What caught my eye this week.
A sign of the times: I woke up yesterday to headlines that chancellor Rachel Reeves had U-turned on her income tax plans, and I wasn’t immediately clear whether this was official confirmation that income tax rates were to rise, or whether Reeves was U-turning on the only just rumoured U-turn to hike rates after Labour had pledged to do no such thing.
Is everyone following at the back?
What a palaver. As you probably know by now, it was the latter – a U-turn of the U-turn. Or as boy racers would call it: a doughnut. Which seems appropriate.
Officially, Reeves’ 360 had nothing to do with all the briefings and counter-briefings that gripped Whitehall watchers this week.
Rather, the Office for Budget Responsibility (OBR) has thrown her a lifeline.
According to the BBC:
Newer assessments from the OBR appear to have increased the projected strength of wages and tax receipts in the coming years and offset several billion pounds of that gap, taking it closer to £20bn.
Gilts yields rose as traders panicked at Reeves chickening out over income tax hikes, and they barely calmed down when they heard the OBR had plumbed the depths of the black hole and found it less black than first feared.
Extra taxes will still have to be found from somewhere. Even £20bn is not chump change, especially when you’re also planning to scrap the limits on child benefit and potentially looking to top-up those WASPI pensions after all.
Someone’s money will have to be found to pay for it:
Source: JP Morgan / Chancery Lane
Putting income tax thresholds into an even deeper freeze is leading the runners and riders this week, along with curbs on salary sacrifice. But mucking about with the pension tax-free lump sum is reportedly now off the table.
Still ten days to go though punters! Place your bets.
Where’s the money, Lebowski?
As if the on/off vibes from Budget Bingo weren’t déjà vu enough, we also got the latest account of the economic damage wrought by Brexit to remind us of why we’re partly in this mess.
To quote the abstract to the new working paper from the NBER:
These estimates suggest that by 2025, Brexit had reduced UK GDP by 6% to 8%, with the impact accumulating gradually over time.
We estimate that investment was reduced by between 12% and 18%, employment by 3% to 4% and productivity by 3% to 4%.
These large negative impacts reflect a combination of elevated uncertainty, reduced demand, diverted management time, and increased misallocation of resources from a protracted Brexit process.
Not surprisingly – given there’s no economic benefit to leaving a vast trade bloc that other countries lobby for decades to enter, to replicating its bodies and functions, to becoming a rule taker, to creating friction for business, and to making investment into the UK less attractive – the estimate of the cumulative damage from Brexit has crept up on those made last year by the likes of Goldman Sachs and the OBR.
What’s the relevance to the budget?
Let’s take the NBER’s lower 6% hit-to-GDP estimate. UK GDP in 2024 is estimated at £2.88bn, so the NBER sees the economy as £173bn smaller than it would otherwise have been without the drag from Brexit.
At about a 39% tax take as per the House of Commons library, that implies the state has about £67bn less to spend than in the no-Brexit alternate universe.
Even at a lower 35% take there’s a £60bn shortfall.
Of course you can debate how precisely we can layer on this speculation. But I’m not taking the highest estimates here – and the point is the overall picture.
Which is that the UK government has tens of billions less to spend than it would have had, and that it likely needs to spend more too than in a Remain scenario, given Brexit’s hits to the economy as outlined by the NBER will have increased the various claims on benefits.
A boondogle with a bill that’s come due
Of course the Leave campaign warned us that long-term economic damage was the price we’d pay for the UK regaining our (technical) sovereignty.
A smaller economy than originally projected due to Brexit would present difficult choices about where we directed our spending after leaving the EU. The economic cost was plain – everyone predicted it – but the political argument carried the day with brave Britons.
Ho ho ho.
Of course they literally said we could have our cake and eat it. So now they are surprised when we’re running the economy based on the old inputs and we’re coming up short.
Brexit will carry on bleeding us out for another decade, I’d guess. Perhaps after that some compensatory factors will see things finally stabilise, as the Bank of England governor mused last month.
In 2016 I said Brexit would be a slow puncture that would hinder us for many years. My critics told me to shut up.
On we trundle.
Lies, damned lies, and the 52%
If you don’t discern the dead hand of Brexit – along with Covid, inflation, and Russia’s war of course – when looking at semi-stagnant out-of-puff Britain limping along with only these occasional bunfights over our shrunken tax pie to liven things up then I won’t persuade you.
Sure, the NBER report is the result of exhaustive work by big brains from Stanford, The Bank of England, and the Bundesbank among others.
And yes it tallies with what other studies have shown.
But hey, you’ve got a bloke on social media with three Union Jacks in his profile who can’t write complete sentences saying:
“LOL.. coz they can see the future yeah!! get over it pal!
“
“Feel free to pick your side.
Just remember later this month when you’re set to pay more tax or the triple-lock pension is unpicked1 that we were told this would happen, 52% voted for it, and we’re living with the result that the decision deserves.
And if you still don’t understand why I belabour this, here’s an article from The Telegraph via Yahoo on how “Britain faces worst decade for growth in a century”.
There’s no mention of Brexit from start to finish. Not even a nod.
It was one thing to be earnestly wrong in 2016. It’s another to stay wrong in 2025.
Have a great weekend!
From Monevator
Why you can’t trust the CAPE ratio [Members] – Monevator
End in sight for renewable trusts? – Monevator
From the archive-ator: What’s your financial origin story? – Monevator
News
Extending the income tax threshold freeze to 2030 raises £8.3bn extra a year – I.F.S.
NS&I Digital revamp is four years late and £1.3bn over budget – This Is Money
FCA doubles down on AI testing versus regulation… – City AM
…and warns CFD firms against failing consumers – Reuters
NHS gets go-ahead to cut thousands of admin jobs – BBC
A technocratic plan for Eurozone growth… – The Constitution of Innovation
…and also note the EU is actually a pretty good investor – Klement on Investing
Products and services
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Hargreaves Lansdown launches a new best buy ISA paying 4.55% – This Is Money
Five major mortgage lenders cut rates – This Is Money
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link. Terms apply – Charles Stanley
Santander’s new £200 switch offer – Be Clever With Your Cash
Royal Mint launches yellow gold sovereigns for £1,200 – This Is Money
The cost of car insurance is falling lately – Which
Get up to £200 cashback when you open or switch to an Interactive Investor SIPP. Terms and fees apply, affiliate link. – Interactive Investor
How to get discounted gift cards – Be Clever With Your Cash
The loveliest towns to retire to in Britain – House & Garden
Homes for sale in former warehouses, in pictures – Guardian
Comment and opinion
The joy of giving up on having ‘enough’ – The Root of All
How a former hedge fund titan learned to invest with humility – Excess Returns
Bull market brains – A Wealth of Common Sense
How to earn £250 a day as a film or TV extra – Guardian
We don’t bury our dead – Fortunes & Frictions
‘Total portfolio approach’ could shake up asset allocation – Bloomberg via A.P.
Why everyday investors should stay away from private markets – CFA Institute
A golden year – Musings on Markets
Your time isn’t worth shit – The Falling Knife
Be a nerd – Financial Samurai
Warren Buffett’s Thanksgiving letter [PDF] – Berkshire Hathaway
Naughty corner: Active antics
Beware booming brokers in a bubble – Arcadian
Hedging AI bubble risk via Oracle CDS [My read, anyway] – Mind of Mojo
The case for business stewardship – Flyover Stocks
A poker pro turned quant explains trading [Video] – via YouTube
How to capture Japan’s value unlock – Verdad
Capital allocation [PDF] – Morgan Stanley
Kindle book bargains
Poor Charlie’s Almanack by Charlie Munger – £0.99 on Kindle
The Man Who Solved the Market by Gregory Zuckerman – £0.99 on Kindle
Chip War by Chris Miller – £0.99 on Kindle
Meltdown: The Collapse of Credit Suisse by Duncan Mavin – £0.99 on Kindle
Or pick up one of the all-time great investing classics – Monevator shop
Environmental factors
IEA: supply boom in renewables will end the fossil fuel era – Guardian
Millions of Australians to receive free electricity thanks to solar – TechCrunch
London congestion charge to rise to 20% and apply to EVs for first time – Autocar
Southern Water says sorry after millions of plastic beads pollute beach – BBC
Conservation projects falter as rich countries retreat from climate fight – Observer
Nature reserve uses new bird protection on windows – BBC
Robot overlord roundup
Big Short’s Michael Burry has some concerns about AI accounting – CNBC
The Slop cycle: media revolutions breed rubbish and art – Scientific American
DeepMind cracks a centuries-old physics problem with AI – Business Insider
Yes, it’s a bubble – SpyGlass
AI will transform the entertainment industry in a decade – Institutional Investor
When will we make god? – Uncharted Territories
From AI to ROI: some positive evidence [Paywall] – FT
Not at the dinner table
UK to limit refugees to temporary stays – BBC
Trump is set to sue the BBC – Sky
Fox to BBC: hold my pint – ProPublica
The last of the Old West – Money with Katie
Reform’s pretty quiet since Labour began exploring Danish immigration model – Sky
Musk’s trillion-dollar compensation – The Lefsetz Letter
Off our beat
The monks in the casino – Derek Thompson
Space food made from astronaut pee to be tested on ISS – Independent
Investor’s ‘dumb trans-humanist ideas’ setting back neurotech progress – Guardian
D&D and racism [2021 called and wants its culture war back!] – The Atlantic
Why do people love spicy food, even when it hurts to eat it? – Guardian
Scientists find surprise link between grey hair and cancer – Independent
Humanity is depopulating itself – London Review of Books
Why don’t people return their shopping carts? – Behavioural Scientist
The governance-industrial complex – 3652 Days
And finally…
“You may know that the Chinese word for ‘crisis’ is made up of two symbols, one of which can signify ‘opportunity’.”
– Andrew Craig, How to Own the World
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