Sell, Sell, Sell!
Hands up if you agree politicians make lousy negotiators? Westminster reminds me of a carry on film at the moment but i am sure, at some point we will soon understand our fate? I recently attended a webinar talking about the next couple of years, the gentleman from Deloitte gave a very succinct and insightful view on the wider global issues and challenges we have in the year ahead, not withstanding BREXIT and our current deficit, the view is indeed challenging but not without opportunity, however we have some brutal facts to face first.
No spoiler alert here but the UK economy has been severely depressed by BREXIT and the UK seems to have forgotten about the deficit. Apparently we are all now bored with austerity? All BREXIT has done is delay us from facing the inevitable, austerity is not over yet, by a long shot.
The last 10 years has played havoc with our public finances, you all remember the localism policies and swinging local government cuts that were instigated in 2010, no government does this lightly, the fact that conservatives inherited the largest ever peacetime budget deficit goes someway to explaining the drastic measures needed to slow, then stop, then reverse the problem. Due to the recession repair has been very slow, some tax rises and spending squeezes have helped a little, and last year apparently government spending dropped to the lowest level in nearly 20 years, that trend this year will continue, which is ok for the longer term outlook for us but it remains ever so fragile.
Some stats that came out of the webinar were; the National Centre for Social Research reports that the proportion of voters who favour increased public expenditure and higher taxes has nearly doubled from 31% to 60% since 2010. The PM suggested an end to austerity at the conference last September, I know it’s only words but the sentiment is very worrying, why?
Three issues;
1. Years of austerity have only slowed the deterioration in the UK balance sheet. We are still at least five years away from being able to repay debt or reverse the decline in the public finances. In November the IMF ranked the UK as having the second weakest public sector balance sheet of 32 nations. Only Portugal ranked lower. Russia, India and Turkey, have stronger finances. We all remember the economic collapse of Greece in 2010/12, and the near fall of Portugal, Spain, Italy and Ireland, and yet just a few years later here we are, second from the bottom on some pretty important statistics and in a crucial area of our economy.
2. Demand for public services is set to rise for decades to come and from a starting point of an already very stretched purse. An ageing population means that spending on social care, health and pensions is set to sky rocket, and the costs are biblical. The ratio of public debt-to-GDP currently stands at 85%, or £1.8 trillion, the highest level in over 40 years. Unless entitlements are cut, or taxes raised, the government’s independent budget watchdog, the Office for Budget Responsibility (OBR), estimates that the debt-to-GDP ratio will rise three-fold, to 280%, in 50 year’s time, currently 60% is widely thought of as a prudent level! The higher the percentage the less likely the country is of paying back the debt.
3. The OBR expects Brexit to slow GDP growth over the next five years. This comes on top of a decline in the OBR’s estimate of the UK’s long-term growth rate. A sustained rebound in growth is less likely to come to the rescue this time. Although from what we have all seen in Westminster in the last few weeks i am currently with the dart weilding monkeys at the moment!
Let’s not forget the car industry and fuel taxes, the UK want all vehicles to be electric by 2040. Did you know that tax on fuel is currently 170% in the UK! So rather than a litre of petrol costing around £0.45p it actually costs £1.20p. I am not greedy I would happily pay 20-25% tax or £0.60p a litre? Currently this generates over £30bn in taxes to the Government annually. How will they manage the transition? Do you think it will be handled carefully and responsibly, having seen the last 3 years political performance? How will they tax electricity for cars? Electricity for charging your car will not be cheap, government will have to impose taxes that will have to be levied if they are to fill what will be a huge gap in tax revenue. The Governments recent knee jerk change in policy on diesel will have profound effects on one of our biggest sectors and at a time when the automobile industry will desperately need help, Jaguar Land Rover! Lets not even consider the increase in our energy infrastructure to provide 22kw power to our homes to provide quicker charging.
So how do we end austerity? We know the current plan is to have paid off the deficit by 2025. But to do that and relieve the humongous squeeze on public sector spending, will need strong and fast growth from the private sector. Right now no one is saying that’s possible, not even the official forecasters. So, if strong growth doesn’t happen, the only option any government will have (labour or Cons) of balancing the books and increasing much needed spending will be to raise taxes.
Here is a worst case scenario – we end the BREXIT negotiations and come out with the best deal we were ever going to get, only to run into an internal conservative power struggle to replace Ms May, right before a general election which is won by whoever, who then go on a monumental spending spree for 4 years and cock it right up for us all! Remember we are now globally at the end of another business cycle, Europe’s largest economy, Germany, has just confirmed manufacturing is down a huge 8% and a recession is looking very likely.
Let’s hope a little history is on our side this time, whatever happens I would suggest it’s time we all grabbed our passports, fill a suitcase full of superb UK products and go to any country that will listen and sell, sell, sell!
By the way my brother’s got a boat if anyone needs a lift!
Watch out for my next blog – Giving it all away…
NJA Consulting 