Blogmidsummer

Is it just me or has the last month been rather bizarre?

It started with half of the Conservative post-election budget coming straight out of the Labour manifesto.  We then saw the Greeks apparently agreeing to pay tax for the first time in their existence, The Sun suggesting the Queen was a six year old Nazi sympathiser based on an old home movie and the Scottish Government deciding that as they failed to get a vote for independence we should suffer weather austerity and that we only should have three seasons; Spring, Autumn and Winter, or as us locals call them, late Winter, early Winter and Winter.

Starting with the Balls, sorry, Osborne budget, it was disappointing that the government failed to increase or remove the £1m Lifetime Allowance for pension funds which comes into force next April.  The fact that this has fallen from £1.8m to £1m in the last four years is extremely disappointing and means that even moderately high earners will not be able to accumulate a pension fund able to provide them with an income in retirement commensurate with their salary whilst working.  The change to dividend taxation means that all taxpayers will have an increased tax liability on dividends received in excess of £5,000 in a year and that basic rate payers who fall victim to this new tax will probably have to complete a tax return.

The much vaunted change to Inheritance Tax is not quite as it seems either.  Rather than simply increase the tax free band to £500,000 meaning that a married couple would have £1m between them, instead we have a ridiculously complicated formula that only benefits someone who owns their home and has children to inherit it and doesn't die before 2020.  To be honest I started to read the outline plans as to how this will be implemented and gave up the will to live which was ironic given the subject.

However, the main headlines after the Budget focused on the new National Living Wage which means that from April anyone over age 25 will have to be paid a minimum of £7.20 per hour which will increase to £9 per hour by 2020.  This will mean that employers with low paid staff will have to increase not only those immediately affected but also staff currently on higher pay grades to ensure that there is still a difference in earnings.  Although on the face of it this seems a worthwhile policy is there any other reason why the "nation deserves a pay rise" as Osborne put it?

Well, as well as increasing the take home pay of the low paid the new rules will also significantly increase the amount of employers, and employees, National Insurance that will be paid as well as Income Tax.  Also, the additional costs will have to be met somehow and although some have suggested that job losses will result, I feel that it is more likely that prices will have to rise and that may well suit the government down to the ground as I will go on to explain.

To put it simply, inflation is the friend of those in debt and the enemy of savers, and, good reader, our country is seriously in debt.  The UK currently has £1.56tn of loans outstanding which is the equivalent of 81% of GDP.  To put that in perspective in 2002 the national debt was 29% of GDP.  Even in "austerity" the amount we owe is increasing by £2bn a week and the chancellor's latest forecast is it will be 2020 before we will stop adding to the debt burden.

So how will we be able to repay this?  Well as the Greeks have discovered there is always a day of reckoning and I would not be surprised if those in power feel that the best way for us to deal with this problem is to "inflate" it away.

For example if inflation averages 2% per annum, in 30 years' time the real value of our current debt would be £861bn.  However if inflation averaged 5% per annum it would be equivalent to £360bn and at 7% it would be a measly £204bn.  This is why when I ask clients how much they paid for their first house, if they bought it in the late sixties or early seventies the typical answer is less than £5,000, which today seems a pittance thanks to the inflation we saw in the 70's and 80's, but at the time was regarded as a significant sum of money.

So, do not be surprised if we see an "unexpected" rise in prices and the headlines that will go along with this, although probably not in The Sun.

Steve
Author
Steve Forbes
Managing Director
Alan Steel Asset Management Ltd is authorised and regulated by the Financial Conduct Authority

The Financial Conduct Authority does not regulate tax advice

This letter is the personal view of Steve Forbes. Please check the appropriateness to your individual position with your adviser before taking or refraining from any action.