That leaked Brexit report. I think this is what's called "cognitive dissonance"?

From Buzzfeed:

The government's new analysis of the impact of Brexit says the UK would be worse off outside the European Union under every scenario modelled, BuzzFeed News can reveal. The assessment, which is titled “EU Exit Analysis – Cross Whitehall Briefing” and dated January 2018, looked at three of the most plausible Brexit scenarios based on existing EU arrangements.

Under a comprehensive free trade agreement with the EU, UK growth would be 5% lower over the next 15 years compared to current forecasts, according to the analysis. The "no deal" scenario, which would see the UK revert to World Trade Organization (WTO) rules, would reduce growth by 8% over that period. The softest Brexit option of continued single-market access through membership of the European Economic Area would, in the longer term, still lower growth by 2%.

Straight off, it's not the "government's" new analysis, this is something cooked up by civil servants, who have their own agenda (Project Fear/Remain).

Be that as it may, let's take the report at face value. People's responses are a whole mess of contradictions.

1. They can't forecast GDP changes even one year in advance, they don't even know what GDP actually is, it's all based on sampling and interpolation. So doing two forecasts 15 years into the future and then subtracting the difference is pretty meaningless. Even if they are right about 8% lower GDP after 15 years, that's losing half a per cent a year. Instead of GDP growing 2% a year it grows 1.5%. Who'd even notice?

2. The usual suspects are rubbing their hands with glee at this. From The Guardian:

Why are the latest leaked forecasts so damaging?

They spell out that all varieties of Brexit on offer would make Britain poorer, significantly so in the case of anything other than staying very closely linked to the EU through single market membership. While some ministers maintain they can still flout EU wishes and achieve this without full membership, it is telling that this option is not even among those presented to ministers in the “cross-Whitehall exit analysis” obtained by Buzzfeed. The economic modelling used also punctures the still popular claim among Brexiters that new trade deals overseas would more than compensate for lost EU trade.

Hang about, isn't The Guardian full of articles like this:

The idea that GDP growth is the wrong measure of a nation’s progress has become so widely accepted as to be the new common sense. Yet it is still the go-to number for lack of a credible alternative. Measuring happiness or wellbeing is fraught for numerous reasons, not least of which is that such indices make questionable assumptions about what it means to live a good life...

It is a truism that money has no value in itself, only in what it allows you to buy. Money is only a proxy for wealth, and a deeply imperfect one at that. Real wealth consists in what we are able to own or consume, not in the size of our bank balances. Real wealth therefore grows when we can have more of, or better of, the things that enable us to live well. We are truly enriched by warmer houses, better medical care, healthier food.

Sounds a bit like "... let's spend it on the NHS instead" to me. So they can piss off.

3. Labour MPs are clamouring for the report to be published. It has been published - by Buzzfeed.

4. The Conservative Party have an undeserved reputation at being better at managing the economy than Labour (they're both equally bad, and it's down to luck as much as anything). So why are Conservative MPs now in such a hurry to dismiss concerns about the economy? And why didn't they ask the civil servants to do projections for whatever post-Brexit agreements the Conservative government would prefer? That's the economically competent thing to do. Unless they still haven't come up with a plan, even 18 months later (like unilateral free trade, replace VAT with LVT, that sort of thing). And it appears that they haven't.

5. We had Project Fear for a year before the referendum, with predictions far bleaker than the latest "analysis". A lot of "Leave" voters were quite clear about this: they don't care about a percent or two of GDP growth gained or lost, they "want their country back". Be that as it may, people's main concern is that things don't get worse, things don't change too much too quickly, job security etc. Whether your income next year is 2% higher or 1.5% higher than this year doesn't matter, as long as it's not drastically lower.

6. The Home-Owner-Ists, which is most politicians and most of the electorate, Leavers and Remainers alike, can fuck right off, fuck off a bit more and then keep going. They engineered the last land price bubble/credit bubble and were happy for others to pay the price of the "financial crisis". Worse than that, they refuse to learn the most obvious of lessons and are happy for everything to be thrown at maintaining the house price/credit bubble (in London and the South East, at least, rest of the country can go hang) and don't give a shit about how long the recession drags on for.

The IFS estimate is that GDP is currently fifteen per cent smaller than it would have been in the absence of the "financial crisis". OK, that's also a projection and subject to a wide margin of error, but at least they are comparing a projection with actual reality and not two future projections. And the IFS are pretty reliable/neutral.

We could add a percent or two to GDP growth each and every year in perpetuity and more or less eliminate recessions by shifting taxes from earnings and output to land values. But that would push land prices down, which the Homeys don't think is a price worth paying.

British justice at its best

From the BBC:

The four ringleaders behind the Hatton Garden raid must pay a total of £27.5m or serve another seven years in jail. John "Kenny" Collins, 77, Daniel Jones, 63, Terry Perkins, 69, and Brian Reader, 78, were ordered to pay the money back during a confiscation ruling at Woolwich Crown Court.

Seems fair enough, especially as one of ringleaders appears to be a VIZ character.

Here's the fun bit:

Plumber Hugh Doyle, who helped the burglars, was ordered to pay £367.50 for his "general criminal conduct" at the court on Tuesday. Doyle, of Enfield, was convicted in 2016 of providing access to a yard where goods from the raid could be moved between vehicles.

The judge said Doyle, 50, had not received any benefit, payment or reward for his participation in raid, but that he had been deemed to have benefitted £27,194.44 from the proceeds of a "criminal lifestyle". He said Doyle had "limited assets" and ordered him to pay the sum within 14 days.

Not reported was whether Collins' grand-daughter, aged 13, who showed him how to Google "diamond drilling equipment for sale" and helped him place an order on eBay was ordered to repay £10 pocket money and surrender the Wii console he bought her for Xmas.

Killer Arguments Against LVT, Not (434)

From Farmers Guardian:

[National Farmers' Union] head of tax Michael Parker said: “We would not support the introduction of a land value tax which included agricultural land as it would simply increase the cost of UK food production with no benefit for shoppers. We would prefer to see the introduction of fiscal measures which encourage economic growth – ensuring farming businesses can be profitable, productive and progressive now and in the future.”

Jolly good, he would say that, wouldn't he. The first sentence is clearly bollocks and his second sentence is just waffle.

But out of interest, how does the NFU calculate its membership fees..?

If you are a farmer, crofter or grower involved in agricultural production then you can join NFU Scotland as a full member. Your subscription will be based on... the area and type of land you farm if you are a farmer...

So basically, a very low-level kind of LVT.

Admittedly that's from the NFU Scotland website, but I'm sure the English NFU does exactly the same.

Questions to which the answer is "no"

From the BBC:

Gambling ads: Would a pre-watershed ban protect young people?

This is an ineffective solution to a non-existent problem. Fun article though, they're really jumping the shark.

Next.

Economic Myths - high house prices are down to lack of supply

Further to Bayard's post of the weekend, another way of illustrating the (lack of) effect of additional supply on house prices is to look at the new build premium.

Countrywide do a detailed quarterly report on the topic:

Last year the average new home sold for 17% more than a comparable second-hand one, up from 15% a decade ago. This figure is an average from the thousands of developments up and down the country, each of which is competing for buyers in their local market. Breaking down this headline number shows that the level of premium developers are able to achieve depends on what, how and where they’ve been building....

So in fact, averages prices go up when more homes are built. Aha, cry the supply numpties, that's because they aren't building enough.

Here's the impact of subsidies on house and ultimately land prices:

Developments offering Help to Buy tend to achieve above average premiums.

Moving on...

Over the last decade large housebuilders have steadily increased their share of the homes built in the UK. These developers tend to focus on big sites, generally places where they can build at least 50 homes to achieve economies of scale. Last year these sorts of sites delivered just shy of half the properties built.

Smaller developments, those with less than 10 homes, carry the largest premiums. Over the last five years, homes in developments of less than 10 properties have carried an average premium of 20%, over and above comparable homes in the surrounding area. This compares to a 16% premium for sites with between 20 and 49 homes and a 14% premium for sites containing 100 homes or more.

The premiums achieved by small developments tend to be driven by their rarity. Often they’re refurbishments of old buildings or bespoke designs for small plots. In other cases they bring something to a neighbourhood which hadn’t previously been available – like flats in a town of terraces.

Small developments also avoid competition from later phases of the same scheme. Builders of bigger schemes often find their new homes competing with almost identical ones being sold by sellers who bought into the first phase.

This fits in with the reasonable assumption that the 'large housebuilders' are profit maximisers and just dribble new homes on to the market in such a way as to maximise the prices they can achieve and/or minimise costs.

Continuing with their incorrect assumption, the right wingers blame the planning system and the lefties blame the land bankers. For once, the lefties are closer to the mark. Either way, you can give them as much planning permission as you want, there's no reason to assume that they would build more - why would they?

And how do you force them to build more if they don't want to? Questions which the numpties don't even address, except I suppose the more hard-left who say "We can't leave it to the land bankers, the way forward is more council housing", which again is the better answer to a question which we shouldn't be asking.

Then there's a nod to agglomeration benefits, which knocks the argument that "they should build even more to get prices down" on the head:

However in the cheapest parts of towns and cities, often where its flats rather than houses being built, big developments tend to carry larger premiums than smaller ones. Here the ability of a large development to regenerate a neighbourhood by providing better quality housing and new infrastructure outweighs the effects of competition from the scheme itself.

They then calculate that on average, the new build premium erodes down to nothing over the next ten years.

That's only a relative value though. It is not so much that the price of new homes falls over the next ten years. They go up and the selling prices of existing homes in the same area increase even faster. It's partly because of agglomeration benefits and partly because people want to buy in 'up and coming' areas, so they build more in 'up and coming areas' so inevitably, overall, prices in the areas where they are/were building will go up. Maybe faster than they would have done, maybe slower...  but probably faster.

The report provides more evidence for this.

The average person who sold their new home for the first time in 2017 had bought it brand new from the developer seven years ago.

They then provide a map and table showing that about 80% of these sellers made a profit, and the average profit is still huge, not that much less than house prices generally.

Supply and demand

This should be interesting.

The current wisdom is that we need to build more houses to bring the price down, it's all about supply and demand. Here we have a good example of oversupply, so, the prices should start coming down and a long way down, if the "current wisdom" is correct, because if oversupply is to reduce prices from their current level to an affordable one, it's going to have to have a really powerful influence.

Funny that the Guardian didn't mention massive price falls in their article though...

Pensions, Tax Subsidies Charges and Incentives to Save

We recently enjoyed a lively exchange on this topic here.  And I said I’d write up something from experience on the coal face as it were.

First a little history.  Pensions originated much earlier than you might think. Quite a few centuries ago some notable taking on a Kings Patent was often obliged as the price to pay the outgoing tenant an income for life. Pensions are therefore strictly a regular payment to someone from someone else.  Annuities were sold by the government to raise money for wars. These annuities morphed into Gilts, which is largely why today annuities sold by insurance companies are mostly backed by Gilts, Gilt cashflows being relatively certain of being sustainable as they are funded out of taxation. By coercion if you prefer.  Private individuals could buy deferred annuities which came into payment at a set date or age in the future, the forerunner of today’s personal pensions.  In time large employers started to offer company pensions to their workforces.  These were offered not generally out of altruism but as an employee retention incentive. From memory at this time it was agreed between employers and the state that as company contributions were an expense they should be treated as pay, and as this pay would not be drawn until retirement age all income and capital taxes should equitably be deferred until those benefits were drawn, with the quid pro quo that the pension benefits – the ‘annuity’ – would be taxed as pay on the whole amount not just on the interest element.  Clearly these tax breaks were an incentive to join the company scheme or if you were a professional or self employed take out a Retirement Annuity Policy. So far so all well and good. 

Over the years as the size of the pensions fund grew it was obvious that the tax breaks were ‘costing’ the state revenue.  (In fact to align with the deferred pay philosophy) these taxes were not lost, merely deferred until the pension came into payment.

Also over time many insurers got in on the act, notably outfits like Hambro Life, Abbey Life and so on  - early examples of sales led unit linked insurers.  Some of the antics of their reps and the inveterate tendency for the state to prodnose into stuff led from the 1970’s to a series of official investigations and reports into pension and private savings, and various ‘reforms’ were mandated leading to the Financial Services Acts of 1986 which made some very fundamental changes.

In my view these Acts were very flawed, not because they ‘deregulated’ (which they did not – they introduced regulation) but because they made a fundamentally flawed intervention into the sanctity of private contract by forcing employer final salary schemes to make cash equivalent transfers of benefits to any member who requested one. This inevitably led to the pensions transfers scandal.  The problems with pensions do start there but the final nails in the coffin came under the New Labour government between 1997 and 2010. The worst financial services act ever, the Financial Services and Markets Act 2000 imposed an entirely flawed regime on the FS industry and effectively crippled company pension schemes.

In the above I have ignored the history of State Pensions, SERPs, S2P, Stakeholder, Auto Enrolment, etc. etc. all of which in one way or another have been largely flawed initiatives.  I have also ignored the failure of Equitable Life which gave me a great feeling of schadenfreude.

In any event pensions regulations themselves are now immensely complicated.  The Common Man has no hope of understanding them, at all.  And in my humble opinion there is no one man in the UK that understands them.  I have an employee who is nominated as our pensions guru and he is backed up subscription access to a specialist technical service who have specialists in separate bits of the legislation and rules.  That is a bill to my business of possibly £20,000 per annum – and we are a very small business.

Pensions Tax

As stated above pensions are deferred pay. The deal is that you pay no tax on the contributions you make, but you’ll be taxed on the whole annuity payment when you take your benefits.  I think that that is easy to understand, simple, and fair.

The question is what proportion of these tax breaks end up in the hands of the scheme providers?

Well, for defined benefits schemes of a reasonable size which are well funded and well run, the answer is not much.  The Trustees can access institutionally priced investment funds which have very low charges. Nil initial and as low as 0.1% TER (See below for TER explanation).  Where these schemes tend to lose out is when they employ ‘consultants’.  These are the usual rent seeking culprits like Capita or Aon (the latter has atrocious administration). I have seen the most stupid recommendations for investment from these outfits.  I also know that they routinely churned Group Personal Pension schemes for the initial commission.

For company money purchase schemes/GPP’s the same factors apply.  They can be run very efficiently, and we have done so.

Total Expense Ratios

These are now called OCR’s.  Ongoing Charges Ratio.

I started in FS in the late 1980’s.  By the early 90’s we were asking fund companies what their total charges were and the good ones would tell you.  In 1996 two blokes Paul Moulton and Hughes Gilibert set up Fitzrovia Fund Research to research and analyse funds costs.  That business developed the Total Expense Ratio methodology and was latterly sold to Lipper.  Gilibert and another ex-Fitzrovia alumnus now run fitzpartners.com.

The Fitzrovia data was used by many pensions (and fund consultants) to drill down into the full costs of fund management.  Good managers published their Fitzrovia TER’s on their own fund fact sheets.

If you want to you can Google these outfits and check their methodologies and see just how thorough they were in getting this data right.

Today, with their usual johnny come lately skill the regulators mandate the publication of TERs (now OCR’s) as if they’d just thought of it.

Fund Charges

Take two sample funds. One a global all cap equity fund the other a global bond fund.  A typical asset split in a pension would be 60% / 40% equity to Bond

Fund                                                                                                      OCR

Vanguard Global All Cap Equity Fund                  0.24% (Institutional class would be less)

Vanguard Global Bond Index Fund (hedged)       0.15%  (for the institutional class it would be 0.1%)

Total weighted OCR                                             0.20%

Pensions admin (Aviva Platform)                           0.25%  (This varies between 0.10% and o.40%)

Total charge                                                            0.45% per annum.

If you want / need to use the services of someone like us then that would be in addition to that figure and again would vary with both quantum and the extent of the services you wanted / needed.

Final Comment

There are lots and lots of investment managers and thousands and thousands of funds out there who charge a whole lot more and definitely soak up the tax subsidies.  This is especially true of things like VCT’s and EIS’s and Cash ISA’s.  And there are certain outfits who are notorious (IMHO) for overcharging, St James Place for example.

But without a shadow of a doubt you are perfectly able to operate a personal pension for less than 0.5% per annum all in.  The real problem with pensions costs is not the investment management – it is the stupid complexity of the rules and regulations arising from a history of utterly flawed interventions by governments and their bureaucratic Satraps.

(Apologies for the length of this. Also I completed it in haste whilst motivated)

Paul Simon "Boy in the bubble"

It was a slow day
And the sun was beating
On the soldiers by the side of the road
There was a bright light
A shattering of shop windows
The bomb in the baby carriage
Was wired to the radio

Lyrics from Google Play Music

AKA "holding the country to ransom"

From the BBC:

The head of Theresa May's new anti-extremism commission - set up after the Manchester Arena attack - has faced criticism from some Muslim leaders. Sara Khan, who has campaigned for women's rights in Muslim communities, has been given the task of rooting out extremism in the UK...

But her support for the Home Office's Prevent strategy has led to claims she is too close to the government.

Lady Warsi, the first Muslim woman to serve as a British cabinet minister, said many British Muslims saw Ms Khan as a "mouthpiece" of ministers. The Conservative peer questioned Ms Khan's likely independence as the Commissioner for Countering Extremism in a series of tweets and warned of "destructive and dangerous games" being played...

Harun Khan, secretary general of the Muslim Council of Britain, said: "The fight against terrorism requires equal partnership between all parties, including Muslim communities. This appointment risks sending a clear and alarming message that the government has no intention of doing so."

They might as well accuse MI5 or SO15 of being government stooges and demand that "Muslim communities" (whatever they are) be given a veto right over their operations.

Fun with numbers: Tax breaks for pensions vs UK annual deficit

From City AM:

Figures published today by HM Revenue & Customs (HMRC) showed the cost of tax relief on pension contributions rose by £950m over the last year to £41bn.

Other tax breaks on pension saving take the total cost to £55bn, Webb said, a figure the Treasury will be studying "with great interest".

OK, here's another figure that the Treasury ought to be studying "with great interest", from The Telegraph*:

Borrowing in the 2017/18 financial year to date is now running at £50bn, down from £56.7bn at the same stage in 2016/17 and the lowest to-date total since 2007.

The figure means Mr Hammond is on course to meet the target set by the Office for Budget Responsibility, the country’s fiscal watchdog, of borrowing £49.9bn in the 12 months to the end of March 2018 - equivalent to 2.4pc of gross domestic product.

I know that it's not big and not clever to compare random items of taxation and spending; or to match the total deficit with individual items of spending (or tax breaks, or subsidies), but it puts it in perspective. We could, in theory, more or less eliminate the current annual deficit by getting rid of tax breaks for pensions (more accurately, people with spare income, more accurately than that, higher earners, and even more accurately than that, subsidies for the lads in The City who soak it all up in fees, charges and commissions).

Broadest shoulders, and all that?
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* Particularly sick-making is that the article makes great play of this factoid:

Public sector borrowing in December dropped by £2.5bn, much more than had been expected, thanks to a £1.2bn credit from the EU. It was the smallest December borrowing figure since 2000.

As if this £1.2 bn were a) some sort of triumph by the UK government and not just a drop in the ocean compared to b) UK deficits/spending or c) the massive overall drain that the EU is/will be or d) a completely made-up number.