Tuesday 29 November 2011
Autumn Statement failure
The markets are about to show the UK what reality looks like.
Today's statement is along the right lines, some minor cuts, some attempt to increase demand, but nothing too tricky as there is still no money left. However, this won't really do for the long-term. We are in a crisis; this should be an emergency budget with radical solutions, not tinkering. Not many chances left now before the IMF come and do it for us.
However, it is the lack of demand that is the big issue. There is no demand in the UK economy because nobody, no even rich people, feel they have any to spend. Corporates don't want to take the risk either. The fantasy of credit easing is just that, businesses that can make it can borrow, those whining are poor risks.
There is only one way to address the lack of demand and that is to give people back some money. So that means NO cuts to social welfare, much as this is needed in the medium term. Welfare money gets spent. It also means there is a need for big tax cuts of people and businesses to give them more money to spend. These tax cuts have to be paid for by some Government cutbacks that have the least effect on demand - so subsidies can go, foreign aid can go, the defence budget can take another hit and most importantly, the NHS can take a hit - notably pay for GP's which averages close to £140,000 a year, up from £70,000 in 2004. Thank you Mr Blair - I recall him saying ' it is right we make our doctors and nurses the highest paid in Europe.'
Of the taxes to cut, VAT is an easy one, but not very well targeted, capital allowances for business and R&D credits are better because you can only get them if you spend money. For personal taxes, reducing NI is surely a way to go when you cut NHS spending.
However, as stated at the beginning, none of this is going to happen. Airy fairy promises about infrastructure spend are going to be made and sadly, the markets are going sooner or later to wake up to the fact that the UK is in a worse financial hole than Italy or Spain. Our Gilts will collapse in value (massive shorting opportunity here, the price of Gilts is not going any higher) and yields close on 5% at least, maybe worse. The only way to avoid this will be the Bank of England buying up the market with more QE - but at what point does the world notice that we have bought all our own debt with printed money - where does the value of the pound go then. Way below parity with the dollar, and probably parity with a real hard currency like the Aussie dollar.