British Politics’s Blog

The ravings of an individual, UK voter frustrated with our politicians

Posts Tagged ‘political comments

Stop banks from carrying forward losses to offset future profits

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Most analysts forecast that most, if not all of our high street banks will shortly announce record breaking losses, as many re-value their assets and take the write-off’s on the chin. In fact, informed pundits are suggesting that this will continue for another 2-3 years. Well, there is little or nothing we can do about that.

However, any bank that has been in receipt of state aid, support or taxpayer sponsored insurance schemes must not be allowed to benefit from a double whammy. That is to say that, whilst the taxpayers of this country take on much of the risks associated with their recklessness, the banks carry forward these massive losses, to allow them to offset past losses against future profits. That would most certainly rub salt into the wound. Under current taxation rules, business can carry forward past losses, to set against future profits. This concession made sense for most businesses that have a difficult year or two, or those that are in a start-up phase. It should not be used to reward banks and their shareholders, when they have had to rely on a state bailout or support programme to allow them to survive intact.

Government ministers and opposition parties must provide the assurances, here and now, that the banks will not be permitted to carry forward past losses, to offset against future profits where these banks have been in receipt of any state aid. A failure to do this will allow banks and more specifically their shareholders to receive handsome ‘tax free’ rewards at the very time that the taxpayers will being having to accept higher taxes as a direct conseqeunce of the banking crisis and the largesse, or indifference of our government and ministers. This would be completely unacceptable. If the banks were not so integral to our economic well being, they would not have been treated as a ‘special’ case and received such massive state aid. But they are and they have been. MP’s must now undertake to identify the banks as a special case in the future, given the racing certainty that they would, under existing rules, be rewarded with future tax breaks/concessions.

Once we come out of the other end of this recession, taxes will rise and if the past is anything to go by, the public will be expected to pay the lions share through direct and indirect taxation. This country will need banks and industry to pay their fair share. We cannot afford any bank or any business to use 2 or 3 years of losses to offset against the following 2 or 3 years profits. Everyone needs to make a contribution. If business, such as the car industry are in receipt of state aid, then they must also be prevented from offset past losses against future profits, similarly, if these businesses are not registered in the UK for tax purposes, then they must undertake to do so before any taxpayers funds are advanced and for a period beyond, to make sure that taxpayers benefit in the future. Now is the time to be negotiating tough terms and looking ahead in terms of these banks and businesses making a real and tangible contribution in the future. A failure to do so will result in a massive public backlash in the future.

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UK Economy, can the future be so bright?

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It doesn’t really matter who you listen to, everyone seems to believe that we will come out of the recession leaner and stronger, with most arguments centering on how deep and how long the recession will be. There are also varying estimates as to the level of debt UK Plc will have and also how long it will take to reduce this debt mountain via increased tax revenues. Maybe I am cynical, naive or just plain stupid, but I can’t for the life of me see what we are going to be left with when the recession does actually end.

We know that after the last recession, our manufacturing industry was virtually decimated, not only did many people lose their jobs, but an industry dating back to the Victorian times disappeared virtually over night. Therefore, even if the pound is weak, surely we cannot rely on manufacturing to provide jobs and tax revenues.

So what of the financial services and banking industries? As we all know, this particular recession has been brought about, for the most part, by poor lending decisions of the banks. In addition, much of the profit derived from The City was via ‘manufactured’ trades of bundled mortgages, securities and so on. The financial services and banking sector have now had their fingers burned. In addition, one of the main attractions of the UK was light regulation, and there is every indication that the UK authorities will now start to tighten the rules. Taking all these things together, it is most unlikely that the UK banking and financial services sector will ever look the same again, nor will it offer the same levels of GDP contribution, jobs or tax revenues. Added to which, with many financial institutions and banks harbouring massive losses, it is quite likely that they will not have to pay any corporation tax for a good few years to come.

As our manufacturing base declined, our GDP was propped by the banking and financial services sector, given the above, do we really have any hope of a strong recovery from any of these sectors? I think not. On top of everything else, before the recession, the government were steadily increasing corporation tax as well as red tape. As a direct consequence, the UK was no longer the land of milk and honey from a tax perspective. So in recent years we have seen more and more companies registering their businesses abroad for tax purposes. Southern Ireland is a case in point, where their tax regime is considerable more attractive than our own. This will lead to a further loss of jobs and more importantly in the current debt climate, a loss of tax revenues.

Then their is our carbon emissions targets. Our government has committed to a reduction of 80%, this is not empty rhetoric, they intend to make it legally binding. Similarly, a reduction in carbon emissions is not incentive driven, instead is uses a stick rather than carrot approach, meaning higher ‘green taxes’. These taxes will hit not just business, but individuals as well and of course the price will have to be paid both at the tills and in the way of fewer jobs. What this means is that is that any UK business will be subject to higher direct taxes and higher indirect taxes via ‘green’ initiatives. Now, because the UK is one of the few countries taking carbon reductions seriously, it means that companies operating in the UK will be subjected to a competitive disadvantage when compared to other countries.

Then look at what has been driving sales over the past 10 years, the so called “credit bubble”. The economy has grown as a direct result of easier credit, low interest rates and rising house prices. The latter has made people feel more wealthy, leading to a release of equity through remortgages or secured loans, the ‘easy’ money has than been spent in th High Street, on consumables, cars and nice holidays. In a harsher climate, with less money available to consumers, a stagnant housing market, higher taxes and fewer people in work, it is difficult to see how or when we can expect a return to ‘business as usual’.

So, whilst I know the politicians hate to paint a picture that is considered too negative or gloomy, I would like to witness them share their thoughts on just how everything is going to be fixed and over what timescale. Becuase, in all honesty, unless I am missing something, the future does not look too bright.

Do not bank on the banks

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My attention was turned to an interesting post over at Power to the People which followed on from my own post in respect of a bankers claim that “banks are not charities“. The post that I am referring to relates to corporation tax that banks would normally pay and comes at the whole issue from a perspective I had not considered, but is, nonetheless, very relevant in the current economic climate.

As everyone knows, the high street banks are posting massive losses as they move to write-off questionable assets and large consumer debts. However, under the current HMRC rules, they are entitled to carry over losses to offset against profits in future years. This means, that in spite of the significant risks being borne by the UK taxpayer as a direct consequence of the banking bailout, when things improve, there will be no win for us. In other words, the big banks, will not have to pay any form of corporation tax for some considerable time to come, perhaps, in some cases, for the next 5 years.

This, whilst perfectly legal, is an outrageous state of affairs and in my view, must be treated as an exception to the rule. Gordon Brown must bring in urgent new legislation to prevent the banks carrying forward these massive losses to set off against future profits. The principle of carrying forward losses is a good one, however, in this particular instance, it would leave the taxpayer with a very sour taste indeed. Failing which, the government must advise the banks that they could be subject to a windfall tax equivalent to any loss to the Exchequer in terms of tax revenues. The full article can be read here: Will taxpayers lose out to the banks again?

The folly of a reduction in VAT

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Suggestions by so called experts and hints by Gordon Brown that the proposed tax reductions will take the form of a VAT reduction will be a complete waste of time. Whilst I accept that Gordon Brown may want to adopt his usual smoke and mirrors approach to how much a tax cut is worth, no-one will believe him, with some justification. A cut in VAT is a reduction in a consumption tax, this will not make people feel as if they have more money in their pocket, instead, they will just feel that their money goes a little further on some vatable items, which excludes groceries, utility bills etc.

By way of an example, a £50 item with VAT charged at 12.5% instead of the current 17.5% would see a reduction of just £2.50, assuming that retailers and traders do not use the opportunity to shore up their own margins. Would this be enough to get people into the high streets spending their money, I think not? Retailers are giving far more away in so called special offers. But from Gordon Brown’s perspective, he can hail it as a massive giveaway, given he is prone to use an over simplistic, almost child-like set of sums, that allows him to maximise the value of a tax breaks, even in the full knowledge that the impact on government finances would be a fraction of the number made public. We have seen this time and again in his budget speeches, anyone remember the 10p tax debacle?

If any package is going to work, then the public need to know that they have more money in their pocket, it would be a hard sell in the current climate to convince people that their money will simply go further. In addition, this is one of those occasions when Gordon Brown must not try and bulls**t the public, nor should be tinker with taxes, it needs to be a bold and dramatic cut in direct taxation, something in the order of a 5% reduction in direct taxes. Anything less is doomed to failure and as anyone with half an ounce of commonsense knows, a delay in a period of such a significant loss of confidence and economic downturn will lead to a prolonged recession or require a much larger cut in the future.

Much is being said about how to pay for the tax cuts. Well there are any number of government projects and initiatives that could be curtailed or cancelled which need not affect education or health services, a good start would be to look at the vast sums being spent on information technology projects, with highly questionable returns. That notwithstanding, the government has no choice, they must give the economy a boost, irrespective of what it does to the short-term finances of this country, one thing is for sure, other developed countries will, in spite of Gordon Brown’s suggestions, not because of them.

However, the government must not stop at personal taxation, they also need to look carefully at small business. This sector has been severely affected by the downturn, in terms of less business, slower payers and bad debt provisions. Given the SME sector employs some 12.5m people, it is self-evident that many will be struggling given the tax on employment (NI) and tax on business (business rates) that the government use to punish enterprise. They will need a package of measures which includes, but should not be limited to, a reduction in business rates and the reversal of employers NI contributions for those that employ 10 people or less. Given many will struggle to make a profit, there is little point, at this stage, in reducing corporation tax, although is has to be said that Brown’s recent increases in corporation tax for small business, does not encourage entrepreneurship, so much for being business friendly.

David Cameron is due to provide his suggestions for tax cuts today, but given he is not in government, I doubt that will make much difference to our everyday lives.

UK banks are not charities

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A senior figure at one of the major UK banks was quoted on Channel 4 News as saying that “banks are not charities“, needless to say this coward was not willing to have his name revealed. But what hypocrites these banks are, they claim that they are not charities, yet they clearly think that the UK tax payers are, after all, only a few weeks ago, they had to come begging for our help.

It is well known that high street banks are the most loathed businesses on the high street and their leaders and managers are, for the most part, considered with the same disdain as politicians. But, what arrogance they demonstrate, these people (high street bankers) made the decisions that ended up with their banks having to come begging for help, they made it easy for people to borrow, they were the architects of their own demise. Now they seek to lecture the government and issue a veiled threat to the very people that have risked their money to protect the interests, jobs and shareholders of the high street banks. They are pathetic, blood sucking creeps, that do not deserve their vast salaries and positions. How dare they lecture us, fair weather friends indeed. I hope this idiot has the courage to ‘own’ his statement, rather than hide in that cowardly way, only politicians and bankers know so well.

I stated in my post yesterday that the public should, when practicable, vote with their feet and punish these bankers by withdrawing funds and cancelling our current accounts and credit cards with all of the banks that so clearly look upon us as the necessary evil, rather than respect.

I also appreciate that many people will not, at this time, be in a position to punish the banks by withdrawing their business. But I do believe, when we are, that we must deliver a hard-hitting message to the banks that have turned their backs on the very people that came to their aid. The banks cannot survive without customers, fact. Every 10 years or so, they go through a phase of telling us they don’t want current account business and shortly afterwards, they realise that they do and go on a recruitment drive. We should all let them know what we think of them for turning their backs on us. Full article

In the meantime, the government should consider their position carefully, the public will not appreciate our money being risked by banks that have little or no regard for the well being of their saviours and their customers.

UK banks continue a path of self-interest

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I was pleasantly surprised when the Bank of England announced that there was to be a further reduction of 1.5% in interest rates, dropping to 3%. After all, most of the economists arguedthat the banking bailout would not work, unless or until there was a “substantial” reduction in interest rates. So, eventually, the Bank of England reacted positively, even if they could have gone further.

So what have the main UK banks done? The answer, little or nothing. With the odd exception, the Cheltenham & Gloucester and the Bank of Ireland for example, none has announced a reduction in the rates they charge their customers, claiming only that the matter was under review. Now I know that the LIBOR rate is supposed to be an influencing factor,  but if the banks were to pass on the 1.5%, surely they would be neutral.

The whole point of the Bank of England reducing the interest rates, was to provide the economy with a well needed shot in the arm, but if the high street lenders do not reduce their rates accordingly, it will be a largely meaningless initiative. I have read a few blogs and a number are calling for some form of positive action by banking and mortgage customers, but for the most part, it seems to be creating nothing of a stir. My own view is that that banks have received massive support from the UK tax payers and many of these people are also their customers.

Therefore, I believe the banks have a moral obligation to offer their support by passing on the rate reductions in full, at the earliest opportunity. Prevarication should not be an option. Banks were careless in their past lending practices and therefore they have to shoulder some of the responsibility for the situation many borrowers find themselves in. Not all, but some. high street lenders and mortgage companies could help themselves (in the long run) and their customers in the short-term by recognising the fact that the economy and many of their customers need and probably deserve an economic stimulus as would be provided by a rate cut.

One website has suggested a boycott of banks that do not pass on the rate cut, especially those that have received tax payer funded state aid. I agree. I also appreciate that many people will not, at this time, be in a position to punish the banks by withdrawing their business. But I do believe, when we are, that we must deliver a hard-hitting message to the banks that have turned their backs on the very people that came to their aid. The banks cannot survive without customers, fact. Every 10 years or so, they go through a phase of telling us they don’t want current account business and shortly afterwards, they realise that they do and go on a recruitment drive. We should all let them know what we think of them for turning their backs on us.

I earnestly hope that fellow bloggers out there will post more on this issue and try, together, to pressurise the high street banks into action and encourage a backlash if they don’t act positively. I am also disappointed, that the government did not include some form of pre-condition, that state aided banks should pass on any interest rate cuts. It is not as if the UK government were not aware that 1. interest rate cuts were inevitable, 2. banks would try and profit from cuts and 3. there would be a public backlash against the government if state aided banks were to shaft their customers.

Government needs to reduce taxes not spend

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Gordon Brown & Co have indicated that they will borrow in order that they can spend their way out of this recession, but in all honesty, I think this is a bit simplistic. Firstly, I do not believe that you can spend your way out of a recession. But secondly and as importantly, any spend would be on infrastructure projects and this would, surely, limit any benefit to the construction sector.

In my opinion, recession is about people having less to spend and a lack of confidence in the economy. I am sure there are other factors, but these are the two that tend to come up time and again. Spending on infrastructure projects is likely to cost £100’s billions and will have to paid over the next 25 to 30 years. This option has limited appeal to the masses. On the other hand a bold government, or an effective opposition party, could propose something more significant.

One of the reasons people feel so poor, is that the money they have left over after they have paid their taxes and national insurance contributions buys much less. Added to that, millions more people today, than say, 20 years ago, are directly affected by the mortgage market and therefore, interest rates. My plan is a relatively simple one, because you do not have to have complex solutions to simple problems.

Government should reduce direct taxation by 5p in the £. This would cost no more than £8bn per year and would therefore be much cheaper than investing in infrastructure projects. This would immediately help people feel richer, more flush and they are therefore, more likely to spend their money. I do not think this should be done via increased allowances, or tax rebates, because these are seen as, respectively, something that can easily be eroded or a temporary bonus. Socialist should forget the fact that everyone would benefit from the 5p tax cut, who cares, if it means that those that need it most are included.

In addition, I would go for a substantial cut in interest rates, perhaps 2.5%. Inflationary pressures are on the eane and the benefit to households of a 2.5% cuts would be immediate, tangible and above all welcome in these difficult times. Banks should be instructed to adopt the 2.5% rate cut. Combined, these two move would provide the public with a massive confidence boost, they would feel more able to spend and the feel good factor would return. My solution does not rely on bringing forward PFI projects that are expensive in their makeup. Instead, it aims to put more money into peoples pockets, at a relatively low cost to the government, taxes could for example, rise in 5 years or so when the economy improves. Over 5 years, this measure would cost less that £40bn. And, lets face it, this is our money in the first place.

A substantial reduction in interest rates will aid a quicker recovery of the property market. To avoid another property boom, interest rates could be managed, but the initial boost in confidence would be incalculable. In addition, is the market starts to recover and property prices more affordable, then first time buyers will start bargain hunting, because they will feel that the decline has been halted. This would allow an exponential increase in property prices at a sustainable rate.

Simultaneously, the government needs to look its legacy of wasteful initiatives over the past 11 years. It is estimates that this alone has cost the taxpayers some £110billion. If they addressed this, then there would be no need to recoup the 5% tax cut at a later date: https://britishpolitics.wordpress.com/2008/09/09/gordon-brown-legacy-economic-competence/

I am happy for people to pick holes in my argument, but unlike this government which just want to spend more on projects no-one wants, or the opposition party that recognises there are real problems, but offers no tangible solutions, mine is simple and effective. If anyone has any better ideas, please feel free to post here! I made clear in a previous article that this country needs wholesale tax reform: https://britishpolitics.wordpress.com/2008/09/15/tax-benefit-reforms-uk/

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