Investment and economics are where we prefer to graze but at the present time, the nexus with politics is palpable. Once upon a time, I followed the latter intently although my ardour has long since cooled; I didn’t even vote at the last General Election. It all reminds me of a gameshow; not a great gameshow like ‘Bullseye’ where lugubrious legend, Jim Bowen, brutally informed the losing duo they had now lost £160 in prize money, the hostess trolley and the Goblin Teasmade. Warming to his theme, the televisual torture continued as Jim made it clear the star prize was something “he had to show to them” while proclaiming the lime green Mini Metro L, speedboat or caravan was “what they could have won”. No ….. I’m talking about a terrible gameshow like ‘3-2-1’ where the ‘clues’ were as credible as host Ted Rogers’ wig and became so contrived they’d have baffled Stephen Hawking.
The ‘star’ of 3-2-1 was a dustbin, which appropriately enough, brings me back to the House of Commons. With a few honourable exceptions, it is now packed with such abject mediocrity (and worse) it exists in a bubble of its own making. We all remember how the Kwarteng Budget spooked the bond market, thus defenestrating not only himself but his boss, too. I have a feeling Rachel Reeves’ recent Budget will do the same for her although in this case, it will take a little longer and it won’t account for her boss as he isn’t the type to be burdened by mea culpa.
On the approach to Reeves’ big moment, one didn’t require Nostradamian levels of predictive ability to guess what was coming. The ‘discovery’ of a £20bn black hole carried all the subtlety of a Scooby Doo plot. Readers of a certain age will no doubt remember how Hanna Barbera’s cartoon sleuths always cracked the case of the haunted fairground/theatre/museum/mansion (other paranormal plagued locations were available). I acknowledge, I am guilty of blatant exaggeration here; Hanna Barbera’s scripts were far more believable but you get my gist.
The main problem I see confronting Reeves is that her expectations contradict what free market economics would predict. Despite combining an uplift in NI contributions with inflation busting wage increases, it does not lead her to anticipate weaker job creation or lower pay growth. On the contrary, she naively believes because working people (however one might define them) will not see higher deductions from their payslips, they will be immune from the consequences of such actions. A director of a local business told me within 24 hours of the Budget that due to increased costs, one of its salesforce would now be made redundant. For that individual, it’s going to be the absence of a payslip that’s the problem, not the deductions upon it.
Reeves even doubled down and explicitly suggested that businesses could absorb the extra costs without affecting employment and future wage growth due to ‘efficiency savings’. Whatever efficiencies are (or are not) possible, how can they not have an employment dimension? Even if a company doesn’t shed direct labour and opts to, for example, cut input costs, its suppliers now have less resources, so will need to consider their cost bases. This is such basic stuff it’s concerning the Chancellor of the Exchequer seems oblivious but then, is it really such a surprise when she’s never run a business in her life? Well, not according to her CV, anyway.
But, there’s more because it’s not just about the costs she thinks will be automatically absorbed without incident. Salary uplifts of this magnitude, together with generous awards to train drivers, doctors etc, must be inflationary. Again, this is GCSE level economics. What is the point in avoiding a notional deduction from pay packets if it risks aggravating inflation, consequently affecting the carrying costs of mortgages, credit cards and car loans? Consumption accounts for two thirds of GDP and it is nothing short of gullible to believe higher costs will not be passed on.
My definition of an investment is an initial outlay that, over an extended period of time, more than justifies the return contained within its subsequent cash flows. The Chancellor tells us she wants to ‘invest, invest, invest’ but due to her apparent confusion regarding rudimentary economic principles, all I’m hearing is ‘spend, spend, spend’. She is also tweaking fiscal rules to justify more borrowing. So, were the previous rules wrong or are they now correct? Or is it merely another fig leaf to justify more investment/spending (delete as appropriate). And will this level of borrowing ‘crowd out’ private sector investment? I doubt it’s even crossed her mind.
I readily accept I could be proven wrong and Reeves’ Chancellorship delivers a golden era of prosperity. Should that be the case, I’ll gladly recant. She might get lucky if, for example, the Bank of England cuts rates aggressively and there are favourable resolutions to numerous global economic and geopolitical issues. However, to use a cooking analogy, the meal is only as good as the ingredients the chef throws into the pot. What are the chances we’ll be dining cordon bleu when the actual ingredients look sourced from a bush tucker trial?
She has some time but not much and having set unstoppable forces in train, if she’s wrong, storm clouds will gather quickly. Returning to my cuisine theme, I’ve never thought previously that Rachel Reeves and Gregg Wallace had much in common. However, with the exceptions of the bald head, dirty jokes and Millwall tattoo, my money says their career paths are on a similar trajectory.
The value of investments and any income from them can go down as well as up and you may not get back the amount originally invested.
This material should not be considered as advice or an investment recommendation. Investors should seek advice from an authorised financial adviser prior to making investment decisions.
John Newsome can be contacted on 01423 705123 or john.newsome@williams-im.com. Williams Investment Management LLP is authorised and regulated by the Financial Conduct Authority.
