PBR as much use as celery – Comment by Stuart Thomson, economist at Ignis Asset Management
“Eating celery consumes more calories than the vegetable contains – we assume that printing the report will cost more than the actual net revenue raised by the package. The centrepiece of the PBR, widely trailed in the press as an attack on bankers’ bonuses, turned out to be an employee dividend tax. The Chancellor will impose a one off 50% tax on bank bonus pools, which represents a windfall tax on banking profits. The banks can choose to pay this tax in order to retain staff or they can utilise retained earnings to bolster their capital ratios and reduce excessive leverage. This represents a clever compromise between Gordon Brown’s class warfare and Alistair Darling’s pragmatic management of the recession. This pragmatism is also apparent in the additional measures to support business and employment, which are being funded by an additional 0.5% rise in national insurance from April 2011 and freezing of the inheritance tax allowance. The Pre Budget Report is designed to be revenue neutral but the government’s record of compliance has been poor over the past few years as politicians have consistently over-estimated revenues and underestimated expenditure.
“Indeed, the abiding characteristic of the government’s economic forecasts have been to adopt the most plausibly optimistic forecasts rather than the most realistic. The forecasts of 3.5% per annum from 2001 until 2015 are required to help reduce the budget deficit. This follows a revised contraction of 4.75% in the current year and growth of 1.0-1.5% next year. The deficit is expected to rise by a further £3bn to £178bn, while the 2010/11 deficit forecast has been raised by a further £3bn to £176bn in the forthcoming fiscal year, before falling to £140bn in 2011/12 and £93bn in 2013/14. Once again these forecasts are likely to prove optimistic with growth likely to be significantly weaker than the Chancellor’s rosy scenario implying that the deficits will also be substantially larger over the next few years forcing the next government to institute a much greater squeeze on public sector pay and expenditure.
“However, on the day in which Standard and Poor’s placed Spain’s sovereign credit rating on negative outlook and after Fitch has downgraded Greece’s rating, the Chancellor’s rosy scenario is sufficient to placate the rating agencies during 2010. In the Animal Farm world of sovereign credit ratings, all ratings are relative and some are more equal than others. Rating agencies have grouped the UK and US together as the leading financial centres and as such the pain threshold for downgrades is considerably higher than other countries.
“The PBR is politically motivated and the focus on recovery over fiscal prudence is designed to encourage voters away from the Conservatives’ frugal message and deny them outright victory in next year’s General Election. It remains to be seen whether voters will be able to forgive Gordon Brown’s part in the recent economic downfall, but in the event of a hung parliament, Alistair Darling has put himself in poll position to lead the Labour party and possibly the country. However, politics is next year’s issue as far as the gilt market and sterling is concerned. The gilt market has received a modest boost from the smaller than expected £5.1bn boost to net gilt sales in the remainder of the year, but is overwhelmed by the risk reduction in global markets ahead of the year-end.”
These are the views of the author and do not necessarily reflect those of Ignis Asset Management.
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