The UK Emergency Budget - Fisher Capital Management Report Part 1

Fisher Capital Management Report  - The UK has had an emergency budget and it could have been much

worse. The heavy lifting is being done by a rise in VAT bringing in

£13 billion. On the spending side the cuts are achieved by freezing

public sector pay, indexing state benefits to the CPI rather than the

faster-rising RPI and freezing child benefits. State pensions will be

indexed to the higher of wages or the CPI but the pension age will

be raised to 66 fairly soon.

The disappointment for the UK is on the tax side where compromises

with the worst aspects of the Lib Dems are apparent. CGT goes up

to 28% for top earners … a mistake.

The UK Emergency Budget - Fisher Capital Management Report: The 50% top tax rate and associated rise in the top marginal rate

on pensions have been left alone. There is a Bank Levy bringing in

£2 billion … defensible, just, at this level but it needs remembering

that taxpayers generally make money out of bailouts because they

get assets at knock-down prices and are able to hold them until

times are better. Then there are cuts in corporation taxes on both

large and big firms, which is to be welcomed.

But there is no clear logic here; no sense that the tax system is to

be remoulded, to give incentives for entrepreneurs, inward investors

to the UK and indeed home investors.

The main question that most people will be asking is whether the

fiscal arithmetic will come off and the deficit come down as planned

to 1.1% of GDP by 2015/16. The answer depends entirely now on

growth. Contrary to most people’s comments, cutting spending as

planned is not really that difficult.

The UK Emergency Budget - Fisher Capital Management Report: Much of it will involve simply freezing programmes in real terms

and also cutting pay in real terms, which the announced freeze on

pay will do. Probably some programmes can actually be cut without

much trouble given the considerable decline in public sector

productivity in the last decade … in other words value for money

in the public sector has never been worse.

The main issue is whether UK GDP will grow as forecast, at 2–3%

in the next few years. If it does, then revenues will recover

substantially.

Already the PSBR figures have come in some £10 billion below the

original projections and that seems to be because the original growth

figures for 2010 were too low.

There are good reasons for thinking growth of this order will occur.

The world economy is recovering rapidly, led by the East — China,

India and East Asia. These countries are achieving extremely rapid

rates of productivity growth by moving people out of lowproductivity

agriculture mainly into high-productivity

manufacturing. Hence their fast growth.

The problem for the West is that these countries also pre-empt

available supplies of raw materials such as oil. So if the West grows

any faster than its present moderate recovery, it would trigger

renewed surges in raw material prices, which in turn would reduce

Western productivity growth (factories are less profitable as those

prices rise).

So there is a built-in drag on western growth. But nevertheless

growth of the 2–3% order is in line with productivity growth at

current raw material prices.

One concern for the UK is whether the spending cuts and tax rises

themselves will derail the recovery. This is something that Labour

is emphasising.

However, the programme is spread out over five years and this

should be gradual enough to be absorbed with monetary policy

remaining supportive.