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Welcome to the award-winning Money Distilled newsletter. I’m John Stepek. Every week day I look at the biggest stories in markets and economics, and explain what it all means for your money.
Libertarianism in the UK?
My colleague Merryn Somerset Webb pointed out a striking chart to me the other day. Kallum Pickering, chief economist over at Peel Hunt, highlighted the same chart in his Friday email last week. It’s this one:
This shows how respondents to the annual British Social Attitudes Survey answered the following question:
Suppose the government had to choose between the following three options. Which do you think it should choose?
1. Reduce taxes and spend less on health, education and social benefits. [The orange line in the chart above]
2. Keep taxes and spending on these services at the same level as now. [The black line in the chart above]
3. Increase taxes and spend more on health, education and social benefits. [The grey line in the chart above]
You’ll note that while the orange line is still very much a minority view, it is rising at a rapid rate, and is more than twice as high as at any previous peak. Meanwhile, the share in favour of raising spending and taxes is at its lowest since the early 2010s, which is when everyone was fretting about the fragility of the economy and of their own personal finances following the financial crisis.
What’s going on? There are a few obvious potential factors. One is that the size of the state grew sharply as a result of Covid-era lockdowns and has in no way “right-sized” since then. Another is that individuals are — as was the case during the financial crisis — uncomfortable with the levels of public debt that we’ve stacked up.
However, that doesn’t strike me as telling the whole story. The survey does not unpack responses by age group. But if you look at what respondents would prioritise in terms of welfare spending, there’s a bit of a clue.
Relative to history, “retirement pensions” is near the bottom of the pack. By contrast, “child benefit” is at a record high in terms of support, as are “single parents”.
My hunch is that the youngish and those at parenting age are feeling a bit hard done-by. And one specific topic, afflicting this age group in particular, would make sense of the sudden enthusiasm for cutting taxes: student loans.
The Hidden Tax of Going to University
Student loans have always been “bubbling under” as it were, but they have suddenly become quite a big talking point in England and Wales (Scotland has a different system, where university places are taxpayer-funded, but rationed).
In particular focus are the Plan 2 student loans. These account for the majority of student debt, and were in place for those who went to university between the 2012/13 and 2022/23 academic years. (In Wales, Plan 2 still applies; England moved onto Plan 5 from the 2023/24 intake).
For more detail on how student loans work, here’s a good column from Bloomberg Opinion’s Lara Williams. But to cut to the important bit for our purposes today, a UK student who has to pay fees and borrow money for rent during their course will graduate with in the region of £50,000 of debt.
This is not your classic mortgage or credit card debt. You do still get charged interest on it. But you only have to pay it back once you earn over a certain amount each year. And if you drop below this amount in any given year, you go back to not repaying it. After 30 years (for Plan 2) the loan is written off.
The current threshold for starting to repay Plan 2 is £28,470 and it’s going up to £29,385 from April. If you earn above that, then the loan is paid back at a rate of 9% of your annual income above the threshold.
In other words, in practical terms, the loan functions very similarly to a tax, particularly if you never earn quite enough to clear the interest, let alone the principal.
So if you’re a graduate stuck with student debt in England or Wales, then assuming you earn more than £28,470, then your marginal tax rate is 37% (20% income tax, 8% National Insurance, and 9% student loan repayment). Toss in auto-enrolment (for many, 5% of gross pay, depending on employer contribution), and you’re up to 42%.
Now it’s one thing if you’re only just getting above the £28,470 threshold. But given that this system has been in place since 2012, the earliest cohort of graduates (assuming they left university around 2015 or 2016) will be getting into their early-to-mid 30s now.
More of them will be higher-rate taxpayers, more of them will have kids, and more of them will be either trying to get on the housing ladder or trying to move up or across said ladder.
A fair number of them will be starting to realise that there’s a good chance they’re going to fall into the two-thirds of Plan 2 borrowers deemed unlikely to ever repay the loan, which means in turn, that they’ll be shelling out that extra 9% for the majority of their working lives.
For those earning enough to be higher-rate taxpayers, that translates into a marginal income tax rate of 51% (or 56% with your auto-enrolment thrown in). And let’s not even start on the £100,000 tax trap (though the consolation is that if you’re earning that much, at least you’re on track to actually pay the loan off).
To add insult to injury, at the most recent UK budget, Chancellor of the Exchequer Rachel Reeves froze the threshold, so that it won’t move again until at least April 2030, unless someone changes their mind in the meantime.
So not only is the graduate tax becoming very prominent in the pay packets of the oldest cohort of Plan 2 graduates, it’s also now being added to the massive costs of fiscal drag that they’re probably already keenly aware of.
I’m open to other explanations. But if you want to know why a significant minority of the UK suddenly wants a smaller state and lower taxes, I think student loans — rather than an outbreak of radical libertarianism — are the most obvious answer.
A quick date for your diary before I go: keep the evening of March 17th free. Merryn and I will be recording a live podcast with some very special guests, here at Bloomberg’s London office. I’ll share the sign-up link with you as soon as I have it, but it’s exclusive to Bloomberg subscribers — so if you don’t already subscribe, make sure you do!
Send any feedback to [email protected] and I’ll print the best. Or ping any questions to [email protected].
What I’ve been reading this morning
* Looking for the next big stock market rotation? Africa’s day in the market spotlight may finally be coming. Why now? It’s all about population, says Merryn Somerset Webb.
* The Gods of the Copybook Headings, Rudyard Kipling’s 1919 poem, should be compulsory reading. It gets to the heart of what ails us today — and even points to a way out, says Adrian Wooldridge.
* Tesla is the odd one out in the Magnificent 7, and not just because it’s the only one that makes cars, writes Liam Denning.
Mid-day markets
Looking at wider markets — the FTSE 100 is up 0.4% at around 10,490. The FTSE 250 is up 0.2% at 23,480. The 10-year gilt yield is sitting at 4.39%, lower on the day. The German 10-year is a little lower at 2.74% as is the French 10-year at 3.33%.
Gold is down 0.9%, hovering around $5,000 an ounce, and oil (Brent crude) is up about 0.3% to $67.90 a barrel. Bitcoin is down 0.7% at $68,310 per coin, while Ethereum is up 0.3% at $1,960. The pound is down 0.1% against the US dollar at $1.363, and flat against the euro at €1.150.
Follow UK Markets Today for up-to-the-minute news and analysis that move markets.
Quote of the day
“We think application software faces an existential threat from AI.”
Nick Evans
Fund manager, Polar Capital Global Technology Fund
Evans is not keen to go bargain-hunting after the software stock sell-off. His fund has beaten 99% of its peers over one and five years, partly by anticipating the disruption that AI was going to cause in the sector.
Putting a number on… a property freeze
0%
The month-on-month change in home asking prices in the UK this month, according to the latest survey from property portal Rightmove.
Before you go…
Make sense of the world with one essential conversation every weekend, by tuning into The Mishal Husain Show. Available on Apple, Spotify or wherever you get your podcasts.
The main stories to watch out for on Tuesday include:
* In economic news, we get the latest UK unemployment and wages data. There’s also the US Empire State manufacturing survey, plus the ZEW survey of German economic confidence.
* On the corporate front, reports are due from miner Antofagasta, hotels group InterContinental Hotels Group, and drinks company Coca-Cola Europacific Partners, among others.
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