The Pre Budget Report

[Ronny]

Having had a little time to consider the pre budget report, I thought I would give it some space and attention seeing as the stock market didn’t.
Given the overhang of debt in the UK, along with the contraction of lending, Alistair's forecast of: 0.75% GDP growth for 2008, contraction of between 0.75% and 1.25% for ’09, followed by a positive growth of 1.5% to 2% in 2010, seems more than optimistic. It will mean that any falls short of this will be met with shock by the market, as that’s what they have budgeted on. They forecast an end to the recession in c June 2009.1

The attempt at reducing VAT has only served to annoy the retail industry it was supposed to serve because of system changes. The same organisations already have 20% discounts on their stores anyway, so quite what a 14% discount in the VAT tax charge is likely to achieve with that already in place remains to be seen. Personally I expect most will wait for the February sales, after allowing the interest rate moves to bed in.

Much depends on whether the consumer sees the rate drops along with VAT as an opportunity to spend, or create some security, i.e. they save. This will be down to confidence and that’s as rare as an interesting politician at the moment.

It’s also possible the public will look beyond now and consider the impact of all of the government borrowing, and consider future taxation, along with saving to reduce debt for when interest rates fall.
However I may be wrong. Just as most of my columns were ignored in pursuit of gain when I forecasted the current property crash consistently for two years, memories are short, and everyone is a natural optimist underneath. Any sight of a light at the end of the tunnel will be met with open arms, after all how much bad news can you take?

Let’s remember that a person with a £150,000 mortgage would have been paying nearly £450 per month more than they are now if the savings are passed on. Let’s also remember that commodities have plummeted and the cost savings will soon be seen at the pump and supermarket, in terms of oil, wheat, metals etc.

Notwithstanding that however, I am not sure that $16b is enough, even if it’s used.
In 2000/2001 the UK’s stimulus was 2% of GDP (the economy). This stimulus is just 1%, or as a mathematician, its 50% short.
The International monetary fund suggested packages of 2% or more. Germany and Spain are equalling 1.5% to 3%. The U.S. has pulled back from a small pre Christmas package to offer a large post Christmas one with talk of between 2-6%1
Clearly the biggest problem is the fact that the UK government had an annual deficit of 3% of GDP before a recession anyway. With public sector finances in such a state, further borrowing was unlikely.
There are many concerns for more efficient use of spending. From a very simplistic view, how many islands do I need in the middle of a road that weren’t needed before? Someone needs to take a closer look at the spending of public finances to cut out the disgusting wastage driven by the ‘spend the budget or we will lose it’ approach taken.
Every penny counts now and if a recession causes a sharp rethink in private spending it should have been started in public spending a long time ago.
Personally, I believe much will depend on the loosening of credit and that’s where I am optimistic. There has been considerable action taken by banks over the last few months to pass savings on. Nationwide has now announced it will waive its ‘collar’ for those on tracker mortgages. A ‘collar’ stops a borrower’s mortgage from falling below a certain level. Nationwide’s move, along with the BOE, shows they are hell bent on keeping liquidity moving. So personally I see some twinkling lights for mid 2009.

[brian]

Agreed - I think the focus on VAT was a fatally flawed move - with rising unemployment it would make bigger sense to focus on reducing Nationwide Insurance contributions for employers, in order to retain staff rather than let them go.

[georgeharrison]

Hi ,must devise effective strategies to retain staff in addition reduce contributions.