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Thursday, 27 November 2008

Collapse of Woolworths and what the government can do!

So Woolworths has collapsed...to be honest it’s not that surprising. In these tough times it was one of those stores that were definitely going to struggle. Although these stores have dominate many UK and international high streets for about a century anyone who has been into one lately will have realised that the store format was thoroughly dated and fading fast. It seems almost inevitable that without a substantial change Woollies would fade and die.

Some might argue that recessions are good for this sort of thing, doing away with those businesses that have fallen behind the times and are no longer efficient or desirable in a modern economy. In many ways this is true, however, the size of Woolworths could have a much wider adverse impact in the current market.

In the long run customers will forget Woolworths, spending will move to other stores and the old Woolworths space will be filled. However, in the short run other successfully run companies may not be able to cope with the transition caused by the collapse. For example Woollies had a substantial supply chain across the country supplying a variety of products.

In more normal times these supplies may have been able to rely on debt whilst they wait for demand to come from the other stores that pick up the custom from Woolworths. However without the credit markets supplies cannot get the debt to make this happen. Therefore this part of the supply chain is likely to fail.

Also of worry is the problems faced by many retails that are unable to get credit insurance. This is one of the problems that led to the sudden collapse of Woolworths. With a lack of debt and liquidity in the economy, insurers are unable or unwilling to provide suppliers with credit insurance. In normal times, retailers buy goods from supplies on credit and pay them back as they sell the goods, and the retailers take out credit insurance to protect against the retailer going bust. Without this insurance the supply has to demand upfront payment from retailers which runs down retailer's available cash and can leave them without available funds to continue trading.

Unless something is done able available credit insurance other retailers will go bust, retailers that are far better prepared for the current market downturn than Woolworths. If more retailers go bust then more suppliers will go bust and the efficient retail supply chain that has been constructed will break down.

This is again an example of where the government should have acted rather than cutting VAT and the other broad brush measures announced in the pre-budget report. The current downturn required targeted solutions, not crude populist announcements.

The French government announced this week that they were actively considering providing guarantees for supplier credit insurance. This is an excellent idea that should be high on the Treasury's agenda. If not more retailers will fail, unemployment will rise rapidly and the high street will lose some much loved stores in a years time.

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Wednesday, 26 November 2008

Pre-budget report - political and bad for the economy

The UK pre-budget report announced on Tuesday, this has to be one of the biggest anticlimax announcements in history. It really was a case of the Chancellor trying to be all things to all men and in the end actually not doing much at all...and in some ways probably doing more harm.

There are specific problems in the economy, most notably in the banking sector. These problems require a targeted approach, with substantial sums of money.

What we got was a costly and broad brush approach that seemed to be more concerned with headlines than strategy. Once again the Chancellor went for big headlines and indeed he managed to get them...sadly for Mr Darling they were mainly negative.

Two big headlines emerged. The first was the cut in VAT. On the surface this seemed like a reasonable way to get people spending again. But will it really? Saving 2.5% isn't likely to make that much of a difference to most consumers, especially in the face of rising unemployment and economic uncertainty. Many will choose to put this money in the bank.

The VAT cut is also highly costly for businesses. It is estimated that changing to 15% and then back to 17.5% will cost retailers over £300m in admin costs as they change the tills and re-write prices. Indeed, many smaller retailers will decide it will be better to pocket the VAT cut themselves instead of paying the admin fees.

The other big headline from the PBR was the outlook for taxation in 2011 and beyond. We were told that those earning over £150,000 would pay a new top rate of tax of 45% - so much for simplifying the tax system but cutting out tax bands. This again is a purely political stunt. It will only impact upon a few higher earners and as such will raise just over a billion pounds, not nearly enough to cover the required tax increases necessary to fill to budget deficit.

Most people will be unfazed and unaffected by the rise in income tax, most people, myself included are a long way away from the £150,000 threshold. They may think it is morally justified that those earning more should pay not only a greater amount in tax but also a greater proportion of their salary to the state. Indeed, some may believe that the rich caused this recession and therefore they should be punished for it.

This is of course nonsense. Firstly we all had a part to play in the current downturn. From the government's poor regulation of financial organisations, financial organisations that failed to calculate risk properly and consumers who decided that taking out an 120% mortgage on a house was a good idea even though a slight change in interest rates would put them into default. We all got giddy in the last couple of years so we should all shoulder some of the blame.

Secondly we live in a tax competitive world and therefore it will have an impact upon all of us if taxes are increased. Not only will higher taxation reduce the incentives to work harder, take risks and get the rewards of higher paid jobs, it will also discourage people to work or set up businesses in the UK. Many of the people at large multinational businesses who decide to set up in the UK are the senior management who, if they come here, will fall into the top tax rates. If they see that they can move to New York and pay only a 35% tax rate or Saudi Arabia and pay nearly no tax then they have an incentive not to come here.

You may say so be it, if they don't want to contribute to society then they can go elsewhere. But these companies are contributing to society in a massive way. They provide the country with jobs, taxable income, skills and encourage the growth of other firms who supply them.

There are some people in the UK who need to stop thinking that wealth is a sign of greed and start to think of it as a sign of success. These people have done well (in general) because they have worked hard, were clever and were successful. They are the leaders of our society and their success breeds success for the rest of us.

Fair enough things aren't working that well at the moment, but things won't get any better by discouraging talented individuals from remaining in the country, working hard, taking risks and reaping the rewards that we all, directly or indirectly benefit from.

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Wednesday, 12 March 2008

Budget 2008 – how to make a financial crisis seem dull

Today saw the announcement of Alistair Darling’s first budget. Not the most interesting budget because the Chancellor had little room to manoeuvre. On the one hand, the government is becoming increasingly unpopular which is stopping them from making any major steps towards raising taxes. On the other hand, the Treasury has overspent in previous years, which has reduced their ability to increase spending now the economy is entering a period of slower growth – and could really do with a little help from the Government.

One major announcement was that the 2008 GDP growth forecast for the UK was revised down by 0.25% to between 1.75% and 2.25% in today’s budget. This still looks like a very high estimate given that the survey of independent forecasts, as mentioned on page 169 of the Red Book, presents forecasts that range from between -0.1% to 2.1% and average of 1.7% in 2008. Independent forecasts are also in a period of being downwardly corrected by many banks and consultancies. As the year continues the Treasury forecasts are likely to look increasingly unrealistic.

Other measures that will impact upon work and working life:

• Income tax changes confirmed for April. Basic rate drops from 22 per cent to 20 per cent and the 10 per cent band is abolished.

• New charge on non-domiciled residents to be introduced from April and won’t change during this parliament, and next if Labour remain in power.

• Public sector employment has fallen in the past year; private sector employment risen.

• Around £60m to be spent over the next three years to encourage people to move into work and to move up the employment ladder.

• Spend of £10m over the next five years to create a new science fund for teachers in secondary schools.

• Increase in the amount of funding for adult training. Investment of £200m in poorly performing schools to try and improve GCSE grades by 2011.

• Long-term sick to attend “work capability assessments” from April 2010.

• New contract to help parents into work involving a commitment to find employment. Benefits for working families will be boosted.

• Child benefit will be up to £20 per week for the first child in 2009, a year earlier than planned. Child element of child tax credit to be raised by £50 above inflation a year.

• Tax-exempt limits on individual savings accounts increased to £7,200 a year for standard accounts and to £3,600 a year for cash accounts.

• Launch of a “savings gateway” in 2010 to encourage people to invest.

…and worst of all:

• Beer duty to increase by 4p per pint, wine up 14p a bottle, cider up 3p a bottle and spirits up 55p a bottle.

Increasing taxation on alcohol and large cars were the only areas the Chancellor could get away with any major increases in taxation. With all the fuss about “binge” drinking and anti-social behavior the Treasury has decided to take advantage of this situation, increasing the duty on alcohol by 6% above inflation. This has been welcomed by the British Medical Association, but has raised concerns from breweries that sales will fall and more pubs will continue to shut.

It is unlikely that the Chancellor was too worried about the health benefits of high taxes on alcohol, and was more interested in the raising revenue, but perhaps that’s just the cynical views of a man who likes a pint.

All in all this was an uneventful budget that will not be widely remembered. The key things to take from this are: the government are likely to have got their sums wrong; there have been some moves towards reducing child poverty; there has been some simplification of the tax system (a good thing but could go further); and if you smoke, drive a big car and like to drink then the government thinks you are a bad person and wants you to pay for it.

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