The Blog

the Vickers report is out and is the banking version of a Collaborative law agreement, where two parties agree they have to break up and divide the financial assets but want to give each other time and space to do so. This one is going to take until 2019.

The key points of the report are that the main British banks must ringfence their retail operations such that if there is a disaster in their investment banking division this will not mean you cannot get your money ‘out of the wall’ and the UK economy go into free-fall. This is a good idea and popular as everyone understands why it is needed.

The cost of this according to the report is estimated at between £4-7bn. Whilst this is less than many of the estimates that had been made, this will still be a higher cost than doing business in the other financial centres. The Government should be careful. The UK’s attractiveness as a financial centre is very important to our economy and more cost, regulation and the 50% tax rate has meant the UK is becoming the highest taxed and most costly financial jurisdiction there is. This is bad news for UK plc.

Whilst the aim to rebalance the economy is a good one, what is needed is to bring up the skills in other sectors of the economy to have an export led recovery. This should not and need not be at the expense of causing competitive disadvantage to our main export sucess story – the financial sector.

The report gets the balance right and the time given, whilst it may upset some, is the right approach. The economy is very fragile and we need to see how these changes will play out as they are developed and implementated to ensure they give us the strong banking sector we need.

Gordon Brown wrecked our economy by spending more money than we had. To succeed again the Government needs to bring the state back in order and allow the private sector to lead the recovery.

In terms of the financial sector, the Vickers report goes in part some way towards this in providing certainty for the banking sector. What we need now in addition is a plan for growth. We should make clear we want large banks to headquarter in the UK and employ staff here, we should encourage investment banks to thrive, encourage more IPOs on the LSE, make M&A easier and cheaper in the UK and encourage entreprenuers to come here by reducing national insurance (which is a tax on jobs) and get rid of the 50% tax rate which discourages them to settle or stay here.

the Budget provided clear evidence yet again that the Government ‘gets it’. The only way to pay for the public services we want is to encourage strong growth in the private sector and take the case for UK plc out to world markets.

The Chancellor proposed tax changes to encourage non-doms to invest their offshore income and gains into UK business without triggering a UK tax charge and a statutory residence test to give more certainty to people coming to the UK. Also he announced that there would be no more changes to their tax system for the rest of this parliament. Amending badly drafted and frankly daft tax legislation which harmed investment into the UK and rectifying the uncertainty on residency are important investment generating measures which put us on the right footing.

The increase in the remittance basis election charge to £50,000 for people staying in the UK for 12 years ensures that those coming to the UK for the medium term are not hit further and those that stay longer are rightly paying a higher contribution for living in the UK for a substantial period.

The proposed changes to national insurance to bring into line with the income tax regime, though difficult, will also be a major simplification of our tax system which will be welcomed by most.

Corporate tax reduction

The 2% reduction in corporation tax in this budget are a boost to the UK in attracting companies to locate to UK plc rather than our competitor jurisdictions.
The main rate of corporation tax will reduce from 28% to 26% from April 2011. The rate will then be reduced by a further 1% in each of the following three years, and as a result will be 23% by 2014. This, together with proposed welcome changes to the CFC rules, are aimed to promote higher levels of business investment and help the UK maintain the lowest rate in the G7.

And in a clever move, to offset the benefits to banks from the further cut in corporation tax, the rate of Bank Levy will increase to 0.078% from 1 January 2012.

davos was an excellent reminder to attendees and observers that politics and economics have an awkward relationship. Politics and politicians like to believe they are the dominant party in the relationship and then ever so often economics comes along and reminds them they are not. The truth of course is that both need each other and both should be wary of each other and not take the other for granted.

Valentines day is next Monday and it would be a good idea for politicians in the UK to remember their relationship with economics on that day and that without strong policies promoting economic growth, an awareness of global markets and a keeness to fight for economic investment to come to the UK, that relationship could decline or worse still come off the rails.

In the UK the new Government has taken the right but difficult first steps to reduce the deficit and put the UK public sector on a firmer footing. The next challenge is to promote economic growth in the private sector and again reaffirm the UK is open for business.

Over the weekend we again saw Labour only talk in negatives. The cost of cuts, the need to tax more, the need to stop “fat cats” and “loopholes”, the need to blame everyone else or create any bogieman they can to shift the blame from the previous Labour Government for overspending and getting us into the huge deficit in the first place.

It is a further tax and spend approach that would lead to the UK closing in on itself, to global economies and business seeing us again as the sick man of Europe, to the relationship with inward investment and global entrepreneurs breaking down and ultimately UK plc falling behind.

What we need and what the Government must hold its nerve to do, is keep to the positives, focus on the economics, show the UK is open for business and encourage inward investment and help businesses and entrepreneurs choose the UK as the place to do business. It needs to help our home grown businesses and talent compete in the world economy by reducing costs and red tape and ensure we keep taxes low and eventually cut them to encourage enterprise.

It is tempting to sometimes let politics solely dictate the agenda and put economics to one side, but the last Labour Government showed what happens when politcians do this and it wouldnt be a good idea to listen to them now.

one of the criticism levelled by some in the Irish bail-out was that Ireland had to use its taxpayers cash to pay up on its guarantee of the Irish banks before it could get the bail-out.

The terms of the Irish bail-out was mainly due to the concern that if Ireland did not stand by its banks it could spark a further crisis of confidence in European debt as many other European banks had lent money to those banks. There was a further concern the contagion of defaulting Irish banks could also badly affect the currency market, notably the Euro.

Amongst the grumbling during the bail-out negotiations was talk of bondholders taking a haircut and this seems to be where the European mechanism may go in future.

The suggested European Stability Mechanism in 2013 could mean bond holders in banks would have to lose at least part of their money rather than have the risk underwritten by European Governments. This may not be liked by the markets and it may push interest rates higher but it seems difficult to argue with the principle.

since the Coalition took over, confidence in the UK and its ability to tackle its economic debt crisis has significantly improved. Its a classic example of when people and businesses have confidence in politicians to make the right decisions and the resolve to see things through, economic activity and planning for the future picks up. So its great news the UK’s manufacturing sector grew at its fastest rate for 16 years last month.

The purchasing managers’ index climbed to 58 compared to 55.4 the previous month.

As I have discussed in previous posts we need manufacturing and a growth in exports to play an important role in our economic growth as consumer spending in the UK comes under pressure next year with the spending cuts starting to feed through and the VAT rise. Its great news that our manufacturing base is rising to that challenge.