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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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Thursday, 6 December 2007

Interest rate cuts

With the Bank of England cutting interest rates today it seems like some of my predictions for 2008 seem to be coming true - not that they were that hard to see. Hopefully the Bank has acted quick enough to stem some of the worst outcomes for the year.

The housing market will slow but if rates continue to fall then those people who have been holding off buying may start to come back into the market and look for bargains. This could help to keep prices from falling too far.

The banking crisis will continue to be a problem for both the banking sector and the wider economy. However, this positive move by the bank could help to reduce the cost of commercial borrowing and start to reduce the risk premium banks have currently placed upon borrowing. As a result businesses will struggle to find capital to expand but by the middle of the year liquidity problems could start to lessen.

The consumer is set to be squeezed in 2008. The previous interest rate cuts will hit home owners, especially with many coming off their fixed rates in 2008. However, some of the major building societies have already taken the positive steps of reducing their mortgage costs as a result of today's cut.

There continue to be many downsides facing the economy in 2008, however I think we must avoid talking ourselves into a recession. There are upsides and downsides. A period of slower growth will probably be good for the economy in the long run as it will make us reconsider some of the poorer decisions made over the boom years. However a sharp slide into recession will leave scars that will take a long time to heal.

As I always mention, whatever happens, people will be losing their jobs in 2008 and as such competition at interview will become more intense. Take advantage of this site and many others to try and stay ahead of the game.

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