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UK Budget AKA Party Political Broadcast

Posted by jdavis on March 22, 2013

I thought I was stepping back in time a few years.  As I was watching it I felt I was watching Clown giving his high borrowings, high spending, short termist giveaways and boost house prices mantra.

WHAT WAS DIFFERENT?

Let me express my deeply held view – one that I only realised a few years ago: Budgets are NOT about sorting out an economy.  They are about winning elections.  It is now three years since the last General Election.  It is only two till the next one.  Thus, Osborne and Alexander’s job is to build two warchests, namely:

  • An increasing positive view by the media and the electorate and
  • A financial buffer with which to buy votes between now and 2015.


First, the fiscal facts.

Most income earners will pay less income tax.  And small companies will pay less taxes overall.  Beer tax cut a bit.  Petrol taxes held for a couple of years (sorry, when is the next election again…? Er…).  Parents will get tax relief on child care costs – which OBVIOUSLY will raise the gross cost of childcare!!!  Car tax will rise above CPI.

Oh and public sector spending will be cut a bit.

You think that’s how the tax cuts are paid for?  We’ll come back to that.

So, overall, you may well think that sounds pretty good then.  In the short term I would agree.

 

In the long run, the Government is – as they all do – destroying our economy and that of our children and maybe even that of our grandchildren :( .

They trumpet we have such low interest rates (and it is because of their prudence they say).
First, it is because they and the previous lot instructed the independent (do me a favour!) Bank of England to lend them hundreds of billions of £ by printing money and buying Gilts.  Thus, Gilts prices have soared and the related interest rates have plummeted.   One day, due to global market forces, the Bank will stop buying Gilts and the rates will soar.

So what?

At c 10 o’clock on the above chart, of forecasted UK Govt expenditure for 2013/14, they say they will spend some £51 Bns JUST ON INTEREST ON EXISTING DEBT.  So, with the lowest borrowing rates in 300 years’ history of the Bank of England our illustrious Govt will spend some 7% of all spending on bank interest.

That’s based on the current debt level of £1,100 Bns and the c £120 Bns they will borrow this year and then add on next year’s £120 Bns of borrowing (AKA Deficit).

They intend to borrow (Deficit) over £400Bns between this year and the next General Election, to add to what we already owe.

Austerity?  Come on, be serious.

By the way, the current Govt has borrowed in 3 years what the last lot borrowed in 13.   Now, granted it was because of Clown’s mismanagement that put us where we are.  (You think it was America?  No, America did not make UK spend as much as we did and have as low interest rates for as long as we did when they were entirely counter productive to long term growth.)  But the next lot – the current lot – did not need to continue down the road of Socialism since 2010.  Yet they did and they are doing.

So, we have been downgraded once to AA.  The next time we are downgraded to A, due to the weight of debt on our finances, smart money will start to sell off UK Gilts.  Rates will start to rise.  The time after that, that we are downgraded into the B’s ie BBB, there will be an avalanche of sales and our interest rates will go through the roof.  That’s when we become Greece.

Our current £51Bns pa of interest payments will soar yet tax receipts will actually fall as the economy falls apart.  Say goodbye to the Welfare State etc etc. Not this year. Not next year but it’s coming.  The maths are crystal clear.

 

 

Have I answered the question ‘how is he paying for it’ to your satisfaction?  Are you satisfied?  I know I am not.  But I am not a politician with a General Election in 2 years.
These politicians say “To Hell with your kids’ needs or their kids’ needs.”

 


The following tables show you the absolutely dire state of our finances.  To obtain the second table I simply took 7 zeros off the UK Govt numbers.  Mr and Mrs Jones are 100% bankrupt.  Why isn’t the UK?  It is.


State of our finances

UK Government


Annual Tax Income (2013/14)               £ 612 Bns

Annual Spend                                            £ 720 Bns (of which £51 Bns Debt interest)

Balance Sheet Debt                                  £1,100 Bns

Off Balance Sheet Liabilities                c £4,000 Bns

 

 

Mr and Mrs Jones


Annual Income (2013/14)                       £ 61,200

Annual Spend                                            £ 72,000

Credit Card/Car/New kitchen etc Debt £110,000

Mortgage                                                 c £400,000

 

 

 

 

 

Houses

Many readers will be sitting screaming “but what about the Help to Buy schemes???”  Surely, they are major initiatives and you haven’t even mentioned them?   (I noticed Osborne didn’t mention the downgrade.)

The media and the politicians (even the Opposition) portray this as help to poor suffering tenants who pay vast amounts to rent property and the housing market is a sure fire way of stimulating short term (unsustainable) growth.

Yes they tried it in Ireland, Spain, China, America as well as The Soviet Union.  Look what happened.

No doubt building some more houses is a quick win (there’s that timescale again in relation to May 2015).  And it’s a vote winner.

No doubt, too, if you are renting in London you are hard done by.  Outside the M25 and in the rest of the country renting is a relative dawdle.

Thus, the 150k pa purchases that these will be used for will be taken up.  It will be temporarily positive on the collapsing housing market which has collapsed everywhere.  Yes, even in the South East.  It’s just prices that have held up in this region.  Not the market.
So, these initiatives – the first Govt policies to do so – will likely be positive for the market.  Also, there will likely be an upward push to prices.  Prior policies we said would not be positive for the market and they hadn’t been – when everyone else said they would be.

I do find it fascinating though that two of the biggest players in estate agency Countrywide and Foxtons are or have been recently floated on the stock markets.  Those who understand these things would agree that Initial Public Offerings are often at the end of growth in a business and not at the beginning.

The Mr and Mrs Jones who take up these offers will be helped in the short term.  In the long run they will be saddled with vast debt and, with long term rising interest rates and a falling global and UK economy, eventually again falling property prices.  Yes, even in the South East.  But not likely before the next general Election.

So, I can understand any good income earner in the South East who would want to access these arrangements.  I wouldn’t but that’s me.  I have a more long term outlook than most.

These initiatives will likely boost prices and will likely benefit estate agents, lenders etc as well as the Govt.  In the short term it will also help people who wish to ‘buy’ or trade up. However, there is no way we have a housing ladder any longer (except possibly Northern Ireland again where prices have fallen more than 50%).  It was a ladder when average prices were £20k not £200k and rising long term.  We are at or near the summit.  Yes, I reiterate prices may well rise due to this but not long term.  To achieve that they will have to double down, double down and keep on doing so.
Within a few years, we would be downgraded to Junk status.  Interest rates will be 15+% in that circumstance.  Thus, doubling down will ultimately fail under its own weight just as it did in the US.

If anything the housing market is a snake.


“Mr Deputy Speaker, I commend this Budget for Sellers to the…er… House.”


You may be interested in this Me on radio on Budget Day morn and there are other TV/Radio appearances Post Budget on the site and there will be more, by next week.


Incidentally, this firm has been awarded Chartered status, a qualification and status I, personally, obtained some years ago.  We are now a firm of Chartered Financial Planners.


Do, please, contact me to discuss all of the above and for me to clarify as you wish.
 

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