Merlin Weekly Macro: Welfare expansion and the UK’s politics of envy

“The inherent vice of capitalism is the unequal sharing of blessings. The inherent virtue of socialism is the equal division of misery.” Winston Churchill.

“Labour hates democracy. This is fundamental socialism. Socialism believes that the interests of the collective allow you to trample on the rights of individuals.” Jacob Rees-Mogg.

Who will rid me of this troublesome Chair?

Since our last edition, the hapless Richard Hughes, former Chair of the Office of Budget Responsibility, has resigned. Less a selfless act of falling on his sword, what is closer to the truth is that he was pushed; that the buck stopped with him for his department’s grievous offence of releasing the contents of the Budget policies before the Chancellor was able to announce them to Parliament is undeniable. For that alone he had to go. But it is easy to suspect that inadvertently and prematurely pressing “send” proved to be a great convenience for Reeves; Hughes’ statement to Radio 4’s Today programme the morning after the Budget that the OBR had been unable to detect “anything” in the new policy announcements that would make “any material difference to productivity or growth” was a public indictment of the Chancellor too far.

The OBR fulfils the role of jury to the government’s fiscal probity; the Chair is the de facto judge: this was a case of a Chancellor not liking the verdict, the most convenient escape from which was simply to fire the chief adjudicator. Cynically, it prevented him from giving evidence to the Treasury Select Committee about the exchange of letters from the end of August between the OBR and the Treasury about the true state of the government finances as the Budget was being prepared. To have had a too straight-batting Hughes allowing the Chancellor to be accused of lying would have been too embarrassing. It would have compounded the Chancellor’s very public censure from the Deputy Speaker for being in contempt of Parliament by not maintaining purdah ahead of the Budget speech, and the accusations from the Opposition that she was the wrong side of the Market Abuse regulations, knowingly front-running (“pitch-rolling” is the new popular term) possible policy measures with price sensitive consequences.

Income Tax and welfare: “Not a lot of people know that”

Notwithstanding yet another youth apprentice scheme (to be encouraged), as Labour loads up the taxes to pay for the burgeoning welfare and benefits bill which is forecast to reach an estimated £389 billion in the fiscal year 2030/31 (compared with £315 billion in 2024/25, and six years out £16 billion greater than was forecast at the time of the March 2025 Spending Review), the OBR’s detailed analysis of government income and receipts reveals a staggering statistic: as currently projected in 2031, 95% of all UK Income Tax (i.e. derived directly from the fruits of labouring or indirectly from income derived from savings and investments much of whose origins will have been from income already taxed at source) will be paid away to beneficiaries of the welfare state (i.e. those who no longer labour, or who cannot or will not work, or who are deemed to be “in poverty”). Income Tax is the single largest source of government revenue.

The tax net will widen thanks to the “fiscal drag” created by freezing the tax bands in nominal terms through to 2031, the period extended in the Budget from 2028. Nevertheless, the direct fiscal transfer of cash from those who earn to those who do not is on such a massive scale that in financial terms they virtually cancel each other out. That leaves the other taxes (VAT, National Insurance, Corporation Tax, CGT, IHT, Stamp Duty, excise duties and the plethora of other revenue raising schemes) to cover everything else from the NHS to defence, education, law and order, transport, and the government’s debt interest bill which on its own already tops £110 billion a year; oh, and the £22 billion Reeves is keeping in her back pocket as “headroom” just in case her sums don’t add up, as if the Treasury were a bank and the taxpayer a forced depositor with no right of withdrawal.

Rights and responsibilities: where minds will never meet

The dividing lines are not merely about the sources and uses of funds. A political chasm separates opposing ideologies. On the Left, the argument for supporting increasing welfarism is about not only dignity and fairness but entitlements and rights; for the Right, the need to row back on welfarism is about making people take personal responsibility for their own actions.

The Two Child Benefit Cap illustrates the point. Rachel Reeves denounced the cap, initiated as one of the austerity measures imposed during Tory Chancellor George Osborne’s tenure, as being one of penalising children in larger families; Reeves claims her policy will “lift 560,000 children out of poverty”. Of course it is no fault of any child born to a household which already has two children; the Left’s perspective is that it is unfair to penalise them financially for no wrongdoing of their own. From the Right, Tory leader Kemi Badenoch’s counter is that it is the responsibility of the parents to live within their means. If parents choose to have more children than they can afford, it is not the duty of the state, and by extension the taxpayer, to make up any financial shortfall. Opponents of the cap abolition also know that in an immensely complex and convoluted benefits system, those who become experts at gaming it can use it to their advantage to milk more cash from it such that there is zero marginal benefit in looking for gainful employment; abolishing the cap potentially encourages such behaviour.

These are morally and politically irreconcilable arguments coming from diametrically opposing ideologies. Where Left and the Right deviate further is about meeting the cost. For the Left, the need to protect the most vulnerable and to alleviate “poverty” is an absolute; in the case of the current government which has lost all its own arguments with its own supporters which make even the barest hint to reform welfare, the cost is irrelevant. It is the social duty of those who have the deepest pockets to pay. For the Right, beyond the need to maintain a minimum safety net to protect the most vulnerable in society and to pay for essential state-provided services, for those who work hard and whose thrift enables them to save and invest, it is their inalienable right to do with their money as they please; the state should have limited powers to tap them for more.

Pernicious, never-ending poverty

Why quotation marks around “poverty”? There is a temptation to think of poverty as an absolute, a binary financial dividing line. In UK politics it is not; it is a relative measure. Poverty is defined as anyone whose earnings are less than 60% of the national median. If the median rises because the gap widens between top earners and those earning less, more people further down the scale are deemed impoverished even if their earnings are rising but at a slower rate. Mathematically, the easiest way to reduce poverty on this measure is to reduce the net earnings of those at the top and to transfer them to those at the bottom. It is such economically reductive logic that underpins the philosophy of wealth redistribution. It now extends beyond taxing income, death and transactions to taxing the ownership of assets with the precedent having been set through the introduction of the new Mansion Tax. But on the 60%-from-median principle, poverty can never be eradicated until there are no differential earnings.

The practical consequences of ideology

Socialism can work. But it will only ever be fully successful as a pure Marxist ideology in the entirely closed environment of a Utopian paradise where everyone is equal, there is no competition for power, influence or resources. Everyone is as happy as they are miserable (George Orwell’s allegorical Animal Farm: “all animals are equal; some are more equal than others” and the pigs eventually become indistinguishable from the humans they displaced in the revolution). Equally, wholly unfettered capitalism, while seductive to some, leads to gross financial and societal imbalances. Both systems are susceptible to corruption and absolutism. 

Open democracies such as ours operating in both a competitive, comparative and cooperative environment sit in the middle-ground between the polar extremes, within which the political pendulum swings right, left and back again. Today in the UK, Keir Starmer’s government’s pendulum is swinging to its furthest Left since the 1970s; even if his Chancellor was once minded that such policies as the abolition of the Two Child Benefit Cap were unaffordable, that reticence has been abandoned. As the health and welfare bills rise inexorably, led by back bench MPs who see Reeves’s financial constraints as her problem and not theirs, so other cost saving and efficiency measures are having to be found. Despite the strategic rhetoric about the need for increased national security, the defence budget is under the cosh; at the Justice Department, a further likely casualty is the 800-year old principle enshrined in Magna Carta of universal access to jury trials being scrapped in favour of Crown Court prosecution and judgements being respectively brought and handed down by the State in all but the most serious cases.

Running consistently second and more recently dropping to third in the polls behind Reform and a Tory party showing sparks of life in its embers, while at the same time under attack from the surging far Left Greens, Labour is once more resorting to the tactics of the unscrupulous: withdrawing some elections under the guise of “reform” (with a small “r”). In the 2025 local elections it was the re-drawing of new local authority boundaries needing time to “bed in”; in 2026, it is the proposed suspension of several regional mayoral elections for at least two years.

The investment perspective on political risk

The politics of envy; trampling on individuals’ rights (including disenfranchisement): it is not difficult to see where both Churchill and Rees-Mogg were coming from. Does it matter to investors? As providers of capital, investors by definition have a capitalist outlook and they are the ones who stand to be impacted most financially. That is not to say investors do not have a social conscience, nor are all investors Right-leaning (anyone with an occupational pension is an investor whatever their political persuasion).

When pricing capital, political risk is weighed up in the term and risk premia attached particularly to government bonds. While markets remain preoccupied with the outlook for inflation and interest rates, the consequences of what might happen in 2029 at the next general election are beginning to weigh. So too the possibility that both Starmer and Reeves are prematurely ejected by a disillusioned Parliamentary Labour party and a new cabinet takes a decisive turn further Left from where it already is. Were that to presage further egregious tax-raising and/or the relaxation or abandonment of Reeves’s fiscal rules with unfettered borrowings, expect a significant re-pricing of risk.

The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.