Nov 2007 26

An excellent piece by Ian Morley in the Financial Times presents a devastating critique of Alistair Darling and Gordon Brown. It’s worth reading the article in full, but here are the main challenges to the Government:

1. Causing great damage by raising taxes on small businesses and entrepreneurs when a more targeted measure on private equity chiefs would have been far easier.

When it comes to the government’s tax changes, the law of unintended consequences starts to become apparent. It will not be the Russian billionaires, private equity or hedge fund managers that suffer but many of the high-quality and technically skilled non-domiciles from the US and Europe who have up until now been attracted to working and living in London. They have created that dynamism that has helped London overtake New York as the major international financial centre.

The greatest and most immoral impact will hit the small business entrepreneur, the real innocent victim. It would have been easier to focus the tax measures on a handful of private equity people – perhaps by differential tax on the gains they make on their clients’ risk capital as opposed to their own – rather than to have increased by 80 per cent the tax on hundreds of thousands of small entrepreneurs that are the life blood of the true economy.

2. Raising taxes on private equity at the precise time when the market was turning.

The current, ill-thought-through demands for greater transparency and controls on private equity and hedge funds, proposals to tax the supposedly rich "non-domiciled" residents and plans for an 80 per cent increase in the effective capital gains tax charge on selling long-term business assets … are all occurring precisely at that inflection point when the market would have adequately dealt with managers’ egos and profits by deflating one and denting the other.

Government intervention now is, therefore, unnecessary. In hindsight, this will be seen not just as bad timing but throwing out the baby, the bath water and the bathtub as well.

3. Removing regulatory control of banks from the Bank of England.

The seeds of this mess were planted 10 years ago in what, at the time, was seen as a master stroke of financial management. The Bank of England was given freedom over interest rates in exchange for giving up direct control of the banks, which was then handed on to the Financial Services Authority. It meant that the chancellor could thereafter blame the bank if it got interest rates wrong yet take credit for giving it independence if they got it right, the ultimate politician’s win-win scenario.

The problem with this split responsibility, made more complicated by the ever-encroaching power of the Treasury, was that the FSA is in fact a regulator, not a market player and, unlike the Bank of England, has no real experience of daily involvement in the markets. It was, therefore, not surprising that as soon as the first major banking crisis came, the collapse of Northern Rock, a case study of collateral damage, the FSA got caught out by not having its pulse on the market.

4. Northern Rock.

Outside Scotland, the north-east based Northern Rock is the only serious financial institution in the heartland of Labour. That may be affecting the government’s handling of the situation. There was no way the City banks and money markets could be seen to destroy the mortgage lender while private equity managers picked over its bones.

These charges make a serious case for the Government to answer. Taxpayers will not forget the matter quickly. For the future, it’s clear that alleviating the burden of tax as soon as possible is essential to getting the economy back on its feet.

Nov 2007 26

So Sir Richard Branson is about to tow away the Crock. Hurrah! Getting that thing off the front lawn will be a load off everyone’s mind.

Although… is this by any chance the same Sir Richard who’s famous for being one of Britain’s very sharpest entrepreneurs?

Hmm.

According to today’s Update on Strategic Review put out by Northern Rock, taxpayers will remain committed even after Virgin takes over. True, Virgin will repay £11bn of the Bank of England loan immediately, but that will still leave £13bn plus outstanding. And we will rank no higher than the commercial banks backing Branson (who may very well be on other sweeteners to ease their troubled minds).

How quickly will we get the rest back? And what happens if the bank gets into difficulties again? What happens in a world of falling property prices? And what happens if it can’t attract new deposits without that Bank of England guarantee?

That second point could be very important. Northern rock currently offers some very attractive interest rates to depositors- their Silver Saver instant access account pays a market leading 6.3% and is fully guaranteed by HMG.

But we know that unsecured Rock debt is currently rated as junk. Specifically, its credit rating for senior debt without the HMG guarantee is BB, a junk bond rating.

Now there are all kinds of reasons why you might want to invest in junk bonds, but only if you get paid for taking the risk. As we’ve blogged before, bank deposits are unsecured senior debt, and 6.3% is most definitely not being paid to take the risk (cf this sleep-at-night Halifax account on 6.25% ).

So as soon as the HMG guarantee goes, a lot of the remaining deposits may well walk out the door.

Of course, Virgin and their backers are aware of this risk. They are going to inject some new capital. The NR Update says it will be £1.3bn, plus the £250m current value of Virgin Money, which will be folded in. Call it £1.5bn, of which £650m will be raised via an issue of new shares at 25p each. Acccording to the Update:

"The Virgin Consortium expects that the Company will quickly re-build a deposit base to drive a more sustainable funding structure and is targeting a credit rating of no less than ‘A’."

Single A? Halifax (HBOS), for example, is a strong AA, much more comforting. Why would a rational depositor leave money with a Branson owned, single A targeting, recovering Crock, when she could get virtually the same interest rate from Halifax?

That’s right- she wouldn’t.

Our guess is that Virgin will find it difficult to rebuild the deposit base. Unless of course, it offers some pretty racey rates. But that undermines profitability, which is not at all what Branson and his backers will have in mind.

So how long before we get the money back? The Update says virtually nothing:

"£11 billion will be repaid to the Bank of England at completion of the transaction – and the Bank of England will have a clear path towards repayment in full."

The reality is that the clear path will meander on for many years. Meanwhile taxpayers will continue to underwrite the enterprise with an open-ended loan commitment. And under the Virgin plan, our loan will be at market rates, not even the penal rates charged up until now.

Good luck to Branson- he’s certainly got nerve.

But we taxpayers should not presume the pain is over.

Not by a long chalk.
Nov 2007 26

Next week the EU will lay out proposals which will formalise the right of NHS users to seek safer and often superior health care abroad. Increasing numbers of UK citizens already choose to travel as far as India and Malaysia to avoid treatment in the NHS (nearly 70,000 this year alone), but these Commission proposals – if agreed upon by the European Parliament and member states – will potentially establish a genuinely open market in European health care; a market in which the weaknesses of Britain’s NHS are bound to be revealed. 

Under the Commission’s ‘2008-2013 Health Strategy’, EU citizens could choose medical care in any other member state and have the cost covered by their national health care system, providing the treatment or service is provided for free in the patient’s home state.  A series of European Court rulings over recent years has established a British citizen’s right to look elsewhere in the Union for free treatment if they are deemed to be on ‘unduly long waiting lists’, but with widespread fears over hospital acquired infections, the potential for mass ‘health tourism’ away from the UK is a serious challenge to the government’s health policy.

Health ministers have expressed concern that these EU plans would place an unworkable administrative and planning burden on the NHS, but the reality is that these proposals could potentially reveal people’s dissatisfaction with health care in this country. Hospitals in northern France already perform considerable numbers of hip and knee operations, while Spain attracts those seeking fertility treatment. Belgium offers British cardiac patients a higher chance of success and a lower rate of infection, and the Netherlands is far quicker in the provision of cancer medication. If these sensible EU plans are carried through, Calais could not only offer British citizens the chance to avoid excessive alcohol duties, it could also offer British citizens the chance to get necessary health care quicker and safer than what’s on offer back home.

Nov 2007 26

The FT reports a new CBI report endorsing new green taxes.  The reports supports a range of policies.  Strengthening emissions regulations on cars are easy for British business to endorse as our car production is now almost entirely foreign-owned.  The central recommendation, to strengthen the EU’s Emissions Trading Scheme, has been characterised by economist Greg Mankiw as thinly veiled corporate subsidy:

"Cap-and-trade = Carbon tax + Corporate welfare."

Both BP and Shell made profits (PDF) from the scheme while NHS hospitals paid millions.  Both companies had members of staff contribute to this report.

More broadly, this report is an attempt to pay Danegeld to the environmental movement.  The authors hope that they can divert environmentalist fervour into corporatist policies that will either provide them with a subsidy or impose further regulation which gives a competitive advantage to big businesses competing with small firms.  The reality is that they will further strengthen unhinged, radical environmentalism and do immeasurable damage to business interests in the medium to long term.

Nov 2007 26

ClownsIs nothing in this country sacred, nothing too out of reach of the taxman?  Today in the Telegraph it appears the taxman is trying to get his beak into pigeon racing.  Yes, pigeon racing.  As pigeon racing isn’t recognised as a sport and therefore doesn’t qualify for tax relief, pigeon fanciers are subject to business rates on the shed where they store the competing birds.

We can add this to the list of reasons how the government is getting bigger and why we need to fight to get the government out of our pockets and back to doing what we want it to do, to keep us safe and let us get on with our lives. 

Usually with these blogs I encourage you to write and complain.  Not this time!  Write to the Royal Pigeon Racing Association to support them in their campaign to be registered as a sport to claim tax relief.  You can contact them by calling 01452 713529 or through their website.

Do get in touch with the RPA and stand by them in their struggle against the taxman. 

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