Ali D In Da Red, Darling’s £16bn Black Hole
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Usually it’s those nasty, unforeseen expenses that blow a hole in a budget. That burst pipe at the start of the month. The unexpectedly high car insurance quote. Anything that involves staging the 2012 Olympics.
But Alistair Darling’s woes are on the other side of the account. He’s based his plans on how much money he thinks he’ll have coming in. Trouble is, he might end up with much less to play with than he thinks.
The National Institute of Economic and Social Research has calculated that the Government will need to borrow £16 billion more than they’ve planned to over the next two years. This is equivalent to what would be raised by adding 4p to the basic rate of income tax.
The institute is blaming (surprise surprise) the credit crunch. As consumers rein in their spending, they pay less in VAT. The squeeze on the mortgage market means fewer houses are bought and sold, meaning a reduction in stamp duty receipts.
One of the biggest problem areas is the City. In recent years, financial high-flyers have enjoyed multi-million pound bonuses. The Treasury taxed these bonuses. They also got the VAT from all the high-profile consumption these bonuses fuelled. And, of course, they enjoyed a flow of revenue from the banks’ profits, and from the duties imposed on their dealings.
But across the Thames from our office, things are slowing down. I recently visited the workplace of one City friend, where he gave me the Grand Tour. One floor in particular was eerily quiet.
“This is Debt,” explained my friend. “They’ve not got much to do at the moment!”
Activity levels are down across the Square Mile. And they could stay that way for a while. Except for the lucky few, the days of the megabonus are over.
All of which means less tax for the Government. And more borrowing. Inevitably the powers that be will blame the credit crunch, and will repeat those words like a mantra. But let’s not forget how we got into this mess.
What we’re seeing now is a straight-forward debt-hangover, but on a macroeconomic level. Blaming the credit crunch is a bit like maxing out your card and then, when you can’t afford to go on holiday, saying it’s the card company’s fault for not lending you any more money.
I’m not saying the Government should have forcibly prevented people borrowing beyond their means. Those consumers now belt-tightening are big boys and girls — they don’t need the state to hold their hand.
But where the Government is culpable is in allowing a credit bubble to get out of hand, because it suited their political ends. It was happy to crow about its economic credentials, especially when an election loomed.
But now the bubble’s burst. It could well have left Darling’s latest Budget in tatters. As a result, Labour is expected to sustain heavy losses in today’s local elections. They’ve only themselves to blame.
Bank of England hints worst is over for credit crunch
John Gieve, number two to Big Merv at the Bank of England, has dropped a hint that the worst of the credit crunch could be behind us.
He reckons the credit markets “overstate the losses that will ultimately be felt by the financial system and the economy as a whole”.
Gieve’s view is predicated on the idea that current market prices imply an “unprecedented” level of default in mortgage backed assets. Basically, 76% of risky mortgages sold in 2007 would have to default for today’s market prices to be accurate. That’s unlikely.
But is Gieve right? Is it time to just dive back into the market?
“Don’t bet on it!” says our research director Theo Casey. “Prices in this market are based on irrational fear, not reasoned historical data analysis. Gieve has a fair point. But with sentiment the way it is now, you could well lose money by being right.”
Theo also points out that the Bank is not totally unbiased in all this. “With their new Special Liquidity Scheme, they’ve just swapped around £50 billion of safe government bonds for mortgage-backed assets,” he says. “So they’ve a vested interest in talking these up”.
Fed cuts rates, but markets don’t like it
The US Federal Reserve cut interest rates last night, from 2.25% to 2%. However, the Fed gave a strong indication that this is the end (for now) of its aggressive rate-cutting policy.
This probably explains why the market responded negatively — the S&P 500 closed down 0.38%.
The dollar rose on the news. It reached its highest level for five weeks against the euro as investors opened new long positions.
Meanwhile US growth figures for the first quarter of the year were ahead of expectations. US GDP grew at 0.6% over the year.
“Not a huge figure — but it’s still growth,” says Garry White. But Manraaj Singh isn’t convinced.
“They always revise these things downwards after about three months,” he warns.
And this wasn’t the only time this morning when Manraaj and Garry’s views diverged…
The US — Iran showdown: good news for oil investors
Iran has stopped accepting dollars for its oil. It will now sell oil for a whole range of currencies — but not the US dollar.
“That’s hardly news,” says Garry White. “They’ve been talking about an Iranian Oil Bourse for years. The reason they’ve announced this again now is simple — propaganda.”
Manraaj agrees. Both he and Garry reckon there’ll be a lot more sabre-rattling from both sides over this. As Garry explains in his piece today, the very future of the dollar is at stake. America’s role as a global superpower hangs in the balance.
But Garry and Manraaj disagree on how best to play this. Garry’s a commodities man, so he’s going straight for the jugular.
Manraaj, on the other hand, is taking a backdoor route. His is a “special situations” approach, and right now he’s looking at an investment that will allow British investors to gatecrash the Arabs’ oil party!
Until tomorrow
Ben Traynor
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