Howard Wheeldon's reaction to yesterday's Pre Budget Report
The UK economic situation is so bad that it called on Chancellor Darling to be bold and brave in an effort to stem the rapid tide of decline that has engulfed over the past eighteen months. The Pre-Budget Report for 2009 should have been a time when the government seized the opportunity to head the UK in a positive new direction providing incentive to create and motivation to work. With luck it would be an opportunity to create new ideas and thus, eventually new jobs. And whilst this would also need to coincide with the beginnings of a long period of pain it was an opportunity to lay down not only a blueprint for recovery but also a convincing argument of how UK debt would be reduced. None such appeared though. Indeed, apart from spiteful and seemingly unnecessary action of voter appeasement in the form of a one off, pooled 50% tax on bank bonuses in excess of £25,000 paid to bank employees there was nothing either bold or brave in this budget.
A neutral budget in technical parlance then but one that lacked the incentive necessary to fire change and create the necessary new ideas that we may hope in future fire the creation of new jobs. Worse perhaps is that despite mild proposals to cut pension and wage costs of the top earners in government service it seems that the 2009 pre-budget report contained nothing perceptible that international rating agencies will see as sufficient to cut government spending. Indeed, Mr. Darling tells us that he actually intends to increase government spending in 2010/11 by some £31bn and says, with some apparent glee, that while estimated borrowing for 2009 will rise by just £3bn to £178bn that next year the government intends to borrow no less than £176bn. In terms of the macro contained in this report I am left to conclude that although it technically might add up this is little short of a fudged attempt to ‘short’ the UK economy ahead of next years general election.
We can of course all live with employer and employee NHS payments rising by 0.5% (we anticipate that this raises around £5bn) and even postponement of the planned rise in the inheritance tax threshold that will actually benefit very little. Indeed, we can probably even live with the 50% tax rate that comes into force next year for top earners, the rise in VAT in January as it moves back to 17.5%, the further increase that was planned in NHS payments due in 2011 and even the previously planned raise in fuel duty due next year. Indeed, given the weakness of the UK position, we might well have been able to live with additional tax rises as well had Darling chosen to be brave enough provided these had been put over as temporary. True, schemes such as the boiler scrappage scheme, tax incentives for those prepared to invest in low carbon and renewable energy forms are useful but if deferral of the proposed 1p rise in corporation tax for small firms really is meant to win votes then I am left to think that Mr. Darling really has lost control of his senses.
As far as implementation of a one off 50% tax on proposed 2009 bonuses in excess of £25,000 is concerned (raising a proposed £550m for the Exchequer) the devil remains in the detail. I suspect that this legislation will face a degree of difficulty in the House particularly in relation to definition. We will see. Meanwhile although the pooled arrangement on banks that propose to pay such bonuses may be regarded as a clever wheeze it is no less acceptable. Definition of what is a bank and what is a banker will of course be all important to determine who is caught by this particularly vicious act. Best to assume at this stage that far more will be caught that may currently believe they are in the net. From the outset that the whole ridiculous notion imposing a tax on bankers’ jobs first appeared we nailed our colours to the mast in opposition. Now that notion has finally become a reality and it appears doubly worse than many first thought possible. I and many others will see this move by the government marking the official beginning of the end for what has been a thirty year period of huge growth in the UK banking and financial market sector. It won’t die of course but from now on others can be expected to take the advantage that has been offered them on a plate by Messrs Brown and Darling. Indeed, I venture to suggest that London could see the beginnings of market share erosion very soon and that the one-quarter of corporate tax revenues that Mr. Darling mentioned today that had traditionally come from the financial services sector may soon be more like one-sixth. How will that be replaced? Presumably Mr. Darling believes it will be found in the long term sustainable growth that he keeps on talking about while putting no new flesh on the bones and that together with the great flexibility of the UK labour force he keeps talking about a magic wand can be waved and all will be well. He talks about resumption of growth and yet ignores the fact that even if Q4 shows that the corner of the recession has been turned this will only be the start of recovery as opposed to growth. In my view the word growth is an anathema.
Take away the motivation to succeed from any worker wherever he or she might be and you end up with the potential for failure. In the case of the bank bonus issue I find myself in total agreement with those that I have sometimes previously had occasion to cross or disagree such as Angela Knight of the British Bankers Association and even CBI President Richard Lambert who isn’t exactly known as a non supporter of New Labour. They too have rightly shown disdain for the Darling bonus move and so too have other worthies such as the CEO of Barclays Bank. How many banks might eventually disappear from London; how many brilliant staff that bring a mass of income into the economy might seek new pastures abroad….frankly I haven’t a clue. But walk away I am sure some will particularly as there appears all too little opposition to this plan from HM Opposition. Was this the day I wonder that the City of London finally lost all trust in the current British government and finally threw in the towel?
By Howard Wheeldon, Senior Strategist at BGC Partners
