Irregular Roundup, 29th July 2024

We begin today’s Irregular Roundup with AI.

AI hopes

Joachim Klement was worried about AI.

We have a growth problem everywhere in the developed world. The demands on our education and healthcare systems are rising, we must spend more on defence , and we are already suffering from tax burdens that in many countries are at a multi-decade high.

Until recently, most countries have skimped on defence to divert funds to welfare without raising takes further.

• The new hope is that productivity gains from AI will bail us out.

Growth (in GDP) depends on three things:

1. Labour
   • In ageing societies with low birth rates, this is propped up by immigration, and lots of people are fed up with that.
   •  The alternative is working longer, but only Japan seems happy with that option.
2. Capital
   • More capital means more machines and/or AI automation and digitalisation.
   • But the trend over the last 30 years is negative (see chart below).
3. Productivity
   • This is the efficiency with which capital and labour are used – output per input.
   • Technological progress will in general improve productivity.

Not only [has] the UK has invested less than its G7 peers for 24 out of the last 30 years, but also that most countries have reduced investments as a share of GDP over time or at best kept it stable.

Joachim quotes a recent estimate that generative AI will only increase productivity by 0.6% pa over the next 10 years.

• This sounds too low, but it matches recent tech boosts like the PC and the internet.

For bigger productivity impacts, Joachim goes back to the steam engine, then the internal combustion engine and the electric light bulb.

Lasting improvements in productivity are driven by our ability to harness different forms of energy and deploy this energy cheaply and universally.

I think there’s a lot to this.

• Arguably, England got a head start on the industrial revolution because we were the first place to start burning all that lovely coal.

Joachim references Matthew Syed’s argument (hidden behind the Times paywall) that lasting productivity gains are only possible if we find technologies with a high Energy Return on Investment (EROI).

• That means investing in nuclear energy and a better electricity grid, rather than green stuff.

Joachim believes that the green stuff is good because it will give us energy independence from Russia and OPEC, but I don’t see why nuclear wouldn’t do the same.

More worryingly, Joachim believes that energy intensity is no longer enough:

The gains in GDP growth from investment in our energy infrastructure are likely to be much lower than in the past. We no longer live in an industrial world where the manufacture of goods drives economic growth and prosperity. Services are the key driver.

Energy intensity has declined by two-thirds over the last fifty years, so new tech with high EROI would have only one-third of the impact.

• This brings us back to AI, which could plausibly improve service productivity.

But it will need a lot of energy, and it might only give us a 0.6% pa boost.

Cross off Portugal

We live in hope that Keir Starmer won’t turn out to be Jeremy Corbyn in disguise, but if he does, my preferred bolthole of Portugal is no longer looking so attractive.

• The previous tax break for retirees (no tax on pension for 10 years) was introduced in 2009 but then first watered down (to a 10% tax) and later abolished by the last socialist government.

The new centre-right government wants to reintroduce a version of it, but this time pensioners are specifically excluded.

• Nor is the “golden visa” regime linked to the purchase of a €500K property being introduced.

They are after young mobile knowledge workers.

• The new proposal is for a flat 20% rate on “salaries and professional income” but will “exclude dividends, capital gains and pensions”.

Portugal struggles to attract foreign workers as there is a 48% tax rate on income above €81K.

• I wonder how local workers will feel about sitting next to foreigners with a preferential tax rate.

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Finland and Sweden complained about the old regime, as too many of their pensioners were moving to Portugal rather than paying taxes in their home countries.

The new government will need the support of either socialist or right-wing (what we must now always call “far-right”) parties to pass the law.

• So it’s far from nailed on, but that isn’t the point.

This is the first explicit statement that even rich pensioners are seen as a burden on society (and particularly the health system) but I doubt that it will be the last.

Labour watch

The election is over, and despite a robust economy, the people voted for change.

• Thanks to our bizarre system, Labour has its biggest-ever landslide majority from a reduced share of the vote (the lowest post-war winning share), whilst millions of us are effectively disenfranchised.

I dread to think what we have in store over the next five years, but I plan to keep my head down (and possibly stick my fingers in my ears and sing “I can’t hear you”).

• Before that, we’ll have one more roundup of the speculation on what Labour might do, and then I will do my best to keep away from politics.

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1. Although the reintroduction of the LTA has been shelved, some form of tax relief reform is likely.
   • Rachel Reeves has previous on getting rid of higher-rate tax relief, so that might be it.
   • A flat rate 30% relief would make pensions far less attractive to (younger) high-rate taxpayers.
   • The 25% tax-free lump sum should survive (until inflation makes it inconsequential) despite Starmer’s gaffe before the vote.
2. There will probably be some move to use pension pots (likely starting with DB, and then perhaps public sector DC, or workplace auto-enrolment schemes) to support UK businesses.
   • That will mean some form of commitment to use equities, including unlisted ones, and to support “investment” in “strategic infrastructure”.
   • The British ISA could also fit in here.
   • As could the use of the Pension Protection Fund to consolidate smaller DB schemes.
   • We could even see housebuilding brought into this.
3. Capital gains tax rates will be equalised with income tax
   • The annual allowance could be abolished and replaced with the return of indexation.
   • Labour has ruled out CGT on primary residences (which would in any case gum up the market).
4. IHT will be tightened up, perhaps with the abolition of business relief (on AIM shares in particular, but possibly on family firms and farms).
5. We shouldn’t get NI or income tax hikes (not an increase in VAT, other than for public schools) but neither will we get indexed allowances, so the fiscal drag will continue.
   • The triple lock on the State Pension will remain, but more pensioners will be dragged into the tax system.
   • I think there could be an appetite to abolish NI, but I’m not sure they could spin the resulting increase in income tax as “not really a rise”.
6. We might get a council tax shake-up, though implementation will be tricky.
   • Perhaps the easiest “fix” would be to add another band above the existing ones.
   • The nightmare scenario is some kind of land tax that largely falls on older people who live in south-east England.
7. Labour claims that their Great British Energy company will bring down bills (at the same time as making us greener).
   • That sounds like nonsense to me.
   • We will get more on-shore wind and offshore wind and solar, and no more North Sea oil and gas.
8. The “Freedom to Buy” mortgage guarantee scheme should (along with continued high immigration) prop up house prices (at the bottom end, at least).
   • There was also talk of reserving new builds for local youngsters and taxing international property investors, which will do the opposite.
   • And of course, Labour plans to build 300K homes per year, which is easier said than done.
   • The war on small-scale BTL will continue, with no-fault evictions being banned and new powers for renters to challenge “unreasonable” rent increases introduced.
   • There will also be new energy efficiency standards for rentals.
9. Zero-hours contracts will be banned and the lower minimum wage for younger workers will be removed.
   • I struggle to match these proposals with Labour’s “growth agenda”.

In a pre-election interview with the London Evening Standard, Rachel Reeves was talking a good game:

The number one thing that I’ve set out to do is to ensure that people can trust me and do feel that they can trust me with their money which is why everything in our manifesto is fully costed and fully funded.

As a former Bank of Englande conomist I’m absolutely committed to fiscal discipline, the tough rules that are needed to get our public spending under control and our public finances back under control.

The focus of an incoming Labour government is going to be on growing the economy rather than on tinkering around with tax rates because in thee nd the way to make people better off is to bring wealth and prosperity.

Let’s hope she’s singing the same song in five years.

Quick Links

I have just one for you this week:

1. Alpha Architect looked at The Negative Impact of Crowding on Active Fund Performance.

Until next time.