Labour’s war on wealth is just getting started

Rachel Reeves is far from the only finance minister in the world grappling with mounting debts, staggering interest costs and rising demands to borrow and spend ever more cash.

French prime ministers are falling like dominoes as they fail to control borrowing. Sanae Takaichi, Japan’s new premier, fought bond market tremors within a month of taking office. In America, Donald Trump has been compelled to change course multiple times this year faced with market pressure.

Worldwide government debts will soon rise to above the size of the entire global economy, the International Monetary Fund predicts – their highest level since 1948.

At the same time, global wealth has hit record highs.

Between booming stock markets, rising house prices and years of pension savings, wealth has risen to $480tn (£360tn), according to a report from a G20 committee this month. That is up from $280tn at the turn of the millennium.

It is easy to see the temptations for those in authority – and even if the Chancellor limits her ambitions in this Budget, Labour’s desire to soak the rich is unlikely to go away.

Paul Donovan, the chief economist at UBS Wealth Management, predicts governments across the world will not be able to resist using private wealth to fund public spending plans.

“If you look at the country balance sheets, you have got high levels of debt in most countries – and on the other side of the balance sheet you have got absolutely blow-the-lights-out levels of private wealth,” he says.

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“So what is going to have to happen over time is that private wealth will be encouraged or coerced or taxed in some way to finance [government] debt as we go forward.”

Here are the ways they will put that cash to work.

Just tax it

A G20 committee led by Joseph Stiglitz, the Nobel prize-winning economist complained this month that taxes on assets are too low, particularly objecting to families saving, investing and passing money on to their children.

“Wealth inequalities have a forward momentum, as compound interest increases fortunes and, in the absence of effective inheritance taxes (IHT), wealth is handed down from one generation to another, undermining social mobility and economic efficiency,” its report said.

In Britain, dozens of Left-wing Labour MPs have backed a call for a 2pc tax on those with assets of more than £10m, claiming it could raise £24bn per year.

IHT and wealth taxes are both politically controversial and tend to drive the rich to move their money elsewhere – hence the G20 demand for more international action.

Reeves hit farmers and family businesses with IHT at her first Budget last year. There is room to go further with threshold changes or a lifetime gifts allowance.

More likely appears to be a council tax raid, potentially on homes worth more than £2m.

Globally, Donovan suspects capital gains taxes (CGT) will be the most popular way for governments to raise cash.

“Capital gains taxes generally are going to be quite likely as a mechanism to divert private wealth into public funding,” he says.

“That is because it is very easy to do – you have got transparency, you know the price because you have just done the transaction.”

Who needs a choice?

Governments also need the rich to buy their debt.

This is particularly critical when borrowing costs have risen so far in recent years.

Five years ago, interest rates in financial markets were close to zero – or even in negative territory for governments in countries including France and Germany.

Ten-year borrowing costs are now close to 2pc in Japan, 2.7pc in Germany and 3.4pc in France.

The UK now pays more than 4.5pc for such debt, the highest rate in the G7.

Britain paid just £25bn of interest in 2020-21 – around half the size of the defence budget.

Now it is paying more than £111bn per year, roughly twice what it spends protecting the nation.

“The level of debt almost never creates a crisis – it is whether or not you can finance the debt that matters,” says Donovan at UBS.

The solution is “mobilising private wealth”.

The most gentle way to do this – using more carrot than stick – is to make government bonds appealing.

“You can effectively skew the market to encourage private individuals to indirectly buy government bonds. So the premium bonds that my late grandmother used to absolutely swear by is a way of doing that. You get a tax-free incentive to put your money into premium bonds, and that goes straight into government bonds,” says Donovan.

“The Italian postal savings scheme, the Kampo scheme in Japan, the lists of these are endless – municipal government bonds in the States. You can just incentivise people, which distorts the capital markets.”

This can include exemption from inheritance tax, for instance, on some US bonds, making it an attractive asset, particularly for the rich elderly.

It is not just tax relief.

Pressure can be applied to make other assets less attractive, too.

France, for instance, for years squeezed interest rates on bank deposits while encouraging the creation of money market funds, which buy Government debt, creating a source of demand for bonds.

Forced to invest

If the carrot is deemed too unreliable, governments can rely on the stick to force investors to buy their bonds.

“You can, through what is normally known as “prudential regulation”, encourage or coerce money in from pension funds – [declaring that] it is prudent for you to have Xpc of your money in domestic government bonds,” says Donovan.

“If you go back to 1945, when the UK’s debt to GDP ratio was 240pc, that is something the Government pursued quite aggressively all the way through the 1960s. It was extremely successful in lowering the real borrowing cost of the Government and enabling the debt to GDP ratio to fall very dramatically over the subsequent 30 years.”

It might be tempting for a government such as Britain’s to repeat this stunt. Final salary pension funds used to be major buyers of long-dated UK debt, allowing the Treasury to lock in low borrowing costs for decades. But as these schemes have closed to new members and started paying out to pensioners, that demand has faded.

The Government is trying to get defined contribution schemes to invest more in UK assets.

Banks can be compelled to hold government debt too – India, for instance, requires lenders to hold 18pc of their deposits in state bonds or other approved assets. In Europe’s banks, government bonds receive favourable regulatory treatment.

Preventing the rich from taking their money out of the country can be another way to force the wealthy to finance the Government’s borrowing, and was favoured after the Second World War.

Former Trades Union Congress boss Baroness O’Grady suggested the idea might be useful to “defend Labour’s programme to invest and rebuild”.

This month in Parliament, she asked “whether, if necessary, consideration should be given to the case for targeted and transparent capital controls to prevent short-term capital movements blowing the economy off course” as part of a bid to “make the markets our servant, not our master”.

And all of this comes before considering the power of central banks to print money and buy debt.

The Bank of Japan’s quantitative easing programme became an explicit scheme of “yield curve control” to hold Government borrowing costs at its chosen levels across different maturities.

Prepare for a raid on your wealth, by hook or by crook.

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