David Coombs: Will Britain make the same mistakes as Japan when it comes to taxes and interest rates?

Following the cautious optimism of COP 26, as an investor, one of the questions I ask is does Britain risk dragging the economic anchor if politicians heed the calls to impose a carbon tax on meat and dairy products with the aim of achieving zero net greenhouse gas emissions by 2050?

In the shadow of the COP, politicians are under pressure to force people to adopt more environmentally friendly lifestyles and diets. No problem with that. However, doing so through higher taxes could put too much pressure on consumers whose disposable incomes will already feel the pressure. Perhaps a more constructive approach through incentives is needed.

The economic rebound from the coronavirus pandemic has provided Chancellor Rishi Sunak with a boon in his fall budget and spending review, to which he added tax increases that take the tax burden to its highest level since the start 1950s. He plans to use these revenues to finance a large increase in public spending, while reducing the budget deficit to pre-pandemic levels. But there has to be a squeeze somewhere, and the question is whether consumers can wear it.

To put this into perspective, the Office for Budget Responsibility (OBR) expects the economy to grow 6.5% in 2021, returning to its pre-pandemic level at the start of the year, and 6 % next year before returning to more normal growth rates (2.1% in 2023, 1.3% in 2024 and 1.7% in 2025).

However, a high risk of policy error could quickly derail the economic recovery. At a time when interest rate hikes seem inevitable in a context of inflation that remains well above the Bank of England’s 2% target, households face a triple threat to their homes. finances: rising costs of housing, whether mortgage or rent; higher food costs; and higher fuel costs, whether for heating or transportation.

I hope Mr. Sunak has done his homework. History has shown that raising interest rates and taxes in unison can be catastrophic. A good example is Japan, which introduced its first consumption tax in 1989, as it began to tighten monetary policy. To this day, it is suffering from deflation and its stock market has yet to recover from the large losses it has suffered.

Contrary to the OBR’s hard-hitting predictions, could the UK economy in fact be heading for an even more difficult time than tit has experienced in the past 18 months with Covid-19?

As a country, we need to have a much more nuanced debate on how to achieve this holy grail of net zero emissions by 2050. Surely the carrot is more efficient than the stick?

Using taxes to force people to change their behavior has proven ineffective. It took decades of increasing tobacco taxes before the prevalence of smoking began to decline in 2011. Likewise, petroleum has been heavily taxed for a long time, but the number of cars registered in Britain has increased by 42.5% over the past 25 years. The only year during this period that saw a decline was 2020 – likely linked to the pandemic.

Using incentives to encourage businesses and people to develop and adopt more environmentally friendly practices would undoubtedly be a much more effective way to deal with the climate crisis, while not jeopardizing economic recovery. .

For example, companies could be encouraged by lower taxes to undertake research and development activities to improve the efficiency of geothermal and air source heat pumps. Households could be offered subsidies for the use of low carbon heating methods, as was the case in the early days of solar and wind power.

Agriculture accounts for 25% of our greenhouse gas emissions, making it a key area to address. Farmers could be subsidized to use more expensive but better food for animals to release less methane and more expensive organic fertilizers to improve crop yields or to maintain forests.

As investors we have little UK exposure – gilts or stocks. Where we find opportunities is among global companies that are involved in promoting more sustainable practices.

We own Chr. Hansen, a Danish bioscience company that develops natural solutions for the food, beverage, nutritional, pharmaceutical and agricultural industries; Tomra, a Norwegian company that builds sensor-based recycling sorters as well as ‘reverse vending machines’, which collect, sort and manage the return of used beverage containers for recycling or reuse; and Trimble, a U.S.-based technology company that enables farmers to increase efficiency, improve productivity, and improve crop performance while protecting soils and waterways from depletion and over-fertilization.

For me, products and processes that cause less damage to the ecosystem are the future.

David Coombs is the fund manager of Rathbone Greenbank Multi-Asset Portfolio Funds

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