A Pair of Updates: Tax Protests and New Econometrics

US stocks’ strong post-election run has dominated headlines we follow, pulling attention away from UK stocks’ recent struggles.^[i] The latter have slumped alongside the rest of Europe over the past month.^[ii] Having clarity on the Budget, it seems, hasn’t given sentiment a positive jolt—rather, some of the Budget’s provisions seem to be extending the gloom. Let us take a look at that and another interesting UK nugget.

The Budget Blowback Continues

Overall and on balance, the tax hikes in last month’s Budget were less onerous than publications we follow forecasted, with capital gains increases watered down greatly from the earlier trial balloons we saw floated in the financial press.^[iii] But financial commentary we follow has documented widespread displeasure with some of the provisions, underscoring a point we have long made: When legislation creates winners and losers, the losers’ negativity can often generally outweigh the winners’ relief. We have found it often isn’t long-lasting, which is why we don’t think tax rises are inherently negative for stock markets, but it can weigh on sentiment for a spell.

We are seeing this with two measures in particular, both of which are dominating headlines we follow this week. One is an issue we would classify as sociological: important to society but outside what our research finds to be markets’ economic drivers. That issue is the expansion of inheritance tax to agricultural properties valued at £1 million or greater. The Treasury says this is meant to close a loophole that allowed wealthy people to avoid inheritance tax by using farms as a tax shell.^[iv] But the farming community argues normal, working families that barely scrape by will get caught in the dragnet thanks to the vast appreciation of farmland in recent years.^[v] They warn of forced sales wiping out UK family farming within a generation.^[vi]

We are seeing a lot of competing forecasts and projections. The Treasury argues the vast array of tax relief available to farmers means estates valued up to £3 million can pass to heirs tax-free and that the ability to spread the payment over 10 years should minimise the risk of heirs having to sell farms in order to pay up.^[vii] But farming groups claim the Treasury used bad math and assumptions and that the burden will be much greater.^[viii]

Our aim here isn’t to take sides, but to provide available facts that inform both sides of the debate—not because we think this issue is hugely meaningful to markets, but because several thousand farmers protested the tax change in Westminster yesterday.^[ix] This follows new polling showing the Conservative Party and new leader Kemi Badenoch now ahead of Labour and Prime Minister Keir Starmer, with farms proving to be a wedge issue.^[x] This, combined with the protests’ heavy media attention and celebrity contingent, appears to be sowing the seeds of internal opposition within the ruling Labour Party. Several Labour MPs are calling on the Treasury to release its modelling and reconsider the change.^[xi] It wouldn’t surprise us at all if this were the start of these measures’ getting watered down.

The second provision prompting blowback is the increase to employers’ National Insurance Contributions.^[xii] Industry groups are weighing in, warning it will hammer businesses’ profits and employment prospects, leaving society worse off.^[xiii] The latest surveys show it is also weighing heavily on sentiment.^[xiv]

In our view, these developments don’t guarantee the tax hike will get scrapped or reduced. And, again, we don’t think it is likely to sway markets materially either way—our research finds there is a long history of stocks getting over these things. But the industry seems to be aiming to get Labour MPs’ attention and inspire a U-turn, and it would hardly be history’s first. If that were to happen, we could see it lifting sentiment. Alternatively, all these negative reports probably help markets pre-price the change before it becomes law, getting the disappointment out of their system.

Move Over, GDP?

On the more fun side of things, the Office for National Statistics (ONS) released a new dataset last week: Gross and Net Inclusive Income (GII and NII).

These fledgling measures are alternatives to gross domestic product (GDP, a government-produced measure of economic output) and aim to address one of its primary shortcomings: the exclusion of unpaid domestic work. We like GDP a lot. But as one of its progenitors, Simon Kuznets, warned when he spearheaded the US National Income and Product Accounts’ creation, it makes some assumptions that aren’t inherently positive.^[xv] Because it tallies only spending and investment, it ignores and therefore devalues all unpaid work done in the home, everything from cooking, cleaning and maintenance to caregiving. We presume all those performing these labours would agree they have value and that the money saved is economically important, but national accounting has historically disagreed.

So the ONS is now trying to fill in the gap with its “inclusive income” measures. As the report explains, “They reflect the economic value of both paid activity, included in gross domestic product (GDP), and unpaid activity, which includes ecosystem services and unpaid household services.”^[xvi] GII adds in unpaid household services, greenhouse gas emission regulation, and intellectual property products and intangible capital that aren’t currently accounted for in GDP.^[xvii] NII takes things a step further, depreciating these intangible assets and the household durable goods used in unpaid labour, subtracting the “depreciation of human capital” and quantifying the environmental costs of emissions and oil and gas use.

Make of this what you will, and obviously there are a lot of sociological and political assumptions at work. The first report runs only through 2022, and the ONS concedes the dataset is incomplete and will need refinement.^[xviii] But as first runs go, it is interesting! And, perhaps, noteworthy that NII grew faster than GDP as the UK moved out of COVID lockdowns.^[xix] We wouldn’t draw major conclusions from that, but we think it is one way to see that all the people pulled from the workforce by COVID weren’t exactly sitting on their hands.

These aren’t replacements to GDP, which isn’t going anywhere, and we aren’t arguing they are inferior or superior. But statistical innovation is a grand thing, in our view. Even if investors don’t think this new measure is the best way to account for unpaid economic activity, it starts a conversation and reminds us of something we find very important about GDP: It isn’t the economy, and by extension, it isn’t stocks. It is one way, just one, to tally a single nation’s or region’s activity, public and private. Stocks reflect one narrow part of this, the earnings of publicly traded companies. In our view, this is why they don’t move one-to-one with GDP, and we doubt GII or NII will be a change on this front.^[xx] But they do seem like nifty conversation pieces.