Fisher Capital Management Report Part 2 - The UK Emergency Budget

Fisher Capital Management Report  Part 2- 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.

Interest rates are projected to remain low, with inflation absent;

and it is possible that Quantitative Easing will need to be resumed

but on present prospects this seems unlikely to be necessary.

Another concern is with the regulative proposals. There is an antibank

mentality developing in this coalition government, which is

most unfortunate; much of it seems to emanate from Vince Cable

and the Lib Dems.

Yet a moment’s thought should be enough to convince one that we

need bank credit expansion and a return to competition on the

bank high street in order to foster recovery and enterprise. Ever

tougher bank regulation is what was needed before, at the peak of

expansion, not now in the slough of recession giving way to recovery.

Talk of breaking up banks fails to recognise the natural economics

of banks, which favours scale and risk-spreading. Talk of capping

mortgage lending at modest percentages of income is also unfortunate

when the UK want to see a revival of it’s housing market, now once

again back in the doldrums.

A last area of concern is the state of the labour market. The UK do

have near ‘full employment’ if one discounts the modest temporary

effect of recession. But this only applies to those normally looking

for work.

Fisher Capital Management Report Part 2 - The UK Emergency Budget: There is now a large group of people who are claiming benefits of

various sorts in order to stay out of the labour market. Disability

benefit is one route; another is the having of children in order to

get child benefits and related parenting allowances, with tragic

consequences for some children.

Tightening up of this has been signalled in the budget but this has

happened before, with no proper follow-through.

Another UK labour market problem is the resurgence of union

power as Labour loosened the union laws passed before 1997. One

key loosening was the 12-week rule, which allows workers to breach

their contracts with impunity when on strike until 12 weeks of

strike have occurred. When strikes are designed for short periods

for maximum disruption, this 12 week period can take a long time

to trigger. During it the employing firm is unable to defend itself

by recruiting a different labour force.

Under the pre-1997 legislation firms were able to dismiss workers

in breach of contract, provided they did so in a non-discriminatory

way. This led to a huge reduction in strikes and a large rise in UK

productivity, to the great general benefit.

As we have seen in recent years, certain unions are exploiting this

12-week rule to damage the economy — the classic case has been

the BA dispute where UNITE has persisted in attempting to defend

well-above market wages for cabin crew.

In sum the budget was a decent start in restoring fiscal sanity. But

only a start.

The UK now needs urgent attention to the creation of a proper tax

system with low marginal rates but generating a reliable revenue

source — the two are perfectly compatible. It needs sense and

restraint in regulation. Finally they need to reform their labour

market yet again.