Archive for March, 2013

Donald’s Instant Budget Reaction

Wednesday, March 20th, 2013

I was struggling to get excited by this Budget. However, for those who didn’t watch the speech I could easily refer you to any Budget of the last three years for a reference point as it was more or less identical. Nothing new. I can capture it today as follows for you:

We’re still going to keep borrowing billions because I can’t see the voters electing me again if I make any real cuts in expenditure or tax hikes. We’re in trouble but I’m sure it’ll get better in future. Come with me on an exciting journey to the edge of national insolvency.

The real story here is the bit I’m not at all well qualified to talk about, but will try to anyway as it seems more interesting this time to have a rant about that – the tax changes are, for many people, irrelevant. That is…the borrowing rather than the tax side of it. In terms of the Budget, we’ve now had a decade of the same story “we’ve missed our target but don’t worry we’ll sort it out”. Problem is, one suspects the policies that are needed to sort it out mean living within our means – something no Politician can do without accepting electoral suicide. Brown was at it when he broke the “Golden Rule” – and from then on we’ve spent beyond our means with the promise of a better tomorrow.

Once again, we’re borrowing billions (and printing money too), instead of cutting expenditure or raising taxes. This year around £114Bn is to be borrowed (note, Cyprus is going bust for about £15Bn) – around 7.4% of GDP. But it’s okay ….really….since our forecast is to reach just 85% of GDP (ouch). We’ve doubled our Debt:GDP ratio in five years. Indeed from 1998 to 2008 we ran at well below 40% and a quick review suggests to me that even going back to 1974 doesn’t see us above 55%. My view is this is a potential national catastrophe even if there appears to be very few credible alternatives.

The Chancellor said he’s “cut the deficit by a third” by which I presume he means had a deficit of over 11% one year (2009/10 I suspect) which is like saying “I’ve achieved nothing except I didn’t have to recapitalise any banks this year”. In any case, it’s a total disaster as far as I can see and the only good thing is we’re not in the Euro. Surely, eventually, investors will stop giving the UK cheap money to waste on things we can’t afford. Growth is the answer – true – but in the meantime we could do more to limit the growth in debt surely?

If we have this level of debt as we head into our 2014 independence referendum it begs some additional questions about a “yes” vote –

1. What is Scotland’s share of the debt going to be? – will we start life alone with 85% of GDP of debt- i.e. will we be a total “basket case” economy from day 1?

2. What will our Moodys/S&P rating be? Not AA+ ?

3. What rates of interest will Scotland pay when we have to rollover that debt – surely not the low rates given to the UK?

4. Will we have to seek IMF and EC help like Cyprus or will England help us?

5. If we join the Euro will our debt be redenominated or will we operate in Euro and service debt in Sterling – creating a massive currency risk (or opportunity).

The other aspect that strikes me as interesting is that if we go our own way after 2014, we don’t meet the convergence criteria to join the Euro – and a commitment to the Euro is required in order to be admitted to the EC now (I believe!)…. Have a look here:

Mr Salmond says we are negotiating to stay in Europe since we’re already in it. But that’s doubtful – the EC has confirmed that the “UK” is a member but if we leave, we’re a new country and must apply like anybody else. If we take our share of UK debt (85% of GDP) and according to the statistics we run even a 5% deficit, we are still some way from being Euro ready and, frankly, I can’t see why we’d find it easier to raise money than the other small, insolvent Eurozone countries.

What about the Budget…..It occurred to me that I should watch Newsnight last night as they were to discuss both Cyprus and the Budget. But…..wait…in Scotland we got flipped over half way through Newsnight to Scotland for a debate on whether old firm football fans have lost faith in the Police instead. Does it annoy anybody else that we get “relegated” to watching the “local Newsnight” rather than the real deal from London? It’s as if you’re watching a top European football game and at half time you’re compelled to flip over to watch Clyde vs Stirling Albion in a winter evening friendly. It’s awful the way we get force fed “tartan tv”.. does anybody else think it’s useful to have the weather twice in 2 minutes at the end of the ten o’clock news, with version 1 simply being the same but a bit cheaper looking graphics and without England? So I decided to give up on the BBC…. as my internet wouldn’t stream Paxman on the ipad for some reason… and switched to STV with the confidence that they’d have something on the main issues of the day …..but their evening topical newsnight style programme (something like “Salmond Tonight”) – and it was having a “sofa session” with some strangely bearded chap – the debate was boldy dubbed “The State of Greenock”. For a minute I thought that Greenock had declared itself an independent State free of Westminster and Holyrood – but I didn’t wait to find – I rather think it was a debate on the condition of the town….. I’m not saying I don’t care but I would rather have been hearing leading world economists speak to Jeremy Paxman about the uncontrolled national debt explosion in the UK and Osborne’s options to resolve this (save for default). I hope Greenock has declared independence and good luck to them.

So, before talking about the Budget, what does all this debt growth mean for all of us here in Scotland? Well, to my mind it makes independence “yes vote” more challenging as we’d surely go out into a big and cruel world with an unsustainable national debt and deficit. Then again, the UK is in that position too…. So I can see why Salmond says that’s not a good argument. Here’s a thought……Perhaps there’s a secret plan that when Scotland goes its own way we immediately issue our own currency (the McPound) and default our sovereign debt. Sounds a bit like a prepack – a sort of Rangers Admistration with a “NewSco” emerging in the third division of global nations. But maybe, long term, it’s not as mad as it sounds. I might even vote for it myself you know.

In terms of the Budget itself, it was the dullest I’ve ever sat through. There was precious little for the majority of tax payers. We’ll get the sensible update on our website tomorrow but at the moment I’d note some highlights –

1. 10,000 personal allowance from 2014.

2. Government schemes to help you buy a house.

3. A CGT holiday extension for people investing in SEED EIS.

4. A CGT exemption if you sell your company to your staff.

5. Some more tinkering with R&D credits and a reminder about the Patent Box (10% tax rate for income from patented goods or patents themselves – very exciting in truth).

6. Some changes to stamp duty to remove the charge on AIM type shares/similar

7. More anti-avoidance rules – the GAAR is with us next month in any case.

8. 20% “top” corporation tax rate by April 2015.

9. A tax break from 2015 for childcare costs.

10. Most of the rest I just confirming things we knew already.

11. Once again our elected MPs generally looked like petulant school children, lacking in decorum or style.

So….a dull Budget. The “House” was very unruly indeed – the MPs behaved like small children at a Christmas Party.

As for the rest…wait and see our Budget “glossy” tomorrow!

Donald Parbrook

***As ever, this is Donald’s personal blog and his views are not those of the firm, his co-directors, the staff, the clients etc.***

Switch to our mobile site