“Focus on being productive instead of busy” – Tim Ferriss, Entrepreneur
Welcome to the supplement as we get to the end of the first quarter of 2022 – and it has been even more eventful and rocky than even the most salty of analysts predicted at the dawn of the new year. As the 2020s starts to get nicknamed “The decade of the Black Swan” the results are still dribbling through from the pandemic, as are the excuses, as the world tries to think about getting back to “normal”. But with war in Europe, zero covid policies and real estate bubbles in China, the world’s manufacturer, inflation abound and central bank confusion, alongside crazy commodity prices from the upset apple carts that originated around two years ago, very little looks normal and that doesn’t look like it is on the slate for 2022.
It is worth remembering, however, what has actually happened since the dawn of 2020 – limiting ourselves to the UK. A massive decrease in household debt. A really significant rise in property prices. Inflation is biting now but we are still currently looking at about 7% since 1 Jan 2020 which is sustainable (it is where it goes from here that is the problem). 3.9% unemployment. More job vacancies than at any point on record. Petrol and diesel at nominal prices we’ve never seen before – but adjusted for inflation, we could go much higher (the $147 peak in 2008 equates to $220 in today’s money – and no doubt about $240 by the end of the year). Nominal prices (before inflation adjustments) provide more clickbait in financially-related headlines than the weather does in the tabloid press!
So – that’s where we are in aggregate. When we go from the macro to the micro, and the individual households, we see a different story. Covid has some big winners – you may even know a few. It also provided that incredibly rare and powerful thing for many who were later on in their careers – a moment of calm. A moment to ask why that demanding job, 60+ hours a week plus commutes, was actually worth doing now the kids have left and the mortgage is paid off. The middle class conundrum of the empty nester. Many tens of thousands in this exact situation dropped out of the labour market, or decided to change direction and take a much less demanding way to earn their living – or to go into a field such as the third sector which could make a difference. 500,000 people (not all later in their careers, either) are currently out of the labour market (so they are not in the unemployment figures, because they are not actively seeking work) in what’s been called the Great Resignation. My personal feeling is that a few hundred thousand of those might well get dragged back in thanks to inflation, aside from anything else – but also, this is the single best opportunity in history for people to do what they love – and it is not a trite statement when someone asks me the one piece of advice I would give to a young person and I say “Do what you love and you’ll never work a day in your life”.
This fresh perspective will of course fade away and the “rat race” or whatever you prefer to call it will swallow society up again within a few years. Memories are like tree roots – a tree’s roots often span out as far as the tree is tall, and if those musings from the 2020 lockdown already feel a long way away, they definitely will by the time the next election comes around in 2024, for example.
This week was a week that was. The Ukraine and Russia conflict became one month old. Regardless of the new breed of Eastern European history experts that have popped out of the woodwork, like always, I think there are a few indisputable facts. Putin wasn’t expecting it to shake down like this. The West have been the big winners, so far, because they look so much more cohesive than they did. Countries have woken up to the fact that the 2% requirement for NATO membership (defence spending as a % of GDP) needs to be taken very seriously and perhaps even exceeded as they play catchup. Russia have lost more troops and materials in one month than they lost in Afghanistan, notoriously difficult terrain, in 7 years. The end feels closer, rather than further away – although the methodology of the finish is still unclear.
The markets took this too seriously. We had oil back down at around $92 a barrel at the end of last week, which looked like the market price with no war. This was overconfident, and we are back around $117. The May futures contract is around $120. This feels a lot more realistic, subject to the usual Black Swan caveats. We’ve had the incredibly timed release of Nazanin Zaghari-Ratcliffe which it is impossible not to be cynical about in my view. We’ve also had a spring statement which Rishi was desperate not to call a budget, which most have interpreted as a budget, which is where we will concentrate today’s efforts, both macro and micro.
What keeps a spring statement a statement rather than a budget? Well, primarily, no significant fiscal measures. That is – no changes in taxation. Perhaps, number 11 would argue, no major changes in taxation. Rishi is a student of the Mark Carney school of thought – plan ahead, announce in advance, justify. Carney had many detractors (I personally was a big fan) – and he adored his “forward guidance”. Things became a little more North American for a while, even mentioning the steady state rate for base at around 2.5% (that number was from around 2014, and nothing has been heard on that front since – obviously that level of transparency was seen to be a bridge too far, but for what it is worth if I had to name this theoretical terminal rate, I would be at around 2-2.5% based on the likely path of the economy as we do transition back to something loosely normal).
The disappointment that goes along with some of the social media posts I have read this week regarding the budget, from those who are realistic, can really be summed up in one easy way. Rishi has played politics rather than economics. My surprise, as often in these situations, is that anyone is surprised. We have to deal with the political reality, the price of a system that allows a democratic election and change of the guard every 5 years or fewer – the number one goal is always to look good, sound good and stay in the job (yes, I can understand why you might think Boris doesn’t take this goal too seriously – but trust me, he thinks he does).
We’ve got a tax cut of 1% in the rate of income tax (why pick income tax – well, it favours pensioners as well as the working population of course) that happens to come into play in April 2024. How convenient, when the election will be slated for May/June no doubt. We’ve also got the double bubble hike in national insurance – 1.25% for the employers and the employees taking another 2.5% out of the pie one way or another. There was political pressure to defer this tax rise – but there never really stood any chance of it happening. Aside from anything else, from a pure economic perspective we should theoretically be happy. Raising taxes is deflationary – normally – because consumption is such a powerful part of the economy. Taking a little bit out of everyone’s pockets means there is less to consume. For companies, it means there is less to invest as well – as well as less to pay out to shareholders. For all the creative tax schemes out there, thanks to IR35 aside from anything else, there is very little that even the most aggressive tax avoiders in Big Tech or any of the listed companies can do to avoid national insurance rises. This is a point often missed in the criticism of the tweaks in the tax system that Rishi has provided.
Now – this is all relatively small beer compared to the very largest tax boon of all time that has come Rishi’s way here – right now as I type and you read or listen to this. Inflation. The opportunity was grasped (remember – never waste a good crisis, they say) to freeze many bands in terms of our progressive income tax system, last year – until 2026. The same goes for housing benefit, and a considerable number of other thresholds (inheritance tax, anyone? The greatest stealth tax of all time – also, the most optional of all our taxes). Taxes like fuel excise duty are fixed amounts per litre (which were cut by 5p this week, which is less than 10% of the FED, for the record), but taxes like VAT are a percentage tax and so when the price of fuel doubles from 99p to £2 (slightly convoluted, because the £2/litres are currently only seen at the service stations on the motorway), the VAT take as part of that moves from 17p to 34p.
At the end of this year your money will be worth somewhere between 8 and 10 percent less than it was on 1-Jan-2022. So, a freeze in the personal allowance threshold means that the amount of tax you pay on anything above the personal allowance, effectively, has gone up 8-10% – or more accurately, the amount of money you’ve got left (assuming no pay rise) can buy 8-10% less. There are pay rises of course – public sector left with 3.1% (so will be 5%+ worse off in real terms) – minimum wage up 6.6% (still losing money in real terms). You can of course substitute certain things, and this is where we start to think about businesses that will suffer and those that will do well. Aldi and Lidl, or all the hard discounters including Poundland etc – you’d expect to do well – and Sainsbury’s or Waitrose relatively badly as people substitute the more expensive for the cheaper. Logic dictates that Just Eat, Deliveroo etc. will suffer a reversal of fortune from the past couple of years as people tighten their belts and cut out the takeaways.
The problems get harder when you think about what low income households do to substitute energy. Electricity is in more demand than ever – and is unlikely to be rationed. Gas is different (as the major heat source still in the vast majority of homes). The substitute might be the second jumper or equivalent – but it will hit the people who can’t cope with the cold the most, when we get to the winter. You still need hot water (which is about half of the gas bill in most homes) – so there isn’t that much on the table to save. If you’ve got expensive to run electric heating – your problems are even larger. This is depressing – but as I also stated last week, by definition the bottom 20% of households by income will always have these problems. This is nothing new.
The chancellor has addressed this by providing local authority hardship funds to administer, rather than blanket benefit rises. This has an element of sense about it – but we should examine the unstated ideology of this administration as it has evolved since the change of power in 2010. What’s clear is that they will support the workers – and that’s evidenced this week by a long overdue rise in the national insurance threshold to the same level as the personal allowance. It is hard to understand without using a calculator, but under the current system, you would pay no tax or NI up until about £8,844 per year, then NI only as an employee at 12% up until £12,570, then 20% income tax plus 12% NI (so 32%) from £12,570 to the higher rate threshold (£50,270 total). That 12% NI goes to 13.25% from April 1, but that 12%/13.25% band effectively disappears from July thanks to this statement. Many earning below 50k are actually better off, but this is the smoke and mirrors that many of the right-leaning press have swallowed. They are most definitely NOT better off, BECAUSE NONE OF US ARE BETTER OFF. I stated last week that unless you have a great business or a magnificent career that means you earn 10%+ more, year on year, you will be worse off by the end of this year (unless your investments outperform that, of course, and you live on your investment income!).
Still, the chance to make right what happens at the bottom end of the pay scale should not go without praise. I applaud the progressive nature of the tax change for NI as a rule – going from 12% to 13.25% is actually a 10.4% increase – going from 2% to 3.25% (which is the rate at which you pay NI when you are a higher rate taxpayer) is a massive 62.5% increase. Those with the broadest shoulders pay the most. This has been appropriated over from the Labour party as a soundbite, and, I must admit, it was one of the very best.
However – back to inflation. At this time, the last household savings ratio on file at the ONS is Q3 2021 (we are overdue a new release) and it was 8.6% (higher than any number since 2015, ignoring the pandemic period). We actually had had a four year very flat period in the household savings rate before the pandemic, and then that level of fear (and the amount of stimulus) made it absolutely shoot upwards during 2020 and 21. So – there are savings to cushion the blow. The pain of which I speak will not be immediate, in any way. This is why I like the carbon monoxide analogy for inflation – the silent killer.
This has a lag effect on consumption of course (from an economic definition perspective – money comes into the household and you can either spend it – consume – or save it. Those are the 2 choices). How has this massive drop in consumption NOT led to a recession (although, of course, technically we had one in 2020, although only a very small proportion of the population seemed to notice, and no-one told the stock market or the property market!) – consumption is by far the biggest driver in economic growth.
Well, firstly, there was more money out there, of course, thanks to stimulus measures. Secondly, Investment has been bolstered by the super-deduction and similar incentives – although it was coming from a bad place in the 2010s anyway. Much more significant however is Government Spending which obviously went through the roof in 2020 and 2021. This in itself has, arguably falsely, driven economic growth (to deepen this argument a little, this is because it was not largely spent on things like infrastructure which would drive larger tax receipts in the future by improving the underlying economy, but on things like Track and Trace which placed £37bn into the hands of too few people for us to see a real economic long-term benefit from it). This will also need to come under control and that can be massively helped by inflation where in real terms budgets get cut but in nominal terms spending still goes up. I’d estimate that somewhere between 75 and 90% of the population either don’t understand that argument or, more likely, have other things on an individual level to worry about that sees it not form a part of their voting choice at the next election. Speaking of that – these household war chests may just be starting to feel a bit tapped by, say, 2024 – and that’s not ideal timing for Rishi.
However, of all the savings warchests that have been bolstered, of course, the Government’s is the largest. The forecasts even 12 months ago were extremely bearish even though we had a vaccine that had been well-deployed, and the knowledge that summer would improve the covid situation, immune systems, vitamin D production, etc. etc. The reality has kicked in that things were nowhere near as bad as feared last year – as I referred to many times, the supposed furlough black hole never emerged, unemployment never went anywhere near the predictions and even stayed below my lowest predictions which were much lower than the average, tax receipts improved from 2020 by nearly 9%, and – and these figures are always so very hard to find – central government receipts as predicted last year have actually come in £77.2 billion above that. Now, that’s a chunk of change. A lot of that meant we are borrowing less than we expected, and all of a sudden the debt figures look an awful lot more manageable, with under 85% of GDP being debt. (The power of inflation, and overshooting miserable predictions). The cynic in me says that they knew all of this, but didn’t waste the crisis and ensured some horrible predictions were put out there thanks to Covid, which wouldn’t be deemed as their fault…..but I digress……
Government spending was also nearly £50 billion lower than forecast (all of this is from the OBR – office of budget responsibility – report released just before the budget). Mostly thanks to underspends on monies provisioned for that were not needed – or not deployed effectively, some would argue – but primarily due to far lower unemployment benefits being needed than expected. The double bubble – which this administration have specialised in – get people into work and they are not getting benefits (well, they are not getting as much in benefits, realistically – there are millions of working poor) – but they are also paying tax. Happy days at the governmental level.
£17.1 billion had been set aside for “bad debt” on CBILS loans, as the government guaranteed. Luckily, many have not listened to the viral youtube clip from a certain Property Guru who advocated taking these loans and not worrying about paying them back, it seems……The actual payouts have been close to zero. That’s another one that wouldn’t make the headlines – and of course it is utter folly to count that money as safe. If we go into recession – which I would have as a 50/50 probability within the next 18 months – we will of course soon see CBILS defaults as the terms were 5 years from Mid-2020.
That’s one hell of a look down the back of the sofa – I’m sure you will agree. So, you can see where the money came from for the national insurance threshold cut – and also the 5p on fuel duty. You can also see that the numbers mentioned by Rishi – £5bn for this, £6bn for that – pale away into insignificance to nearly £150bn above. That’s some warchest for a tax cut before the next election……but you could also argue this is very sensible stewardship, because the next 12 months have a chance of being worse than forecast, and a small chance of being much worse than forecast. The OBR is now much less bearish, although they have cut some of their other forecasts which, I must say, is not before time.
In Oct 2021 they forecast GDP growth of 6% for 2022. I was among those laughing in the face of this prediction. The only way it could be achieved, I said, was a terrible 4th quarter and a large winter wave – which did not emerge in the end, although it looked a possibility at some points of course. They are now closer to my school of thought with a revision to 3.8% GDP growth this year (which, with inflation and energy, looks too bullish still to me at this point). They have peak inflation at 8.7% which is a sensible number, but as above if we see $150/barrel oil or even $200 a barrel, you can definitely forget about single digits being the peak. I’ve stuck my neck out that we will breach 10% at some point this year – to be honest, that isn’t important (although it’s always nice to be right, right?) – what’s important is how quickly we come down, or not, once we’ve hit the peak, and where we settle for 2023-24 (my feeling is a 5% average is sensible forecasting, which is well above what the larger analytical machines are predicting – but they have to be careful about what they say, whereas I can say what I think!). They see CPI coming back to 2.5% or lower fairly quickly – I’m in the camp scoffing at those predictions, I’m afraid. “Dream on” by Aerosmith is playing in my head!
These forecasts have a wonderful way of saying “everything will be back to normal in about 2 years time” and you’d be excused for not believing that, in the 2020s. After all, don’t they say these things come in threes……OK I’ll stop that now.
So where does it leave us? Those with tenants on fixed incomes, heavily reliant on the benefits system – having to educate ourselves and those tenants on how to access local authority hardship funds, and also invest in our properties for energy efficiency and for the good of our tenants and our EPC requirements for 2025 (which, we still need a lot more info on too, please, and a grant scheme – will this be fixed for June? Do we need another open letter that falls on deaf ears?). Those on lower incomes will feel it most but the £3000 threshold increase on NI puts £375 a year extra into the pocket before considering pay rises. That pays for about half the current energy bill rise (and that’s all). It is helpful. For those who work – this government will continue to support them. For the workshy, the popular enemy of any right-leaning voter, they will continue to turn the screw. The victims are those who are reliant on benefits in a long-term, genuine capacity. The hope is that the third sector will pick up the slack on that front, and that’s the uncaring part of the mentality. Remember, politics is often a choice between bad and worse, and in reality, those who chose a benefits lifestyle in the 90s and 2000s are making sure everyone pays for it today, but particularly those most in need, and that’s what is so very sad. The skulls at the side of the road thanks to austerity – whether it is stated, or not stated – whether it is achieved by government spending cuts in nominal terms, or in real terms thanks to that carbon monoxide that is inflation.
As one final aside, I’d like to say I find the chancellor’s willing to get “surgical” quite interesting. As a cynic he puts the problem on the local authority – which means bureaucracy and inefficiency. However, he does it at 20% or less of the price than a blanket increase in benefits. That’s got to be good for the majority. Very clever. I also prefer a surgical local intervention to a shotgun national one, and I am VERY pleased to see we are at the very lowest end of interfering with the market in general when it comes to pricing. Fuel excise duty is so bloody high we can give a bit back, after all! More money in the pocket for the lowest earners all gets spent and has a positive multiplier effect on the economy – the reverse of the negative effect of austerity. Even though it will hurt me – I hope the minimum wage will be whacked up again next year to £10, not before time, and the lowest tax thresholds are increased. Personal allowance needs to get up to 15k. Easy for me to say as a company director, because of course I have far more control over my own tax position than those on PAYE (who are up again, of course, because of IR35). But my dog in the fight is not that clear – I have plenty of staff, directly and indirectly, and margins will suffer from that being enacted – but for the good of the economy, it is the right thing to do. Can Rishi avoid recession? Well, we will be talking about that a lot over the coming weeks and months, so buckle up. Please like share and comment, and keep the supplement growing!
