Delays, debt and taxes
For mere mortals, the old adage is “there’s nothing so certain in life as death and taxes”. For governments, it seems the equivalent is “there’s nothing so certain in government as delays, debt and taxes”.
Last week, the Jupiter Merlin Roadshow came to town in Birmingham. Travelling up from London to Birmingham New Street, one could not but help being struck by the significant construction works at Euston station, the great holes in the ground on the approach to Birmingham and the vast, sweeping scar across the countryside through the Chilterns extending through what little remains of Shakespeare’s prosaic Forest of Arden, that which is not already under tarmac, concrete and steel.
Welcome to HS2! The highspeed railway construction project with an end and no beginning (when travelling south; vice-versa in the opposite direction). With its London terminus no longer at Euston, but a barren reservation of platforms in West London at Old Oak Common, the whole point of clipping 10 minutes off the journey time between the UK’s first and second cities (Phase 1) is immediately rendered void when, until 2035 at the earliest, you have to complete or begin the journey on the clickety-clack line running between the nether-end of Willesden and central London. As for the original strategic purpose, of then creating high speed links with Manchester, Leeds and Sheffield (Phase 2), all of that is under suspended sentence of cancellation. And the cost of this infrastructure white elephant? £100bn and counting, already more than double the original estimate. Phase 1 is between three and seven years behind schedule. This project easily surpasses Crossrail (now the Elizabeth Line) as the definition of an over-budget, very late-delivered railway project (Crossrail cost a mere £18.8bn, £4bn more than expected, and was completed only four years late).
The UK seems to have a very big problem with infrastructure planning, development, delivery and budgeting. It is an alarming prospect as we embark on the biggest infrastructure programme in more than a century. On the path to carbon net-zero, the strategic shift in the means by which we generate electricity from hydrocarbons to alternatives; what should be a doubling of generating capacity consistently to meet the potential demand, not just for the next decade but the foreseeable future; and significant upgrades in electrical transmission and its load-bearing capacity to the point of use where all the charging kit to refuel car batteries will also be needed. What can possibly go wrong.
Last week, the Jupiter Merlin Roadshow came to town in Birmingham. Travelling up from London to Birmingham New Street, one could not but help being struck by the significant construction works at Euston station, the great holes in the ground on the approach to Birmingham and the vast, sweeping scar across the countryside through the Chilterns extending through what little remains of Shakespeare’s prosaic Forest of Arden, that which is not already under tarmac, concrete and steel.
Welcome to HS2! The highspeed railway construction project with an end and no beginning (when travelling south; vice-versa in the opposite direction). With its London terminus no longer at Euston, but a barren reservation of platforms in West London at Old Oak Common, the whole point of clipping 10 minutes off the journey time between the UK’s first and second cities (Phase 1) is immediately rendered void when, until 2035 at the earliest, you have to complete or begin the journey on the clickety-clack line running between the nether-end of Willesden and central London. As for the original strategic purpose, of then creating high speed links with Manchester, Leeds and Sheffield (Phase 2), all of that is under suspended sentence of cancellation. And the cost of this infrastructure white elephant? £100bn and counting, already more than double the original estimate. Phase 1 is between three and seven years behind schedule. This project easily surpasses Crossrail (now the Elizabeth Line) as the definition of an over-budget, very late-delivered railway project (Crossrail cost a mere £18.8bn, £4bn more than expected, and was completed only four years late).
The UK seems to have a very big problem with infrastructure planning, development, delivery and budgeting. It is an alarming prospect as we embark on the biggest infrastructure programme in more than a century. On the path to carbon net-zero, the strategic shift in the means by which we generate electricity from hydrocarbons to alternatives; what should be a doubling of generating capacity consistently to meet the potential demand, not just for the next decade but the foreseeable future; and significant upgrades in electrical transmission and its load-bearing capacity to the point of use where all the charging kit to refuel car batteries will also be needed. What can possibly go wrong.
IHT: a lightning rod for a much bigger debate
This week, The Times columnist Alice Thomson published an opinion article in her newspaper. Ahead of the next election as Conservative backbenchers apply pressure on the government to abolish Inheritance Tax, as well as arguing against ‘the rich’ benefiting from a windfall (Gov.uk reveals that in 2021/22, 27,000 estates paid IHT, 3.7% of the total number of estates settled in the year but a 17% increase on 2020/21), Thomson asserted that the £7.2bn foregone by the Treasury would have to be found elsewhere: “Removing it would necessitate other tax rises or spending cuts”. It almost certainly would necessitate raising taxes elsewhere. But much more pertinently, in the context of examples of government spending on projects such as HS2, is to ask whether it should.
Successive UK administrations, albeit some not quite as bad as others, have a long and inglorious history of a near criminally casual propensity to waste money: poor conception, planning and delivery of IT installation projects; abysmal defence procurement planning, pricing and management allied to fantastical government accounting systems; the prodigious expense incurred in ill-conceived and misunderstood Public/Private Financing Initiatives for capital projects, to name but a few. It is easy to think of it as government money. It is not. It is taxpayers’ money: yours and ours which government has a duty to spend wisely, effectively and efficiently and to extract the best possible value on the taxpayer’s behalf.
The UK has the highest tax burden in history (heavily skewed: the Institute for Financial Studies, the BBC’s favourite go-to independent economic authority calculates that the bottom 50% of UK adults contribute 9.3% of all income tax collected; the top 1% contributes 29.3% and the next 10% of earners another 31.6%); the government has outstanding borrowings of £2.3 trillion exactly the equivalent of the total size of the economy; and yet public services are demonstrably struggling or are in decline, major projects too often shambolic in their execution. Surely the inescapable conclusion is that the model is broken. The question Thomson should be asking is not “where do we find £7.2bn of replacement tax from or do we endure the equivalent in spending cuts”, but “how do we reform public services and government spending to do things differently and maximise their efficiency?”
Successive UK administrations, albeit some not quite as bad as others, have a long and inglorious history of a near criminally casual propensity to waste money: poor conception, planning and delivery of IT installation projects; abysmal defence procurement planning, pricing and management allied to fantastical government accounting systems; the prodigious expense incurred in ill-conceived and misunderstood Public/Private Financing Initiatives for capital projects, to name but a few. It is easy to think of it as government money. It is not. It is taxpayers’ money: yours and ours which government has a duty to spend wisely, effectively and efficiently and to extract the best possible value on the taxpayer’s behalf.
The UK has the highest tax burden in history (heavily skewed: the Institute for Financial Studies, the BBC’s favourite go-to independent economic authority calculates that the bottom 50% of UK adults contribute 9.3% of all income tax collected; the top 1% contributes 29.3% and the next 10% of earners another 31.6%); the government has outstanding borrowings of £2.3 trillion exactly the equivalent of the total size of the economy; and yet public services are demonstrably struggling or are in decline, major projects too often shambolic in their execution. Surely the inescapable conclusion is that the model is broken. The question Thomson should be asking is not “where do we find £7.2bn of replacement tax from or do we endure the equivalent in spending cuts”, but “how do we reform public services and government spending to do things differently and maximise their efficiency?”
Public sector reform: kicking a can down a very long road
Because there is a significant opportunity cost to that wastage. Every pound which is figuratively poured down the drain is a pound that, left to the individual who earned it, could have been invested much more profitably elsewhere to greater economic benefit (which, in the long term, stimulates growth and in turn generates higher tax receipts without the need for higher rates of taxation). Economically and competitively, it is a win/win, a virtuous cycle with the added benefit of attracting not only domestic but foreign inward investment. The converse is also true: that an inefficient public sector creates a significant fiscal drag, it runs the risk of becoming a vicious cycle of declining competitiveness and making the country a less attractive place in which to invest. Of course the state has a duty, funded by taxpayers, to provide essential public services: defence; law and order; a safety net for the most disadvantaged, the vulnerable and the elderly; there are choices to be made in other areas, notably health and education as to whether they should be free at the point of consumption or whether people should be prepared to make a level of direct payment. But beyond those minimum obligations, surely individuals have the right to decide what to do with their own money?
It is the fundamental chasm which divides socialism from capitalism: in a socialist society, the people work primarily for the benefit of the state and themselves second, the state believes it is the most efficient allocator of capital; in a capitalist society, individuals and their families come first, the state must take only what is necessary and the belief is that the private sector is the most efficient allocator of capital.
Which goes to the heart of Thomson’s other observation about the ‘rich receiving a windfall’ should IHT be abolished. Beyond a pre-determined threshold it is their money that is being appropriated by the State on death at the rate of 40 pence in the pound. Surely, at the very least, before it is handed over to the government rather than to the next generation, they are entitled to question whether it is necessary and in what proportion to be assured that it will not merely be poured down the drain by poorly run governments to no good at all.
Public sector reform is politically charged and challenging; on short electoral cycles, politicians constantly shy away from it. They fall into the classic ‘TBD’ trap: ‘To be Decided’, or ‘Too Bleeding Difficult’. Either way, the can is kicked down the road when the bold should be standing up to the challenge. With a maximum of 15 months before we go to the polls, of the main political runners and riders most likely to form a government or coalition, the current evidence says that either none is up for the challenge or all are relaxed about the status quo. As an electorate, we are owed more and better than this.
It is the fundamental chasm which divides socialism from capitalism: in a socialist society, the people work primarily for the benefit of the state and themselves second, the state believes it is the most efficient allocator of capital; in a capitalist society, individuals and their families come first, the state must take only what is necessary and the belief is that the private sector is the most efficient allocator of capital.
Which goes to the heart of Thomson’s other observation about the ‘rich receiving a windfall’ should IHT be abolished. Beyond a pre-determined threshold it is their money that is being appropriated by the State on death at the rate of 40 pence in the pound. Surely, at the very least, before it is handed over to the government rather than to the next generation, they are entitled to question whether it is necessary and in what proportion to be assured that it will not merely be poured down the drain by poorly run governments to no good at all.
Public sector reform is politically charged and challenging; on short electoral cycles, politicians constantly shy away from it. They fall into the classic ‘TBD’ trap: ‘To be Decided’, or ‘Too Bleeding Difficult’. Either way, the can is kicked down the road when the bold should be standing up to the challenge. With a maximum of 15 months before we go to the polls, of the main political runners and riders most likely to form a government or coalition, the current evidence says that either none is up for the challenge or all are relaxed about the status quo. As an electorate, we are owed more and better than this.
QED
As if to prove the point on spending and debt, you will remember back in June, the US suffered its self-inflicted debt ceiling crisis when the Biden government had exceeded the $31.6 trillion maximum borrowing limit mandated by Congress (if we are 100% ‘geared’ in the UK in terms of debt/GDP, the US is now over 130%). It was faced with defaulting on its loans or being unable to continue paying for public services. The resolution reached with the Republicans allowed a modest increase in the ceiling in return for limitations on government spending. That agreement has been busted in less than three months: US government borrowings have already exceeded £33 trillion. A couple of months ago, recognising that the administration is nothing short of fiscally incontinent, Fitch, the ratings agency, downgraded US government debt, thereby pushing up the cost of funding as investors perceived a greater level of financial risk. At one point this week, and not helped by bumps in the road in the fight against inflation, the yield on the US 10 Year Government Bond reached 4.65%, the highest level since before the Global Financial Crisis in 2007.
When governments are careless with their spending as in the UK with HS2, or reckless as some see Biden’s fiscal policies, that risk carries a cost. Surely the taxpayer is due the courtesy and the confidence of knowing whether their hard-earned cash is being put to good use or squandered? Investors have a choice; taxpayers do not.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
When governments are careless with their spending as in the UK with HS2, or reckless as some see Biden’s fiscal policies, that risk carries a cost. Surely the taxpayer is due the courtesy and the confidence of knowing whether their hard-earned cash is being put to good use or squandered? Investors have a choice; taxpayers do not.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
Authors
Investment Manager, Jupiter Independent Funds/Merlin
Investment Manager & ESG Investment Director, Independent Funds/Merlin
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