The three aspects of the British Economy that have immediate resonance in the mood and the pockets of individual and business alike are heading for the Perfect Storm over the next few weeks and the next five years; and the Country’s ability to pull through the stormy water… or not, will result in a successful or failed UK Economy because of decisions taken and different reactions across the land.
VAT; the easiest tax for the Chancellor to collect and the one that puts immediate cash in the coffers. No time lag, no waiting for the end of the tax year, no wriggling. Bang! Dosh… and fast! So, will adding five pence to a two quid non-essential item ramp up inflation and shoo shoppers away from the High Street and Shopping Mall? I doubt it, and so many retailers will go some way to absorb the rise in any event. The big-ticket items may feel a slight decline in initial sales but with wider margins to play with, vendors will respond positively to an essential tenet of capitalism, in a buyer’s market the seller takes the hit on the margin.
Bank bonuses; the lack of sensitivity amongst some parts of the banking community continues to amaze me but, to be fair, (and I appreciate that very few politicians, none of the media and virtually no-one “out there” sees any reason why we should be) when the CEO’s of the major banks sacrificed their contractual entitlements to bonuses over the past couple of years (or gave the cash to charity) not one jot of praise or even understanding came their way. So why, they may think, bother when the rest of the World’s banks (and especially those who are providing the stiffest competition in the Gulf and beyond) are enticing staff away every day)? With so many aspects of this, the most globalised of sectors, enticing talent away from these shores it is right that we ask just what the Banks (or the Government for that matter) are meant to do. Tax bonuses in isolation (that is, without the rest of the World following suit) and talent will leave the UK (“Let ’em go!” is an ignorant reaction that is Route One to the destruction of the biggest tax-generator we’ve got).
Moreover, when will the penny drop that bonus pay-outs are not all they seem? A great part of the declared sum is paid in shares which vest in years to come (but interestingly are taxed as if they were cash now, tax is paid out of cash not received; imagine if that were to be implemented across Society!) and the Revenue (yes, acting on behalf of you and me) actually collects more money by a Bank paying a bonus than by it keeping the cash in the business. Keeping it throws up a tax charge of around 26%. Paying it out as a bonus allows the Bank to avoid that 26% charge BUT the recipient pays an income tax charge of 60%! (the high rate income tax charge of 50% plus National Insurance of 10%).That extra 34% sure builds a lot of schools and hospitals.
So what of inflation? Currently roaring ahead to the dizzy heights of nearly 4%. We have an earning generation (but probably not a saving one) that weren’t born when the monster destroyed our economy with levels of 20% and more. Prices are not leaping up and wages definitely are not keeping up so where is this inflation coming from? In energy costs and especially oil and gas lie the answer. Filled up at the pump lately? Ordered that tank full for home? No amount of the application of the conventional remedy, jacking up interest rates, will deal with this.
Ah yes! Interest rates! The Governor of the Bank of England has had a good war; a bit slow off the mark but deft and courageous in the steering of monetary policy ever since, and quite prepared to speak out. But the next 12 months will define his term in office. Put up rates in a futile attempt to stop the World putting up the cost of oil and we kiss goodbye to the already-fragile housing market and the auto-manufacturers wouldn’t be far behind in implementing a round of lay-offs just as our manufacturing sector is really earning the Nation’s living in overseas markets. There should be no hiking up of rates for months to come. The fragile recovery just won’t stand it. Conventional inflation might call for a conventional interest-rate-raising response. But not this time; there is just too much at stake.
None of this is easy. We are looking at 2011 stretching out ahead of us with challenges that occur once in a generation. Whether the Country is up to the test (and that is not just about our leaders but about each and everyone of us as well) remains to be seen. I hope for our children’s sake that she is.