If the economic recovery in the UK is beginning to make you feel a little bit more confident in your financial future, you are clearly not concentrating. That’s the message from this week’s news.
On Monday we heard from the Labour party about their plans to have a go at the personal finances of anyone they consider to be even vaguely rich. The top rate of tax is to go back to 52% (including the National Insurance payments that insure us against absolutely nothing). Pension relief is to be cut to 20p in the pound for everyone. There is to be a new bonus tax (a bit like the last “one off” bonus tax) and there will, of course, be a mansion tax which will take in every three-bedroom cottage in Fulham as a matter of course. You can say that each one of these is no big deal. Pensions are over-subsidised; bonuses are too high (and banks are state-supported anyway); and the mansion tax might at least cap house prices at the top end.
But together they are a big deal. They won’t raise enough money to make the slightest difference to anything, but they do add complication, confusion and an extra element of ‘hate the rich’ division to our tax system. We don’t really need any of those things.
However, even more of a threat to the wealth of some MoneyWeek readers than the actions of any elected government will soon be those of our non-elected leaders – the Monetary Policy Committee. On Tuesday, Bank of England governor Mark Carney was questioned by the Treasury Select Committee. Two things of interest emerged. The first is that the Bank has effectively monetised a significant chunk of the UK national debt. Quantitative easing (money printing, or QE for short) involved the Bank buying £375bn worth of gilts (British government debt). Reversing QE would involve selling those gilts back into the market. But, according to Carney, “we’re not going to sell £375bn of gilts”. We’ve all suspected for years that this would end up being the case. But now we know.
The second is that Carney expects interest rates to rise to 3% by 2017. This confirms for us something else that we have long suspected: the 30-year trend of falling interest rates is nearly over. Rates might rise faster than that. They might rise more slowly. And either way it still represents a remarkably loose (and experimental) monetary policy. But the direction is absolutely not in doubt. We are constantly told these days – as we were pre-2008 – that housing is a safe place to put our money and that buy-to-let is back. I wonder if we will still think that by the time interest rates have risen by 600%.