I try to stay away from writing about Brexit as much as possible. People in the UK simply can’t think about the topic dispassionately or without going tribal.
My general position on the whole thing is that both sides make good and bad points, but that the bigger issue is a failure to communicate with each other respectfully. I personally tipped towards the Brexit position in the end, but I am not an extremist on the subject. I started off very much as a remainer and I can see both perspectives.
With that caveat out of the way, the point of The Blind Spot is to puncture through groupthink. Since the circles I orbit in tend to be inclined towards the remain position, this tends to push me towards framing things from the Brexit point of view. But this is in the interests of giving everyone a broader perspective.
Which brings me to the key point.
There was a very popular refrain from the remainer classes after Brexit won that the idiot Brexiteers had voted for self-harming policies that would be economically damaging to them in the long run.
The retort from the Brexiteers was something like “life isn’t just about GDP, it’s also about purpose and meaning. Better to be less well off and sovereign than wealthier but without freedom.”
What I’ve found super interesting in the post-mini-budget fallout is that a mirror of this situation is manifesting among the remainer class related to higher income tax cuts that would in theory disproportionately benefit them.
Before I explain my logic, a little bit of context is necessary.
In my long-form follow up to my Twitter rant about Liz Truss, I argued that the tax cuts everyone lost their sh** about were not necessarily insane. They were needed to stimulate entrepreneurial activity in the UK as well as to sell Britain as a good place for doing business.
I now realise some of that analysis was wrong.
I blame the shortsightedness on the fact that I myself am still in a mental transition from being paid through PAYE to being renumerated as a director. (The fact I haven’t yet had to file a tax return is a factor.) That means I still occupy a mindset that thinks in terms of income tax. It is a blind spot.
But as was pointed out to me on The Blind Spot’s Discord chat it’s not the entrepreneurial class that would benefit most from a cut on the highest earning bracket in the UK, it would be those paid through PAYE or operating as sole traders.
The actual mega-rich, meanwhile, pay themselves through dividends or other mechanisms related to capital gains. They would be largely unaffected.
That leads me to conclude that the mainstream media’s take that the cut was some sort of gift to the uber wealthy was not entirely accurate. (I’m sure some media will have been more nuanced about this but by and large, this is how the message was transmitted.)
In reality, the main beneficiaries would have been the upper middle “intelligentsia” classes of London or the commuter belt. We’re talking about lawyers, doctors, salaried back-office bank workers, consultants, and so on. The type of people living in highly leveraged £1m+ properties.
In spite of being paid huge sums of money by the standards of average British people, it is they, ironically, who are most exposed to interest rate hikes due to the scale of their leverage. They are also the least unionised and thus the least likely to get inflation-linked pay rises.
Yet it was this class (which also tends to lean towards remain) that was the most vocal and critical about the tax cuts. This is weird. I get that the working class would be upset by the injustice of it all. But here we have an element of turkeys voting for Christmas “for the greater good of the bond market”. It seems a very self-harming phenomenon.
Now you could argue that a few £1000 pounds thrown in the direction of a mid-tier lawyer or EY consultant would not make much of a difference to their ability to keep up with repayments on a mortgage. But you might also think every little helps, and something is still better than nothing.
During the GFC the upper middle classes were among the most likely to turn to pawnbrokers to bridge funding shortfalls. They did so by handing over high-value luxury assets as collateral. I don’t see why they wouldn’t be particularly vulnerable again – especially given the scale and sensitivity of their levered positions to interest rate hikes.
So perhaps they’re thinking at a second-order level? An uncosted budget is more likely to generate inflation, which is more likely to see the central banks lift interest rates. This would be even worse for them given their interest-rate sensitivity. Better austerity for the masses than higher interest rates for them?
That might make sense.
But then again, if you are going to use financial repression and uncosted budgets as a policy tool, it might make even more sense to throw the class that’s most likely to be hurt by interest rate hikes a sweetener in the form of a tax cut.
I personally don’t think we have seen the worst of inflation, higher interest rates or rising energy prices regardless of the costing status of any future budget.
It will be interesting to track how the narrative around tax cuts might change if and when this class is hit particularly hard.
It will also be interesting to see if Rishi as PM might find a way to sneak in some tax cuts of his own but be able to get away with it because of superior messaging. If he does that will tell us a lot.
