Sunday, 29 July 2012

Borrowing Overshoot is a Blow to George Osborne

Recent data in shows that the State borrowed more in June this year than it did in 2011. The public sector borrowed £14.4bn which is £500m more than in 2011 and £1bn more than the market expected.

Statistics, produced by ONS (Office for National Statistics) showed that borrowing for the financial year to date is £6.8bn higher than for the same period twelve months earlier - which puts under threat the borrowing targets for the year. 

These figures are the result of the economy falling back into recession which has a significant bearing on tax revenues and social spending. 

June’s figures show a 0.1% drop in income tax raised to £10.8bn while spending on social benefits, including unemployment rose by 2.3% to £15.4bn.

Recently the IMF (International Monetary Fund) has slashed forecast GDP Growth for the UK to just 0.2% for 2012.

These figures highlight the importance of the UK returning to growth. The IMF has warned that austerity should be eased in 2013 if the economic recovery fails to materialise.

written by Tim Corfield.

Thursday, 26 July 2012


Recently the Eurozone approved the terms of a loan of up to 100bn Euros to re-capitalise Spanish banks but the crisis continues.

Investors have reacted negatively and Spanish 10 year bond yields have increase to well over 7%. Madrid is now paying 20% more for short term money than it was around 6 weeks ago! The market seems to be very seriously questioning the fiscal viability of Spain which is the Eurozone’s fourth largest economy.

We really need to start thinking about the break up of the Euro as it now stands. Italy is also teetering and the crisis is only just getting started.

A spokesman for the IMF (International Monetary Fund) recently said “the Euro area crisis has reached a new and critical stage”… “And financial markets in parts of the region remain under acute stress, raising questions about the viability of the monetary union itself”.

Without the Germans accepting Euro bonds whereby the Eurozone becomes a genuine loss sharing banking union the present system seems doomed to failure. Are the Germans likely to do this? Would the rest of Europe accept the terms of the Germans and polices necessary to keep the Eurozone going in its present state? Full fiscal union is probably politically unobtainable.

The underlying problems relate to excessive debt and uncompetitiveness of the southern states. With countries locked into the Euro there is no mechanism to resolve these problems.

One solution could be that Germany actually leaves the Eurozone – perhaps with other Northern Eurozone countries including Austria and the Netherlands.

This spilt would be along the lines of competitiveness. One interesting question would be whether France would join the group of Southern European counties who are largely less competitive countries than the Northern Countries. France’s recent economic performance would ally into the Southern states but politically the French are more likely to want to continue their close relationship with Germany.

There are many questions to be resolved to bring this crisis to an end but the sooner it does happen the sooner the global economy will benefit from a European currency with a future.

Tim Corfield - July 2012

Thursday, 19 July 2012


The latest Government initiative to get the banks to lend money has recently been announced by the Bank of England and the treasury under the “Funding for Lending Scheme”.

Under this scheme UK banks and building societies will be able to raise funds for about 1% less than they currently can in the market.

The thinking behind this is that this cheap money should be passed on the households and businesses in lower borrowing costs bringing a quicker end to the recession. The scheme will work by incentivising lenders to compete.

George Osborne said it would “inject new confidence into our financial system and support the flow of credit to where it is needed in the real economy – showing that we are not powerless to act in the face of the Eurozone debt storm”.

The banks have always said that the major stumbling block for lending money was that businesses presently do not have the appetite to borrow.

However, any credit easing has to be welcome.

Add to this the relaxation of the banking liquidity rules and the additional £50bn of QE and the measures could add up to a helpful package.

With the worsening Euro crisis lending has fallen and borrowing costs risen - uncertainty associated with the problems in the Euro area have simply exacerbated the problem.

According to a Bank of England report “some firms were unable to obtain credit at any costs” and resorted to raising money “wealthy individuals”. This is clearly a very difficult situation for small business’s to operate within.

The scheme will let UK banks and building societies swap difficult debts for treasury bills at a fee starting at 0.25%. This fee will increase if lending is reduced so therefore the more lending the bank does the bigger its interest margin and the easier it is to outprice competitors – easy!.

Tim Corfield says “any initiatives in this area have to be welcome. However, I suspect that until confidence is resorted many businesses will not have the appetite for investing. Bank credit decisions also would not have changed and given that the balance sheets of many small or medium size companies have deteriorated over the last few years the banks may not see sufficient security for their lending”.

Tim Corfield - July 2012

Friday, 13 July 2012


The new French President, Francios Hollande has recently raised taxes by 7.2bn Euros for this year, and more to come next year as he laid out in his election pledge.

The wealth tax is to be increased with a one off levy this year. Under the wealth tax anyone worth more than 1.3m Euros pays further tax.

Inheritance taxes are also set to rise.

There are also new taxes aimed at banks, dividends, bonuses and big business.

Properties owned by foreigners are also going to be further taxed. Any income above 1m Euros is now set to be taxed at 75%.

A recent poll of the French showed that 75% were in favour of these increases in taxes for the wealthy.

Jean-Philippe Delsol, a French tax lawyer said there is a “considerable increase” in wealthy clients who are prepared to leave France. There was particularly an increase in younger entrepreneurs interested in moving to London.

Delsol calculated that some high net worth taxpayers would pay tax at marginal rates in excess of 90%. He went on to describe the measures as “scandalous” and compared the regime to “pre Thatcher” UK under Harold Wilson.

“The more you tax the rich, the less it brings in”. This is because the rich adapt, they leave, transfer their money into capital, sell their affairs, work less, and move. This is a punitive tax, not productive tax” Delsol said.

It will be interesting to see what effect this has in France. It should at least stimulate the industry of tax avoidance!

Tim Corfield July 2012