RACHEL RICKARD STRAUS: We pay a high price if No 11 is scared of markets

Daily Mail​

9 hours ago

What can throw tantrums and fling its toys out of the pram when it doesn't get what it was hoping for?
A petulant child may spring to mind – but it's an equally accurate description of financial markets.
Investors crave certainty and Governments tie themselves in knots trying to give it to them for fear of the consequences.
Understandably so – if investors start to lose confidence in a Government's prudence, they can throw a strop and refuse to lend it more money unless they are compensated with higher interest payments.
Debt costs then spiral, gobbling up taxes and leaving the Government with less to spend on everything else.
So you can see where Chancellor Rachel Reeves was coming from when she made it clear from the off that her mission is to keep financial markets happy. With debt interest predicted to cost us £111 billion this year, we can hardly afford for the bill to rise further. That's already around £3,915 per household.
Appeased markets should mean lower debt payments – in theory, good news for us all.
But Reeves' attempts to provide security for financial markets are resulting in her eroding it elsewhere. UK households are now the ones in the dark and fearful about what's coming their way – and that is starting to have its own consequences.
Ms Reeves' strategy to create certainty was to construct rules about how much the Government would borrow and pledge never to break them.
But meeting her rules is getting trickier as economic growth weakens. Short of a miracle, the only way she'll manage it is if households stump up. She'll have to find £50 billion from somewhere – be it tax rises or spending cuts.
The problem is that we won't know where she'll target – and are unlikely to for several long months until the autumn Budget. The uncertainty is already starting to bite.
Financial experts have told us that households risk making costly mistakes when trying to protect their estates against the possibility that Ms Reeves chooses to target inheritance tax.
Leading estate agent Savills last week warned that a 'vacuum' of information about potential changes to inheritance tax is also affected house sales.
Potential buyers are sitting on their hands in part because they don't know what is coming down the line. Collectively that hurts the housing market, but individually that's thousands of households stuck in homes that no longer suit them and putting life plans on hold.
Aviva boss Amanda Blanc also warned last week that fears of a Budget tax raid are stoking customers' uncertainty.
'There's been a huge amount of speculation… customers should wait and see before they take any action,' she said. 'It is really important you don't do anything detrimental.'
Relentless uncertainty about the outlook for pensions erodes confidence in them – which can make savers think twice before making such a long-term investment. Things will only get worse as we get closer to the Budget.
Chancellors and the Treasury have a habit of stoking rumours about what they might do – to gauge the public response and decide whether or not to go ahead. Think-tanks, financial firms and other invested organisations publish endless papers about what the Chancellor could and should do in the hope of steering her decisions.
Speculation mounts, fears grow. It's easy to get caught up in the frenzy.
So what to do? For most of us, the best action to take is likely to be none at all. Acting rashly on rumour could leave you worse off than waiting to see what happens. Any changes the Chancellor does make are unlikely to come in immediately, so you should have time to act then if you need to.
But it doesn't hurt to do things that are win-win – in other words, that you wouldn't regret regardless of what the Chancellor does or doesn't announce. That means stashing what you can in your Isa, where investment returns, dividends and interest earned are tax-free.
It means remembering your pension as well. Tax relief is effectively free money in your long-term savings – an incredibly generous perk – and long may it remain.
And it means doing what makes sense in your life, rather than what may prove to be the most tax efficient.
Giving away wealth now may help keep it from the Chancellor if she targets inheritance tax, but that's little solace if it leaves you short in older age.
Finally, the Chancellor should keep a check on the uncertainty that she's creating among households. If it results in fearful households curbing their spending, making poor financial decisions and a gummed-up housing market, then financial markets won't like that either – and, as always, they'll make her pay.