HAMISH MCRAE: Chancellor’s getting a message from the Seventies

This is going to be a bad week. It will be bad for Rachel Reeves, who will have to acknowledge in her Spring Statement that her Budget tax and spending plans of last October have gone haywire.

It will be bad for the economy, as companies face the increases in their National Insurance Contributions that are about to kick in. And it will be bad for the rest of us who have to cope with inflation climbing again and taxes rising towards the highest level of national income since the late 1940s.

In fact, it all feels more and more like the 1970s, which was a miserable decade.

We know what has gone wrong, though we will get more detail of that from the Office for Budget Responsibility on Wednesday.

Growth has tanked, and government borrowing has soared. In the first 11 months of the financial year, the Government borrowed £132 billion, £20 billion more than the Chancellor planned last October. The problem is partly higher spending, including the interest on the National Debt, but the real killer for Rachel Reeves is lower-than-forecast tax revenues, now coming in well below expectations. There won’t be any more tax increases on Wednesday, but stand by for yet higher taxation in the autumn Budget.

So what should we do? I think we have to go back to how we coped in the 1970s. What forced the Government then to sort out public finances was the need for a bail-out from the IMF in 1976.

Feeling the strain: Rachel Reeves will have to acknowledge in her Spring Statement that her Budget tax and spending plans of last October have gone haywire

That’s not going to happen now – it is the financial markets that will impose the discipline.

Already, the UK’s 10-year gilt yield, at 4.7 per cent, is the highest of any G7 country, and about one-quarter of our National Debt is index-linked, making us vulnerable to the rebound in inflation. We know that Reeves is really concerned about the debt bill, as she jolly well should be.

Eventually, they will have to tackle public sector productivity, which is lower now than in 1997, but we have to live in the world as it is, not how we wish it to be.

In the 1970s, there were two basic rules.

Rule one was to cut your income tax bill. The top rate on earned income in 1978-79, the last year of the Labour government, was 83 per cent. So companies devised all sorts of ways to pay their senior employees. These included lavish entertainment allowances, company cars with free petrol and having staff work abroad for part of the year.

It’s not quite as bad as that, though making personal pension pots liable for inheritance tax (IHT) will push taxation on them into that bracket. But for most, the main way to keep income tax down is to put the maximum possible into pensions, notwithstanding the tax change, and hope that some future government will do something about IHT.

There are other incentives, and the onus will be on employers to figure out how to develop these.

For some, there is the option of setting up a business, and build up savings in that. For others, more radically, it is moving abroad to a low-tax jurisdiction for a few years, not only to hold down income tax but also cope with capital gains tax liabilities.

Rule two is to stop savings being eroded by inflation. That means buying anything that will go up in value in real terms, notably property and equities. Everyone who bought a house in the 1970s will have seen it go up much faster than prices in general.

The average property in 1975 cost £8,500. That’s equivalent to £65,000 now, whereas the average price today is £270,000.

Shares have gone up faster too, with a real return of around five per cent a year – and we have ISAs now, which did not exist then. That is massively helpful, because investments there avoid capital gains tax and tax on dividends. Over any long period, equities are much better investments than cash.

The message from the 1970s is this. Like then, the Government is floundering, the economy is flat, and the beast of inflation is on the attack. But for the calm-headed there are still ways of building and preserving wealth.

Hold down your taxes and buy things that will preserve value. Not easy, but got to be done.