As featured in the Investment Times.
I am sometimes accused of right wing rhetoric. I find this strange because I have no political leanings. I think the calibre of most seeking election is poor, whichever party they represent. Indeed, I was exceptionally critical of John Major.
I would just like the country managed in the same way we try to manage Hargreaves Lansdown - containing costs, delivering great service and rewarding ability and effort. The reason for the preamble is that I am now going to be exceedingly critical of what I believe has been gross mismanagement of the economy.
Eleven years ago our Prime Minister, the then Chancellor, told us that his policy would be neutral regarding expenditure and borrowing over the economic cycle. This would lead me to believe that during periods of economic growth he would have created a budget surplus and saved that money for the rainy day that has now arrived. He had surplus when he took office in 1997.
We never had a recession in those first ten years so I don't think it would be unreasonable to have expected him to have stashed away £10 billion a year; it would have been a tiny proportion of the tax collected. In fact he did the reverse.
First, he sold over half our gold reserves. I don't blame him for selling them at the wrong time; I blame him for being profligate and having to sell them at all. Indeed if he was the finance director of a public company he would be brought to book. In addition to not saving he has actually borrowed behind the scenes. The Government has indulged in what are known as Private Finance Initiatives (PFIs).
Here again I will show my neutrality - PFIs were a BAD idea of the Conservative Party. The difference is that Mr Brown has milked them. Many of the new hospitals, schools and many other capital assets have actually been bought by the private sector and leased back to the Government at exorbitantly profitable rates of return. This is a legacy that Mr Brown has left for society long after he will have left office.
In addition he has solved the unemployment problem by employing close to a million public sector workers. This will create another huge problem as the public sector pension deficit skyrockets. This deficit has been calculated to be in excess of £1,000,000,000,000 and not one penny has been paid into a pension fund for civil servants, teachers, the military and NHS workers. Their pensions will be borne out of future taxation.
What next?
The country looks to be going into recession, house prices are sliding, the pound has declined against most other world currencies, unemployment is rising, corporate profits are down and the Government already has a budget deficit. At the same time inflation has once again reared its ugly head and public sector workers are seeking inflation matching pay rises. This means:-
- The Government's tax take looks certain to decline.
- Less corporation tax as company profits drop.
- Reduced income tax receipts as unemployment rises.
- A massive reduction in stamp duty as house purchases stall.
- Less VAT as people reduce spending.
- Unfortunately it will be very difficult to trim expenditure; if he does it would most likely create an even bigger recession.
- This means he is likely to borrow - and borrow billions.
Had he been the prudent Chancellor he claimed to be, I believe he should have had £100 billion in the kitty which he could be spending now to reflate the economy. The Government is now in a quandary. They know the public sector borrowing requirement will be massive, but they would like to spend even more to revive a flagging economy.
What this means to the British general public is that the value of our investments is being eroded by inflation and the falling value of sterling.
40 to 50 years ago the value of sterling was of less concern to British people. The only time we came in contact with exchange rates was on rare holidays abroad. Indeed when Harold Wilson devalued the pound in the 1960s he famously said it does not affect the "pound in your pocket."
That is certainly not the case today because we import so many of the items we take for granted. Where are many electrical goods sourced? Where do the foods and fine wines we have become accustomed to originate? Even if your car was built in Britain it was probably merely assembled from parts imported from abroad.
In addition there is huge demand for commodities and oil. We have been lucky to have reserves of North Sea oil. Unfortunately we are no longer a net exporter of oil; we are now a net importer. As sterling falls in value this is another bill that will increase.
So we have to criticise Mr Brown for getting the economy in this state. If he looks a worried man, he should be. He has left all of us much poorer than we thought we were. In current economic conditions it will become increasingly difficult for UK investors and savers to preserve their wealth. Inflation is once again eating into capital and sterling's fortunes have been completely reversed. At the same time the Governor of the Bank of England is in a complete dilemma. On the one hand he would like to increase interest rates to damp down inflation and shore up sterling. On the other hand he is under pressure to keep interest rates low in order to not further slow down our economy.
There is precious little confidence from investors about how they will, in the short term, maintain their wealth against a declining pound and rising inflation. It is a problem that I personally have applied my mind to for some time, seeking, like every other UK investor, to preserve my personal wealth. Clearly everyone's circumstances are different; however I think there are things which all of us should be considering.
Whether we like the stock market or not, I do not think it seems expensive. It strikes me that, for long term investors, the stock market is still probably one of the most sensible ways of trying to build your wealth. Many UK companies have massive overseas earnings and with a declining pound these earnings are worth considerably more when repatriated. The declining pound has also made our exporters more competitive in world markets. Elsewhere we still believe there is a place in most portfolios for absolute return funds and corporate bonds also look good value.
Peter Hargreaves
Chief Executive
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