If I Were a Rich Man

I'd like to congratulate Sir Keir Starmer and the Labour Party for their victory in the next general election. Liz Truss has been Liberal, Conservative and now appears to be, covertly, Labour. And a great asset to them she is too. Right from the start she's set out to alienate great swathes of the electorate who voted Tory last time out, and probably also before that. These are the huge percentage of floating voters who have no lifelong allegiance to any party but vote for the party they see as being best for them at that point in time. Or least worst, anyway.

These people aren't on an MP's salary and gold plated pension. They're not bankers, earning more money than they can spend and then getting huge obscene bonuses on top. They're the ones who sell these people their new Bentleys and serve them their expensed lunches and corporate dinners. Bankers being able to save and invest even more money won't help normal people or small businesses pay their fuel bills. Huge bonuses won't be used for philanthropic ends.

If Liz were ever to look for a well paid seat on the board of a large financial institution when she finishes PM-ing, removing the cap on Fat-Cat bonuses will look good on the CV. Would it be cynical to suggest that she recognises her tenure may not extend beyond the next general election, and already has an eye to the future?

Reversing the National Insurance increase will benefit working people who earn over the threshold £12584pa. Earning below this, or not working, or retired and it won't make any difference. The more you earn the greater the benefit, so favouring the stereotypical Tory supporter. The reduction in the basic rate of income tax to 19p coming a year early will help more people, but scrapping the additional rate of tax is a tax cut for the rich.

The extra debt that's being amassed will however be paid ultimately by all taxpayers. If there's a change of government in the next general election (due by January 2025) more of the burden may be taken by a windfall tax, corporation tax increase, or similar, on big businesses, but if Ms Truss (sounds too much like Mistrust!) is still in charge the lower paid will likely have the heaviest burden. It's a sad fact that very high earners often have ways of paying proportionately less tax than us mere mortals.

And that debt time bomb continues to grow, not just with further spending (with money they don't have), but also due to increasing interest rates. And interest rates will keep rising to try and control inflation. This has worked in the past by restricting consumer spending - but this time that's already happened with necessities increasing in price. People are starting to struggle to afford basics, let alone any form of luxuries. Apart from those in the higher socio-economic groups, who have enough to carry on and are therefore protected from the real world. Tax revenues then are falling as people stop spending, so government debt continues to increase. Our debt - or at least one we'll ultimately have to pay.

The huge profits announced this year by some energy companies have been protected, it's said, as they need the money to fund research into renewable and other sources of energy which will benefit us in the future. They'll help us become less reliant on other countries, and protect us from high and fluctuating costs. Liz Truss wants the UK to become a net energy exporter by 2040, reversing energy imports which have been increasing since 2004. Who's going to fund this, and who will benefit? 

I may be missing something, but haven't we had north sea oil for decades, and been spawning ever increasing numbers of wind turbines over the last 20 years. Why then have our electricity bills never been higher, and I struggle some weeks to get diesel for my truck? Something's not quite adding up. The first wind turbines will be coming up to being taken down and replaced soon as they reach the end of their 25 year life, which will be a further cost preventing any savings being passed to the consumer. Energy bosses will still be able to receive five and six figure bonuses though, which will take the sting out of their winter electricity bills!

The recent announcements seem to be based on 'Trickle Down Economics', based on an ideology that says 'if we reward those who are already wealthy, the whole of society will benefit'. Think 'Downton Abbey', or 'Upstairs, Downstairs, and make your own mind up. 

Keep in mind also that the government has blocked any independent forecasts being published prior to this fiscal statement. You have to ask why they don't want us to see what the office of budget responsibility forecasts.

If the tide turns and Sir Keir moves into number ten the general populace will have more money in their pockets, high earners and fat cats will still have more than enough, consumer spending will therefore increase which will benefit businesses large and small, helping to lower unemployment, therefore increasing tax revenues which will then help to start making a dent in the national debt. 

So perhaps Liz Truss is right. Making unpopular decisions now will benefit us all in the long run!

Sustainable Borrowing?

Many years ago I worked for a finance company, providing credit facilities to motorcycle dealers to enable their customers to buy bikes. At that time Honda advertised their Cub range to commuters as a cheap way to travel to work, and the iconic machine has sold over 100 million world-wide since 1958.

Most buyers however were teenagers chasing a dream, but whoever the customer was it was always drilled into us to prove their ability and willingness to repay the loan before granting the credit. 

This was in the days before computers. A credit check was done by the telex operators sending off the customer details, and the result coming back a couple of hours later. If that was inconclusive an enquiry agent could be hired to physically check out the details we'd been given. Time-consuming, expensive, and far less effective than todays data and algorithms.

Then we looked to see if the proposed purchase fitted the buyer. A 70 year old pensioner buying a Honda 750 was likely to be doing so on behalf of a grandson. If he couldn't get credit in his own right it was unlikely he'd repay with his grannie's name on the finance agreement.

It was a high-risk business, but ultimately turned a profit - possibly helped by the not inconsiderable interest rates being charged.

Those that didn't pay had it reflected on their credit file, meaning the next time they wanted to borrow money the mainstream banks wouldn't help and they'd pay higher rates to get the money elsewhere. This cycle would be repeated with further defaults, until ultimately they'd run out of lenders.

But even those willing to repay the loan could find their circumstances changing, and suddenly their ability to repay had gone, and they also defaulted, and a credit file made no distinction between them and the serial defaulters.

We've been told today that energy bills are to be capped at £2500 for a typical household until 2024. That's higher than last year, but still very welcome considering what we were potentially looking at. The cost is said to be in excess of £100 billion, and will be funded by government borrowing.

The government wants to cut taxes, not raise them, so in order to help people with energy bills the money will have to be borrowed. But when governments borrow the money has to be repaid eventually - with interest. That means taxpayers ultimately pay.

The total amount the government owes is called the national debt, which is currently around £2.4 trillion - almost as much as the total of all goods and services produced in the UK in a year. Interest on this over the next two years is expected to be around £100 billion, and interest rates are increasing.

Traditionally the government borrows by issuing bonds - basically interest-bearing IOUs - which are bought by investors, pension funds and private individuals. UK government bonds are known as gilts - short for gilt edged securities - seen as a solid investment as they have never yet defaulted on a repayment.

However like any borrower there must be a limit to borrowing, based on their perceived ability and willingness to repay the debt. They will always want to honour a debt, but the ability is dependent on the money they can raise - in other words taxes - which is finite. Particularly if you pledge to reduce personal taxes and don't want to levy windfall taxes or other increases on businesses.

There has to come a day of reckoning if it isn't managed along the way, which would affect us all. The cost of this current crisis hasn't been lessened, just deferred, like any buy-now-pay-later scheme which we're repeatedly advised to avoid.

The government could do worse than follow traditional credit advice and learn to budget more effectively now, rather than face a situation like the Greek debt crisis later.