Bonkers Budget

There has been a dramatic u-turn from the Chancellor just 7 days after the Budget announcements. The plans to increase National Insurance levels for self-employed people have been dropped, probably due to the fact that it would break a 2015 manifesto pledge that no National Insurances rises would take place if the Conservatives were elected.

 

The second most powerful position in the UK has a political antennae that has gone incredibly wonky. How could Foolish Phil not be aware of the manifesto pledge? It should be tattooed on his forearm……it’s the go to political guide. How could his huge team of advisers not have raised the issue?

 

Simply crazy on every level.

 

As a consequence of dropping the National Insurance rise, the Chancellor needs to find around £600 million in the Autumn Budget to replace the income this would have created in 2018. In fact, Flaky Phil now has to find around £2 billion extra by 2022 to fill the void.

 

Income tax, National Insurance contributions and VAT raise 65% of the Government's tax income. If you pledge not to raise any of them, your room for manoeuvre is severely limited. It will be intriguing to see how he will find the £2 billion……but then he’ll probably change his mind anyway.   

 

Having closely followed and written about Budgets for 20 years, I am wracking my brains whether I can ever remember such a rapid u-turn on the central element of any previous budget.

 

It is a big mess and Chancellor Philip Hammond is looking significantly weaker politically. Perhaps the bigger issue is that when a Government is so overwhelmed by the burdens of exiting the EU and keeping Scotland in the UK, big accidents will happen. They have happened.

 

Such an avoidable mess.

Necessary Evil

Car insurance is set to rise in cost across the board this year and we are powerless to prevent it. It is has nothing to do with an increase in claims or insurance providers being greedy. I can’t even blame ambulance chasing solicitors that promise the earth on a ‘no win no fee’ basis. Damn it……not even Trump can be blamed for this one.

 

The blame lies at the door of the Government……the Ministry of Justice to be precise.

 

Here’s the background bit……

 

A new formula for calculating compensation payments for those who suffer long-term injuries has been announced by the Ministry of Justice.

 

Accident victims are paid compensation in a single lump sum, which in serious cases is supposed to support them for the rest of their lives. But someone who receives that lump sum can actually increase that amount by investing it, and getting a cash return. So to be fair to insurance companies, the payout is reduced accordingly.

 

For the past 16 years the ‘discount rate’ has been set at a typical rate of 2.5% - making the payout that much smaller. Now the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75%. That will result in more money for the victim, but a higher cost for the insurer......which is being passed on to drivers.

 

The basis the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75% was because the formula assumes the victim were to invest his or her money in Government Bonds. By the time inflation is taken into account, real returns on such bonds have become negative.

 

Huw Evans, director-general of the Association of British Insurers (ABI) summed things up perfectly……"Claims costs will soar, making it inevitable that there will be an increase in motor and liability premiums for millions of drivers and businesses across the UK. A crazy decision.”

 

A crazy decision in deed.

Pre Brexit Budget

At face value, today’s Budget was small change in comparison to some that have gone before. There were only 28 policy changes in comparison to 77 last year. Having said that, there will no doubt be journalists looking to spin headlines. Expect them to be dominated by National Insurance, Public Debt, Social Care and Tax.

 

 

National Insurance

At the General Election in 2015, the Conservatives promised no increases in National Insurance Contributions. Today, saw a u-turn on this and announced an increase in National Insurance Contributions for the self-employed from 2018. A clear breach of the Conservative election manifesto. Politicians not keeping their promise……who’d have thought it!

 

In fact, for those that are not employed in the UK, there was little to cheer as there was also a kick in the shins for shareholders of Limited Companies who will see the Dividend Allowance reduce from £5,000 to £2,000 from 2018.

 

On the one hand, it is not right that the tax paid on an average employed salary by an employer and employee is 3 times that of a self-employed person earning the same. However, on the other hand, there needs to be recognition of the risk to be self-employed the jobs that are created. I am not sure that the measures announced really address either side of the argument.

 

Regardless, the actions proposed will make things “fairer” apparently and bring greater tax revenues into the public coffers.

 

 

Public Debt

Another big headline grabber was the increase in public borrowing as it will be significantly lower at £51.7 billion than the predicted £68 billion. Don’t get me wrong, this is still huge borrowing figures of course but better than forecast. Before you get too excited though, the national debt will peak at a colossal £1.7 trillion in 2017 / 2018 before starting to reduce (hopefully). I appreciate that £1.7 trillion is a figure beyond most people’s comprehension, so let me put it another way……that’s £62,000 of debt per household in the UK. My particular favourite is the interest payment on the debt alone……£50 billion per annum. You could do a lot of good with that.

  

Box Office Phil said “we will not saddle future generations with debt” as he saddled future generations with record debt. Errrr……a little confused there Mr Chancellor.

 

Social Care

There are some very scary figures on the rising age of the UK’s population. We now have 500,000 more over 75’s than we did in 2010. This increase will rise to 2 million by 2020. That is staggering growth in pensioners and as a consequence the social care system is creaking at the seams.

 

The Chancellor announced £2 billion of additional funds for social care that typically is needed to support those aged over 75. The devil was in the detail though, as the funds are to be released over a 3 year period. It felt more like a positive headline grabber and sticking plaster than a long term solution. It’s a start I guess.

 

 

Tax 

In short, you should be better off than you were……assuming you aren’t self-employed or a shareholder of a limited company. 

 

There were no changes to income tax, VAT or other National Insurance categories. Personal tax-free allowance is to rise as planned to £11,500 this year and to £12,500 by 2020. There were no increases in alcohol or tobacco duties on top of those previously announced.

 

 

So there you have it……a bit of a dull Budget. Apparently, the Budget provides a "strong, stable platform for Brexit" according to the Chancellor but he didn’t explain how it does. In his defence, Chancellor’s never explain their statements. However, I’m not sure how it can provide a platform of stability when our negotiations haven’t started. Nice try though Phil.

 

In summary, if you are employed then it’s ‘as you were’. If you are not, you might swear a little more this week……but not much more. It could have been better. It could have been worse. The UK ship continues to sale reasonably safely……for now at least prior to heading into European waters. Brexit choices dwarf Budget 2017 choices.

 

It is always worth remembering that today's Budget is merely a step along a financial lifetime journey and it’s never good to measure the distance between your home and work with a 12 inch ruler!

 

But don’t let that stop journalist sensationalism!

Propping Up Property

The UK economy is so strongly linked to consumer confidence and (most importantly) consumer spending. It is the oil for the UK’s economic engine.

 

Countless studies have shown that when house prices are good, we spend. Conversely, when our treasured homes are worth less or are falling, consumer confidence falls, we spend less and the UK economy shrinks. It’s a pretty straight forward equation and politicians are only too aware of it. Property is a big deal in the UK from an economic perspective.

 

With first time buyers becoming all but extinct over recent times, Buy To Let investors have propped up the lower end of the housing market and kept property prices ‘healthy’. However, a series of tax changes to Buy To Let properties has dramatically reduced their appeal from April 2017. It feels like death by a thousand cuts.

 

Westminster is all too aware of the negative impact of the reduced appeal of Buy To Let investing and instead is looking to invigorate the first time buyer market with subsidised homes. Thirty areas across England are to receive funding from the £1.2 billion ‘Starter Homes Land Fund’ for new developments on brownfield sites. Buyers must be aged between 23 and 40 and will receive a discount of at least 20% below market value.

 

On the upside, this can only be a good thing for first time buyers and it will increase the appeal of property ownership again.

 

On the downside, this was launched in 2014 and it has taken until 2017 for the first property to be built. The Conservative pledge in 2014 to build 200,000 homes by 2020 looks very optimistic.

 

However……it’s a start……it’s progress.   

International Bank Bashing

Time to take my ‘bank bashing’ global……to the US shores no less.

 

The fallout from the banking collapse of 2008 / 2009 troubles me more and more as time passes. The financial and banking sectors have the worst memories of all and some of the current practices leave me at best bemused and at worst damn right angry. Clearly lessons have not been learnt.

 

Let me give a few examples of evidence that concerns me:

 

Wells Fargo

A US bank that is the most valuable bank in the world. Recent practices saw employees open more than 1.5 million fake bank accounts as they tried to hit sales targets. The bank took no action until the scandal became public……when they then sacked 5,300 staff. Alarmingly, not one of those sacked was a senior executive or manager. It took pressure from Senator Elizabeth Warren that some higher level sackings actually took place.

 

Prudential Financial

Another US juggernaut of a financial services company who have a corporate handholding arrangement with Wells Fargo (who sell Prudential Financial products). Prudential Financial decided to review sales practices of their products by Wells Fargo given the story above. You can guess the rest……less than desirable sales practices and another bout of sackings.

 

You don’t have to be Einstein to know that banking continues to be more than a little bit broken.

 

Here’s the thing……due to the integrated nature of banks across the world who are all so intertwined with each other, it is literally a domino effect when one fails and falls. Just look at what Northern Rock did in 2008 / 2009……the domino fell and it took others with it.

 

Creating fake bank accounts doesn’t bring the banking system down. Taking huge risks to meet sales targets does.

 

Until the banking sector uses the same moral compass as the rest of the world, we will always be looking over our shoulder for the next banking collapse.

 

I really hope I’m wrong.  

Bank Bashing

In amongst the Brexit and Trump hysteria, a little news story got ‘conveniently’ pushed under the mat.

 

If I am being honest, I haven’t been very subtle with my opinion on the banking crisis over the years and in particular, the propping up and rescue that occurred. The biggest target of my efforts has been the Royal Bank of Scotland banking group (which includes Royal Bank of Scotland, NatWest, Ulster Bank and Coutts). So few have been made accountable for poor risk management and yet at the same time there has been widespread acceptance that banks being morally corrupt is somehow the norm and acceptable.  

 

Recent figures from RBS have got me disproportionately excited about all of this……again. Let me show you where I am coming from:

 

• The banking group is 72% owned by us.

 

• RBS have posted £5 billion of losses for 2016.

 

• This is the ninth consecutive year of losses.

 

But here is the big figure for me……

 

• £370 million was paid out in 2016 in staff bonuses.

 

And for dramatic effect, that’s £370,000,000.00. Which leads me to a question I just can’t get my head around……has £370 million been paid out in bonuses because a loss of £5 billion is considered a ‘good’ result worthy of financial reward?

 

If you just stop and think about that for a moment, it doesn’t make sense on any level and actually compounds the losses. Yet as 72% public owned, why are there no demonstrations taking place? Or do we just accept that owning a loss making bank is very normal?

 

Perhaps only a Trump visit is worthy of demonstration now.

Economic U-Turn

You will be forgiven for missing a key economic announcement from the Bank of England last week given the excitement of MP’s voting in favour of commencing the notice period of Article 50 to the leave the EU and Trumps latest bemusing outburst. It was also a good news story which typically don’t get air time!

 

In short, the Bank of England made yet another dramatic rise in its growth forecast for 2017. It expects the economy to grow 2% in 2017, up from a November forecast of 1.4%, which was itself an upgrade from the 0.8% forecast made in August.

 

The raised growth forecast follows much criticism levelled at the Bank for being too gloomy when it drastically cut its growth forecast after June's vote in favour of Brexit and then subsequently cut interest rates.

 

The Bank said the improved forecast was partly the result of higher spending and investment contained in Chancellor Philip Hammond's Autumn Statement.

 

It also predicts "a significant fall in the savings ratio over the next three years as consumers take time to adjust spending growth to weaker income flows". The savings rate is expected to fall to 4%, the lowest rate since records began in the early 1960s.

 

Or to put that another way……we will continue to spend until inflation bites us on the bum later down the road.

 

So in the short term, the UK economy in 2017 looks reasonably good. Just the EU political malarkey to sort now!