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 moments 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 its 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; nother 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.

by: fishercapital

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