Cut Tax and Tax Collectors - Good Strategy?

Okay, I wasn't at all sure about the strategy to spend your way out of a recession and all the juicy tax giveaways were somewhat perplexing as we hit austere times, but that's what the Keynes Theory said so that's what we'll do.

In fact the Government were so committed to this that they said they would not cut spending on major enterprises and in fact bring them forward. And to try and help businesses not cut jobs, it would encourage banks to led more freely.

So what's this about 3,400 jobs going at HMRC? As tax gets more complex and the Government faces a hole in collections in the near future, plus its commitment to keep jobs, why is a major Government Department shedding staff?

Public Sector Jobs - The Reality

Well over a year ago, 1 in 4 jobs were in the Public Sector as New Labour's focus on bureaucracy created a job bonanza. For the sole purpose of pandering to the philandering John Prescott, the previously non-existent Department of The Deputy Prime Minister sprang up to insert itself as an extra layer of fat in an already top-heavy planning regime. As the economy grew, Public Service Departments and layers of Government swelled with the New Welsh and Scottish Assemblies buying themselves brand new buildings ignoring the plentiful empty office space in their countries in order to provide much needed shelter for all those important and expenses-rich politicians. The good times rolled in.

But as the downturn and Credit Crunch bites, unemployment in the Private Sector has risen sharply and so that proportion of jobs in the Public Sector grew and it was once again obvious to the man in the street something had to give. For all the Big Talk about rescuing the economy, the reality is that Gordon Brown is not King Canute. Jobs will have to go and that's an economic fact.

Recession Hurts

There is no hiding from the effects of recession. As much as you can lower interest rates to stimulate a housing market that has some 15-20% of fall left in it, the corresponding effect is that Britain becomes less attractive for foreign investors and our currency takes a pounding (excuse the pun) as George Osbourne was reprimanded for pointing out. Over £200bn has drained out of the UK financial markets in less than a few months and that again creates another hole in invisible earnings as Britain fights to recover.

Desperate Schemes Lacking Execution Skills

Yesterday we saw an interesting move to help those facing mortgage difficulties. It is a fair assumption to make that someone losing their job does not mean they don't intend to pay so are not really a bad credit risk. However, the details are the devil as if the person cannot restart repayments after 2 years then their house is repossessed and if it cannot repay the outstanding mortgage at auction then the Government will underwrite the difference to the mortgage provider, i.e. the taxpayer.

Umm, so who pays the 2 years of deferred interest? Oh the mortgage company does - well that will serve them right for being so greedy in the past. You know the ones who actually tripped over themselves to give away money and stoked up the economy to its current heights without which the Government would not have had a 'stable economy' in the last 10 years. No wonder the Banks don't want to lend if they stand to lose out. Bail out the fat cats but leave the mortgage providers in the lurch.

The Lord Giveth and The Lord Taketh

As we absorb all this bonhomie of tax cuts and decrease in inflation, ignoring the job losses, it almost slipped our attention that Councils have been granted the right to add up to 2% on business rates in their areas in order to boost economic developments. So while there is some relief on tax it will be grabbed back again in another charge. Nice one - it should fund a few 'fact finding' mission to exotic places to see how its done on the beaches in Thailand.

Crazy, Crazy

I can't help feeling there is a forlorn belief by Mr. Brown that a 2.5% cut in VAT, a couple of snippets on tax and lower interest rates are going to blow away an economic downturn that has been pending for some years and get the housing market all stoked up a again. Repossessions are rising fast and the new figure is 75,000 this year and while interest is at its lowest since 1951, we are now back at the giddy heights of 1991 for repossessions. When the Conservatives were in power - so the clock has been reset after the boom time and we can no longer have the age-old argument about the last Government because we are now officially in a worse position. I wish.

You do not need to be a genius to work this out. If a mortgage company offers a mortgage based on 90% of the house value today and the market drops 20% in the next year, the householder will be in negative equity and the asset at risk. If there is a risk that householder will lose their job then the mortgage company would be barmy to lend money. In Germany deposits have to be around 40% of the value - at this rate in the UK a minimum of 80% deposit would be required here for break even after one year. It doesn't make sense.

At current values and forecast - the housing market will not save this economy and pouring more fuel into a broken engine will not make it move. As caring as it may have sounded, the Government is fast building up the liabilities of the taxpayer from bail out of banks to underwriting the housing market. With falling tax revenues to come, we face an almighty reckoning at some point. Why not retrench today, cut spending and focus on surviving not pretending a recession is not here and spending like obsessed gamblers?