Issue 176: 2018 11 01: Lens on the Week

01 November 2018

Lens on the Week

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UK

BUDGET: Some modest giveaways, no further raid on pension contributions, the Budget may not represent an end to austerity but there is definitely loosening.  How has the trick been worked?  The answer to that is better than expected figures from the Office of Budget Responsibility, which has upgraded its growth forecast for next year from 1.3% to 1.6%, and, for the year after that, from 1.3% to 1.4%.  Also improved are the tax projections for 2022/2023 (up by £14 billion) and a lower-than-expected interest burden for that year.  All this must have come as a great relief to Mr Hammond, who was then faced with a choice.  Either he could use the extra money to pay down the national debt, achieving a balanced budget in about 2025, or he could use the windfall to increase spending and make some tax cuts.  In choosing the latter course he takes two risks.  The first is that everything is thrown all over the place by Brexit.  Perhaps an expansive approach is a sign of his confidence that a deal will actually be done.  The second is that what goes up can come down.  This year the Office of Budget Responsibility has upgraded its forecasts.  Next year it might do the opposite.  Sooner or later, that must happen.  Basic housekeeping would indicate that if you always spend the windfall, things will go wrong when you have a deficit.  Didn’t Joseph’s Pharaoh have a dream along these lines?  Still, there are political risks as well as economic ones.  Mr Hammond may feel that some loosening is politically necessary if Labour is to be kept out of office.  There would be little point in the savings made through austerity if they resulted in a high spending Labour Chancellor.

That, of course, does not mean that no taxes will go up at all.  HMRC are to take a further bite at personal service companies from 2020.  Non-residents will pay a 1% surcharge of Stamp Duty Land Tax on the acquisition of residential property.  Those making plastic packaging will be liable for a levy if less than 30% of the material used has been recycled.  And, of course, there is to be a new digital services tax on online companies whose global revenues exceed £500 million.  The tax, due to apply from April 2020, would be 2% of the revenues derived from the UK.  This turnover-based approach breaks with the current UK tax system and OECD norms under which tax is charged where the activities which give rise to profits take place and its design is likely to be challenging.  In the event that the OECD comes up with an internationally accepted methodology before the start date, it may be replaced before it comes into force.  Initially the tax would raise some £400 million a year, not a large figure in the circumstances.

Moving to the expenditure side, the most important announcement is of additional funds for the Universal Credit system which will ensure that it is no less generous than its predecessor.  Chaos surrounding its implementation has led to Universal Credit being compared to the poll tax as a potential source of political damage.  The Government must hope that the new subsidy will draw much of the sting.

Another place where help is badly needed is the High Street, where retailers have been suffering from online competition and have seen their profits disappearing.  Here there is to be a one third cut in business rates for two years from April 2019 where retail property has a rateable value of less than £51,000.  In addition to that, £675 million has been committed to a fund to allow High Streets to adapt.

The £84 billion contribution to the NHS had already been announced by the Prime Minister, and other dollops by the Chancellor were small by comparison.  There was £1 billion over the next two years for defence, something for schools and infrastructure and an extension of housing subsidies.  £1 billion is to be invested in science and innovation.  Among all these handouts the wage earner was not forgotten.  The increase of personal allowances to £12,500 and the 40p threshold to £50,000 will be brought forward to next April.

Politically speaking, this seems to be an attempt to get the Conservative reform agenda moving.  At the moment everything is paralysed by Brexit but they will need a little momentum when that comes to an end if they are to be in shape for the next election.  Mr Hammond seems to be conscious of that.

PARLIAMENTARY PRIVILEGE: Following Lord Hain’s outing of Sir Philip Green, the Speaker of the House of Lords has made a statement to the effect that members should respect the courts and not seek to supplant them.

LEICESTER CITY: The death of popular club owner Vichai Srivaddhanaprabha in a helicopter crash has stunned players and fans at Leicester City, and indeed the Premier league as a whole.  It is expected that there will be a period of silence at all next weekend’s games with players wearing black armbands.

International

ELECTIONS: In Germany, Chancellor Merkel’s CDU party took a beating in the state election in Hesse.  Its share of the vote fell from 38% to 27% – the party’s worst result in the state since 1966.  Its coalition partner the SPD also suffered, losing a third of its share of the votes (down to 20% from 31%), its worst ever result in Hesse.  Nevertheless, the CDU may be able to hold onto power in the state by forming an alliance with the Greens.  The AfD won 13%; it now has seats in each of the 16 state parliaments.

In the wake of these results (and national polls which show that support for the CDU has fallen to 24%), Chancellor Merkel announced that she will step down as party leader this December.  She also announced that she will resign as Chancellor in 2021, when general elections are due; this presupposes, however, that her coalition government will last that long.  It may well collapse before then; her left-leaning partner the SPD and her right-leaning partner the CSU are in conflict over policy, and both are faring even worse than the CDU in state elections and national polls.  The coalition is being squeezed from the right by AfD (16% in national polls) and from the left by the Greens (20% in national polls).  Some members of the SPD think it should resign from government and reform as opposition.

In Brazil, the far-right populist candidate Jair Messias Bolsonaro won the final round of the presidential election, securing 55.1% of the vote against his left-wing opponent Fernando Haddad’s 44.9%.  Mr Bolsonaro, an ex-paratrooper and a long-standing congressman, will be inaugurated on January 1st next year.  During the campaign, he praised the country’s military dictatorship of 1964-1985, said he would allow greater destruction of the Amazon rainforest, proposed tough law-and-order measures such as shoot-to-kill, suggested liberalising the gun-laws, threatened to pull out of the Paris agreement on climate change, promised to move Brazil’s embassy in Israel to Jerusalem, said he would give retired army officers places in his government and denigrated women, gays and other minorities.  All of which might have prompted his opponents to declare “He’s not the Messias, he’s a very naughty boy”.  On the eve of last Sunday’s vote, however, he announced that “We want a free Brazil, without prejudice, white or black, homo or hetero”, and in his victory speech he pledged to defend the constitution, democracy and freedom.  He benefited from a general disillusionment in a corrupt political establishment and a collapse in support for the left-wing Workers’ Party which has governed Brazil for over a decade (its founder and twice-president Lula da Silva is in prison for corruption, and his successor and protégé Dilma Rousseff has been impeached), although almost a third of the electorate abstained or cast blank votes (voting is compulsory).  As president he will face a number of tough challenges; the biggest country (an electorate of 147 million) in South America is in a deep recession and suffering a tsunami of a crime wave, and he himself is still recovering from a serious knife wound which nearly killed him when he was attacked while campaigning.

BAN IT: This week, Shaw Sheet’s Aunt Agatha Award For Banning Stuff (named in honour of Bertie Wooster’s intolerant, self-righteous and bullying relative) goes to French MP Laetitia Avia, who has tabled a bill proposing to make it illegal to mock other people’s accents.  We agree that laughing at the way other people speak is bad-manners and a cheap joke (though that didn’t stop Shakespeare – he gives us a good laugh at English, French, Scottish, Irish and Welsh accents in Henry V – or Moliere or Feydeau), but etiquette is one thing and legislation is quite another; if we mix the two up, we’ll end up in prison for forgetting to say ‘please’ or ‘thank you’.  Besides, my accent when I try to speak French deserves to be laughed at, and I don’t think I’d be motivated to improve it if no one took the micky out of it.

TRAGEDY: In Indonesia, Lion Air flight 610 crashed into the sea 13 minutes after taking off from Jakarta.  All 189 people on board are thought to have died.  The jet was a new aircraft (only three months old) of a new type (the Boeing 737 Max 8, which came into service only last year).  Passengers on the jet’s flight from Bali the previous day reported apparent evidence of alarming technical faults on what they described as a “rollercoaster” flight.

A gunman opened fire on worshippers in a synagogue in Pittsburgh, USA, killing 11 of them, wounding another two and wounding four police officers.  The gunman was shot in the leg and overpowered by police.

In Chongqing, China, a woman armed with a kitchen knife attacked pre-school children in a playground. At least fourteen were injured before she was overpowered and arrested.

In Jordan, flash floods hit a group of children on a school trip at a picnic spot near the Dead Sea.   At least 18 have died and another 22 were injured.

Financial 

INDIGESTIBLE:  Apologies if you are just settling down to a delivered-to-your-door pizza as you read this; but the cost of that might be just about to rocket.  It’s (presumably) part of the law of unintended consequences as the Chancellor’s budget statement gets to grips with the very low tax yield from the digital economy.  The Treasury says that he is going to impose a tax of 2% of turnover on UK businesses that act as “marketplaces”.  That is aimed at companies which act as on-line intermediaries; such as Just Eat, which may have delivered that triple hot pepperoni now cooling on your lap.   The tax only applies to businesses which have a turnover of more than £500m and Just Eat is one of the very few, indeed maybe the only one, big enough to be caught by the new rules.  It is also a major employer of the low waged, so an odd target.  (Mr Hammond is also gunning for Google and Twitter’s advertising revenue and also for Amazon, but they are likely to be caught with a different net.)  So the local pizza maker who has a part-timer delivering locally will not be caught.  The Treasury will be sending out the office junior for late night food if this goes through…

ON THE EATING TRAIL:  That junior might decide to go to Wagamama, a trendy Asian fusion style eaterie which has been around for quite a while now.  But they might find that things are about to change there; Wagamama has just announced that it has agreed terms to be taken over by Frankie and Benny’s, an Italian style chain of family restaurants owned by Restaurant Group, who also own Brunning and Price, and Garfunkels.  Brunning and Price operate a chain of traditional pubs, Garfunkels describe themselves as “traditional British” restaurants.  Restaurant Group has been struggling with their brands for a while – branded restaurants are prone to going out of fashion – so the Wagamama acquisition should be a move into a brand with a reputation for quality, customer loyalty, in a sector (Asian) which is a growth area.  Wagamama is owned by two hedge funds which have loaded the business with debt in the usual hedge fund way to maximise return on capital.  That means that Restaurant Group needs to put £315m of new shareholder capital into their buy, and also £220m of new debt, and are keeping £202m of the existing debt in Wagamama.  Restaurant Group shareholders did not like the sound of that – the share price dropped 14% on the announcement, the commonly held view being that the price agreed is too high and the amount of debt for the 133 outlet business too much.

SMALLER BASKETS: No avoiding food this week:  perhaps we are all slimming down after the summer of comfortable outdoor living.  Retail food sales are down in the September retail industry statistics, recently announced, down 1.5% which is about double the overall fall in retail sales.  That is, it is fair to say, after two exceptionally strong months in July and August which analysts think were due to the exceptional weather.  But a fall in food sales at this time of year is unusual, the graph usually ticks up towards Christmas as summer appetites recover and more entertaining takes place.  The number crunchers are now anxious to see if October reverses the downward trend.  No doubt there are some shareholders out there who will be hoping that the reason for the decline is that we are ordering more home deliveries or dining at Wagamama…

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