The first job I had
after leaving university was with an insurance company which specialised in agriculture.
During the time I was there, the company introduced a new type of policy for
farmers, namely Consequential Loss. The basic idea was that, if a farmer lost
stock, a building, or whatever due to storm, fire or some other insured peril,
they could claim not only the value of what had been lost, but also for any
loss of profit which ensued. A meeting was convened in Cardiff to which the
local inspectors from the southern half of Wales were summoned to hear a
presentation on the benefits of the policy and to help them sell it. After the
presentation, Johnny, ‘our man in Carmarthen’ as he was, quietly asked a
question about the information that farmers would have to provide to get the
insurance. Specifically, which figure would they have to give about their
profit – the one they gave the Inland Revenue or the actual one. After hearing
the explanation that both the premium and any payout would be based on the
figure that they put on the application form so it needed to be an accurate
figure, and that, in any event, providing inaccurate information could
invalidate the whole policy, Johnny shook his head briefly before declaring, “Well,
I’ll never sell any of that in Carmarthen”. Some might see that as a foul
calumny against the honest farmers of Sir Gâr, to which all I can
say is that Johnny was astute, was good at a job of which he had decades of
experience – and he knew his customers well.
An alternative, and
rather more charitable, interpretation of the point that he was making is that
the way numbers are presented, and the assumptions used to derive them, can
sometimes depend on the purpose for which they are to be used. I wonder,
however, if that little anecdote might still help to explain the gulf between
the farmers’ understanding of the impact of the changes to inheritance tax
(IHT) and that of the Treasury. I don’t recall many farmers ever
underestimating the negative impact of any change that they don’t like (which
at times seems to cover any proposed change), let alone being optimistic.
That’s another way of saying that it’s just possible that they may be ever so
slightly overstating their case. On the other hand, the idea that Rachel Reeves
and a few allegedly ‘clever’ economists at the Treasury understand agricultural
finances better than the average farmer is risible; the probability that the
government are significantly underestimating the impact of their proposals is
high. But unless we start from a set of commonly agreed and understood
assumptions, we will not close that gap in perceptions.
If we assume that
the average family farm in Wales really is worth the millions of pounds which
would start to attract IHT, and that the average farm income really is as low
as some are saying, then in purely financial terms, farmers in that position
would be better off selling up, buying a house in the nearest town or village,
and putting the rest of the money into a building society from which they would
enjoy a much better income. Those are big caveats though. (And the issue isn’t
purely financial either. Family farms are the backbone of many rural
communities and a major factor in the survival of the Welsh language in the
rural north and west of Wales. Few of us would want to see that undermined.)
But if the return on
capital from farmland is so poor, why is the price so high? Conventional
economics would suggest that low return on an asset should lead to lower asset prices. Part of
the reason for the high price of agricultural land is precisely the current
exemption from IHT, an exemption which makes it attractive for the very wealthy
to put part of their wealth into an asset which, unlike their other assets,
will not be taxed on death. And part of the problem with Rachel Reeves’
proposal is that she’s only doing half a job. Not only will her changes not be
enough to deter the transfer of non-agricultural wealth into farmland, they
will therefore also not do enough to stop the artificial inflation of farm land
prices, and will as a result catch many more farmers in the net than the
government are claiming.
They also don’t
address the real underlying issue – why are the rewards from such an essential
enterprise as agriculture so low for those engaged in it? But that’s a whole
other question, and not one about which the Chancellor seems particularly
bothered.
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