Chris Ogle's view of Recession Busting with the Pre-Budget Review!

This week was an unprecedented week in politics and one in which the government laid out it's plans for how we are to stave off the worst of the recession, minimise it's impact, and emerge on the other side during the second half of 2009.

The key issues as far as I can see with the recession are :-

1. lending is pretty much at a standstill from the banks, even with money pumped in to shore up the countries financial institutions this is not translating to life saving funds for small and medium sized businesses. We are therefore likely to see many businesses go bust with the inevitable increase in unemployment and associated burden on the welfare handouts. MFI and Woolworths (not SME's by any means) are already demonstrating the issues here with potentially 30,000 jobs to go before Christmas.
2. Mortgage products are just not available and even where they are at high interest rates and with a requirement for larger deposits or existing equity. This is preventing demand for house buying with the inevitable knock on effect of hitting the building sector very hard (with more job losses) and suppressing house prices still further. With prices decreasing potential buyers will wait to see where things bottom out before demand picks up which further exacerbates the problem.
3. Spending is reducing due to high levels of uncertainty not only because of job threats but also because prices are now dropping. Except for essentials such as food, heating and basic clothing there is an expectation that prices will have to drop further and hence waiting to buy will save money. This is dampening demand which is unlikely to be saved by a spending frenzy over the run up to Christmas.
4. The increased borrowing being touted by the government has reduced confidence in the British economy resulting on a mild 'run on the pound'. This has created a devaluation of our currency against the dollar of some 25% and against the Euro 10% in just one month alone. OK this means exports are cheaper, but in the UK our biggest export is Financial services, not exactly hot property in the current climate.
5. Unemployment rising due to the contracting economy. This is a double bubble problem as those not employed cost the country in dole money, there is the opportunity cost of lost production / output, less tax revenues and less money to spend by the person out of work.

GOVERNMENT RESPONSE TO THE RECESSION

In reaction to the above the Governments pre-budget report is based upon the premise of spending our money (which we don't have right now) and to pump a much needed cash injection into the economy to stimulate growth and minimise the impact of recession.

The Pre-Budget report was a tax giveaway to put more money in our pockets so that we all will increase spending. Tax Cuts cost money and the government gave away around £18 Billion of tax cuts, so let's analyse the key ones.

• VAT Rate changed from 17.5% down to 15% with the promise that this will be reversed at the end of 2009 and thereafter we could see it rise to 18.25% or even 20% if the current government were to be re-elected.
• Increase in Tax Credits / Child Benefits, Pension payments and the continuation of the low income payments which replaced the abolished 10% tax threshold.

In order to pay for this, when we are emerging from the recession during the latter half of 2009 (governments prediction only) and into 2010 we will see the return of the 17.5% VAT rate (for now), increases in national insurance contributions for both employees and employers and the redistribution of wealth by taking more tax from the highest earners.

WHAT IMPACT WILL THIS HAVE ?

Well the short answer is, no one knows and the government has played a massive gamble. We are in unchartered territory with projected national borrowings being way above levels we have previously known, financial, housing and business markets in turmoil and a world recession going on around us.

Interestingly I watched Question Time on BBC1 with David Dimbleby last Thursday and Justin King the CEO of Sainsburies was a guest panelist on the show. It is amazing how the voice of a successful commercial business person differs so much from those of politicians who have a predominantly legal background and live on a different planet to the vast majority of us.

Justin King's opinion on many of the governments tactics were fairly closely aligned to my own and rather disparaging with regard to how effective they are likely to be.

VAT Tax reduction

Let us be clear about this, it is not a tax reduction but an adjustment for a specific length of time. There are a number of issues with this.

1. Will a reduction of 2.5% make any difference?
2. How easy is it to for the retailer to pass these reductions on anyway?
3. What is the commercial cost and implications of implementing these changes?
4. Who was consulted on the implications of the VAT adjustment?
5. Most of low income families buy items that do not attract VAT, so there is no difference
6. Heating, Gas and Electricity are unaffected which is in percentage terms a large proportion of low income families monthly outgoings
7. The government has now paved the way to hike the VAT rate later on justified by the need to pay back the £12 billion the VAT change will cost.

Will £2.50 on a £100 spend encourage any of use to spend more money or make a purchase that we would not otherwise have done? I think probably not. With sales in the high street scarce at best at the moment, prices are being slashed regardless of this VAT adjustment. This is too little to be of any import whatsoever and I can't help thinking a complete waste of £12 Billion of our money. It is rather like the money we receive from the European Union which is to be spend on madcap projects that we just would not waste our own money on. Here is another example of the Government now "borrowing money" to misuse which we will all have to repay later on. This is an absolute tragedy and one I feel we will regret (and pay for) for years to come.

It is highly unlikely that some retailers will be able to pass this 2.5% reduction on anyhow, it means re-pricing everything, changing computer systems, extra bookkeeping, the costs of which will far outweigh any gains. Another example of an idea, implemented without due consideration.

We also learned on Question Time from the Shadow Chancellor that what would have amounted to a sensible move, removing the VAT on Gas and Electricity is not actually allowed due to European Parliament legislation. This would have given money back to the lower income families which proportionally is a high percentage of their disposable income.

BANK Bailout and Lending

We probably all agree that bailing out the banks although leaving a 'bad taste in the mouth' was essential to stabilise the economy. What seems more difficult to understand is why the banks are not lending to us all again? Well Justin King explained this very eloquently on Question Time.

The banks are a commercial business, they have a responsibility to the shareholders to run and manage the business to return profit. We, the Taxpayers are now large shareholders in the Banks. In order for the banks to pay us back and return our money they need to make money, so herein lies the catch 22. They will lend money conservatively or else we will end up back in the place which started all this some 12 months ago.

In order for the banks to lend money to us all again and to create flexible financial products that will start them lending to Businesses and mortgage applicants again they will need yet further funding from the Government in the form of loan underwriting. Whether the government embarks on this essential course of action looks doubtful and maybe this will be the missing vital component that would provide any hope of reducing the impact of recession.

Once again the Shadow Chancellor was at pains to explain that Northern Rock which is a 100% nationalised bank and is putting it's mortgage rates up, has little choice because under EU legislation as a Government owned bank it has to be uncompetitive in the market.

INCREASES In Taxes to Pay for it all

Yes, of course after the 'spending ourselves our of recession' comes the inevitable pay-back. The concerns regarding the increases in Tax surround not only the manner in which they are to introduced but the timing of them.

There is no economic pundit out there today that agrees with the governments optimistic opinion that in a mere 6 months we will start to see the signs of a recovery. There is doubt in most peoples minds whether we are at the lowest point yet and when we do arrive there we are likely to remain there a while before improvements in economic growth emerge.

Of course the government is going to put up VAT probably higher than it was before, and yes they are hiking duty on all the usual suspects, booze, fags and fuel, but it is the clumsy attempts at wealth re-distribution and increases in National Insurance contributions that baffled me.

Unless I have completely got it wrong, we want to encourage people to do well, to build solid businesses, take on employees and make a positive contribution to this country. Starting, building and running a business requires huge personal commitment, tremendous drive and energy, flexibility, tenacity, persistency, determination and a large dash of risk taking qualities. People who build businesses often risk it all, but as the saying goes, 'if the risk is little then the reward is little'. We as business owners take risks, take the gamble because we know that's what it takes, and we do battle with competitors, the market, red tape, and ourselves striving for success and what that means for each of us.

The government has now embarked upon a program of disincentivising this bastion of British inventiveness and entrepreneurial spirit. If you build a business with all the associated risks and challenges we will reward you by taking more of your income in Tax. If we create a business which supports 20 people, we have made a massive contribution in terms of giving back to the nation and yet we are penalised still further. Does the Government not see that from as little as 2 or 3 years ago to where we will be in 1 year from now Britain has gone from being the most desirable location to work in Europe to being one of the least.

NATIONAL INSURANCE contributions

The days have long since past when National Insurance contributions were used for Healthcare purposes, this is unashamedly another tax. There are two components to this, what is paid by the Employee and then what is paid by the Employer. Both of which are set to rise by 0.5% in the governments plans to 'balance the books' when we are cruising out of the recession in 2010!

Can someone please explain to me how, when unemployment levels will be at circa 3 million at this point, increasing the tax for a business on employing someone is good news? If we want businesses to start hiring surely we should make it attractive for them to do so, not make it yet more painful?

If we revert back to the VAT giveaway that is likely to have almost no impact, we could have done something with the National Insurance which would have had a much greater direct benefit and incentivised business to keep people off the dole queue.

CONCLUSIONS

For those that read my previous rant about the recession, you will have seen that in my opinion people are recessed the world inherently hasn't changed. I am an extremely positive individual and this post may seem a tad negative. Yet, in all of the above what comes over load and clear to me is that you just can't expect the government to save you or make your life any easier. Even if they tinker with the tax, NI, Credits, allowances it all has relatively little impact compared to what we as individuals can do for ourselves.

The problem is not out there, it is within us all. The responsibility for how we fare during this recession lies with us and what we do, not with Governments. Throw off the shackles, accept that where you are right now is a direct consequence of all the decisions you have ever made, and if you're not happy with it then make a decision to change it. Get new experiences, mix with new people, change, if you want something different, something has to change, don't let others decide what happens to you by coasting along and getting what life dishes out by default.