It was a great pleasure to host a virtual gathering for our Cambridge customers on Tuesday 1st December. The event was a celebration of the success of our Cambridge Office, which opened last year.
With its blend of tradition and leading-edge entrepreneurialism, Cambridge is a natural heartland for C. Hoare & Co. and this was an opportunity for Venetia Hoare to thank all those who have made us so welcome in the city.
Our speaker was the bank’s executive chairman, Lord Macpherson of Earl’s Court. Lord Macpherson served as Permanent Secretary to the Treasury from 2005 to 2016, serving three Chancellors - Gordon Brown, Alistair Darling and George Osborne - and steering the Department through the global financial crisis of 2008. So it was reassuring to hear that, in his expert opinion, the current economic outlook is not as gloomy as feared.
In the first place, he pointed out, the election of Joe Biden as the next president of the United States will have a broadly stabilising effect on geopolitics. ‘One shouldn’t get too carried away,’ he cautioned. ‘Policy is not going to change as dramatically as some of us might hope: the forces that encouraged Mr Trump to be protectionist will ensure Mr Biden is not suddenly going to introduce some amazingly open and liberal US trade policy. However, it is safe to say his actions will be more predictable than Trump’s. He’s got a hugely experienced team, all of whom will understand government, and he’s a multilateralist with knowledge of global institutions. Even more importantly for most of us, Biden is extremely committed to doing something about climate change. The World Trade Organisation, G7 and UN Climate Change Conference (COP26) body will all be strengthened by his presidency.’
On the domestic front, Lord Macpherson remains sanguine despite the bruising Britain has taken from COVID-19: ‘I think, with the virus diminishing, we’re going to see a really strong recovery across the global economy and Britain, as a trading nation, will benefit from that. It’s fair to say Britain has been an outlier when it comes to the coronavirus. The government was relatively slow to react. It seems to have thrown more money at the problem than any other nation – with the possible exception of Canada – and our economy has probably been worse affected than most, but looking forward, I’d like to say that all is not lost. We saw in July and August that when the economy does start recovering, it can do it very quickly. There’s a huge amount of pent-up demand from those of us still lucky enough to have jobs. Savings are high, and people will want to draw those down. And one of the no doubt unintended, but now blindingly obvious, consequences of quantitative easing by the Bank of England is that asset prices are high. If you’re wealthy, you’re quite likely to want to deposit some of the gains on those assets, and indeed we’ve seen this at Hoares’ bank, where deposit inflows throughout the year have been strong.’
Historical comparison, in Lord Macpherson’s view, is not always helpful: ‘It’s easy to get carried away by these extraordinary amounts of government borrowing – and yes, the last time we borrowed so much was in 1944 when we were dealing with challenges such as D-Day – but the government can still borrow incredibly cheaply. If it issues a 40-year bond, it has to pay interest of something like 0.6% a year, which is just astonishingly cheap. And the Bank of England is helping by hoovering up an awful lot of this debt. So in the short run at least, the government can support the economy really quite easily. In fact, the debt-interest burden is falling in this period, despite the national debt increasing significantly. It’s worth distinguishing the macro from the micro response to this crisis and I think that in macro-economic terms, the government’s done rather well.’
More immediately, a rational response to Brexit is crucial: ‘I know people close to negotiations are really worried, but I have to assume that at in some point in the coming weeks a deal will be done with the EU simply because, in my experience, there are certain things the British people expect the government to do and one of these is ensuring there are not 50-mile tailbacks on the M20. Nor would any rational government want to shoot itself in the foot by generating severe friction in trade, compounding the massive economic problem generated by the virus. It’s also got to be remembered that the deal on offer – which is a pretty thin deal – probably isn’t the end of the matter. I would predict that in 10-15 years’ time, we will settle down in a new equilibrium which is much closer to Europe than the theologians in the Conservative party currently are prepared to accept.’
While crisis management is a natural focus now, Lord Macpherson made it clear that hard decisions for the future cannot be ducked: ‘There needs to be a credible economic plan and part of that has to do with the Bank of England formulating a sensible exit strategy to quantitative easing. Personally, I hope it will avoid negative interest rates, which I think would reduce rather than increase confidence and will certainly gum up the banking system. But the more important issue is whether the government has a long-term plan to get the public finances back on a reasonably sensible path. I think there has to be consolidation – the only question is when the government will announce it. I suspect March may be too early, but by next November, the government will have a plan for taxes and spending and I think it’s important to say that consolidation will almost certainly involve tax increases.’
Rumours of draconian ‘wealth taxes’ are, however, overplayed: ‘I suspect there will be lots of scare stories in the weeks and months ahead about increases in Capital Gains Tax and Inheritance Tax. My prediction is that nothing very radical will happen on these fronts. There may be some tidying up at the margin, including some small increases in the rate of CGT, but I simply don’t believe that wealth taxes will account for much of the consolidation. This is based on experience: if you raise, people just sit on assets and wait for a government to come in that charges a lower rate, so it doesn’t bring in much revenue. Moreover, wealth taxes are notoriously difficult to implement. Even the most ambitious wealth taxes such as those introduced by Mitterrand in France in the 1980s raised very little. So the only way to raise significant amounts is through taxes that affect everybody and not just higher-rate taxpayers.’
‘I’m sure there will be small increases in the top rate of income tax, but in my experience, raising the top rate really doesn’t bring in any revenue. So my bet is that, in the end, there will be an increase either in the basic rate of income tax or in National Insurance contributions. This may be introduced on a temporary basis as some kind of social solidarity charge, but it’s worth remembering that income tax was introduced on a temporary basis by William Pitt back in 1800. So I suspect any solidarity charge will remain in place for a long time yet.’
Finally, Lord Macpherson addressed the increasingly vexed question of the Constitution: ‘Relations between London and the regions are going to become a bigger issue in Britain. London, the South East and the eastern regions are the only parts of the UK which run a surplus, effectively subsidising the rest of the country. Clearly, the North has been worst affected by COVID-19, as it is a region with more manufacturing, and the North is also likely to be more affected by Brexit. Whether there is a deal with the EU or not, we can expect a lot more debate about “levelling up”.’
‘The other big issue in the coming year is the Scottish election, which I predict will not have a good result for supporters of the Union and I fear the issue of Scottish independence is going to start dominating the UK debate in the next five years in much the same way that Europe has dominated in the past five years. And if the UK were to break up, that would have a significant impact on Britain’s role in the world.’
Lord Macpherson’s speech drew spirited discussion and a wide range of opinion from our virtual audience in Cambridge. It was a privilege to share his insights on the inner workings of government and his balanced optimism was balm to many – a much needed reminder that despite the exceptional challenges of 2020, a happier, prosperous future may not be so far off.
