Crossing the Rubicon

In 49 BC, on a cold winter night, the advanced guard of the 13^th Legion of the Senate and People of Rome reached a small stream that flowed towards the Mediterranean.  This was the Rubicon, a waterway of such little geomorphological importance that today no-one really knows where it ran from and to: its location has been lost.  Minor in physical terms, it was nonetheless major in symbolic terms, for the Rubicon formed part of the frontier between Italy and Gaul, between Rome’s domestic territory and its foreign dominions.  It the 13^th Legion crossed the Rubicon, they were in effect declaring the start of a civil war, a repudiation of the republican form of government that had existed in Rome for almost five hundred years, its traditions, its laws, its aversion to monarchy, and the clear separation between the violence used to suppress enemies abroad and the electoral process used to settle arguments at home.  The commander of the 13^th Legion – Gaius Julius Caesar – paused at the stream, contemplating the potential consequences of his next steps.  

Caesar was aware of the likely immediate impact of his actions, but perhaps not even he could fully understand the historical significance of the symbolic act that he was about to undertake.  A contemporary British historian notes that, in Europe, because of Caesar’s action, a thousand years of civic self-government were brought to an end, and not for a thousand years and more, would it become a living reality again.  (Tom Holland, Rubicon, 2003.)  Caesar overthrew the Roman republic and inaugurated two millennium of monarchic and imperial government, the legacies of which remain today in Europe: the designations ‘Kaiser’ and ‘Czar’ are both derivations of Caesar’s name, and while he might call himself the President of Russia, it seems clear that Mr Putin considers himself an heir to the form of militarist dictatorship that Gaius Julius established at Rome. 

Ancient historians were keen to stress the significance of the moment when Caesar paused, prior to leading his legion across the Rubicon, when he stopped to estimate the risks and rewards of his actions.  Plutarch, the Greek historian, describes him silently weighing up the alternative choices – to cross into Italy or to return to Gaul – then discussing these with his closest friends.  He then makes use of a gambling analogy to show how Caesar, unable to make a rational calculation, acted on impulse: Finally, in a sort of passion, as though he were casting calculation aside and abandoning himself to whatever lay in store for him, making use too of the expression which is frequently used by those who are on the point of committing themselves to desperate and unpredictable chances, ‘Let the die be cast’ he said, and with these words hurried to cross the river.  Suetonius, the Roman historian, prefaces his version of the crossing – in which Caesar sees an apparition in the river, who blows on a trumpet and leads him across to the other bank – by reporting that Caesar liked to quote from the play, The Phoenician Women, by the Athenian tragedian Euripides: if it is ever right to do wrong, then for a throne’s sake is wrong most right!   Crossing the Rubicon was a symbolic act, but to win power at Rome, the greatest city state of the ancient Mediterranean world, no risk was too high; and no rule, no principle, and no law too holy to stand in his way.

I have been thinking about the Rubicon this week.  Not because of the recent elections in Italy, nor the fake referenda in occupied eastern Ukraine, but because of the ‘tax-and-borrow’ programme set out by the new British government.  To avoid any misunderstanding, I do not consider the new Prime Minister to be a second Caesar – although, at a stretch, her predecessor might come to be thought of as a second Nero – nor do I think that Britain is on the brink of civil war.  We are a much-diminished nation – militarily, economically, and politically – and of peripheral interest to the rest of the world, in a way that ancient Rome most certainly was not, but I am interested in the political gamble that has just been made by means of a small symbolic act: crossing the Rubicon was in this instance the giving up of a very modest stream of tax revenues from the highest income earners, but which nonetheless might turn out to be enormously costly to the legionnaires of the Conservative Party.  The fiscal die has been cast, but for what purpose?

Immediately after the new tax announcements were made, Sterling fell sharply (although it had been falling gradually for several weeks) and then again, on the next trading day, hitting an all-time low against the US dollar.  The pound has now mostly recovered, as the dislocation in the financial markets transferred from currencies to bonds.  Gilt prices fell as expectations regarding interest rates changed: now market participants expect the Bank of England to raise rates faster, to higher levels, and to keep them there for longer.  This in turn caused a particular problem for many defined benefit pension funds, which hold Gilts to match their long-term liabilities, and which use derivatives to reduce other risks (inflation risk, currency risk, credit risk, etc.).  The full details of what happened are not yet public, but it seems clear that many schemes were unable to sell assets to create cash for margin calls.  The Bank of England, in one of its other roles as stabiliser of unruly markets, stepped in and announced a Gilt buy-back programme.  After a week of market chaos, it appears than some sense of order has been restored.   However, the price disruption is now being transmitted to the real economy via rises in mortgage rates and corporate lending rates, all of which means significant pressure on household and company budgets, at a time when inflation is high, and a recession is looming.  In short, the immediate prospects for the British economy have gone from bad to very bad.

What was it that provoked this financial disorder?  Most of the line items in the statement had been extensively trailed in the press beforehand, most notably a government funded cap on energy bills, the withdrawal of a tax rise brought in earlier this year to fund the growing costs of social care, and a cut in the basic rate of tax that has now been brought forward a year earlier than promised.  The new and unexpected item was the abolition of the additional rate of tax, which is charged at a marginal rate of 45% for those earning more than £150,000 per year.  From next April there will be only two tax rates: a basic rate of 19% and a higher rate of 40%.  The cost of abolishing the additional rate is estimated by the government to be £2 billion per year, which is a small figure compared with the withdrawal of the social care tax, which costs an estimated £16 billion per year.  (Note, currently the additional rate brings in £6 billion per year, but the government is assuming that two-thirds of this will not be lost because changes to the tax rates will encourage high earners to redefine their earnings as income: maybe, maybe not). 

As it happens, I was not a fan of the additional tax rate.  It always struck me as odd that the highest marginal tax rate for earned income should be 45%, when for inherited wealth it is 40%, for capital gains on assets it is 28% for property and 20% for other assets, on dividends it is 39.35%, and for consumption it is 20%.  Why tax earned income at a higher marginal rate than all other sources of wealth?   Only a society that wanted to reward the rentier class at the expense of workers would think that a good idea.  That said, abolishing the additional rate of income tax should have been undertaken as part of a wider exercise of tax reform, in which the lowest and highest rates could have standardised and properly indexed.  In the present economic circumstances, such a reform package should also have been revenue neutral for the government rather than part of a tax giveaway, Instead, despite the pressures on public spending, the British government showed itself willing to forego anywhere from £2 billion to £6 billion in revenue gathered from the 600,000 highest earners.

Why did such a small tax change have such a big impact?  My answer is that it was a Rubicon moment, that is, a symbolic gesture designed to emphasize the values and character of the new government.  Despite the British economy facing a long recession, with abnormally high energy and food prices, disruptions to trade relations and supply chains, workforce shortages, and significant problems in the provision of health services as a lasting result of the pandemic, despite all of this the government thought that in addition to a vast public subsidy of energy consumption – neither costed, nor with any incentives for consumers to reduce their energy usage – it would be a good idea to offer the highest income earners a tax rebate.  These lucky 1% will all end up with more cash than they might reasonably have been expecting in the next tax year: anyone earning more than £1 million per year will be at least £42,500 better off.  Nice work if you can get it.  According to the government, the tax cut is designed to improve growth, but I know of no serious economist who thinks that a £2 billion stimulus to the economy targeted at the wealthiest income earners, will improve productivity in any meaningful or measurable way.  The sum is too small overall to make any difference and the beneficiaries are too few and, anyway, unlikely to spend or invest their windfall immediately (or to spend or invest it in the British economy for that matter). 

It is quite possible to think that the British tax regime acts as a disincentive to economic growth, and to think that increasing productivity is the central economic challenge of our time, without thinking that tossing a tax bone to the top dogs is a smart strategy, politically or economically.  Burdening future generations with yet more government debt, particularly now the costs of financing this debt are rising fast, looks like a spectacularly irresponsible thing to do. 

Euripides play The Phoenician Women, which Caesar liked to quote from, is set in Thebes – the women of the title are captives, brought to the city as slaves, who form the chorus – after the fall from power of Oedipus.  Initially, his two sons Eteocles and Polynices agree to share power: Eteocles will rule for a year, then Polynices will take over for a year.  However, at the end of the first year, Eteocles refused to cede to his younger brother.  Polynices raises an army with funds from his father-in-law and besieges the seven gates of the city.  Jocasta, their mother (and grandmother), tries to persuade them to come to a peaceful settlement but Eteocles refuses to honour their agreement, ending his speech with these words: What I hold I shall not willingly resign. When I have the opportunity to rule, shall I ever be a servant of this man?  Therefore come fire, come sword, harness your horses and fill the plain with chariots.  I will not yield my throne to him!  If it is ever right to do wrong, then for a throne’s sake is wrong most right.  In all else should a man fear the gods.   This refusal to act with honour, this refusal to recognise the justice of his brother’s claim, leads that same day to the deaths of both brothers, in single combat with each other.   Soon afterward, according to Sophocles’ version of the story, their younger sister Antigone’s refusal to accept her uncle’s prohibition on burying Polynices’s body according to customary religious rites leads both to her death and those of her uncle’s son and wife.  This is, rather obviously, a gruesome precedent upon which to take a calculated risk.

The lesson from Caesar is that leading his legion over the stream was easy, but wining the ensuing civil war was not.  The lesson from Eteocles is that grabbing and keeping all that you can, will cost your family dearly.  It is not yet clear what the lesson will be for the British government, but I have a strong sense that the symbolism of the act will have ramifications well beyond its true fiscal impact.  Some small streams are best left uncrossed.

Postscript.  After I wrote this text, but before I published it, the British Government announced the withdrawal of the abolition of the additional tax rate, in response to widespread public criticism.  They have turned out to be reckless – like Caesar, like Eteocles – but also irresolute– like the Duke of York.

The main point of my text – that symbolic actions have impacts well beyond their immediate material consequences – remains apposite.  And if my text encourages any of my readers to spend some time consulting Plutarch or Euripides, I consider that to be a good outcome.