A Personal Stress Test
You may have seen a recent documentary on the behind the scenes workings of the Bank of England. Part of it focussed on the report they were asked to prepare by Parliament on the ability of the UK’s financial system to withstand a no-deal Brexit. The Bank created what they envisaged as the worst possible outcome if we experienced a disorderly no-deal when we leave the EU. Their scenario factored in an 8% fall in GDP, unemployment up to 7.5%, inflation over 6% etc.
The report stated that even in this scenario their stress tests showed the UK financial system was robust enough to cope and the major banks would remain solvent and not need to be bailed out as they were in 2008.
The report clearly stated “This analysis includes scenarios not forecasts. The scenarios illustrate what could happen, not necessarily what is most likely to happen under a range of key assumptions.”
Was this important caveat heeded? What do you think? Instead headlines shouted “Bank of England predicts economic disaster under no-deal.” The headlines could just as easily have been “Bank has a guess at what the most harmful Brexit may look like” but I suppose that is not much of a story.
As one of the Bank’s media people, exasperated that the main message in the report that UK banks could withstand a worst case scenario was ignored, stated “we have done the writing we now need to teach the journalists how to read.”
A forlorn hope I suspect.
Ignoring the hyperbole it is of course vital that those in charge of the nation’s finances keep an eye on what may happen in the future to ensure decisions made now don’t have unintended consequences if events do not pan out as expected. It is something that is worthwhile doing from a personal finance point of view given the changes we may see in taxation.
To be frank we have had a pretty settled tax system for the last thirty plus years. The Labour government between 1997 and 2010 did not make major changes to the personal taxation regime they inherited and this continued with the coalition government of 2010 and the current government. However there is currently a chasm between the two main parties philosophies on tax and as it is odds on we will see a General Election before the end of the year it might be prudent to undertake a personal finances “stress test” in terms of taxation plans between the two and the impact this may have on your own families “economy.”
Like the Bank of England a lot of guesswork is required. However, this is what we know just now. In the few weeks that Boris Johnston has been Prime Minister, and during the hustings with Jeremy Hunt, he suggested that he would be keen to raise the higher rate income tax threshold considerably as well as relook at the tax system.
I would be surprised if he did not campaign on the basis of making the tax system fairer for the “middle classes” whom he has suggested have borne too much of the burden in recent years. There have been suggestions he would like the higher rate threshold to increase to £80,000 from the current £50,000 level and he may well alter the level at which Stamp Duty Land Tax is paid on property to a much higher starting threshold. Ignoring the rights and wrongs with this philosophy from a personal finance point of view this is the scenario that is likely to produce the least stress (in the short term anyway!).
On the other hand the Labour Party, under Jeremy Corbyn, has made it clear their goal is to redistribute wealth. Their 2017 manifesto proposed introducing the 45% tax rate at £80,000 and creating a 50% band on income over £123,000.
They have mooted abolishing Inheritance Tax and instead introduce a lifetime gift allowance whereby each individual would be able to receive gifts totalling up to £125,000 free of tax with gifts thereafter being added to their income in the year they are received and taxed accordingly. Given their proposed tax bands this means quite probably at 50%.
They have also suggested abolishing Council Tax and replacing this with a tax on property based on the property’s real value rather than bands as Council Tax is levied at present.
Of course if we have an election they may temper these proposals in their next manifesto but it does look like we are on the cusp of seeing the biggest difference between both main parties tax and spend plans since the early 80’s when Michael Foot and Margaret Thatcher were the party leaders.
However, unless there is a major change from their plans in 2017 those that are high earners and have no control over how their income is provided may well find their disposable income is far less than it is just now in the event of a Labour government and maybe should temper any financial commitments accordingly until such time as the next government is known.
We will of course know more when the parties produce their manifestos, and at that time what, if any, action it may be prudent to take. In the meantime it may be more than a no-deal Brexit that will have an impact on your wealth.