Month: June 2010

There are four pieces of welcome news on the new CGT proposals.

The first is that savers with modest incomes will still only pay 18% on modest gains over the tax free allowance.
The second is the substantial increase in the entrepreneurs allowance as an encouragement to people to establish and grow businesses.
The third is that the top rate is 28% rather than 40% or 50%.
The fourth is the maintenance of the £10,000 plus tax free allowance.

28% will not raise as much money as a lower rate. This year receipts from the first three months are likely to be high, as people sold assets prior to the budget. They are then likely to fall sharply.

Yesterday the yuan edged higher against the dollar as the first installment in China’s new approach to its currency after a period of pegging it to the dollar. Although the move was small, it was important. There are no guarantees of a big revaluation, and no suggestion that China will move to an unmanaged rate. However, it was important because at last we have a substantial world currency which the authorities do not wish to see fall.

Over the last couple of years the US and Uk authorities have been at best unmoved by declines in their currencies, and at times appeared to be grateful for any fall. In more recent months the Euro area has seemed relieved that its currency has started to fall against others. All the major countries have kept interest rates very low, putting people off holding their currencies and short term bonds.

The world remains divided between the hard working, high saving, successful exporting economies, and the heavily indebted, high borrowing, big importing countries. Japan has some mixed characteristics, China leads the former group whilst the US, UK and peripheral Euroland are in the second group.

To create greater balance, behaviour – and costs – have to change in both groups to level things up. Changing currency values can do some of that work for the relevant governments. China has put a new safety valve into the world economy. We need to watch the extent they allow it be used. Meanwhile the rupee has gone up reflecting India’s economic success, and taking a ltitle of the large inflationary pressure out of the Indian economy. These revaluations are Mr Osborne’s stroke of good fortune as he picks up a very difficult inheritance.

We do make heavy weather of controlling public spending in this country. The £6 billion of cuts which caused such anguish in the Election debates represented less than 1% of total public spending. Tomorrow’s budget will probably be proposing cuts of less than 10% over the lifetime of this Parliament. Sensibly managed, this need not entail cutting anything that really matters.

The UK state has been living a middle class lifestyle. If you are living on a low income then of course cutting spending is difficult or impossible. If you are living a middle class lifestyle and your income goes down by 10% you have plenty of options. You can holiday nearer at home and cut out the foreign trip. You can eat in more than in the local restaurants. You can trade down for a cheaper car. You can draw some money out of the savings account to tide you over until your income goes up again. You can buy more of the value items at the supermarket, and put more vegetarian dishes into the home menus. You can discover home entertainment to keep the leisure bills down. You can turn down the thermostat a little and put on a jumper.

The UK state finds itself in that position today. It has plenty of assets. Some can be sold to help out. It has been dining out on consultants and temporary labour. It needs to do more in house. It has been appointing all too many to exotic job titles which we could manage without, and sending many of them on expensive overseas fact finding trips and seminars. It has indulged in a mind blowing array of politically correct regulations which often fail to tackle the underlying problem they wanted to address. It has been a master at buying the “nice to have” or the “why do we need this?” instead of concentrating on doing the basics well.

I know it is asking a lot for an outbreak of commonsense by public sector CEOs in Councils and quangos. But can they spare us the crocodile tears and the parade of the bleeding stumps? Can they do what any household or company does when faced with a few percent off their income? Just get on and manage it in the least damaging way possible. The cuts in funding are going to be nothing like as severe as the loss of income in industrial companies during the great recession of 2008-10.

Good news – China will revalue the yuan.

The huge imbalances in the world stem from supercompetitive China knocking the rest into a cocked hat. Gradual increaes in the value of yuan will help rebalance a bit, and will mean China is nearer to the end of her period of slowing her economy by restricting credit.
The Uk will be worse off again because Chinese goods will be dearer, but have better chances of making things to export or to substitute for imports.

I was pleased to hear yesterday through the media that the budget will include measures to boost a private sector recovery at the same time as taking action to control the public deficit. As I have been arguing, the country needs hope and budget control needs the prospects of many more private sector jobs. Curbing the deficit means transferring people from the public sector payroll – be they on benefits or in non jobs – to the private sector.

So what measures can and will they take to boost the private sector? The likely measures include:

1. Cutting employer’s National Insurance, the tax on jobs.
2. Putting tapers and Indexation into Lib Dem plans for higher CGT.
3. Cutting the overall level of Corporation Tax to 25%.
4. Cutting the small companies tax rate.
5. Exempting NI on the first ten jobs created by small business.
6. Sweeping away some of the regulations and set up costs on new business.
7. Encouraging new groups and individuals to set up schools

If they want to send out a strong and positive message that the UK is re-opening for business after the deep recession they could also:

1. Set a CGT rate of 10% for gains over 4 years
2. Say Corporation Tax is coming down to 20% over the life of this Parliament
3. Announce a return to 40% top Income Tax rate for 2012
4. State small business profits tax will not go above 20% this Parliament
5. Announce a plan to cut business regulatory costs by £20 billion through the Great Repeal Bill
6. Offer areas of public sector work to private sector franchise/state employee buy out
7. Announce asset sales programme from public sector
8. Split up some government contracts to allow smaller businesses to compete
9.State that banks now have enough cash and capital, allowing them to lend more to the private sector
10.Amend the tax rules on private sector pension contributions so more pension funds can be saved
11. Boost tax free savings plans for investment in business

Some bloggers advise me to keep away from football commentary. Last night I returned home in time for the highlights of the England game. That didn’t take long to watch. England have now played around three hours of match football wthout scoring a goal after their stylish opener against the USA. Perhaps our football experts who write to this site could send in their best reason why England finds itself in this predicament, and their best advice to England for the last game of the league stage. The replacement goalkeeper’s interview this morning was a classic of how to stay loyal to the manager without conveying any sense of confidence in him or his strategy.

The government needs an MPC which gets it right. Unfortunately, for the last five years, the MPC has been well behind the plot, lurching from too easy to too tight to printing money.

Today their rationale for believing inflation is not a problem is that our economy enjoys a lot of unused capacity. So, they say, as more money finds its way into the system the UK can just produce more without prices going up. So why then are prices increasing by more than 5% a year (RPI)?

If you talk to manufacturers they will tell you that we now live in a global market. UK factories depend on a global supply chain. Raw materials shot up in price over the last year. Oil more than doubled from the bottom, metals like copper were also bid up rapidly. Now the surging demand in China, India and the rest of Asia, coupled with some recovery in the USA means a shortage of various components. There are price pressures within the global suplly chain. The UK does not have loads of spare factory capacity that it can bring on to insulate itself from these pressures. The long decline of the last decade meant many more closed foundries and factories. The recession also led to reductions of capacity, as firms were forced by a shortage of cash to close their produciton facilities. Many will not reopen.

At the same time the UK has experienced a big devaluation, in part brought on by the money printing in the latter stages of the last government. That too has served to raise industrial costs here at home.

Just as the good inflationary news comes in of a modest revaluation against the Euro countering some of the price increases, UK private sector wage increases start to rise from their very low levels during the recession. Inflation expectations are on the upwards march again. We need a more convincing account from the MPC of why they got it wrong over the recent past, and how they intend to stop inflation from here. Now the currency is beginning to help them they have a chance to break the cycle of rising expectations of more price increases to come.

BP’s decision to go to the White House on Mr Obama’s terms was strange enough. I would have thought they should have offered to go in conjunction with their main American sub contractors, saying “We are all in this together. We need all to be available to answer the President’s questions and to show how we can work together to find an answer”. It is the drilling company which offers most hope of a solution, as the end of the oil spill now rests on two new wells they are drilling to relieve the pressures in the failed well.

Yesterday the politicians were bound to be very angry as their constituents are. They were bound to want to know how and why it all happened. Without pre-empting the final results of the enquiry, BP could have been more forthcoming about the problems of drilling so deep so far below the waves, and could have made some preliminary findings public about what failed. Instead of saying he was not involved or did not know, the CEO could have said “our preliminary view is… or subject to further enquiry we believe…”

Let us hope the new wells work as planned. The best answer to BP’s critics is to find a way to stop the spill. BP needs to put up a new senior spokesman who is American and who knows about oil wells to field the US media and politicians.

It was good to learn yesterday that projects announced shortly before the election which Labour could not afford are to be cancelled. I am surprised in many cases that people think it worthwhile arguing against such cuts, when there is no money to pay for these new commitments.

The BBC chose to give time to critics to defend one of the most marginal ones – a new Visitor Centre at Stonehenge. When we are borrowing £1 in every £4 spent surely a new Visitor Centre for an ancient monument must be top of the list for cuts? If it is likely to bring in much extra revenue, as its defenders suggest, then it is a project which should be carried out with private capital under a suitable franchise or lease arrangement which transfers all the risk and none of the existing public revenue to the private sector.

It was also good news to learn that the taxpayer will not be asked to pay £240,000 a year for a new head of the Audit Commission. I am sure they will find someone good to do such a job for around half that amount of money. If the Audit Commission cannot set an example over value for money then heaven help us.