Budget 2009, UK: some commentary
Yesterday the Chancellor of the Exchequer, Alistair Darling, announced the budget for the fiscal year 2009 with the customary PR shot outside No.11 Downing Street:
Five key elements of the Budget stood out for me:
• Economy forecast to shrink 3.5% in 2009
• Public borrowing to increase to £175bn this year
• Borrowing levels to be £173bn, £140bn, £118bn and £97bn in years after
• Scheme to guarantee mortgage-backed securities to boost lending
• Income tax for those earning more than £150,000 to rise to 50% from April 2010
I chose these five because they reveal the real cause for concern for the UK economy and how this Budget may be detrimental for this generation and future ones in terms of debt repayment. Firstly, it’s clear that the increase in government borrowing will be allocated towards some form of insurance scheme to guarantee the mortgage-backed securities. Unfortunately, no one has a grasp on the precise value of these toxic assets still sitting on the balance sheets of the likes of Royal Bank of Scotland, Barclays, Lloyds TSB etc……yet. Structuring the insurance coverage for assets for which there’s incomplete information in valuation terms will be a real challenge. Secondly, the shrinkage of the UK economy by 3.5% in 2009 may be an under-estimate by up to 0.4%. The IMF’s forecast predicts a UK shrinkage of 4.1% for 2009 which is fairly severe, I think. Reading some of the banking analysts’ economic reports around 3.8-3.9% may be more realistic. Thirdly and finally, increasing the tax levels of high earners may, on the one hand, send out the signal that the bankers who earn US$million salaries and bonuses will have their earnings clawed back (directly and indirectly) and, on the other, result in the very people who are knowledgeable and talented enough to get the UK banking sector properly functioning again move abroad to locations like Singapore, Dubai and Continental Europe where they will get more favorable tax regimes. If this happens, London will lose its status as the financial hub of Europe and we may see the rise of either the Deutsche Borse or Euronext superseding the London Stock Exchange as where more of the stock market activity and investment is happening.
The final point is a particularly challenging issue because, obviously, London wants to retain its position as a premier destination for international banking and asset management with top talent. Yet, increasing taxes for higher earners to finance public provisions for the less well-off could also be presented as a more just and equilibrating measure of social democracy or “caring capitalism”.
Notably, this morning, on all the news channels as well as in the British newspapers the reaction to this budget has been less than favorable towards the Government. Here’s a selection of sites providing good analysis on what it all means for families and what the business sector thinks of the Treasury’s plans for economic recovery and its contingent debt burdens:
http://news.bbc.co.uk/1/hi/8010759.stm
http://www.ey.com/global/content.nsf/uk/budget
http://www.ft.com/indepth/budget-2009
http://www.guardian.co.uk/uk/2009/apr/22/budget-economists-reaction
http://www.newstatesman.com/business/2009/04/budget-public-institute
On a final note, I noticed this point:
• New £750m strategic investment fund to help emerging technologies and regionally important sectors
This is a step in the right direction and I would go further. I’d like to see the type of innovation proposed in this article which suggests a Venture Capital bank on every high street:
http://www.businessweek.com/globalbiz/content/mar2009/gb20090316_305393.htm
The author, Ann Lee who is an adjunct professor teaching economics and global affairs at New York University, doesn’t have the model quite right yet in terms of which parties due diligence and sign-off budgets on those investments nor the board and operational structures which need to be in place but the idea has merits worth exploring.
After all, as one BBC Breakfast interview observed this morning: angel investors are putting their money into SMEs because the rate of interest in a bank account at 1-1.5% means it makes more financial sense for them to angel invest.
So why not set-up VC/angel banks for the UK high street?
