It seemed such a neat idea. The Government needed money, and there were all these British companies making a packet abroad, but not registering the cash in the UK. Fix the loophole, ran the logic, and hey presto! More tax revenues in the Treasury coffers.
Trouble is, businesses aren’t playing ball. No-one (including the Government, it seems) knows exactly what form the new tax rules on foreign earnings will take. But not all businesses are prepared to wait and find out.
Pharmaceutical group Shire has already relocated to Ireland; publisher United Business Media has followed them. Both WPP and AstraZeneca have got the suitcase out of the loft, and could be packing it come the summer.
It’s got Chancellor Eyebrows in a tizz
"Crumbs!" he’s said to himself. "We can’t have all these businesses evacuating the UK. Then we’ll get no tax from them at all!"
So yesterday, Darling dashed off to the City to try to repair the damage. He announced he would be inviting multinationals to join a working group that will look at the "long term challenges" facing the UK tax systems.
"We need to anticipate a growing problem for all governments — how to protect revenues in an increasingly global marketplace...while promoting the competitiveness of our businesses," he said.
As yet we don’t know who will be in this working group, what it will say, or what the final proposals are going to be. So uncertainty remains king — not a great scenario for businesses trying to make plans.
What is clear is that the Government is in reverse gear again. It doesn’t really have a choice, though. This was a bad idea to start with, and it’s also been badly handled.
KPMG has warned there is a danger of a "bandwagon effect" which would see a rush for the exits if the Government gets this wrong.
If that happens, we’re all in trouble. Businesses create new wealth. Maybe the Treasury doesn’t get to see as much of that wealth as it would ideally like to. But if it gets too grabby, and scares business away, then that wealth is lost to the economy as a whole.
If Britain does have a recession, how deep it will be and how long it will last is dependent on how robust our private sector is. Because we’ll need the private sector to drag us out of it.
A wrong move on the tax regime could have dire implications for more than just the Treasury.
Metro newspaper in house price scare story shocker
Another alarmist housing story on the front of this morning’s Metro. "House prices ‘may fall 30%" it blares.
The quote was from Professor David Blanchflower, a member of the Bank of England’s Monetary Policy Committee. But, as is often the case with these things, the devil is in the detail.
The story itself quotes Prof. Blanchflower as saying "I am not suggesting that such a drop will necessarily occur, but it may."
So let’s take this opportunity to restate the Fleet Street Daily position on house prices. To put it bluntly, they’re too high. As the Metro story reports, the average house costs seven times the average salary. Many lenders are now simply unwilling to lend on that kind of multiple — especially with the economy looking wobbly.
House prices rose too far too fast, and now we’re seeing a correction. Any attempts to prop up the housing market will only delay the inevitable.
Incisive analysis from Brown and King
Both Gordon Brown and Bank of England Governor Mervyn King have been having a pop at the banking sector. King attacked the City’s bonus culture yesterday, while this morning Brown said the banks have taken too much risk.
So... the banking sector had a hand in creating the credit crunch. Give me strength.
One man enjoying the spectacle of Brown’s response to the credit crunch is Tom Bulford, our resident small-caps expert.
"Have you noticed," he says, "that we don’t have ‘the threat of a recession’ or even ‘a serious financial crisis’? What we have, according to Brown, Darling and the whole chorus of government ministers is ‘a-financial-crisis-emanating-in-America.’"
Tom reckons it’s that old stand-by, ‘blame the foreigners’.
"Never mind that both the USA and the UK have been attending the same debt-fuelled binge for the last decade. Just because the USA may have got its hang-over a few weeks earlier, doesn’t mean we’ve been partying any less hard!"
BG beats profit forecasts — and hits the acquisition trail
BG Group yesterday announced profits of £767 million for the first quarter, compared with £448 million the year previously. Profits beat forecasts by £92 million.
Now BG has launched a $12.9 billion bid for Australian utilities firm Origin.
"There are no guarantees this is a done deal," says our research director Theo Casey. "The offer represents a 40% premium on Origin’s current share price, but they’ve already rebuffed more generous offers. But it’s a sensible move by BG, using retained earnings to bid for a gas supplier. If they’re successful, this will make them a more balanced energy group."
Manraaj says: "It’s NOT time for bed!"
"Boing!"
This was Manraaj’s rather cryptic contribution when I called on him at this morning’s meeting. For a moment I thought he’d turned into Zebedee from the Magic Roundabout. But then he carried on:
"I said Asia was due a bounce. Well, it started last week, and it’s carried right on through! Check it out!"
He proudly showed us the chart of China’s Shanghai A-Share Index.
"Up 12.7% in a week!" said Manraaj. "And it’s not just China: India’s Sensex is up... the tide has turned in Asia my friends! Pow!"
Then he stopped to catch his breath. Then he carried on:
"Just look at how fast Asian economies are growing. The falls we saw were way overblown — because of sentiment."
Manraaj is adamant that sentiment has turned, and this week’s events seem to prove it. Now, he says, it’s time to get back into the market...
Until tomorrow,
Ben Traynor
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