Batten down the hatches: a Corbyn government could be on the way

 

Jeremy Corbyn © Getty Images
Corbyn has been war-gaming for a run on the pound.

It is, I’m afraid, time to prepare your personal finances for a Corbyn government. The collapse of May’s well-meaning but inept government and replacement by a neo-socialist Labour government is now a high enough risk that not to prepare for it would be pretty foolish. Remember how neither David Cameron nor Jean-Claude Juncker bothered to prepare for Brexit? Quite.

So what should you be doing?  

The first thing to note is that whatever you do you will want to do it quite quickly: John McDonnell has said that Labour wants to “hit the ground running”  with tax rises and sweeping changes to employment legislation introduced immediately, and nationalisation proposals “all on the shelf”.

So think first about your income and your savings. It is more or less certain that ncome tax will rise – for “the rich” at least. There may be new bands at £70,000 or £80,000, and rates on current additional-rate payers are bound to rise. So review your spending. Cut where you can and prepare to live on less – and if you are very highly paid, substantially less. There has already been talk of a national maximum wage and it seems unlikely that many multi-million-pound pay packets will last long in a new era of social justice.

Next, think about getting rid of your buy-to-let investments. The current government hasn’t exactly been kind to landlords (buyers now have to pay a 3 percentage point surcharge on purchases and their ability to write off mortgage interest against rents has been slashed). But socialism has a long history of loathing landlords, and Corbyn has already proposed rent controls – something that I suspect will be the last straw for the finances of many small landlords. It also wouldn’t be much of a surprise to see a new annual wealth tax of some kind imposed on holiday and rental properties. Now is as good a time as any to sell up.

You might also fix the mortgage on your primary residence if you haven’t already done  so.  Back in October it came out that Labour had been war-gaming for a proper run on the pound. That’s far from a certainty – today’s markets are remarkably forgiving and a new Labour government could start more carefully than Momentum might hope. But if it happens it could mean rising imported inflation at exactly the same time as huge (and unfunded) public spending promises will be freaking out international bond investors about the UK’s creditworthiness. Interest rates will rise – particularly if a Corbyn government removes the Bank of England’s independence and suggests it prints yet another new pile of money. Mortgage rates will rise with them.

Next look to your savings – both in terms of the structures you keep them in and the asset classes you hold. I’m not much worried about Individual Savings Accounts (Isas). These haven’t quite gained the religious status of the NHS in the British psyche, but they aren’t far off; it would be a particularly stupid politician who meddled with them. Your pension is a different matter.

The current annual contribution allowance for those of us with defined contribution schemes is £40,000 and the lifetime allowance is £1m. £1m isn’t enough to generate a rich person’s income (by a long stretch). But it sounds like a lot of money: the kind of money only “the rich” would have. If you have cash left over after your Isas are filled contribute to your pension sooner rather than later.

Then look at how you invest. The last time the pound fell sharply (immediately after the EU referendum) the FTSE 100 rose nicely in response (a low pound makes it easier for our big exporters to sell abroad). That may not happen this time. Rising sales are likely to be quickly offset by rising regulation, nationalisation and taxation.

According to broker AJ Bell, 42 of the constituents of the FTSE 100 paid less than the UK’s 20% standard rate of income tax last year (for entirely legal reasons); and 11 paid less than 10%. See that lasting? Me neither. Corbyn has already said that the “richest corporations” will be paying a lot more so that his government has the cash to “invest” in infrastructure and public services.

All this suggests you need to be invested even more internationally than usual, despite the fact that UK is one of the few markets offering value anywhere at the moment.

Finally, make sure that the portfolio you end up with is one you fancy for the long term: McDonnell has promised us new taxes on financial transactions, so you could find it more expensive to get out of your holdings than it was to get in.  

Next, think about the consequences of a run on the pound. Labour’s war-gaming will have involved talking about capital controls – putting in place systems to prevent money leaving the country and stop complete currency collapse (socialists always blame financiers for pushing down their currencies rather than their own policies). Not many people appear to remember these from their last go round in the 1970s. Those that do will remember that only being able to take £50 out of the country was very restrictive indeed.

Those who are worried that Brexit will crimp freedom of movement might have a bit of a shock in store if the UK goes back to the 1970s. Say goodbye to gap years, cocktails in Dubrovnik and Christmas shopping in New York. It will be over.

You can hedge against the first stage of a weak pound by keeping a stash of foreign currency on a currency card (try Caxton) or on account with a foreign exchange broker (again try Caxton). Otherwise you can open a foreign exchange account with most of the main banks: dollar and euro accounts are relatively easy to get although most providers will either have high minimum balance rules or high charges or both. Or to make absolutely certain that you will still be able to go on holiday even if things do go horribly wrong at home, open an account actually in a foreign country and deposit your cash there.

Finally – one last piece of advice. If you were thinking of avoiding some tax via any kind of avoidance scheme or tax haven, maybe don’t. Corbyn’s reaction to the Paradise Papers doesn’t suggest he’ll be looking kindly on your attempts to optimise your tax affairs. Better to pay up than to be seen as an enemy of the state.

• A version of this article was first published in The Spectator

  • ElRoberto

    So review your spending. Cut where you can and prepare to live on less – and if you are very highly paid, substantially less. There has already been talk of a national maximum wage and it seems unlikely that many multi-million-pound pay packets will last long in a new era of social justice.
    —————
    Almost everything in this article tells me I will live on more thanks to a Corbyn government.

    BTL investors leaving the market will mean fall real estate prices. Happy Days! That alone makes a Corbyn government extremely welcome.

    Higher minimum wages will swell the pay for the real middle classes – those on middling incomes. Corporations paying their taxes will mean investment in social housing, bringing down general rent costs :Brilliant.

    End tax avoidance, even advise against it. how is that bad for the nation?It isn’t.

    And interest rates need to go up. We have a private sector debt bubble. and it is dangerous. Popping it will be extremely dangerous. But it has to happen.

    This article is a sad and ironic indictment of a failed system, We must bring it to an end.

    One omission here is on Europe. I believe Corbyn will make us a Norway model for the five years of the parliament. Then Parliament will debate a long term path for the UK on Europe. It will be too dangerous for Corbyn to change the economy as much as he intends to, especially one based on record levels of personal and central bank debt under “this well meaning government”, and leave the Single Market at the same time. Some in business will welcome that

    • Nick

      Yes, but what does the term ‘debt’ actually mean?? …. given that the ‘money’ people borrow is created from thin air…. There must be a clear distinction between the two kinds of debt…. real honest money vs dishonest thin air credit.
      The young should be taught this fact ….. so they understand why they have been cut out of the housing ‘market’.

      • ElRoberto

        I would like MPs to be taught this fact. A recent poll of MPs – not got the source, sorry – found some 85% did not know what you know. That debt is created out of thin air. Is the honest debt even available anymore? A radical overhaul of banking is required along with positive real interest rates. I hope Corbyn brings it. no one bloody else will

        • FriarStuck

          MPs would pay lip service to it, but it’s not in the interest of parasites to understand the problems of the useful and productive.

    • FriarStuck

      Firstly, Corbyn will struggle to pop the housing bubble, because the bubble was caused by loose monetary policy, and with his daft spending plans, he’s going to need even looser monetary and fiscal policy.

      Secondly, the problem with socialists and communists is that their so called love of the poor, is far outweighed by their hatred for the rich, which unfortunately blinds them to certain harsh realities.

      For example, the Pareto Principle, simply put 50% of our total output is provided by the square root of the total number of workers.

      In absolute terms, if you have a million workers, it means one thousand of them will be responsible for half of all output.

      When the government confiscates the output of the most productive and it spends it on wasteful consumption and high living for them and their cronies (a small percentage is handed back which the bureaucrats then use to claim status as some sort of charitable messiah), productivity nose dives, such that all of the useful products and services that benefit everyone are slowly destroyed, particularly to the detriment of the poor.

      Taxation hurts the poor, taxation is theft and extortion dressed up as charity, high taxation destroys an economy.

      Minimum wage is another example of socialist fantasy thinking.

      Minimum wages cause unemployment, particularly long term unemployment, as it makes it more difficult for those with little work experience to get an entry level job, in other words young people (it turns higher education into a necessity, just so they’re considered for a job, not a choice, and not everyone is academic).

      If minimum wages were of benefit why not set the minimum wage to £1000 per hour, or
      whatever, and with the wave of a bureaucrats pen we can all be millionaires.

      It makes no sense for the government to criminalise someone for offering work, and for someone to voluntarily take it.

      Every time socialists try to enact their ridiculous ideas it ends in disaster simply because their theories are so far out of line with observation and reality.

      Unfortunately, after every disastrous failure of socialist experiments on hapless populations often resulting in deprivation, starvation, death, despotism and eventually civil war, other socialists turn around and say “oh no, that wasn’t proper socialism, there will be utopia if you let us try”.

      Corbyn is no less deluded, and will do all of the above if allowed to.

  • Wildcat

    What an utter load of scaremongering, fanciful garbage. I generally enjoy your articles as they are balanced but this one might as well have been written by CCHQ. Complete rubbish from start to finish.