax because I just believe that its nice for people to be able to keep more of their own money.” That’s Rishi Sunak in 2020.

So here we are, a year later, with a tax burden that is about to be one of the highest ever. The new health and social care levy is a 1.25% tax on income. Add it to the others (National Insurance and income tax) and the entry-level rate of income tax in England will now be 33.25% (unless you are paying back a student loan, in which case it is 42.25% – and yes, that is shocking).

The top rate of income tax in England is to be 48.25%; 49.25% in Scotland. You are about to get to keep rather less of your own money. The excuse for this is the pandemic. How could the Conservatives possibly have known? That question would have more resonance if this tax was as temporary as Covid-19 lockdown policies or a levy that could solve one of our major problems (the shocking inadequacy of the NHS or our ongoing social-care row).

It isn’t either of these things. We are told (by a one-time small-state, low tax-loving party) that it represents a “permanent new role for government”. But we are also told that it is initially going to be used to cut waiting times in the NHS – and be used for the long-term funding of social care later. This seems unlikely. Money is never diverted from the NHS. It is always diverted to the NHS, and will be until someone somehow makes a genuine effort to reform it (they won’t). The Resolution Foundation reckons that by 2025 the Department of Health and Social Care will account for 40% of public spending, up from 28% in 2004. It won’t be long before your health and social care levy goes up again – to pay for social care.

A plan, but a lousy one

You could argue that there are positives here. At least there is finally a (sort of) plan for social care. We know who will pay what – and we know that few people will lose their home to care costs. However, while it might be a plan, it is still a lousy one. There is one perfectly acceptable alternative in a state-sponsored collective insurance scheme. There is a second: insisting that people use property wealth to pay for care.

The idea that houses are somehow sacred is very British (witness our inheritance-tax rules). But while our houses are often precious to us during our lives, they are generally nothing but representations of accumulated assets after our deaths. When we die our children don’t move into them as some kind of celebration of our lives. They sell them. In life a house is a home. In death it is just money. So why not use a type of state-backed equity release to pay for care?

The only vaguely positive thing I can say is that while the tax will fall predominantly on working people, it is at least being extended to dividend income. That makes sense. Much dividend income is paid instead of salary. If tax is going up for the salaried it should go up for those who earn via dividends too. However, tax is the one area where we wish Boris Johnson’s government would think more about levelling down than levelling up. Just like they said they would.

Governments globally have spent a great deal of money to contain the worst economic fallout from Covid-19. Now they’re wondering how to keep the public finances under control.

The last thing the UK government needs right now is a massive increase in one of its biggest bills – the state pension.

So it’s little wonder that there’s a lot of talk this week of chancellor Rishi Sunak putting a halt to the “triple-lock” on the state pension – even if it means breaking a manifesto pledge.

So what is the “triple lock” and will it be scrapped for 2022?

What is the triple lock and why was it introduced?

The triple lock pension is the formula by which state pensions are set each year. Currently, state pensions rise in line with either the cost of living (as measured by the annual change in the consumer prices index – CPI); the change in average earnings; or 2.5% – whichever is highest.

These three factors are known as the triple lock. It was introduced by the Conservative/Liberal Democrat coalition in 2010 and was intended to act as a guarantee that pensioners’ purchasing power never gets eroded by higher living costs.

Given the relatively low levels of inflation since then, pensioners have enjoyed significant “real” terms increases in their pensions – which is one factor that has helped to drastically reduce the number of pensioner households living beneath the poverty line.

How has Covid-19 made the triple lock controversial?

Maintaining the triple lock until at least 2024 has long been a key Conservative manifesto promise. But while the Conservatives have wanted to honour that pledge, statistical oddities related to the Covid-19 shutdown and recovery make that rather difficult.

Covid-19 resulted in millions of workers being put on furlough – reducing their wages while being able to keep their jobs. Then, when the economy started to reopen, many of those who were furloughed returned to their old jobs or sought new ones.

One result of this is that the rise in wages for this year has been artificially inflated.

The most recent reading for average earnings growth from the Office for National Statistics (ONS) found that headline wages were growing by more than 8% a year. However, in most cases, earnings haven’t increased by anything like that much – the number is simply being inflated by people coming back to work. The ONS reckons that actual wage growth is more in the range of 3.5% to 4.9%.

How likely is it for the triple lock to change?

If it is up to Sunak then there is a high chance the triple lock may be lifted, as the chancellor has clearly signalled he is willing to break the manifesto promise, due to numbers being grossly inflated because of the pandemic.

There is certainly nothing to stop him. Politically, it could prove unpopular – although at the same time, given the unusual circumstances and the fact that we’ve racked up a lot of debt during the pandemic, it shouldn’t be difficult to explain why boosting the state pension by 8% based on faulty statistics is probably not the best use of public money.

As Julian Jessop, economic adviser to the Institute of Economic Affairs think tank, points out, each percentage point increase will mark a £900m rise in annual spending on state pensions.

Forecasts by the Office for Budget Responsibility indicate that upholding the triple lock promise for next year would increase state pension spending in 2024-2025 by £6bn more than if it rose at the pace of inflation.

What’s next?

It looks as though the government will announce its decision later this week, alongside its ideas on paying for social care – we’ll cover both topics when the news is confirmed, but it looks as though the state pension is most likely to rise by inflation or 2.5%, rather than the artificially inflated earnings figure.

Norway is due to go to the polls in a general election in a few months’ time. With £2,009 matched on Betfair, punters expect Labour leader Jonas Gahr Støre (pictured) to emerge triumphant, giving odds of 1.18 (84.7%) on him becoming the next PM. Sitting prime minister Erna Solberg is at 4.6 (21.7%) to remain in office. Punters also suggest Labour will come top of the polls, with Smarkets putting the party at 1.68 (59.5%) to get the most votes and the Conservatives at 2.26 (44.2%).

Although a Labour victory, in terms of both the number of votes and who ends up as prime minister, is more likely than not, neither is assured. Labour does have a small lead in the polls at the moment, but the two parties are almost neck and neck – the Conservatives were in front in the first few months of the year. With Norway’s vaccination programme finally picking up some steam, it’s possible Solberg’s poll rating could bounce back, causing the Conservatives to take the lead once more.

Norway’s complicated electoral system means that the composition of the next government will depend on the performance of the smaller parties. With major divisions between the left parties over Norway’s relationship with Europe, it’s possible Støre could be unable to form a government, even if Labour does end up with a viable route to power. I therefore suggest that you bet against Støre becoming prime minister at 1.39 – equivalent to betting on him not to become PM at 3.55 (28.1%).

What’s the government planning?

In a bill trailed in a white paper last summer, and now announced in last month’s Queen’s Speech, the government is proposing the most radical shake-up of planning laws since 1947. Under legislation to be brought forward in the autumn, local councils will no longer have the power to accept or reject planning applications case-by-case. Instead, all land in England will be classified into one of three planning categories. In “protected” areas (areas of natural beauty, places at risk of flooding, the green belt) development will remain restricted. In “renewal” areas (largely urban and brownfield sites) there’ll be a presumption in favour of development. And in “growth” areas permission will be automatically granted, providing plans conform to pre-agreed local guidelines. In addition, the system whereby developers contribute to affordable housing and community amenities would be replaced by more straightforward levies.

What’s the purpose of the reform?

The idea, according to the government, is to “create a simpler, faster and more modern planning system to replace the current one that dates back to 1947, and [ensure] we no longer remain tied to procedures designed for the last century”. The bill contains reforms that will digitise the whole process, aiming to slash the average five-year timescale from drawing board to shovel. And with house prices once again surging (up more than 10% in the past year on average) there’s clearly a case for increased supply. More controversial is the three-way zoning proposal.

Why is that so contentious?

Critics see it as a power grab by central government that will undermine local controls and despoil the countryside. Many Tories are especially angry about taking away the right of local people to prevent developments in areas earmarked for growth. “I fear that… what we will see is not more homes, but we will potentially see the wrong homes being built in the wrong places,” Theresa May told the Commons last month. The white paper’s proposed substitute for the planning process in growth zones is greater community input into the local plan that sets the general approach. “But that is simply not an adequate replacement,” says Theresa Villiers in The Times. It would “require people to anticipate, potentially years in advance, proposals that might affect them in the future”. Some senior Tories think an overhauled planning system will be key to maintaining the party’s recent gains in the northern Red Wall of traditionally Labour constituencies. But many Tory MPs in southern seats are fearful of a backlash from angry constituents.

Nimbys, in other words?

One person’s Nimby (“not-in-my-backyard”) is another’s public-spirited resident. “The boundary between landscape conservation and Nimbyism has always been hard to draw, but it is vividly illustrated in the catalogue of ministerial hypocrisy on planning,” says Simon Jenkins in The Guardian. In his role as prime minister, Boris Johnson last year in effect told his own constituency it needs 446 new houses (the total for his area under the widely criticised algorithm that calculated local targets under the initial planning white paper). Yet in his role as local MP, Johnson formally objected to a scheme for 514 – and now intends to remove his own MPs’ right to object. Similarly, Priti Patel has objected to 225 houses in her constituency, defence secretary Ben Wallace to 210 in his, and Michael Gove to 44 in his. Are they Nimbys – or democrats defending local interests? “Once upon a time,” says Tory MP Bob Seely on CapX, “Conservatives referred to ‘Nimbys’ by their other name: ‘Conservative voters’. I’d suggest we should start to do so again.”

So why are the Tories doing this?

There’s a very basic political driver behind the planning bill, says Will Heaven in The Spectator. “When you build a house, someone buys it – and when they do, they tend to start voting Conservative. The Bill’s aim is to get more houses built, 300,000 a year by the mid 2020s, helping to create millions more homeowners over the next decade and bringing long-term dividends to the Conservative party.” Currently, we do build fewer than we used to, but numbers are picking up. During the postwar building boom, Britain built on average 325,000 new homes a year (between 1950 and 1970). But in recent decades from 1990 to 2019, this average has fallen to just over 180,000, despite the growth in population. Supply of social housing has collapsed, with much of the stock sold off under the “right to buy” scheme of the 1980s. However, in 2019, there were 241,000 housing completions, the best for 30 years, so it’s not clear that a radical overhaul is needed to get the overall figure up to the government’s target.

Will the reforms get more houses built?

One statistic that suggests they won’t have much effect is that 90% of developments are already granted planning permission. So it’s hard to see how the reforms will lead to a splurge in housebuilding – especially as the big developers are sitting on one million unused planning permissions. The big builders have long used “landbanking” to restrict supply and protect their pricing power. So rather than making it easier for them to build where they want, a priority could be to make them build where they already have permission. In 2018 the May government’s Letwin review found that the main driver of lack of supply and slow construction rates isn’t the planning system, but the “market absorption rate” – that is, the rate at which new houses can be built and sold without bringing down local prices, and thus reducing the incentive for builders to build. “Housebuilders build homes at the rate they can sell them,” housing analyst Neal Hudson told the Financial Times. “There doesn’t appear to be anything in these proposals that breaks that relationship.”

David Cameron pestering the chancellor, Rishi Sunak, for a bung to rescue a business he stood to make a mint from. Communities secretary Robert Jenrick redirecting cash meant for deprived towns to marginal Tory seats that didn’t qualify for the help. Companies with political connections getting priority for Covid-19-related government contracts and for money from the “levelling up” fund. Boris Johnson’s holidays, redecoration plans, gongs for cronies and cash for his ex-girlfriend’s business. His text-message exchange with James Dyson about tax and ventilators.

It would seem, as Henry Mance puts it in the Financial Times, that we are living in a “new era of sleaze” – one “built upon Johnson’s personality, the winner-takes-all politics of Brexit, the denigration of the civil service, and the emergency of coronavirus”, which has proved a handy defence for government ministers in a rush to hand contracts to their chums.

It’s not just the Tories either. Labour figures at a regional and national level have been mired in sleaze too. Joe Biden’s new administration has come under fire for its ties and financial stakes in vaccine manufacturers, which are lobbying to prevent policies that would cut into future profits. Germany’s chancellor Angela Merkel faced a grilling last week over her support for disgraced finance firm Wirecard.

These cases represent just the most visible tip of a “fatberg” of cronyism, as Andrew Rawnsley puts it in The Observer. Politicians grease the wheels of favoured businesses, then later get jobs with them; lobbyists end up taking jobs as MPs; senior civil servants take lucrative second jobs with businesses; businessmen end up in the House of Lords. It all makes for a “very hectic revolving door”, says Rawnsley. Indeed, it’s busier than we know, according to activist lawyer Jolyon Maugham. “Virtually every day I have a conversation with a business person, with a civil servant, a think tank, even Tory MPs, in which they say: ‘Jolyon, everything you say [about cronyism] is right … and I can prove it because I’ve got the receipts’,” he told The Times. “But when I ask them if they can go public, they’re too frightened.”

The well-lubricated revolving door

Perhaps, but it’s not that Britain is exactly a stinking hotbed of corruption. Traffic offences are not settled with a wink and a roll of banknotes; judges do not rule in favour of the highest bidder; and British prime ministers do not build palaces with plundered national resources, says Rafael Behr in The Guardian. Britain ranks 11th in the world on Transparency International’s index of perceived corruption, “eight places behind Finland, 12 above France and 118 clear of Russia”.

Nor need we blame malign intent on the part of a conspiracy of evildoers. As Matthew Syed points out in The Sunday Times, it took a number of landmark studies published in prestigious scientific journals to convince medical doctors that the bungs, gifts, funding and favours granted them by pharmaceutical companies might conceivably influence their clinical judgement and decisions. (Although much earlier reports were available: “Thou shalt not respect persons, neither take a gift: for a gift doth blind the eyes of the wise, and pervert the words of the righteous”, Deuteronomy 16:19.)

Similarly, politicians, surrounded by lobbyists and business friends, might not see anything wrong in making the decisions they do. Cameron, for example, insisted that he broke no rules and claimed his lobbying on behalf of Greensill was a selfless act motivated by concern for British business in general. There is no reason to doubt he believes that. But justifications for bad behaviour that an earlier incarnation of Cameron found obnoxious – when he was prime minister and involved in drawing up rules for lobbyists – are never that hard to find. Whatever blinded participants might say, “wise observers” should be able to see “how these ‘retroactive inducements’ signal to the next generation of politicians that their route to wealth is to help market incumbents”, as Syed puts it. “Unconsciously or otherwise, the revolving door is lubricated.”

The economic roots of cronyism

It is, of course, only right and healthy that instances of cronyism and corruption such as those mentioned should come to the light in the press and action be taken. Perhaps those who see a “new age of sleaze” will be vindicated as the inquiries go on. Still, the real problem goes deeper than individual cases of malfeasance and has historic and economic roots. Adam Smith had already put his finger on it in 1776.

His The Wealth of Nations presents a model that shows that free individuals, guided only by a concern for their self-interest, are led as if by an “invisible hand” to produce for the social good. A corollary is that the need for state interference is minimal: “No regulation of commerce”, he wrote, “can increase the quantity of industry in any society beyond what its capital can maintain… [i]t can only divert a part of it into a direction into which it might not otherwise have gone: and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone by its own accord.”

Yet Smith was well aware that the real world all too often gave the impression of being only passingly acquainted with his work. Capitalist society may thrive on competition, but all good capitalists hate it: “To widen the market and to narrow the competition is always the interest of the dealers”, said Smith. “The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted, till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who generally have an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

In other words, it is to be expected that established businessmen will seek government favours – but the opportunities for cronyism can only be all the greater when once it has been generally accepted that it is legitimate for the state to grant certain businesses special favours, whether that be in the form of favourable regulation, or the granting of monopolies, tax credits, favours, bailouts, subsidies or protective tariffs. Cronyism can be defined, as economist David Henderson points out in a 2012 paper for the Mercatus Center at George Mason University, as the “substitution of political influence for free markets”.

This is a much bigger problem that we won’t see if we limit ourselves to a moral condemnation of the wheeling and dealing of particular individuals. Cronyism does not merely enable and promote the corruption that we do see, does not merely take from some (the taxpayer) and give to others (the favoured clients and businesses of government); it also shifts power to government and away from citizens. It makes political power more important and increases the competition for that power. And it “actually destroys wealth”, says Henderson – by shifting the allocation of resources away from what consumers want to what governments want; by squandering money that might have been spent or invested elsewhere on goods and services that are more expensive than they would otherwise be; by diverting resources into lobbying itself; and by causing wealth to flow from where it might be used well to where waste and inefficiency and bureaucracy is inevitable.

Cronyism creates, in short, what Syed calls “Sovietism by proxy” – with all the effects you might predict from the real thing. Of Europe’s 100 most valuable companies, none was formed in the last 40 years, says Syed. “In the US, dominant firms are staying longer in the stock indices. Start-up rates are falling across the Organisation for Economic Co-operation and Development. These are not free markets; they are rigged markets. And during the same period, the number of lobbying firms has increased up to fiftyfold.”

What is to be done?

Identifying the problem is simple; tackling it is hard for three interrelated reasons. The first is that, even if governmental power could be reduced to the absolute minimum necessary, as advocated by Henderson and other libertarians, there can never be total separation between the state and the economy. The state has to rely on private enterprises to fulfil its minimal functions, says Neera Badhwar of Oklahoma University. The potential for cronyism will therefore always be there.

The second is human nature. Natural human sociability is built on two principles: kin selection (doing favours for your family as it’s good for your genes) and reciprocal altruism (you scratch my back and I’ll scratch yours). Modern states have created rules and incentives for overcoming this tendency to favour family and friends, but if the rules are held in abeyance or institutions decay, the default tendencies reassert themselves.

The third reason it is hard to do anything about cronyism is, as economist Luigi Zingales has emphasised, that the concentrated lobbying power of established private interests is more powerful, and has greater incentives to succeed, than the more dispersed and fragmented public that would benefit from freer markets and fairer rules. As he put it in a piece for the Financial Times, “while everybody benefits from a competitive market system, nobody benefits enough to spend resources to lobby for it”. It is, therefore, a political problem.

When it comes to policy prescriptions, most commentators reach for the obvious: stricter rules, better policing of the rules, and a realigning of incentives – by paying politicians more, for example, so that they don’t find corporate sidelines so attractive. Zingales favours using the tax system to create better incentives (property taxes rather than income taxes that penalise the efficient); open borders to put competitive pressure on market incumbents; and a strong safety net to remove political obstacles to the free functioning of markets. The current review of the post-Brexit subsidy control regime (see page 21) presents an opportunity for improvement in Britain.

But nothing can in the end substitute for our own political participation, good conduct and awareness of the issue. It is our “own belief in the power of free markets… which will keep incumbents and politicians in check”, says Zingales. So the problem of crony capitalism “is not entirely the fault of crony capitalists”, as Howard Ahmanson, a US philanthropist, has said. “We all need to look to ourselves. We need to make sure that there is some kind of powerful constituency that sees itself benefiting from anti-patrimonial, impersonal, honest government, the rule of law, and accountability.”

There is no “magic money tree”. Apparently, that’s what chancellor Rishi Sunak is telling his colleagues in the Conservative party.

That’s not strictly true. Sunak has already given the money tree a rather vigorous shake in his efforts to contain the economic fallout from lockdown.

However, Sunak also understands something else: the first rule about magic money trees is that you don’t talk about magic money trees.

How does a government pay back debt? Through default, inflation, or growth

The UK government borrowed another £34.1bn in December. Ever since the 2008 financial crisis, a billion has seemed like a far smaller number than it once was. I mean, we’ve just had Joe Biden talking about a $1.9trn stimulus for the US economy. So is £34bn a big number?

Well, in this context, yes – it is rather a big number. It’s the highest amount the UK government has ever borrowed in a December (monthly records only began in 1993 but I think we can safely assume that “ever” is the right word here). It also drives our debt-to-GDP ratio to nearly 100%. That’s the highest it’s been since the early 1960s (and at that point, it was on the way down, not up).

None of this should come as a huge surprise. The government is currently paying a lot of wages, parts of the economy are entirely shut down, tax receipts have been pushed back in some cases – we really are in a unique situation.

Now we’re even looking at giving people £500 as an incentive to self-isolate if they get a positive Covid-19 result (there’s absolutely no room for that to be abused, I’m sure you’ll all agree).

Of course, all of this raises the question: how do we pay this back? This isn’t a hard question to answer. There are really three ways to deal with debt. You can just tear it up. This is a route that quite a few nations have gone down in the past, many of them more than once. It doesn’t do much for your economic credibility, though as Argentina’s regular defaults and market comebacks demonstrate, hope does spring eternal in the heart of bond investors.

Another route is to pay it back with “real” money. Under this method, your economy grows more rapidly than the interest on the debt, and you are able to pay it off via actual productive growth. This is how you or I need to repay our debts.

Another method – one that’s not open to you or me (though we can still benefit from it), but that is open to a government – is to repay the debt by inflating it away. If inflation is higher than the interest on the debt, then in effect, you’re paying the debt back with devalued money. It’s a little bit like a default without it actually being a default.

So the answer is easy. The tricky bit is in the execution.

Inflation is the easiest way out of this – just don’t expect politicians to admit it

Bond investors aren’t stupid (in fact, they’re generally viewed as being smarter than equity investors). If they think a government is planning to go for option 3 – the inflation route – then they will try to get ahead of them by charging higher interest rates on debt. That’s where the notion of the so-called “bond vigilantes” came from.

Some argue that the bond vigilantes have been given a sound thrashing in recent years. That’s because central banks have been printing money and trying to spark inflation for ages. Nothing has happened; yields on bonds across the world have continued to fall. Indeed, bond investors are apparently largely accepting negative real (after inflation) returns, and in some cases, even negative nominal returns.

Hence, the pro-money-printing lobby argue, there are no bond vigilantes left. Indeed, bond markets are now mostly willing to accept negative returns in both real (after-inflation) and sometimes nominal terms.

It’s more complicated than that; bond yields have been held down for all sorts of reasons (buyers with infinite potential buying power in the form of central banks, plus regulations forcing financial institutions to hold more of them, are just a couple). But the other big driver is that investors have broadly agreed that we’re in a disinflationary environment and that whatever central banks do, it won’t spark inflation.

Also, it’s a massive momentum trade. Falling yields mean rising bond prices. We often talk about bond investors as if they’re just going to buy and hold. But bonds are tradeable, just like stocks. You may not care about the yield if you think the price is going to keep going up – buy it today at one price, sell it tomorrow at a higher price, and it doesn’t matter if the “real” yield is negative or not.

If bond investors stop believing that inflation is under control, or start to believe that the trend is no longer lower, then keeping bond yields down is going to be a lot trickier. That’s not to say it’ll be impossible. Central banks do have infinite printing power, so they can artificially keep yields as low as they like. However, the risk then is that this comes out in the currency market.

Again, that can be controlled too. If every central bank in the world is printing money, then ditching one currency for another is not especially appealing. However, a country like the UK needs to be careful. If it looks like we’re the only ones going down the modern monetary theory/magic money tree route, or if we’re a bit ahead of everyone else, then we could find ourselves being buffeted by markets rather more than say, the US would be in the same situation.

So, to sum up, our chancellor – and our central bankers – have to talk a good game. Hence all the slightly stern suggestions from Sunak that there is no free lunch, and that taxes will be raised in the March budget to pay for all of this.

The truth is that inflation is the easiest way out of this mess, and it’s the desired goal for every government out there. It will create winners and losers – every policy does. And it’s unfairer to some people than others – every policy is. But it’s the least politically painful method, which is why it’s the one that will be pursued. Just don’t expect any politician to admit that in public.

Of course, if you have savings, then you risk being one of the losers from this policy. If you don’t already read MoneyWeek, then subscribe now. We’ll be writing an awful lot more about how to protect your money in an era of financial repression. Get your first six issues free here.

Britain’s wealthiest citizens could be in for a “multibillion-pound tax raid” after the Office of Tax Simplification (OTS) recommended a “major overhaul” of capital gains tax (CGT), says Camilla Canocchi in the Daily Mail. The review by the Treasury body, which estimates that the changes could raise the CGT haul from £9.6bn to £14bn, assuming taxpayers don’t alter their behaviour, was commissioned by the chancellor, Rishi Sunak, in July as the government considers options to repair the economic damage coming in the wake of Covid-19 (the bill currently stands at £300bn). The recommendations, detailed in a 135-page report, can be “broadly summarised” as aligning CGT rates with income tax and cutting the annual amount that is currently exempt from CGT, says Ian King on Sky News.

Less than a year ago, Boris Johnson was elected on a promise not to raise “any of the ‘big three’ taxes – income tax, national insurance or VAT”. The appeal of targeting CGT is that only 276,000 households paid the tax in 2018-2019 and therefore any change would affect “fewer than one in 100 taxpayers – albeit many of them older, wealthier and conservative-voting”. CGT applies to assets that can increase in value, including property, businesses, art and shares. Above an annual exemption of £12,300, CGT is charged on gains at 10% for basic-rate taxpayers and 20% for higher- and additional-rate taxpayers, says Emma Agyemang in the Financial Times. This rises to 18% and 28% respectively if the gains relate to residential property. Income tax is charged at a basic rate of 20%, rising to 40% and 45% for higher- and additional-rate taxpayers.

The considerable difference between income tax and CGT creates an incentive to classify income as profit and to realise annual capital gains of just below £12,300 (the OTS found a “bunching of claims” at this level, notes Carol Lewis in The Sunday Times). The OTS has proposed cutting the CGT allowance to £2,000-£4,000, as well as reducing the number of CGT rates from four to two.

One benefit, if these changes became law, is that it will correct an “anomaly” that has benefited private-equity groups, creating a “generation of buyout billionaires”, says the Financial Times. Central to how private equity is taxed is the treatment of “carried interest” (defined in the box on page 20). This is currently taxed as capital gains, although it does not reflect a genuine level of personal risk taken on behalf of buyout executives. More broadly, the changes could have a particularly negative impact for investors, business owners, landlords and heirs (see below).

They could also complicate rather than simplify the tax system, say Robin Vos and Edward Reed on the Macfarlanes website. To mitigate some of the consequences, the OTS accepts that other changes will have to be introduced; for example, allowing basic-rate taxpayers to average gains over the holding period of an asset to ensure they don’t have to pay tax at higher rates for realising a large gain in one year. Another issue recognised by the OTS is that increasing CGT rates will encourage people to hold on to assets, interfering with the efficient allocation of capital as well as reducing CGT revenue. CGT is “ripe for reform” and tax rises are inevitable, but we should tread carefully, says James Coney in The Times. “It’s easy to say tax the rich. It is much harder to do it without destroying the incentive to create businesses and invest in the future.”

The effect on business owners

The question posed by the OTS is whether someone who accumulates trading profits in a company and then sells the company, paying CGT on the sale, should be better off than someone who receives profits regularly by way of salary or dividends, say Vos and Reed. Since the OTS acknowledges that there may be many good reasons to accumulate trading profits; that “knowing where to draw the line is very difficult” (it was focusing on personal service companies); and that there is “significant risk” of creating further distortions, we believe that “singling out owners of small companies in this way” will prove hard to justify. Shalini Khemka, CEO of entrepreneurs’ group E2E and a government adviser, told The Times’ James Hurley that the timing was “all wrong” as business owners already faced the “enormous challenges” posed by Covid-19 and Brexit, adding “people will try to offshore or sell up to get ahead of such a change”.

Investors will pay more

Reducing the annual CGT exemption to £2,000-£5,000 would reportedly increase revenues by £500m-£900m, dragging up to 400,000 more individuals into the CGT net. In cash terms, it is “insignificant for the very wealthy” and likely to affect the modestly wealthy, making it an “attractive” proposition politically, say Vos and Reed.

Landlords brace for another squeeze

Aneisha Beveridge of Hamptons calculates that if the CGT allowance were reduced to £5,000 and the CGT rate bumped up, the tax bill for a higher-rate-paying landlord selling for a gain of £69,000 would rise 61% from £15,880 to £25,600. David Alexander, CEO of Apropos property platform, says the changes would “stifle growth, discourage investment and depress the housing market” as landlords raced to sell ahead of any change.

Will heirs lose out too?

At present, the CGT base cost of an asset is raised to market value at death, without any CGT liability arising. This means the beneficiary can then sell it, without paying CGT, regardless of whether inheritance tax is payable. This encourages people to delay transfers until death. The OTS’s primary recommendation is to scrap the “capital gains uplift” rule if the asset is not subject to inheritance tax (eg, owing to agricultural or business property relief), but it goes on to suggest that the change should be extended to all assets. If it becomes law, it means that capital gains could accrue across generations, making assets “unsaleable due to the astronomical tax liability”, Tim Stovold of Moore Kingston Smith tells the FT. It would also produce the “surprising result” of allowing people to transfer lifetime gifts of any asset without any immediate tax charge, add Vos and Reed. The change is unlikely as it is politically sensitive, doesn’t simplify the tax system and is “close to” revenue neutral.

Not long after the 1992 election, I heard Michael Portillo speak at an investment conference in the City. Britain was then emerging from a recession, but the finances of John Major’s government were in massive deficit. Portillo’s message was clear. As Labour retreated from its capture by the Left in the early 1980s, the policy differences between Labour and the Conservatives, he predicted, would steadily narrow. But on one issue, taxation, there would continue to be “clear blue water” between the parties. If, however, the chancellor used tax increases to narrow the fiscal deficit, the Conservatives would be defeated at the next election and remain out of power for a long time.

Whereas Nigel Lawson had taken pride as chancellor in abolishing a tax in every budget, his successors adopted the opposite policy, perhaps egged on by Treasury officials. In 1993, Norman Lamont levied VAT at the rate of 8% on domestic fuel as well as freezing tax allowances and raising excise duties in real terms. Later that year his successor, Ken Clarke, introduced taxes on insurance and air travel and continued to raise inflation-adjusted duties.

Abolishing boom and bust

The combination of tax increases, spending restraint and economic growth eliminated the budget deficit as planned. But, as Portillo had predicted, the government got no thanks from voters at the 1997 election. It remained out of office for 13 years and could only govern in coalition for another five. Labour’s chancellor, Gordon Brown, was initially “prudent for a purpose”, but, believing he had abolished boom and bust, then threw caution to the wind.

In the 2008 financial bust, the government deficit again went through the roof. All that had been achieved by the fiscal rectitude of the Major government was to enable its successor to be reckless. When Labour lost the 2010 election, Liam Byrne, Brown’s number two at the Treasury, left a note to his successor saying “there is no money left”. It’s not surprising that the initial enthusiasm of the coalition government for cutting the deficit soon wilted or that the subsequent Conservative government was no more keen. The lesson that electorates don’t reward fiscal rectitude – yet it is a gift to the opposition – seemed to have been learned.

But has it really? The pandemic has seen government revenues plunge and expenditure soar so that public-sector debt is now over 100% of GDP. With public transport and many local councils bankrupt without bailouts and monthly deficits continuing, Treasury officials, egged on by the media, the opposition and, surprisingly, many Conservative backbenchers with impaired memories, are again calling for tax increases. The focus is on “the rich”, by which most people mean “someone other than me”, but taxes on the rich or well-paid never generate as much revenue as expected, if any. Such tax increases would inevitably be extended to everyone.

The obvious problem with this strategy is that it would impair economic growth and growth is always the principal driver of deficit reduction. The second problem is that taxes are already high; for example, the top marginal rate of tax, applied to annual earnings between £100,000 and £125,000, is 62%. The third problem is that it would be electoral suicide for the government.

Buying time

There are no good answers, but with the cost of government borrowing down to derisory levels, there is no urgent need to take action on the deficit. It may seem to us that the government is spending like a drunken sailor and that a good part of the money has been wasted, but governments in the EU, Japan and the US have been far more extravagant. In time, economic recovery will increase revenues, limit spending and reduce the ratio of debt to GDP, provided that the rebound is encouraged.

There is action the government could take to reduce the current and future deficits. The collapse in rail traffic shows HS2 to be a grotesque waste of money and replacing student loans with a graduate tax would increase revenues, reduce the debt burden on graduates and be fairer. A trick was missed when some of the benefit to petrol prices from the fall in the oil price was not absorbed in petrol duty. Unfortunately, though, there are also taxes that need cutting: the rate of national insurance should be cut from 12% to 10% and levied above £12,500 (the income tax allowance) rather than £7,500. The top marginal rate of income tax is too high.

With such a strategy, the government might have nine years to get its finances in order, rather than four and a half. If only Portillo could take some time off his rail travels to repeat the powerfully vindicated warning he gave nearly 30 years ago.

What is the pensions triple lock?

The pensions triple lock is the guarantee, introduced by the coalition government in 2011, that the state pension is increased each year by either the (CPI) inflation rate, the rise in average earnings, or 2.5% – whichever of those three is the highest. The lock applies to both the “basic” state pension and the higher, flat-rate pension paid to people retiring since April 2016. This year, for example, the pension rose by 3.9% in April, in line with the rise in average earnings last year. But when the government introduced the triple lock, it did not foresee the prolonged stagnation in real earnings growth, which has meant that a guaranteed 2.5% increase has served pensioners very well compared with workers. In the ten years since the financial crisis, state pensions have increased 37% in cash terms, compared with less than 20% for average earnings. The triple lock has become part of the Tory pitch to older voters: it was reaffirmed in the party’s election manifestos in 2015, 2017 and 2019. But now, chancellor Rishi Sunak is reportedly preparing to dump it.

Why does it need unlocking?

The triple lock has been criticised for years as no longer appropriate in an age of low wage rises and growing inter-generational inequality. But now there’s a particular problem due to the wild fluctuations in wages expected as a result of the Covid-19 shutdown. Depending on the depth of the recession and the strength of the rebound, the government could be facing a massive pensions liability as wages fall but then bounce back by as much as 18% in 2021. This year, wages have “artificially” slumped as a result of the furlough scheme. But next year, they are expect to bounce back as people go back to work full-time, or are made redundant. Under the existing triple lock, pensioners will still get 2.5% next year. But in 2022 they’ll benefit from the huge bounce back in 2021 earnings. Plainly, that’s “not fair on working people”, says The Sunday Times. “The triple lock should be stood down and replaced by a double lock to give pensioners 2.5% or the inflation rate.”

What are the figures?

The latest forecasts from the Office for Budget Responsibility (OBR) suggest that average earnings will fall 7.3% in 2020, but rise by 18.3% in 2021. They reckon inflation will be 1.2% this year and 2.3% next year. Of course, these figures may turn out to be way off the mark: there is too much uncertainty about the post-Covid-19 recovery to be sure of much. However, what this scenario means for state pensions is that, with the triple lock still in place, the flat-rate pension would rise by 2.5% in 2021 and 18.3% in 2022. That’s a two-year cumulative rise of 21.3%. For the flat-rate pension received by people who have retired since April 2016, that means a jump from £175.20 a week to £212.45.

How does that compare to no triple lock?

If the state pension rose in line with the OBR’s predictions for average earnings, it would increase 9.7% over the next two years (down 7.3%, then up 18.3%). Clearly, that’s still a decent uplift. Or, if the pension rose in line with predicted inflation it would rise by just 3.5% (1.2% and then 2.3%), rising to £192.15 a week. And if the triple lock became a double lock (removing the earnings link), it would increase by 5.1% (two years of 2.5%) over the same period to £184.07. That “double-lock” scenario is what many pundits are expecting to happen – perhaps with a promise of reintroducing the full triple lock after two or three years.

What’s the effect on the public finances?

These might sound like small sums, but there are an awful lot of pensioners. The triple-lock promise “simply wasn’t designed for a world where inflation or earnings are veering so wildly from one year to the next”, says Tom Selby of AJ Bell. According to his analysis, based on previous OBR costings and its estimates for future inflation and earnings, retaining the triple lock for 2021 and 2022 would cost over £22bn more than a straight link to average earnings and £34bn more than if it were only protected in line with inflation. That’s a big chunk of money and compares to overall UK government spending of £109bn on pensioners in 2018-2019 (expected to rise to £115bn in the current year, on OBR figures).

So what will the government do?

The government has two options, says Selby. “Carry on with the state pension triple lock and create a colossal chasm in the public finances, or revisit the policy and risk the wrath of millions of pensioners.” However, any break of the triple lock is likely to kick off a new round of debate about its long-term sustainability. Rather than remove the earnings link, most previous proposals to modify it have proposed removing the 2.5% guarantee. According to the Social Market Foundation, removing that guarantee could save the government £20bn over the next five years.

Is the pensions triple lock really unfair?

Some defenders of the triple lock (such as Stephen Bush in the New Statesman) argue that attacking it on grounds of inter-generational fairness is misconceived. That’s because today’s pensioners are only going to benefit from it for a fairly short period of time. In the long run, the triple lock represents a strengthening of the state’s role in pension provision and the people who will benefit most from decades of guaranteed increases are the young. And there’s certainly a lot of ground to make up. Currently, the UK devotes a much smaller percentage of GDP to state pensions and other benefits for pensioners (around 5%) than most other advanced economies. However, the bigger picture is that the triple lock is already becoming unaffordable, given demographic trends, and Britain already has a relatively big and sophisticated private system; it makes sense to rely more on that to help ease the burden on the state over the longer term.

How the Conservative party has changed. When he was chancellor in the 1980s, Nigel Lawson took pride in abolishing at least one tax every year. Now, in the run-up to Rishi Sunak’s first Budget, the press has been filled with presumably well-founded speculation about tax increases.

The prime target for the media pundits is the dwindling array of tax breaks available for pension-fund saving. In 2014, Lib Dem pensions minister Steve Webb persuaded a sceptical George Osborne to free pensions from the stringent restrictions they were subject to. Ever since, Conservative chancellors have been chipping away at tax reliefs on pensions as if to reverse the incentive to save that was then provided.

The lifetime allowance, first introduced in 2006, limited the value of an individual’s pension fund. Above that limit, a penal rate of tax of 55% is applied either on drawdown, at the age of 75, or, for members of defined-benefit (DB) schemes, as the limit is exceeded.

The allowance was progressively reduced from £1.8m in 2011/2012 to £1m five years later. Though it has since been raised to £1.055m, there is no shortage of advocates for slashing it further, even though the current limit is causing significant problems for the NHS, whose senior doctors and surgeons are finding that their net pay from extra shifts is more than swallowed up by the pension tax.

The lifetime allowance is a tax on successful investing

The justification for this limit is to restrict the tax relief on pension contributions but, in reality, it is a tax on investment returns. Pay £30,000 a year into a pension fund for 35 years and you will not be liable for tax at 55% if your investment return is zero, but pay in just £10,000 a year with an investment return of 10% per annum and your tax liability will exceed £900,000. All the benefit you had from the exemption of your fund from income and capital-gains tax will be more than clawed back.

In 2011 the chancellor went further, limiting tax relief on contributions to £50,000 a year, reduced to £40,000 three years later. This might seem generous, and it is for those such as higher-grade civil servants whose pay rises steadily over a lifetime. Those with family commitments or erratic earnings often cannot afford to contribute every year, but do so from windfalls or when they can. They are penalised, as are high earners, whose limit is just £10,000 a year.

The next target of the lobbyists for more taxation is the higher-rate tax relief on pension contributions, on the pretext that higher-rate taxpayers account for more than half the total cost of the tax break.

This ignores the reality that the tax relief is no more than tax deferral. Pensions are a system for converting capital, which is not taxed, into income, which is. Tax at both the standard and higher rate is payable on pension incomes, so stopping full tax relief on pension contributions would amount to double taxation, as would levying capital gains and income tax on pension-fund returns.

How to spread the benefit

There are much better ways to spread the benefit of the tax relief more widely. Auto-enrolment in the expanding National Pension Scheme (NPS) will help, as would raising the threshold for higher-rate tax.

The value of the tax relief to standard-rate taxpayers has come down with the tax rate, but it doesn’t have to be so limited; tax relief could be granted to standard-rate taxpayers at a rate of 25% or 30%. And if people are expected to become more reliant on the NPS and less on the state pension, shouldn’t the rate of employee’s national insurance be cut? It was just 6.5% when Lawson was chancellor, but is now 12%.

The objection is that the government can’t cut taxes because it has to fund monstrously extravagant and pointless infrastructure projects such as HS2. People supposedly want higher taxes to pay for higher government spending, but I don’t believe it, not even when the tax is targeted at the better-off. People realise that governments that start raising taxes on the few soon raise them on the many.

Pension funds are the primary source of long-term savings in an economy, vital to fund the long-term investment on which economic growth depends. Yet the government seems determined to continue chipping away at incentives to save for retirement. Having abolished higher-rate tax relief, will it go on to abolish the current entitlement to withdraw 25% of a pension entitlement tax-free? Will pension funds be sequestered to finance low- or zero-return infrastructure projects favoured by government? Will defined-contribution (DC) schemes suffer the same fate as DB ones? Pension savers need long-term certainty and the economy needs pension savings.

What changes are proposed to Britain's immigration system?

Like much of what the Johnson government has got planned, the broad outline is visible, but the detail is hazy. We know for sure that once the Brexit transition period is over (which the government says will be at the end of 2020) EU nationals will no longer have the automatic right to live and work in the UK. Freedom of movement will end. Instead, “Global Britain” will treat potential immigrants from all countries equally, deploying what the government calls an “Australian points-based system” to assess applicants. Although the government has now abandoned the Conservatives’ previous promises to bring net immigration below 100,000, it is clear that it wants the level to fall. “We are not going to fix on an arbitrary target,” said foreign secretary Dominic Raab during the election campaign. But “by exercising a points system you bring it down year-by-year”.

What is this points-based system?

Under the Australian system, foreigners applying for a work visa are assessed and awarded “points” based on various “economically relevant characteristics” such as education, language skills and work experience. Typically, an applicant picks a “skilled occupation” from a list, and needs to score a certain number of points to be accepted. Of course, that doesn’t necessarily bring immigration down: it depends how liberal or how restrictive you make your criteria. In the case of the UK, the stated goal of the system will be to attract lots of high-skilled workers, and workers in key shortage areas such as education and health, while deterring low-wage, lower-skilled workers – and gradually reducing overall net immigration. However, not everyone is convinced that such a system will work, or that it’s in the best interests of the UK.

Who’s sceptical?

The CBI for one. They and other business lobby groups worry that the Conservatives’ plans, under which the vast majority of migrants would need a job offer, could lead to skills shortages in key industries, such as construction. If you want to build houses, you don’t just need “the architects and designers”, says CBI director-general Carolyn Fairburn. “You need the carpenters, the electricians, the labourers. We need people to come and help us renew our economy. It’s not just the brightest and the best, it’s people at all skills across our economy that we need.” Even more awkwardly for the government, the Migration Advisory Committee (MAC) – an outside panel of experts tasked by government with analysing the issue and offering guidance in a report – is also sceptical. Launching its report last week, the MAC’s chairman, Professor Alan Manning, dismissed the idea of a “points-based system” as a mere “soundbite” – and advised the government to have a rethink.

What did the MAC report say?

It basically recommends a hybrid arrangement: a points-based system only for skilled workers coming to the UK without a job offer (in practice a minority), plus a minimum salary threshold for people who do have a job to come to. Currently, unless they’re applying for an “exceptional talent” visa (capped at 2,000 a year), would-be immigrants apply for a so-called Tier 2 general visa, which requires them to have a job offer paying at least £30,000 a year. The MAC recommends cutting that threshold to £25,600, making it easier (for example) for teachers, NHS workers and younger professionals to qualify. The government doesn’t have to accept any of this – and its response has been non-committal, simply re-iterating its existing commitment to a points-based system to be introduced in 2021.

What would the effect be?

According to the MAC’s analysis, the effects of its proposals compared with the current situation would mean lower overall immigration, lower economic growth and lower population growth – but a bit less pressure on public services and housing. Overall, Professor Manning thinks the changes would lead to “very small increases in GDP per capita and productivity, slightly improved public finances, slightly reduced pressure on the NHS”, schools and social housing, but slightly increased pressure on the already stretched social-care sector.

Does everyone agree with this analysis?

No. The lobby group Migration Watch UK, for example, which campaigns for lower immigration, argues that failing to put an explicit cap on skilled migrants – and scrapping the promise to cut net inward migration to tens of thousands – are likely to mean a post-Brexit surge in the numbers coming to the UK. “The electorate, including those who don’t usually vote Conservative, will expect Boris Johnson to keep his word on reducing immigration,” said the group’s chairman, Alp Mehmet. What’s likely to happen in practice, says The Economist, is that the government will accept most of the MAC’s recommendations for a hybrid model, but call it a “points-based system” anyway.

What do the public think?

What’s most striking is the extent to which immigration has fallen down the list of voters’ concerns since the 2016 referendum, says Sunder Katwala of the British Future think tank. Where once it topped electors’ lists of priorities, it now ranks a lowly ninth, according to a new ICM poll. That poll found that 79% of voters want the number of high-skilled EU workers to stay the same or increase. That proportion is 65% for seasonal EU workers, and 77% for high-skilled non-EU workers. Only a slim majority (51%) want to cut low-skilled EU immigration, with 31% thinking it should remain at the current rate. In short, the UK public is pretty relaxed, wanting a “balanced” system of immigration that secures its benefits while managing its pressures. Brexit is looking “less like it will make a decisive turn towards restricting immigration”, says Jonathan Portes in The Guardian. “Instead, consistent with the more benign aspects of our history, it may signal a different form of openness.”

This article was first published in MoneyWeek magazine issue no 984 on 31 January 2020. To make sure you don't miss out in future, sign up to MoneyWeek here and get your first six issues free.

Despite the thumping majority delivered to Boris Johnson just a few weeks ago, he knows that he cannot afford to rest on his laurels. Within hours of his victory he was quick to thank those who “may only have lent us your vote”; where “your hand may have quivered over the ballot paper before you put your cross in the Conservative box”. He now has up to five years to convince these people to stick with him. How will he do it?

To start with, he must, as he promised, “Get Brexit Done”. The easy part will be achieved when the UK officially exits the European Union (EU) at 11pm on the day this magazine hits your doormat. But it won’t look like we have left, given that the implementation period preserves the status quo for the following 11 months. To convince voters that he has delivered, Johnson will need to show that the UK has taken back control of its borders, its money and its institutions of government. This will be tricky, to say the least. Not only because he now enters a complex negotiating period with the EU – whereby compromise will be part of the inevitable conclusion – but also because this next phase will be weighed down by tortuous details and legal jargon. If voters felt the Irish Backstop was complicated, let’s see how they feel about how rules of origin affect just-in-time supply management chains. Your eyes are no doubt glazing over even as you read that sentence.

This Brexit fatigue is exactly what the PM wants. He has reportedly forbidden ministers from using “the B-word” and won’t mind a jot if it moves from the front pages to the business pages of the newspapers. The less it’s spoken about, the more voters will move on. Instead, he will drive forward the narrative of an open Britain, moving onwards and upwards as it embraces new trade agreements and a fresh domestic economic strategy. The Budget will become the B-word that matters. On 11 March, Chancellor Sajid Javid will be able to deliver a radically new fiscal direction for the country. His predecessor Philip Hammond declared an end to the age of austerity; Javid can introduce a new era of infrastructure investment. Johnson loves a big project. With interest rates low and (some) fiscal headroom, he can build new bridges or train tracks. He can be bold. His budget will sail through, not only thanks to that huge majority, but also because it will still be Jeremy Corbyn at the opposite despatch box. Labour’s new leader won’t take over until April. There is no opposition to anything Johnson wants to do.

The tricky balancing act facing Johnson

Except, of course, when it comes to those pesky negotiations with the EU over our future relationship. Alignment to EU rules would be less economically disruptive in the short term; but without divergence, Johnson will struggle to make the key argument that the UK has indeed taken back control. Can he deliver enough of a fiscal boost to buffer the economy from a disruptive departure at the end of this year? Will the Bank of England play its part with monetary stimulus?

Even if he gets an economic boost, it must be one that helps those voters who lent him their votes. Those citizens, who are based in areas which have struggled in recent times, might not be too happy if, for example, a huge employer in the area decides to up sticks and quit the UK because it has diverged too far from EU rules. We might all glaze over at the mention of legal jargon – but nothing hits home like job losses.

The framing of the debate

And so the final part of Johnson’s political strategy falls to his right-hand man, arch-campaigner, Dominic Cummings. Economic pain can be taken if it’s in the pursuit of an ideological goal. Just look at people who voted for Scottish independence – their decision was motivated by their sense of identity, rather than by GDP statistics. Even if Johnson can’t keep the economy buoyant, he can still keep voters onside if they feel he’s acting as their champion.

Last year, we had “The People vs Parliament”. Johnson needs a new bogeyman for the next battle. Step forward the EU. If it can be shown that they are the aggressors, attempting to bully Britain into unacceptable compromises, then Johnson can once again stand up for the common man. If he can’t get economic growth, then he can use this outrage to once again power him to victory at the ballot box.

This is why the Withdrawal Agreement Bill contained a line to the effect that “no Minister of the Crown will accept an extension to the 31 December 2020 deadline for a free trade agreement”. Under the terms of the agreement, both the UK and EU must mutually consent to extend this deadline by 1 July 2020. But now, it’s written into UK law that the government can’t do that. If the EU seeks to change that, the headlines will shriek that “the EU are trying to tell us what to do even after we’ve left!” and so on. So the plan for Johnson is clear: Get Brexit Done, get growth, and if all else fails, get Britain angry. If he can achieve that, he will be back as prime minister in the next election.

For more from Helen, visit blondemoney.co.uk

Will the new Conservative government’s first Budget on 11 March abolish inheritance tax? Chancellor Sajid Javid said in September that he was mulling significant reforms, but there were no firm proposals in the Conservatives’ election manifesto and he has gone quiet on the matter.

The good news, however, is that the pension system now offers a golden opportunity to cut, or even wipe out, a potential liability. Since the pension freedom reforms of 2015, pensions have become a key inheritance-tax planning tool.

The main rules for passing on your pension inheritance-tax free

This is primarily because, while pension assets bequeathed to your heirs have always been exempt from inheritance tax in most circumstances, the reforms make it much easier to pass on such assets.

You’re now entitled to pass on any unspent money in your pension fund – that is any cash you’ve not spent on an annuity or drawn down as income – to the beneficiaries of your choice.

If you die before your 75th birthday, your beneficiaries will receive your pension fund with no tax implications at all. There’s no inheritance tax due and they can withdraw the money in one go or as regular income, with no income tax or capital-gains tax to pay. If you die after age 75, the rules are slightly different. Your beneficiaries will pay income tax at their marginal rate on money they take out of the fund, but there will still be no inheritance tax to pay.

The reforms make pensions really useful for families’ financial planning. You can pass pensions wealth down to your children – and they can pass it on to their own children if they choose not to use it.

For these reasons, it makes sense for anyone worried about inheritance tax to consider making full use of pension saving. The more you shift into a pension plan – subject to rules on annual contributions and lifetime savings – the more you’ll be able to pass on with no inheritance-tax consequences.

Do, however, check the terms of your pension. Some older plans include clauses requiring savers to buy an annuity or come with other conditions that reduce their effectiveness from an IHT perspective. Final-salary pension schemes also have less freedom in this regard.

Finally, it could be worth exploiting pensions to work around inheritance tax in another way. You are entitled to set up pension plans for your children, paying in up to £3,600 of contributions a year including tax relief even for non-taxpayers. This can be a useful way to provide them with money and reduce the size of your estate for inheritance tax purposes.

With just a fortnight to go in the UK election campaign, several things are starting to become clear. Firstly, the Liberal Democrats are going nowhere. Next, Labour is slowly but surely closing the gap with the Conservatives, a process that may be speeded up by recent revelations regarding trade discussions with the US. Thirdly, the Scottish National Party (SNP) surge is likely to be modest, perhaps because Scottish voters are strongly opposed to another independence referendum.

I therefore suggest that you bet on the SNP getting under 45.5 seats (45 seats or less) with Ladbrokes at 5/6 (54.5). I'd also take Ladbrokes' bet on them getting either 30-39 seats at 5/1 (16.7%) and 40-48 seats at 4/7 (63.6%), for combined odds of 80.3%. In this case I'd put £2.08 on them getting 30-39 and, £7.92 on them getting 40-48.

In terms of individual constituencies, I'm going to bet that Labour will hold Eltham (where I live). This seat used to be pretty marginal, but has been moving towards Labour in recent years and is now down to 88th on the Conservatives' list of targets. I'd therefore take Paddy Power's 8/11 (57.9%) on Labour holding on.

Finally, I'm also going to tip Labour in Bermondsey and Old Southwark at 8/13 with Bet 365 (56.5%). At the start of the campaign many pundits assumed this would be an easy Lib Dem pickup, since Simon Hughes held it until the 2015 election. The truth is that this is now a solid Labour area, as shown by Neil Coyle's majority of nearly 13,000 at the last election.

With the election campaign well under way, it's a good time to look at some of the best bets on the Labour Party. Ladbrokes is offering odds on the outcome of a "Vote Match" between Labour and the Liberal Democrats. At the moment it is offering 1/6 (85.6%) on Labour getting more votes, and 7/2 (22.2%) on the Lib Dems. With the Lib Dems stuck at 15% in the polls, and with the millstone of their time in coalition with the Tories still hanging around their neck, I'd say that you should bet on Labour to win this particular contest.

In terms of vote shares, I think that Labour's absolute bottom is 25% of the vote, so I'd bet on Labour to get 25%-30% at 11/4 (26.7%), 30%-35% at 11/4 (26.7%) or 35%-40% at 5/1 (16.7%) with Paddy Power, and between 40%-50% of the vote with Ladbrokes at 10/1 (9.1%), for combined odds of 79.1%. To weight your bets properly, split a £10 betting unit by putting £3.37 on 25%-30%, £3.37 on 30%-35%, £2.11 on 35%-40% and £1.15 on 40%-50%.

At the moment Paddy Power is offering 5/6 on Labour getting more than 206.5 seats, and the same odds on them getting less. Ladbrokes is even less optimistic, suggesting putting the over/under at the slightly lower level of 204.5. I think Labour will do better as Boris Johnson will have more trouble than you'd think making inroads into the north of England. So I'm going to suggest that you take Ladbrokes' odds and back Labour to get more than 204.5 seats.

The passage of legislation ensuring an election on 12 December means that my advice to bet on an election happening in either October or November proved unfounded. However, my earlier tip, made back in August 2017, that there would be a general election in 2019, 2020 or 2021, has paid out. The news looks good for the bookies and betting exchanges too £1.27m has been matched on Betfair alone on which party will get most seats.

Given the Conservatives' lead in the polls, it's no surprise that they are the firm favourites to get most seats, with Betfair putting their odds at 1.18 (84.7%). Ladbrokes is also offering 1/6 (85.7%) on them being the largest party. In contrast, Labour's odds are 8.4 (11.9%). Punters on Betfair still think that there is a near even chance of another hung parliament at 2.06 (48.5%), with Ladbrokes offering slightly better odds of 11/10 (47.6%) on there being no overall majority.

Although I won't be making any tip on the above bets yet, I'm much more certain that Nigel Farage (pictured) won't be celebrating on 13 December, as Boris Johnson's entry into Downing Street has pushed support for his Brexit Party back down to just over 10%. Indeed, I'd be very surprised if it did better than Ukip's share in 2015. With Farage admitting that his party won't contest every seat, it's a good idea to take the 1.24 (80.6%) on Smarkets that Farage will not become an MP, as well as the 2.14 (46.8%) on Betfair on them getting fewer than 0.5 seats.

Even though there may not be an election until next year, Ladbrokes recently extended the range of parliamentary seats that it is taking bets on.

One obvious opportunity is Burnley, currently held by Labour's Julie Cooper. She won the seat in 2015 and retained it in 2017 with an increased majority of 6,373. Ladbrokes put a Labour victory at the next election at evens (50%), with the Conservatives at 2/1 (33.3%). The Liberal Democrats are at 4/1 (20%) and the Brexit Party is at 10/1 (9.1%).

The Lib Dems won this seat in 2010, so you'd think that they would be in with at least a chance of victory. However, since the area is heavily pro-Leave with two-thirds of the constituency voting to quit the EU, it's no surprise that they did dismally last time around, getting only 15% of the vote. While the Conservatives still have an outside chance, they will have a long road to climb to clinch a seat that is number 97 on their target list, so I'd stick with the evens on Labour.

One seat that will definitely be remaining Labour is Manchester Withington, won in 2017 by Labour's Jeff Smith (pictured). While the Liberal Democrats prevailed there in 2005 and 2010, Labour won it in 2015 and again in 2017, with a massive majority of just under 30,000 votes. It's also important to note that even at the last European election Labour beat the Lib Dems in the Greater Manchester area. Overall, then, I'd take the 1/8 (88.9%) on the Labour candidate.

Boris Johnson's victory in the Conservative leadership contest at the end of last month means that several of my most long-standing bets have been settled. I backed Johnson to become the next Tory leader (along with five other candidates) in July 2017, followed by a bet on him becoming the next PM in October 2017. I also correctly advised you to bet againstJacob Rees-Mogg becoming Tory leader in February 2018 and tipped Sajid Javid and others to become the next chancellor in March 2018.

Not all of my bets paid off. Johnson got two-thirds of the vote in the final ballot of members, beating my prediction that he would only get between 40% and 60%. I also predicted back in April 2018 that Theresa May would go as Conservative leader before either Vince Cable or Jeremy Corbyn. Although she resigned in early June, Johnson didn't replace her until late July, just after Jo Swinson (pictured) won the Liberal Democrat leadership contest.

Betfair's decision to go with the later date is controversial to say the least. That said, it can argue that as a betting exchange it doesn't have a vested interest in the outcome if it had recognised the earlier date then those who had bet on Vince Cable being the first to depart would have had cause to complain.

Still, if you had followed my advice and combined the bets you would have made a profit of 14% on the six bets. If you had treated each part of the bet separately you would have made 24.7% profit from 21 bets.

"If Boris Johnson's name is ever linked to a political idea, it is likely to be cakeism' the notion that it is possible to govern without making hard choices," says Gideon Rachman in the Financial Times. Johnson's remark about being pro having cake and "pro eating it too" defines his approach to Brexit.

Its feasibility will be tested when, "as seems inevitable", he becomes prime minister after winning the Conservative Party leadership election. His "cakeist campaign" insists he can secure a better Brexit deal within months, and that even if he can't, a no-deal Brexit would be "vanishingly inexpensive if you prepare",a view vigorously contested by experts.

The pound slumped following a hustings on Monday night, at which both Johnson and his rival, Jeremy Hunt, ruled out any compromise on the issue of the Irish backstop, including a time limitor unilateral exit clause, increasingthe likelihood of a no-deal Brexit on31 October, say George Parker,

Jim Brunsden and Arthur Beesley, also in the FT. The "central flaw" of Johnson's plan is that Brussels has already said that it will not countenance a deal that does not include the Irish backstop.

A risky strategy

On the other hand, there are plenty of Tory MPs who are vehemently opposed to a no-deal Brexit, says Jessica Elgot in The Guardian, and some may be prepared to vote against their government, even if it means losing the whip, being deselected and bringing down their own administration. Johnson's working majority in the Commons is also likely to be reduced to three if the Liberal Democrats win the Brecon and Radnorshire by-election on 1 August.

It is still "theoretically possible" to avoid a no-deal Brexit on 31 October, says The Times, but even Dominic Grieve, the former attorney general who is "leading backbench efforts to block no deal", has conceded that Parliament is running out of legislative options. A vote of no confidence may be the only answer, but time is running short. The last date for Parliament to trigger a new election before 31 October is 3 September. The only way that even a vote of no confidence could stop a no-deal Brexit beyond this date would be for Parliament to "coalesce behind a cross-party national government under a different prime minister".

Given the "deep divisions" between, and within, the Tory and Labour parties, this seems unlikely. A general election may happen even in the event of no deal. With Johnson in power and Brexit delivered, Nigel Farage's Brexit Party would be neutered, the Lib Dems no longer able to campaign for Remain, and the opposition party would be "engulfed" in civil war over Jeremy Corbyn. Johnson may fancy his chances. "The country should brace itself."

As for a no-deal Brexit, if it does happen, Johnson's hopes that it will awaken the "Blitz spirit" and unite the country may well prove misguided, says Parker. If it is forced through Parliament, half the country will see Johnson, not the EU, as the "villain". Angry demonstrations are likely to follow, and Johnson could end up as a "British version of Marie Antoinette a French queen, infamous for an ill-advised remark about cake, who met a sticky end".

With nearly a fortnight to go before ballot papers in the Tory leadership election have to be returned, the amount of money matched on the betting exchanges continues to rise. The sum matched on Betfair has grown to £14m; another £2.2m has been wagered on Smarkets. Both betting exchanges predict that Boris Johnson will emerge triumphant, and his odds have narrowed to 1.06 (94.3%). Those on Jeremy Hunt have drifted out to 17 (5.8%).

Having tipped Johnson (among a host of other candidates) two years ago, I'm not going to recommend that you put any more money on either candidate. In any case, the odds seem about right, since Johnson has a huge lead in the membership opinion polls. Still, a lacklustre debate performance, his failure to back the (now former) UK ambassador to the US (see right), and the possibility of a last-minute scandal, mean that there is still a small chance that Hunt could yet end up as the next leader of the Tories.

However, if you want some real value, then I'd recommend that you turn your attention to Europe. Last week, it was announced that the German defence minister, Ursula von der Leyen (pictured), has been selected to be the president of the European Commission. Because of the controversial way she was appointed, there's a chance that the European Parliament could refuse to confirm her. I think it's unlikely they will reject her, so you should take the 1.33 (75.2%) available on Smarkets on her being the next president.

Despite the various controversies surrounding Boris Johnson, his status as the presumptive leader of the Conservative party seems undimmed.

With a total of £12.7m wagered on Betfair alone, his odds have tightened to 1.14 (87.7%) while those of Jeremy Hunt have drifted out to 8.6 (11.6%).

Interestingly, given that betting exchanges are generally more generous than the bookies, the best odds you can get on Boris anywhere come from Ladbrokes, which is offering 1/6 (85.7%) on him being the next prime minister.

Ladbrokes are also offering odds on the next Chancellor. Sajid Javid (pictured) is the favourite, with odds of 4/5 (55.5%). Tied for second place are Liz Truss and Matt Hancock, who are each on 4/1 (20%). Jacob Rees-Mogg and Andrea Leadsom are also in contention at 8/1 (11.1%) and 16/1 (5.9%) respectively. Since I made lots of recommendations a year ago, at markedly different odds, I won't offer any more suggestions.

Ladbrokes is also offering bets on the outcome of Jeremy Corbyn's constituency of Islington North and Johnson's seat of Uxbridge and South Ruislip at the next general election.

While I prefer not to make bets where the odds are very short, I think the 1/10 (90.9%) on Labour to win Islington North is worth taking because Corbyn's majority was 33,215 at the last election. Indeed, the last time Labour got less than 50% of the vote in that constituency was in 1983.

The Tories have one issue on their plate and it's seasoned with plenty of snake oil. Emily Hohler reports.

"When Donald Tusk, the European Council president, warned Britain in April not to waste' the extra time it had been granted to sort out its position on Brexit", he probably didn't have the Tory leadership contest in mind, say George Parker and Sebastian Payne in the Financial Times. This week, much of the debate has revolved around the idea that, unless Britain can renegotiate its Brexit deal, it will leave with no deal on 31 October. However, Jean-Claude Juncker repeated on Tuesday that the draft withdrawal deal would not be reopened, and there is still no majority for a no-deal Brexit in the Commons. The Tory leadership contest is "taking place on a different plane".

Boris Johnson, the frontrunner, says he will see through his promise to ensure that Britain leaves on the 31st, with or without a deal. Andrea Leadsom "insisted that the EU would agree to rewrite the deal". Dominic Raab is talking of "suspending Parliament" to force through his vision of Brexit, says the Financial Times's Robert Shrimsley (though Labour is moving to prevent this). Esther McVey is refusing to rule out this gambit, too.

Gymnastic manoeuvres towards the exit

Regardless, Johnson is leading the field by a long margin, commanding the support of at least 80 MPs, more than twice that of his closest rivals, says Daniel Capurro in The Daily Telegraph. Jeremy Hunt whose "central pitch", notes the FT's James Blitz, is that he is "a wiser and more pragmatic figure than Mr Johnson" has the backing of 30 MPs. Michael Gove, who may have had his chances scuppered by revelations of his cocaine use, has 31.

Johnson is also fighting this contest in "propitious circumstances", says James Forsyth in The Spectator. He is the Tories' most obvious answer to the Brexit party, and the least like Theresa May (parties always "overcorrect when picking a successor"). The "conundrum" for the Tories is that they need a "proven vote winner" like Johnson, but they are also "desperate to avoid the very election they need him to fight until Brexit is delivered", says Philip Johnston in The Daily Telegraph. If Johnson were to push for a no-deal Brexit by 31 October, his "short-lived government" would be brought down in a vote of no confidence.

"Mind you, this assumes that when Johnson says he will seek a no-deal Brexit, he means it." But once he encounters refusal in Brussels, he will surely realise that the "only way out" is another general election or referendum, with the Tories campaigning unambiguously for Leave and Labour morphing into the "champions of Remain". Johnson may even do a deal with Nigel Farage. But "until Brexit is sorted", any "promises and attempts to redefine Conservatism are irrelevant". The country "craves clarity, direction and a leader who can provide it Without Johnson, arguably, Brexit would never have happened. Now he has to deliver it."

With the contest to become the next Conservative leader heating up, punters are pouring money into the betting exchanges. In all, £3.85m has been wagered on Betfair on the identity of the next Conservative leader; on Smarkets £1.8m has been bet. At the moment Boris Johnson is the clear favourite, at 1.66 (60.2%) on Betfair, followed by Jeremy Hunt on 7 (14.2%), Andrea Leadsom on 9.4 (10.6%) and Michael Gove on 17 (5.8%).

There are also a lot of subsidiary markets to consider. A total of £53,000 has already been wagered on Betfair on who will make the final two, for example. In this case the leading candidates are Boris Johnson at 1.26 (79.3%), Hunt at 1.4 (71.2%), Michael Gove at 3.7 (27.2%), Rory Stewart at 3.9 (25.6%), Andrea Leadsom (pictured) at 6 (16.7%) and Dominic Raab at 10 (10%). There has even been £9,469 bet on the number of MP ballots, with four currently the favourite at 2.66 (37.5%), followed by three (36.2%).

As I have already made tips on the identity of the winner in the summer of 2017, and conscious of my rule not to bet on the same contest twice, I'm going to have to stand aside. I think it unlikely that Leadsom could make the final two, but the odds may have shifted by the time this reaches you, with the first ballot due to start to take place on Thursday, so I can't formally recommend betting against her.

MPs will vote on Prime Minister Theresa May's Brexit compromise in the first week of June, regardless of whether the government and Labour have reached an agreement by then, says the BBC. Downing Street says a vote on the Withdrawal Agreement is "imperative" if it is to be on the statute book before the Commons' summer recess starts in late July. If the deal is defeated and Labour says it will vote it down without a cross-party agreement the UK is set for a no-deal exit or the revocation of Article 50.

Cross-party talks, which are intended to address future EU ties rather than alter the Withdrawal Agreement, which Brussels says is non-negotiable, began in April after May's deal was rejected three times by MPs. Although May says the government would propose a close customs arrangement with the EU, Labour is seeking a permanent customs union. Senior Tories warn that if May cedes ground on this she risks losing the "loyal middle" of her party, says Sean Morrison in the Evening Standard.

Changing political landscape

May's allies believe the European elections could tip the balance. If Nigel Farage's Brexit Party takes first place as expected on 23 May, Labour MPs may be scared into backing the deal. Success for Farage would also "embolden the crash-out faction of the Conservatives", saysAndrew Rawnsley in The Observer.

"Mass defections of Tory voters" will make the struggle to succeed May a "competition to see who can sound the most Farage-iste". The "most effective antidote" would be a "powerful result for the parties unequivocally committed to reversing Brexit" the Lib Dems, the Greens and Change UK and although it is too late for them to unite and field a common slate of candidates (which could have helped them secure ten more seats, notes Jack Maidment in The Daily Telegraph), it is "not too late to behave as friendly allies". Since the "bulk" of Labour party members and MPs are against Brexit, voting Labour will ultimately be "counted on the anti-Farage side of the ledger" too, claims Tony Blair in The Guardian. "But whatever you do, vote." This is "a vote for the Farage Brexit or against it".

For now, all Farage has to do to "harvest a large haul of votes" is to "repeatedly cry the word betrayal'", says Rawnsley. It is "pointless" to mock the Brexit Party for its lack of a manifesto. There is likely to be plenty of time for that, says Matthew Lynn in The Daily Telegraph. If May and Corbyn fail to "cook up a deal", the Brexit wrangling could drag on for years and the Brexit Party will become a "part of the political landscape".

To endure, it should come out in favour of a managed no-deal exit and prepare for "lots of side deals" from visa-free travel to customs checks, instead of "one big one". It should "go for zero tariffs" and start unwinding 40 years of EU rules that "didn't work for the UK". The Brexit Party should be pro-enterprise, pro-competition, and "realistic about helping industries and regions that get hit hardest by Brexit. Who knows, it might even be a pretty successful formula."

Jeremy Corbyn has faced down a challenge spearheaded by his deputy, Tom Watson, for Labour to "signal its unequivocal backing for a second Brexit referendum in the forthcoming European election campaign", says Heather Stewart in The Guardian. On Tuesday, Labour's ruling National Executive Committee announced that its manifesto would be in line with its longstanding policy.

That means a "confirmatory referendum" only on what the Labour leader calls a damaging Tory Brexit, says Jim Pickard in the Financial Times, not on his preferred softer version of Brexit, which would involve a permanent customs union with the EU.

Labour has "always been split" between loyalty to its pro-European roots and fear of alienating working-class Leave voters, says James Blitz, also in the FT. But this time there are also differences over the party's tactical goal in the European elections. Watson says Labour's main goal must be to defeat Nigel Farage's Brexit party, which it won't do if it continues to "sit on the fence" over Brexit.

However, some Corbynites see a Brexit Party victory as an opportunity, says Will Hutton in The Observer. It would lead to a eurosceptic nationalist, probably Boris Johnson, taking over from May in the summer. He would argue for a no-deal Brexit, split the parliamentary Tory party and pave the way for a Labour election victory.

Given the disarray among the main parties and the fact that six million signed a petition for Brexit to be cancelled, "I find it remarkable that Change UK, the Lib Dems and the Greens have not made common cause to create an anti-Brexit alliance in what is effectively a proxy referendum' on 23 May", says William Hague in The Daily Telegraph. The election now stands to be a reassertion of Brexit. This failure to unite also suggests that "if and when" a realignment of parties takes place", Labour and Tories will pull left and right, with no real alternative left in the centre.

The failure to deliver Brexit is "doing serious damage" to the Conservatives' electoral prospects and, assuming they take place, the European elections could provide the perfect opportunity for Tory Leavers to "express their disappointment", says John Curtice in The Daily Telegraph.

Protest voting, a greater willingness to vote for smaller parties, and taking the opportunity to "express disquiet about the EU" have long been features of Euro-elections; these factors are all set to "work against" the Conservatives on 23 May.

A surge of Faragistas

They also show a "surge in support" for Nigel Farage's recently launched Brexit Party, which would gain ten MEPs (candidates include Annunziata Rees-Mogg, the sister of Conservative MP Jacob Rees-Mogg, and ex-Communist Claire Fox). The Conservative Party is projected to win 12 seats, Ukip nine, the Liberal Democrats six and the newly formed anti-Brexit Change UK four.A recent internal poll from the European Parliament gave Labour an even bigger lead, with 28 seats.

Theresa May's best chance of stopping all this is to reach an agreement with Labour, says Adam Boulton in The Sunday Times. "Inconveniently," however, party rivalries are "already inflamed"by campaigns for local elections on2 May. And if May were to "conclude her courtship with Jeremy Corbyn and the Labour Party and sign up to a permanent customs union and alignment with single-market rules support for her party could collapse", says Nigel Farage in The Daily Telegraph.

Farage is "pretty sure" that No.10 will choose to "take the hit that is coming its way" on 23 May rather than "destroy the party", although it may already "be too late" for that. Citizens no longer "just want to leave the EU, they want to change politics altogether".

Farage's Brexit Party, "freed of some of the Ukip fruitcakes'", could be a "potent political threat" to the Tories and Labour, says Richard Littlejohn in the Daily Mail. There is a still a chance that the Tories could "jettison May immediately" and choose a leader committed to Brexit to avoid participation in these "ludicrous" EU elections, but "I'm not holding my breath". With the Faragistas "surging ahead" (his party already has more than 100,000 registered supporters, notes Matthew Goodwin in The Daily Telegraph), they could "annihilate both main parties".

Beyond Brexit

Farage has already said that he plans to target the millions of Labour voters who voted for Brexit, says Sam Coates inThe Times. Indeed, he plans to use a quote from Adonis, who told an LBC phone-in last September, "If you're a Brexiteer, I hope you won't vote for the Labour Party". Adonis told The Times that he made the remark before the party adopted the referendum policy, and urged both Leavers and Remainers to vote for Labour.