Wednesday, December 24, 2008

Merry Christmas!

Just wanted to say Merry Christmas to everyone! Hope you all get decent presents and Scrooge relatives don't use the Krunch as an excuse to give you a pair of socks.

Will be back blogging after the festivities.

Thursday, December 11, 2008

More on the VAT cut

Lots of people, including Cameron, and Germany, have been ruishing to claim that the Vat cut "won't work", just 11 days in. Their reasoning seems to be that the VAT cut involves a loss of tax revenue, which will have to be borrowed, which in turn will make people wary of spending as they worry about future tax rises to pay for the borrowing.

This argument ignores one fundamental point: in downturns, sales fall, and thus VAT revenue received will drop anyway. Therefore anything the government can do to support consumption, supports tax revenue and mitigates the need to borrow.

John Lewis says that the VAT cut has worked. They say that sales for the first week of December are down 6.7% on the equivalent week last year, but that sales in the pre-VAT cut period were down 13%-14% on equivalent weeks last year.

Lets say for ease of calculation, that John Lewis made sales of £1 million per week last year. A 13% drop in sales equates to £130,000 in lost sales and £19362 in lost VAT revenue at 17.5%. A 6.7% drop in sales equates to £67000 in lost sales and £8739 in lost VAT revenue at 15%.

Therefore the VAT cut, in getting people out to the shops, has reduced the rate at which VAT revenue was dropping. Paradoxically, more revenue would have been lost if nothing was done. Cameron's belief that a VAT cut results in a straightforward loss of revenue assumes that sales will be the same or more than last year. But it is self-evident that in a downturn sales drop. The question then becomes, how do we slow down this trend or reverse it.

People can deride the VAT cut as "too small" and a "gimmick", but anything the government can do to support economic activity, helps. Do-Nothing Cameron would have seen his tax revenue drop faster and his borrowing increase quicker than Do Something Darling.

As to why the VAT cuts work - people are programmed to just like tax-cuts, it seems to stimulate a different pleasure centre in their brains than mere discounts. And half the time they arn't being rational or logical about it. John Lewis was surprised - "Nat Wakely, director of selling operations at John Lewis, said there had been clear evidence that consumers were holding back on more expensive items until the cut in VAT spending was passed on 10 days ago - although he admitted it was "slightly curious" because the 2.5 point cut announced in the pre-budget report had appeared to be too little to make a difference". But then it is the Conservative party that has trained the general public to act like pavlovian dogs to tax cuts these last thirty years. Curious that they now no longer believe in what they themselves have wrought!

Wednesday, December 10, 2008

Saving the World...

Much merriment in the Commons, as Gordon Brown meaning to say "the government has led the world in saving the banks" said by mistake "we saved the world..."

It's funny, but also sweet and oldfashioned. Not many politicians go into politics these days aspiring to save the world. Certainly the derision from Conservative benches, together with their resistance to temporary tax cuts, resistance to recapitalising the banks, resistance to all government efforts, combined with their belief that "recessions can be good for us" shows that the Conservatives arn't even interested in saving Britain. What are they interested in? Raising the inheritance tax threshold to £2 million, so that the shadow cabinet can leave their money without the Treasury touching it - that's why they've gone into politics.

There is absolutely nothing wrong with aspiring to save the world. In trying much good is done. Those who refuse to try, achieve nothing of worth at all.

It must be chilling for voters to see how palpably Conservatives wish things would get worse, how gleeful they are when people lose their homes and jobs, and how cynically they deride those on the Labour side trying to ameliorate the downturn. The voter is probably thinking, what have I done that the Conservatives wish me ill and take such pleasure in misery in this way?

Friday, December 05, 2008

Savers complain

As predictably as night follows day, we have had a savers rant in the Times, complaining about falling interest rates.

What people don't seem to understand is that interest rates are the price of money and savers are really lenders, who loan money to borrowers, with the banks acting as middlemen and taking their cut as middlemen do. All year we've had savers complaining about the feckless youth of the country who are borrowing too much when they should be saving. And these same people have been complaining about prices. Now they've got their dearest wish - this it what it looks like when you have rapid disinflation and everyone is saving. The profits (interest rates) of the savers/lenders are falling, because no one will borrow from them. Message to savers - your interest comes from borrowers, not out of thin air, and when people cease to borrow, you cease to get a return for your money.

Of course some savers believe they should be paid high interest rates even if no one is borrowing, in the same way that some people think they should be paid an income even if they do no useful work. But that's not how it works in a capitalist system. If savers want interest rates to go back up, they need to get out there and do their Christmas shopping and stimulate the economy.

If the above makes you feel grumpy, then console yourself with the thought that we are not a pure capitalist economy. Instead we are a mixed economy with a big Labour government. There is still one borrower left in town willing to pay you for lending your money. You can lend to Her Majesty's Government either by buying gilts (you can do this directly - see your Post Office for the form) or through National Savings. National Savings are offering tax-free Index-Linked Savings Certificates at 1% + RPI, which is pretty damn good. It should be enough to cheer up the grumpiest saver.

Thursday, December 04, 2008

Action in Queen's speech on Repossessions

The Labour government has secured agreement from eight banks who control 70% of the mortgage market (HSBC, Abbey, Nationwide, Lloyds TSB, Barclays, Northern Rock, Royal Bank of Scotland and HBOS) to allow homeowners who are struggling to either take a two year mortgage holiday, with the interest added to the loan, or more likely to make reduced payments, with the balance added to the loan.

Why is this a good thing? First of all, it's cheaper for the householder to take a payment holiday (even if they will end up paying interest on the deferred interest) than to go through the whole nasty palavar of repossession through the courts. Plus they get to stay in their own homes. From the government's point of view, this means that they don't have to suddenly house people who are homeless (and fork out housing benefit for them). From a macro-economic point of view, it slows house price falls. House prices fall mainly due to forced selling (otherwise householders simply stay put rather than sell). This also gets rid of some of the fear factor (the main reason people arn't spending is that they are worried sick about losing their jobs and homes). And from the lenders' point of view, this makes long-term sense - their biggest profits come from people who pay their mortgage over the entire term. Having to repossess, sell-off and write down bad loans is a hit on profits that they only undertake to please the short-termists in the markets - but now the govt is a major shareholder, the long-term can be considered. If this actually gets the economy moving again, the banks will be the first to benefit.

Today also saw the French unveil a €26bn stimulus plan. Unlike the UK which went for tax cuts, they have gone for public spending via the state owned companies like EDF, and building social/affordable housing.

So we are now seeing several different stimulus models. The Americans went for a straight income tax rebate in the summer (this is generally believed to have failed as a stimulus), and Obama intends to undertake a mammoth $700bn public spending spree when he takes office on Jan 20th, spending the money on infrastructure (which the USA desperately needs as they've let things atrophy in the last 30 years). The public spending should work (but we will have to wait till the New Year to see if it does). The French are also going down the public spending route (though you could argue that their infrastructure is in good shape already). The British have gone for support for business - the 2.5% VAT cut plus another £7bn help for small business (eg spreading tax payment for struggling firms) - plus help for householders (spreading mortgage payments for struggling homeowners). The Chinese are going to spend $586bn on infrastructure (though they have spent plenty on infrastructure already, arguably too much - they might have been better off providing a social safety net, as the lack of domestic spending in China is due to a lack of welfare support). The Germans have decided to Do Nothing, though bizarrely they are hoping everyone else is acting - Michael Glos, the economics minister, said last week: “We can only hope that the measures taken by other countries ... will help our export economy.” Free-riders!

Everyone has also cut interest rates sharply. So now the fiscal and monetary authorities have done their stuff, and we wait to see whose remedies work best. Of course I'm biased, but I think our remedy is the best. Business activity is key - they pay tax and they employ people. If they survive everyone else does too.