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Economic review of March 2007 “A budget for Britain’s families, for fairness and for the future”, claims the Chancellor. We did not really intend to cover the budget in this Economic Review, because most readers will probably be full to the brim with comment already. Unfortunately there is little option to our doing so, because it was not just families who were caught out by the sleight of hand that involved “burying” news about his removal of the 10p tax band in a years’ time, within the headline of reducing the standard rate. 
In fact small businesses fare far worse, because the increase from 19% to 20% on the first £300,000 of profits – which will probably include the vast majority of SMEs – is immediate, rather than deferred for a year. Many of us recall that it was only last year that the same Chancellor – who wishes soon to become Prime Minister – removed the £10,000 tax free profit allowance that had been helping many small companies to build up reserves in order to finance future growth plans.This may not sound much of a change, but a company making £10,000 profits in 2005/6 would have paid no tax, whereas the same company in 2007/8 will have to pay away £2,000. To make matters worse, this is occurring at a time when the increasing burden of regulation is already making it more difficult to operate. Large companies will save 2p in the pound in 2008/9. But it is questionable whether this will be enough to discourage some large companies from moving away from the UK as the burden of taxation and regulation combine to make ours an unfriendly environment for many. If the London Stock Exchange should fall into foreign hands, then the demise of London as a world finance capital could be inevitable as tighter US style regulation makes matters even worse. Barclays may not be the only bank to consider relocating its head office to another jurisdiction. And consider the balance of payments (or current account as it is now known). If the level of invisible earnings generated by the City were to fall, the International Monetary Fund could very quickly become concerned that our deficit – which rose by £12.7 billion in the last quarter of 2006 to 3.8% of GDP – is no longer sustainable. “Golden rule” rule KO’d? Public trust in the Bank is falling At a time when trust in the Bank of England is apparently at it’s lowest for seven years (according to an NOP survey commissioned by the bank itself) at 37% it is slightly worrying that the Treasury is refusing to confirm what the definition of the golden rule will be for the cycle that starts some time this spring. The fact that the start and closing dates of the last economic cycle were constantly altered so that it could be adhered to is well known. 
However, whether the Chancellor (whoever that is by then) will attempt to maintain the aim that borrowing for current (as opposed to capital) expenditure must balance over the economic cycle has yet to be seen. Certainly, there are indications that spending plans into the next decade are well above expected revenue levels.This can only mean the Chancellor is building in the certainty of higher taxation, or increased public borrowing. American mortgage market News of problems in the US sub-prime mortgage market may appear to be remote – there are, after all differences in the market – but when Barclays bank demands immediate repayment of loans to a sub-prime lender in the US of $900 million, there should be concern of a possible knock-on effect in the UK, especially if the debt is defaulted on. Pensions under threat from FRS17 Government decisions should be balanced not punitive At last someone has said what we have all known for a long time; that the accounting standard (FRS17) requiring companies to carry their pension fund deficit on their balance sheets is actually part of the problem that has resulted in tens of thousands of workers seeing their final salary pension schemes closed – or benefits reduced. 
Even a A-level economics student would be able to tell that if you import massive deficits onto a company’s balance sheet that don’t really have to be there because they relate to future liabilities that might never occur, the value of the company’s shares will fall. When this happens on a widespread basis, equity markets will fall, resulting in bigger pension deficits, because funds invest in the equity markets.
Now the Association of British Insurers has come off the fence and said how absurd the position is, we hope to see some changes. It is a blow to the Treasury that, at the same time, news has emerged how it was warned that the effect of removing the tax reclaim for pensions of tax paid on dividends from UK companies would be to open a £75 billion gap in private pension provision. Gordon Brown’s so-called £5 billion a year tax raid on pensions back in 1997 was said by the pensions industry to be a mistake, but the Treasury chose to ignore this fact. It is worth noting that ministers and MPs are not affected, because their index linked pensions are paid for by the very taxpayers who suffer from their decisions. Markets New Zealand may need the magic of the Lord of the Rings to reduce interest rates The main stockmarkets rose last month, with the exception of the Nikkei 225, which lost 
1.8%. The mid-cap FTSE250 rose by 5.47% during March, making its 12 month value grow by 18.67%. However the FTSE100 only managed 2.21%, giving the 12 months performance a rise of 5.76%. By contrast the Dow Jones and Nasdaq 100 only just kept in the black with growth of 0.7% and 0.23%, respectively.Sterling rose by almost a cent against the US Dollar but fell by a slightly larger margin against the Euro. With interest rates level in the UK (and expected to remain so until May, when a further quarter basis point rise is anticipated) our interest rates remain firmly above those in the Eurozone (which rose to 3.75%, despite opposition from France) and on a par with the US. The Federal Reserve has signalled that it does not intend softening rates yet, which may be bad news for Professor David “Danny” Blanchflower, who was the only MPC member to vote for a rate cut here, this month. At least we are not in as bad a state as New Zealand, where they may need the services of Gandalf the Wizard to help them, following a further rise to a massive 7.5% interest rate. Of greater domestic concern is a 10% rise in oil prices last month, bringing the price of a barrel of Brent Crude (1-month futures) to US$68.10. While this will exacerbate the rise in fuel duty (deferred until later in the year), it could be another incentive towards individuals cutting emissions, in which case it is not as bad as it might appear. Driving slower and making fewer unnecessary journeys could write off the increased cost. But beware, if we use less petrol and diesel, the government will have to raise taxes in other ways! Heads-up on inflation Hopes that inflation will soon start to sink back towards 2% - at least as far as the rather esoteric Consumer Prices Index is concerned – could be dashed by news that 38% of firms manufacturing consumer goods plan price rises over then next three months. As we have become accustomed to falling prices for some time, this could be something of a culture shock. Official figures indicate that disposable incomes rose just 1.3%, last year. If you require any further information about the services that we provide or would like to review your financial planning position, please contact us |