Is The UK Becoming A Poor Country?

Welfare Trait

More than half of all UK households – that’s about 36 million people or 54.2 percent of the total population − get more in state benefits than they pay in tax, according to a report by the think tank, Civitas. That compares with about 24 million people at the beginning of the century when Tony Blair was newly in power.

Benefits include universal credit, jobseekers’ allowance and the state retirement pension plus services provided by the state such as schooling and healthcare. The poorest fifth of all households receives on average £17,600 more in welfare and other benefits than they pay in tax. The average family receives £5,000 a year more in welfare and services than it pays in taxes. One in five people in England and Wales (9.8 million) considers themselves disabled, according to 2021 census data. This includes people who consider they have mental-health issues.

The extraordinary government-support programme during the coronavirus pandemic – paying people to stay at home, for which Boris Johnson and the current prime minister were responsible − seems to have changed the mindset of a large part of the country. Millions of people now believe that the state owes them a living. This was articulated by a former leader of the Conservative Party, Sir Iain Duncan Smith MP, who said last weekend: “Lockdown changed the psyche of the British people”. National dependency on the state spiked between 2020-22 as tax receipts nosedived and state spending soared.

The figures produced by Civitas did not include the cost of the furlough scheme nor the costs of current government subsidies to both household and business energy bills. The Energy Price Guarantee and the Energy Bill Relief Scheme for businesses will cost £43.2bn this year and £18bn next year, according to the OBR. Nor does it consider the phenomenon of millions of people – not least civil servants − answering emails in their dressing gowns, also known as working from home (WFH).

How is all this possibly sustainable? It turns out that the top 10 percent of earners (widely referred to nowadays as “the rich”) pays 53 percent of all income-tax revenues. The top 20 percent of earners collectively pays 83 percent of all income tax.

What would happen if a goodly number of those “rich” people decided that the quality of life were better elsewhere? Most of the electorate have an incentive to crank up the welfare machine further; but many of those who pay for it − and who choose to pay their own healthcare costs given the desperate condition of the NHS − might decide to opt out.

Soak The Rich!

Labour is committed to abolishing the “non-dom” status of well-off people who have familial and heritage links overseas. Just to be clear, people with non-domiciled tax status have always paid the full whack on their UK domestic income. Their privilege is that, as in many other countries − but not, of course, the US − they do not pay UK tax on overseas income that is not repatriated to the UK. This ensures that personal taxation remains in symmetry with corporate taxation.

In practice, there are anomalies in how this status is granted. It seems to me perfectly reasonable that the prime minister’s wife, Akshata Murty, enjoyed non-domiciled status until she voluntarily renounced it. She is an Indian national, and most of her fortune was ultimately generated in India by her billionaire father. It is quite possible that she might decide to return to her native land to live one day in the future – she has a perfect right to do so. On the other hand, it is less clear to me why Sajid Javid MP, born in the UK and a UK resident throughout his life, should have been able to claim non-domiciled status simply on the basis that his father was born in Pakistan.

What is certain is that if Labour goes ahead with the abolition of non-domiciled tax status, many very wealthy people of foreign heritage who chose to live here will think again. That includes dynasties like the Mittals, the Rausings, the Makhtoums and many others. All of these families have been big spenders and generous benefactors in the UK.

There is also the little matter that it is pretty much impossible to assess wealthy people’s overseas income without spying on them. I suppose that business class on Emirates flights will be choc a bloc with mid-ranking HMRC officials going to snoop on people in Dubai. They will not receive the typically gracious Arab welcome.

In practice, the super-wealthy will brush a Labour government aside like an irritant wasp. The real victims of Labour’s ‘soak-the-rich’ initiative will be the long-suffering, indigenous middle classes. Those who have been provident and have bought themselves a bolt hole in the countryside to escape the ghastliness of London, Birmingham and Manchester will be branded criminals who are depriving poor country folk of the chance to buy a home. They will be charged double (nay, triple) council tax on their unassuming cottages (on which most often they have already spent good money refurbishing, using local tradesmen).

But even before an incoming Labour government has the chance to soak the rich, the tax regime bequeathed by the outgoing Tories will already have stifled the economy.

The CBI director general warned on Monday (23 January) that the UK’s tax system is about to go from being one of the most attractive for foreign investors to one of the most repellent. Tony Danker reminded us that corporation tax is set to rise from 19 percent to 25 percent in the spring. At the same time the “super deductions” initiated by Rishi Sunak when chancellor are to be scrapped. That will disincentivise new business investment which is already running at anaemic levels when compared to our major competitors.

The UK is now labouring under the highest tax burden as a proportion of GDP since WWII. And yet the national finances are deteriorating relentlessly. This week we learnt that government borrowing for the month of December had hit a record £27.4bn – way more than expected, and the highest figure since records began in 1993. This takes the total national debt to £2.5trn (that’s 2,500 billion pounds) or about 100 percent of UK GDP. That new borrowing included £7bn for domestic-fuel support and £17bn in additional interest on the national debt, given rising interest rates.

In an OECD report out this week the UK was ranked 35^th out of 38 countries for investment. Despite the government’s much vaunted “levelling up” agenda a lack of investment is most acute in the north of England. The truth is that inflows of foreign-investment finance has never recovered from the impact of the Brexit referendum in June 2016.

All this leaves the chancellor with very little headroom for tax cuts in the upcoming Budget, on 15 March.

The UK And The Tories Have Shifted To The left

Something very strange is happening within the ruling party. Tory ministers and MPs now vie with one another to vaunt how left-wing and woke they are.

Blair’s government (1997-2007) was accused of being “Tory lite”: but its thinking was actually further to the right of current Tory thinking. When Kwasi Kwarteng wanted to reduce the top rate of tax to the threshold at which it had remained throughout the Blair years (40 percent), Tory backbenchers were shocked. Yet Blair’s senior henchman, Peter (now Lord) Mandelson once mooted that he had no problem at all with people becoming “filthy rich”. No Tory could get away with saying that today.

New Labour obliged single mums to report for work within a year of giving birth. It made disabled benefits dependent on drug tests. Under the Tories, more than half a million working-age people have left the workforce altogether and subsist on benefits.

Under Blair, the Labour government tried to introduce an element of choice into the NHS using private-healthcare providers. Blair wanted 40 percent of operations to be carried out in private hospitals “under the NHS banner”. His party favoured the pursuit of excellence through foundation hospitals. John Reid, when health secretary, railed against the “culture of resistance” in the medical profession which opposed all reforms. Under the Tories, however, we were instructed to clap the NHS even as it withered; and the only panacea advanced is the invariable one: more cash to be hurled in its direction.

It’s interesting that New Labour had a much more robust approach to illegal immigration than the current crop of Tories. Failed asylum seekers were obliged to pay for non-essential healthcare: “It is a National Health Service, not an International Health Service”, said minister of state John Hutton – and was applauded on all sides. New Labour gave asylum seekers vouchers, not cash. Blair wanted to make it harder for opportunistic lawyers, financed by legal aid, to challenge deportation orders. Liam Byrne MP wanted to “flush illegal asylum seekers out”. Yet Theresa May’s attempt to create a “hostile environment” for illegals resulted in the Windrush Scandal for which the Tories now apologise. If any of my British readers have ever fallen foul of the US immigration authorities, I would love to hear from you. They are much tougher than ours.

Blair introduced tuition fees for university students because he (mistakenly, in my opinion) wanted half of all youngsters to go to university. But not everyone is a book-learner, even if many of my readers are, like me. And after all, there are at least eight types of human intelligence. Blair replaced student grants with loans. He even resisted grade inflation – unlike the Tories.

Even Gordon Brown thought that “the days of Britain having to apologise for its colonial history are over”. He clearly spoke too soon. The two grandparents I knew – my paternal grandfather and my maternal grandmother, both long-since gone – were staunch Labour voters who were proud of the British Empire. That mindset no longer exists.

Clearly, the prevailing political climate has changed. Political scientists would say that the Overton Window has moved (or even closed). Politicians do not determine the shape or location of the Overton Window; rather, they chase it so as to be considered relevant and on-message.

A principal reason for massive changes in perceptions and expectations is probably that social media, particularly amongst millennials (that’s roughly people born between 1981 and 1996), has fostered an obsession with identity politics and gender conflicts which simply did not exist before. That is why most people of my demographic find it all bewildering.

We should also recall the historical context. Blair came to power just seven years after the fall of the Berlin Wall and six years after the collapse of the Soviet Union. There was a sentiment that the West – and certainly the US – had won the Cold War. Soviet-style Marxism-Leninism had been completely discredited. Nowadays, the millennials have forgotten all that – if they were ever taught it at all. And their inclination towards collectivist state intervention is reinforced by the millenarian vision of climate emergency. The young do not seem to grasp the fundamental connection between economic and personal liberty advanced by conservative thinkers such as Friedrich Hayek (1899-1992).

The Tory party is now not just left-leaning but is going woke. We learnt from the Telegraph on Tuesday (24 January) that all prospective Tory parliamentary candidates now have to go through inclusivity training, which includes a multiple-choice exam in “white resentment”.

Customer Service Is In Freefall

About 80 percent of the UK economy resides in the service sector, yet customer service here – never the best when compared to the US, Japan and elsewhere – is poor and getting worse. UK PLC is all up for ESG (meaning positive environmental, social and governance norms) but many UK firms don’t seem to like their customers very much.

Many of the bureaucratic chores of modern life, like amending an insurance policy, changing bank details, upgrading a mobile phone contract or changing a monthly direct debit with a utility company have become the stuff of nightmares.

For my sins, I am the treasurer of a benefice within the Anglican diocese of Ely. I was recently informed by Barclays that they were about to close our bank account. This would not have rocked the world, but it would have seriously perturbed various local clergy who claim motoring expenses through this account.

I decided a branch visit might help – only to find that the branch of Barclays Bank in Thetford where the account is nominally maintained was closed down in the autumn. I then spent 30 minutes in a telephone queue listening to jarring music, while trying to get through to the corporate help team. The community team which used to help with such things has been abolished and we have been subsumed into the world of commerce. Eventually, I got through to a call centre in India and found myself in conversation with a gentleman who seemed to find me totally incomprehensible. After two or three minutes the call was terminated – whether by the operative in Bangalore or because of a technical hitch, I know not.

I don’t blame the gentleman in question: rather, I blame Barclays and others who outsource their customer service and support to the cheapest provider − or to half-baked artificial unintelligence. These companies are always droning on about support for mental health – but what about the mental health of their customers?

It does seem in the UK that private-sector companies are becoming more like public-sector bodies. Now that the HR departments have taken control of the destiny of companies, the well-being of employees has become more important than that of customers. It’s clear that the endgame for banks will be to have no branches at all and to require us only to communicate with them using apps on our mobile phones. Airlines now require us to check in our own luggage. Our service culture is in swift decline, seemingly along with everything else.

Back To The 1970s? No – It’s Much Worse.

The last time the UK was trapped in a gloom loop (as I call it) was in the 1970s. That was when huge economic challenges – rampant inflation, unemployment, perennial strikes, a balance of payments crisis and a falling pound − collided with the perception that the country was being demoted in the world. The British Empire effectively ended with the debacle of Suez in 1956; although it was not formally abolished until the British Nationality Act of 1981 − ironically under Margaret Thatcher. But in the 1970s the UK was known as the “Sick Man of Europe” – which was why Europe seemed to be the answer.

The economy did recover, and indeed under Thatcher’s premiership (1979-90) the UK resurged as a rich and prosperous country with a clutch of multinational corporations based in London − which became the world’s most dynamic financial centre. The Falklands War (1983) reminded the world that the UK was still a formidable military power, with a standing army of over 300,000. It’s at about 88,000 today if you include the Royal Marines.

Living standards rose rapidly under Thatcher and then, after a recession in the early 1990s, they also rose under Blair (prime minister 1997-2007). The UK was seen as politically stable − the country had just three prime ministers in 28 years, and it became a natural destination for foreign investment. Business and capital formation continued apace, and the country led the world in life sciences. The UK’s soft power (referred to as “Cool Britannia”) was envied from afar.

Then came the financial crash – further to which the banks were bailed out with public cash, and no one was punished. There followed the monetary experiment by the global priestly caste of central bankers – near-zero rates and compulsive quantitative easing − unrestrained by either politicians or electors.

This time round, in the early 2020s, the UK is confronted with a precipitous decline in living standards, combined with a suspicion that we don’t count for much on the world stage either. The exciting post-Brexit trade deals have not materialised – and certainly not with the US. We are now stuck between the protectionist rock of the US and the hard place of the EU. True, Johnson led the initial coalition of the reluctant against Russia’s aggression against Ukraine. But if we have a clear voice in NATO, we have none in Europe.

The Commonwealth is a national asset − but it is too amorphous to be an effective instrument of our foreign policy. The first state visit hosted by King Charles III was that of President of South Africa, Cyril Ramaphosa, who has blamed the Ukraine war on NATO. This week he hosted a visit by Russian foreign minister Sergei Lavrov – and confirmed that joint military exercises with Russia would go ahead. The honours bestowed on Ramaphosa in London have not yielded a return on investment.

The UK, in terms of GDP per capita, will soon fall below that of the poorest state of the US, Mississippi. And given our sluggish growth rate we shall be overtaken within 10-15 years on that count by Poland – a country which has been cutting taxes of late and where real wages are rising. The era of cheap energy, caused by geopolitical disruption and the push to net zero, and thus of cheap food, on which UK prosperity has been built, is now over. The momentous impact of this paradigm shift is compounded by the simultaneous end of near-zero interest rates which (as I have banged on about here for years) were never going to last.

What is clear is that both the Tories and Labour – and the latter will probably form a government in the final quarter of next year − are determined NOT to face the reality that a country that was once wealthy is becoming poor. Neither articulates the essential message that to govern is to make trade-offs. Higher taxes or poorer public services? They all want to lavish money on their favourite causes while ignoring what makes countries rich in the first place – unimpeded wealth generation by ambitious individuals.

People rarely become suddenly poor because of an act of God. They become poor because they gradually realise that they have been living beyond their means for years. It’s the same with countries.

Argentina was one of the most prosperous countries until the mid-20^th century – wealthy, stylish and glamorous. It now bears the dubious distinction of being the country that has defaulted more often on its national debt than any other. Its pantomimic political class – Peronists, and the rest – lived in a state of delusion for a generation.

There are parallels.

Victor will be appearing the Master Investor Show on the 18^th of March. Get your free tickets here.