The 2021 budget or option trading- our Chancellor is undoubtedly an ex-banker

Yann Gindre
Posted by Yann Gindre
Posted on March 04, 2021 Leave a comment

As everybody has already widely commented on the budget, I would like to explore it from a different angle.

To finance the impact of COVID and Brexit, the Chancellor has in essence, taken a gamble or a bet between the Treasury and the tax payers. In other words, he has traded an option and reached his decision on a probable future outcome. 

What does it mean? 

  • Today, the tax payer receives  the benefits of no direct or indirect  tax increases, they are the seller of the option, but will pay the cost of it at a latter stage. 
  • The Treasury is now financially impacted with less tax revenues and forced to raise more debts. The treasury is the buyer of the option but will receive the benefit at a latter stage based on a probable future outcome. 

If the economy grows massively (i.e. the future outcome) then the future tax increases might be less painful  but do not be fooled, these are tax increases whether the time is right or not. However, like any good bankers he has hedged the treasury position as:

  1. Interest rates are still low and it would be reasonably cheap to raise more debts before interest rates start to rise . 
  2. While simultaneously being able to receive more tax revenues, through a combination of tax increases from 2023 and freezing thresholds until 2026 . 

The risk is that the future outcome does not happen. The economy does not recover as well as expected, maybe a combination of COVID and Brexit . 

What will happen? 

  • The tax payers as the seller of the option will have lost the bet which they, unfortunately, did not even take. 
  • The Treasury as the buyer of the option, will win the bet as taxes will be increased irrespective of future outcome. Of course in the long term, this may cost the current government an election, but it is probably worth the risk. 

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