Rachel the Clueless Investor

 As I continue to dissect Rachel's budget, it's become clear that she hasnt got a clue about investing or saving for that matter.  I mean as an individual , as it goes without saying that Labour dont want to make any savings.  

She has been tinkering with ISAs, savings, dividends making things worse not better.

So she is pretty clueless about investment and savings as well as clueless about basic maths and economics. 

At risk of mansplaining, I will go through what she could have done which would have been a win-win.

Let's start with the big picture.

The UK economy is in trouble. 

The debt pile is huge and it's getting bigger. Rachel knows this so the budget was really about

1/ Keeping her job

2/ Stopping the bond markets betting against her (raising taxes)

3/ Keeping her job by giving lots of freebies to the welfare class (who generally vote Labour).

So currently the cost of borrowing is high.  The 10 year gilt price is 4.5% (there's a touch on yield inversion happening which is often an indicator of a pending recession as the 30 year is 4.38%).

So it would make sense if Rachel could borrow money at a lower rate.  Us, the tax payers, are currently paying between £105 - £110 BILLION each year in interest payments to China and other governments to borrow money from them to give out as benefit handouts, jobs for the boys in quangos etc.

So if Rachel could borrow at 3.6% instead of 4.5% that could translate into significant money. So I think she could quite easily borrow £180 BILLION at 3.6% instead of 4.5%.  That would save £2.8 BILLION in interest payments per year.

Ironically the government already has a vehicle for doing this. It's called Premium Bonds.  The underlying bond structure assumes and interest rate of 3.6%. Currently the maximum value of premium bonds that can be held is £50,000. Bonds are backed by HM Treasury not the FSCS. 

Currently Premium Bonds held by the Treasury are worth £130 BILLION. By making a simple change that could be increased to £312 BILLION saving £2.8 BILLION in interest payments per year.

The holdings limit for Premium Bonds is £50,000.  The FSCS limit was £85,000 but was very recently increased to £120,000 - a positive move to encourage saving. This was a positive move by the Bank of England not Rachel so she can't claim it was her idea.

The Premium Bonds holding limit has slowly increased over the years - no really keeping up with inflation.  It increased to £30k in 2003, then £40k in 2014 and £50k in 2015.

So if the FSCS savings protection limit is now £120k (guaranteeing other people's money the government is NOT holding), why not increase the Premium Bond limit to £120k on money the government IS holding?

There are 1.4 Million people with the maximum £50k. I would guess that these would all increase their holding  to £120k if they could so that would automatically raise £98 BILLION of the £180 BILLION.

So returning to Rachel's budget.

Firstly Rachel attacked salary sacrifice reliefs on pension contributions.  Why discourage people from saving into a pension.  Real world workers dont have the luxury of gold plated civil servant pensions so why limit them just to avoid some national insurance.  It's a very short term move to a long term problem.  It will raise costs for employers who are already struggling with jobs taxes introduced by Rachel.

Why reduce the tax-free limit on cash ISAs from £20k to £12k ? Her rationale is to encourage investment in "higher risk" equities.   Holding cash positions is a natural thing for an investor to do. If the markets look risky then holding cash is a sensible thing to do.   This move also discourages investment in cash like products such as Bonds (gilts) and money market funds.  Completely the opposite of what she should be encouraging !  The Treasury (which Rachel allegedly runs) wants to expand the market for treasury bills but these are "cash-like" so falls foul of this change.

So let's look at the UK stock market.  Once the envy of the world it's now feeble compared to it's once world class state.  It was once bigger than the New York and French stock markets combined.  Now it struggles to be bigger than the French stock market.  Companies are de-listing and moving to other jurisdictions.  New listings, particularly in tech, list in America eg ARM holdings rather than list here.  There's virtually zero new listings in London.  

Why?

A key reason is stamp duty.  It discourages the purchase of UK equities. There is ZERO stamp duty to buy USA equities.   In fact pretty much all foreign equities can be bought without paying any stamp duty.  The UK is the odd-ball. 

Share stamp duty raises £3 Billion in tax.   However various estimates suggest removing it would increase the value to the economy of around £250 Billion !  Rather than giving £15 BILLION per year in welfare hand-outs Rachel could have funded the abolition of stock market stamp duty. If Rachel was brave, she could have funded the tax cut simply by scrapping legal aid for illegal migrants which currently costs the UK tax payer £2.4 BILLION! 

The move to discourage holding cash may result in more people buying into equities. Higher risk than cash. But that doesn't translate into buying UK equities.  It probably means buying into USA tech stocks when there's a bubble. This could wipe out lot's of amateur investors wealth which ultimately makes the country poorer.

Why increase tax on savings interest?  It discourages people from saving. Adding 2% interest to savings interest discourages savings in cash - which struggles to keep pace with inflation anyway.

Why tax landlord profits a further 2% (10% in real terms for a basic rate tax payer).  It ultimately will discourage landlords, resulting in tenants being evicted, increased homelessness, properties being sold and the resulting cash moved elsewhere eg purchase of overseas property. 

Rachel seems to be encouraging share ownership yet introduced increases in dividend taxation.  Shares pay dividends !! Dividends are already very highly taxed in real terms.

Measurement drives behaviour.  

If you create disincentives to save then don't be surprised if people stop saving. 

If you create disincentives to invest (in property for example) then don't be surprised if people stop investing (in the UK).