The Truth, The Whole Truth ………..

Table of Contents

James Baxter, Tideway Founder
James Baxter, Tideway Founder

Sadly, not when it comes to politicians.

It now looks pretty certain we will have a new Government by this time next week. I generally try and avoid politics in these updates and so I will today. I will however try and put some context around the UK economic background to this election with some basic fact checking.

Did Liz Truss Crash the UK Economy?

Liz had many failings in her brief time as UK Prime Minister, but crashing the UK economy was not one of them, unless she simultaneously managed to crash the economies of the US and Europe.

GDP Annual Growth Rates 2010 – 2021 with Estimates Thereafter

GDP Annual Growth Rates 2010 – 2021 with Estimates Thereafter

Liz caused a spike in gilt prices by side stepping a fiscal check on her proposed tax cuts. This was amplified by a margin call on pension funds from complex gilt derivatives who had to sell gilts to fund their calls. This spike passed quickly.

Covid crashed the economy initially in 2020 for obvious reasons. Post the lockdowns we got a splurge of upward activity which has settled back as predicted once that splurge abated. The UK did briefly go into recession at the end of last year, but you probably did not notice, it was very shallow.
Economies around the world have all been through the same gyration and are recovering again and have proved to be very resilient. The UK is not much different to anywhere else.

The UK’s reaction was amplified versus other countries, most likely down to our approach to the lockdowns and the UK’s generous furlough scheme, step up Boris and Rishi!

Is Rishi Sunak to Thank for Lower Inflation?

No. Again inflation rose sharply in 2021 with the global response to Covid (i.e. printing money to stave off severe recessions) combined with a sudden supply shock from the Ukraine/Russia conflict and slowness of supply chains to restart. I seem to recall a tanker blocking the Suez Canal did not help matters!

Harmonised Headline HICP inflation in the G7

The Bank of England, which sets interest rates in the UK, not the Government, put rates up in line with other central banks and inflation has fallen around the world. It has been a little more stubborn than expected everywhere and perhaps more so in the UK, most likely down to Brexit and our reliance on imports. A stronger Pound is helping on that front. I’ll put Brexit on David Cameron, although of course he did not act alone.

Will Labour Be More Reckless with Government Borrowing Than the Conservatives?

The answer here is that both Governments can appear to be reckless and prudent. It actually comes down more to timing and the hand they are dealt as they come into power plus the subsequent events they have to deal with, rather than the political leaning.

Why to Invest in Offshore Invemtment Bonds: UK Annual Net Borrowing % GDP

This great chart shows that Covid spending outstripped what was needed to rescue the banking sector and that no Government has had much wiggle room for the last 20 years.
Rishi has undoubtedly been the biggest user of a budget deficit in the modern era fighting a Covid induced recession. That he spent so much so quickly on stuff that had not been spent on before, is it any wonder that some went astray?
This was not just a UK phenomenon. NBC News has called the looting of the US Covid relief programme the biggest fraud in a generation.
Like Tony Blair in 1997, Keir Starmer is coming in with momentum on his side and public sector debt coming down fast, which may give him a bit more freedom in the coming years. Let’s hope he uses it wisely.

Will Labour Tax More Than the Conservatives?

Current rhetoric from the right would suggest that this is inevitable but noting the improving state finances highlighted above, it is not a complete given that the next Government will need to tax more.
I found the chart below tracking basic income tax rates and VAT which shows both parties lowering basic rate tax and increasing VAT to where we sit today with both at 20%.

How Tax Rates have changed since the 1970s

Tax is always close to the top of the agenda at any election, and it is something politicians will always fiddle with because they can. This time will be no different, I am sure.

In Wednesday’s debate Keir suggested he would leave the basic rate tax, national insurance rates and VAT rate unchanged. The Labour manifesto also suggests corporation tax at 25% is safe, but that still gives him a lot of scope!

  • The income tax rate bands. These have been the Conservative’s stealth tax increases, increasing real marginal tax rates on lower earners. When the nil rate band is lower than the basic state pension something is not right. Dare I mention the Reform party, they are suggesting a £20,000 nil rate band and £70,000 higher rate threshold, these would make more sense relative to the current costs of goods and services.
  • Higher income tax rates. Labour’s Alistair Darling brought in a 50% rate in 2010.
  • Capital gains tax (CGT) rates which are currently half income tax rates. Fiscal studies show that collection rates decline when CGT goes above 20%, but the Labour manifesto name checks private equity style ‘carried interests’ as a particular target.
  • Inheritance tax produced a record receipt last year and is likely to become a bigger focus.
  • Pensions, just leave them alone why don’t you! But no doubt we will get some more fiddling.
  • And those taxes that don’t yet exist. Will we see a wealth tax?  We won’t be the only country to apply one if we do.


How to Soften the Pain

I met an old colleague last night with whom I pretty much started my career in financial services with and we debated the pros and cons of one tax wrapper – the offshore investment bond. These went out of fashion during the post financial crisis, low interest rate world, when the only real investing you could do was for capital growth, and inevitably at higher risk. Now we have real returns on corporate bonds ahead of inflation, which is the norm not the exception, and offshore bonds are seeing a resurgence of interest.

The ability to defer income tax in a non-contentious tax wrapper is a great privilege as we know in our ISAs and SIPPs, the offshore bond is no different and is of great value when these other two wrappers have been filled up.

If capital gains and income tax rates (and how they are applied) were fixed forever, offshore bonds might have less appeal. But, bearing in mind offshore bonds are now cheap to set up, cheap to run and free to collapse, in a world where politicians keep fiddling about with rates and rules, why pay any excessive tax until you absolutely have to.

This approach applied to the pensions Lifetime Allowance tax worked very well. It was always a complex, contentious, excessive and ill-conceived tax. I don’t think any of our clients ever paid it, as we advised to defer it and now it’s gone! Will it be back, we don’t know.

Fiscal studies show that politically motivated higher rates of tax usually end up with lower receipts – politicians should learn from that, but they don’t. The good news is that with sensible planning there is often a way of deferring liabilities when such excessive rates apply. The offshore bond is a great tool for deferring both income and capital gains tax and we have a great set up with Canada Life, one of the leading providers of these wrappers.

In considering the use of these wrappers and other tax wrappers open to us we need to be open minded to the possibility of very different rules and rates in the coming years, a bird in the hand is worth two in the bush!

We had some great England football analogies discussing our fund selections yesterday, but I’ll keep those for another week as England undoubtedly and unstoppably progress through the Euros!

In the meantime, a few links for you;


  • Our latest guide on offshore bonds.
  • Tideway Wealth Manager Mihir Choughule’s first appearance in the “Not the Martin Lewis podcast” is out on Monday 1st July. The page can be a bit confusing, so be sure to click on the “Not the Martin Lewis Podcast,” which has the same image/logo as the regular ‘Martin Lewis Podcast’.
  • Lastly, please be reminded to register for our next webinar on July 8th, covering the Election Debrief and Quarterly Investment Performance.

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