An alternative, rational UK budget

The Tory government’s budget is due this week. As is the custom, the chancellor will stand up and propose what he will argue is the best thing for the UK economy. Numerous other customs abound, including the privilege of having an alcoholic drink to ‘steady the nerves’ during the speech.

In reality any chancellor’s proposals have little to do with the right thing for the economy. They are rather what he/she believes are best for his/her political party and its electoral prospects at the next election. In this case the Tory chancellor Philip Hammond is under unusual pressure to ‘go big and bold’, ‘fix the housing crisis’, and so forth – none of which has much to do with the actual needs of the UK economy, but rather the political predicament the Tories find themselves in amidst the chaos of Brexit.

So, in the absence of a bipartisan budget from anybody else, FIREvLondon hereby humbly submits its proposal for a rational budget – designed purely from the point of view of the long term benefit to the UK economy and its citizens.

A fiscally neutral budget

Unfortunately FIREvLondon’s financial resources do not extend to a detailed model of the UK economy. This is just as well because, almost unnoticed, the UK’s enormous fiscal deficit (the delta between government receipts and government spending) has in fact shrunk significantly since its 2009 peak of >10%, and is now at the decidedly modest level of £48bn. £48bn, “decidedly modest”?! you shriek. In fact £48bn represents around 2.5% of GDP. Provided the economy grows, in nominal terms, by more than 2.5%, then the debt will in fact shrink as a proportion of GDP.

There is an argument that with government debt at c.80% of GDP the priority should be to shrink the debt faster. I have sympathy for this argument – especially when the last chancellor but one preached that a national debt level of 40% was a ‘golden’ ceiling above which we must never go – but I am not going to make it here.

So, my aim is to leave the net fiscal deficit unchanged. I am also going to assume no significant change in government borrowing costs; were interest rates to rise significantly my spending projections would increase alarmingly, but for the purpose of tax/spending policy I think it is reasonable to assume no change in medium/long term borrowing costs.

Right now our tax code is riddled with absurdities. For instance

  • We tax jobs. At about 25% per job. Except the really high paying jobs which we tax at about half this level. You can’t make this stuff up.
  • We tax mobility. Via stamp duty. Via high property prices, planning laws etc.
  • We subsidise the rich. Via private schools having VAT exemptions. Via pension tax relief. Via Right to Buy, Help to Buy, etc. Via non-dom. Via EIS. Via carried interest.
  • We subsidise property. Every which way you look. Whereas in fact property is a much more natural thing to tax than people – it can’t move overseas, for starters.

My budget will take steps to start restoring common sense and rational thinking to the tax rates. Here goes.

Taxes on people (living and working)

Taxes on people who live and work are the highest. They should in fact be the lowest.

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Oct 2017: Sex and separatism

Interested, yet?  I’m not mentioning interest, because the Bank of England’s long-awaited base rate decision was on 2 Nov, after the month end.

October felt like back to the basics of human relations, courtesy of Harvey Weinstein.  In the UK we had a foretaste of this drama with the Jimmy Saville scandal a few years ago.  But the rumour mill is whirling around Westminster, and the first scalp – Michael Fallon – has just been claimed.  It feels very reminiscent of the dark days of poor old John Major’s wafer-thin majority Tory government, just after his ‘back to basics’ plea and well before the Edwina Currie story got out.  None of this has much relevance to investing or markets, not least because the current Tory government has very little credibility in such matters so markets are largely ignoring the daily newsflow.

Overseas the Catalonian independence movement has been the main story.  This has curious echos of the Nationalist nonsense going on in these isles.  But there is clearly more relevance to the real world.  I’m amazed that 20 large Spanish companies managed to relocate to Madrid almost overnight, in order to stay afloat on the ship which the separatists rats (there’s a rat in separatists, geddit?) are jumping off.  If only we’d had this sort of behaviour going on in Scotland or, dare I say it, among UK-based businesses before the Brexit referendum it would have made Project Fear a darn site more credible.

In any case, and notwithstanding some of the Washington histrionics about tax reform, there’s not been much to report in the markets for October.

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Investing in Unicorns

I’ve just discovered a unicorn. Or more to the point, I’ve just learnt that one of my angel investments has become a unicorn. A real one!

Unicorns – myths and reality

What am I going on about, you might be asking? In the investing world a Unicorn is a common nickname for a startup business that reaches a valuation of $1bn+. That’s the type of unicorn I’m talking about. There are dozens, but not hundreds, of unicorns in the world. In the UK the better known ones include Asos, Deliveroo, FarFetch, Funding Circle, Transferwise and Zoopla.

But many so-called Unicorns are not ‘real ones’, to my mind. How come? Because the valuations are often something of a fantasy, and concocted out of funny structured notes for the benefit of the media/credulous staff/others, rather than being a true reflection of the value of the company. I do speak from some experience here, sadly.

For me a ‘real’ Unicorn is one where investors are able to sell shares at a Unicorn valuation – i.e. a price which values the company at $1bn+. Asos and Zoopla pass this test – both are now public companies worth >>$1bn, and their investors have full liquidity. Deliveroo does not pass this test; the large sums being invested at $1bn+ valuations represent money going in to the company, but (to the best of my knowledge) existing investors have not had an opportunity to sell any holdings and, if they did, it would be at a significant discount to the headline valuation.

When is it wrong to take a 40x profit?

So, in my case I received one of those rare but delicious emails this week telling me that I have an opportunity to sell my shares in an angel investment that I made around 10 years ago, and sell them at a significant profit. The total valuation at the offer price is a smidgeon over £1bn. For the record I bought shares at a little over £10/share and can now sell them at £400/share, so this is almost a 40x gain. Happy days! I’ve held these shares so long that the annual rate of return is not as high as you’d think, but it’s around a very respectable 40% p.a.

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