But there was a big problem. At first, the government thought it had solved it. In fact, all it did was bury the problem under a big pile of taxpayers’ money. Now the public finances are screwed up. The government can no longer afford to keep this problem under control. It’s about to hit the economy with a vengeance.
Allow me to explain. One of the government’s proudest ‘achievements’ over the last few years is the number of new jobs that have been created. But look a little closer, and you’ll see many of those new jobs were public sector jobs. Employment growth was not solely the result of sound economic stewardship. The government was directly creating employment. And it used our money to do it.
You’ve probably read about this before. What you may not know, however, is that the government’s ploy has already begun to unravel. The denationalisation of the British workforce is underway.
Let’s take a look at some figures. In the first quarter of the year, public sector employment fell by 20,000. Now, that’s not huge drop in percentage terms. Only 0.3% in fact.
But it continues a trend that has been quietly happening for some time. Indeed, public sector employment peaked in the third quarter of 2005, at 5,858,000 (20.3% of the total workforce). It now stands at 5,758,000 (19.5% of the workforce).
The falls are not dramatic — yet. But a look at where the jobs are being lost is revealing. By far the biggest fall by headcount in 2008Q1 was in public administration — 15,000 jobs.
We shouldn’t be surprised. Buying up the unemployed with public money is an unsustainable strategy. Worse, it deprives private employers — the ones that create wealth — of every worker the government sucks up.
When times were good, the government used tax revenues to create office jobs that would give the illusion of economic growth. Now times are leaner, it’s quietly cutting back. Hence the drop in the number of public admin workers.
I expect this phenomenon to continue. Tax revenues are taking a hit right across the board. Here are a few examples:
- Fuel duty. VAT revenue per litre may be rising as petrol prices go up. But excise duty — applied as a fixed sum per litre — has remained static. Even worse for the Exchequer, people are driving less and using more fuel-efficient cars.
- Stamp duty. As house prices fall and fewer homes change hands, this staple revenue source takes a nosedive.
- VAT. Inflation should mean VAT receipts go up as prices rise. However, consumers have simply cut back spending. An example is alcohol. Beer sales are at their lowest levels since the 1930s.
- Corporation tax. As consumers cut back, corporate profits are squeezed. Bad news for the government’s coffers.
- Taxes on income. Income tax, capital gains tax, the story is the same. And, don’t forget, the government budgeted for the extra tax revenue it would get from scrapping the 10p rate. But then it did a U-turn...
It can continue to quietly push people off the public payroll. But many won’t find jobs so easily in today’s labour market. Not with the current economic outlook.
So we’re likely to see a rise in unemployment. That will be taken as a signal we really are in trouble. Confidence — both business and consumer — will take another battering.
That’s option number one. Number two is that the government maintains the existing level of public sector employment. Of course, it won’t be able to afford the wages. So it’ll have to borrow (yes, even more).
Extra borrowing will further weaken investor confidence — in our markets, our economy and our currency.
These are scary times for investors. But, as ever, we at Fleet Street are on hand to try and shine some torchlight through the gloom. There are paths you can tread. It’s just a bit trickier than usual.
Ask Fleet Street
Last Thursday I asked you to email us your investment questions.
Earlier this week I herded our editors into a room and made them pick out and answer their favourites. The first two are below.
If you have an investment question, send it in. Maybe you’re wondering if there are any stocks that can benefit in a downturn? Perhaps you have queries about value investing — is it everything it’s cracked up to be? Or maybe you want to know which sectors look hot at the present time. And which investments you should avoid.
Whatever your investment question, send it along to askfleetstreet@fspinvest.co.uk
Here are today’s questions and answers:
Q: Can you tell me the difference between Royal Dutch Shell 'A' & 'B' shares please, and which do you recommend? — RF
A: A pertinent question on the day the oil giant released its results.
Colleague Garry White, who edits Smart Commodities, used to cover the Dutch market in a previous job. So I’ll hand this over to him:
"A UK resident investor should never, ever buy the ‘A’ shares. If you do, you may be liable to pay Dutch tax.
"The company used to be listed separately as Shell Transport & Trading in London and Royal Dutch in Amsterdam. Shell T&T incorporated all the company’s downstream businesses, such as refining and transport. Royal Dutch was the upstream exploration and production arm.
"After the company was forced to downgrade its reserves in 2004, shareholders demanded a new structure.
"The company previously had a Dutch board and a UK board, which were often at loggerheads. The company was merged into one entity, but because 60% of the business used to be listed in Holland, Dutch tax rules apply to some assets. "To account for this, the "simplified" structure involved the creation of ‘A’ shares and ‘B’ shares. Both were primarily listed in London.
"Dividends paid on Class ‘A’ ordinary shares have a Dutch source for tax purposes and are subject to Dutch withholding tax of 15%. There is no withholding tax issue with Class ‘B’ ordinary shares for UK residents.
"So, if you have decided to buy shares in Royal Dutch Shell, and you buy the ’A’ shares, then the Dutch government may pursue you for tax on your dividends at some future date. Buy the ‘B’ shares and there’s no chance of that happening."
Q: Having read everything and anything I can about personal finance, I now feel ready to finally put my money where my mouth is at long last. However, I have one question that no publication has yet to touch on that I would like answering:
How many separate investments should there be in the perfect portfolio? In other words, how thickly or thinly should I spread the jam? — IM
A: This is a question Tom Bulford, editor of Red Hot Penny Shares, wrote about last year. Says Tom:
"You need to strike the right balance between the number of shares in your portfolio and the average holding size. If your total portfolio is worth £2,000 then you should not hold ten shares of average size £200 — dealing charges would wreck your overall return.
"On the other hand, if your portfolio is worth £200,000 you can happily hold 40 shares of average size £5,000 knowing that the dealing charges are a small fraction of the holdings’ value.
"The more shares you have the less risk is attached to any one stock. On the other hand, you also dilute the impact of those shares that do well. On the whole, I believe that most private shareholders hold too many shares rather than too few. I would aim to have at least 10, but no more than 30, shares in your portfolio, depending upon its total value."
In his book ‘How To Make Big Money in the Exciting World of Penny Shares’ (free to all Red Hot Penny Shares subscribers as an introductory gift) Tom makes a good case for 10 shares being a good rule of thumb number:
"The risk of your portfolio is determined by how many shares you own, by how much they swing around and by the extent to which they all tend to move in the same direction at the same time. All this multiplies up to something called the standard deviation of your portfolio.
"Now assume you have one share with a standard deviation of 25. If you add another share — in a different sector — the standard deviation of your two-share portfolio falls to 20.2. With five shares the standard deviation is down to 16.6 and by the time you have ten the standard deviation of your portfolio falls to 15.2.
"But now listen to this. If you have 100 shares the standard deviation falls to only 13.9 and even if you have 200 shares the figure is still 13.8! You need not understand exactly what is meant by standard deviation.
"The crucial message is that after a certain point you can go on adding new shares to your portfolio, but they will make practically no difference to its ‘risk’ — in other words the extent to which it is likely to fluctuate in value from one day to the next."
Garry White arrives at a similar conclusion, though he cites different reasons:
"I think that a portfolio should contain no more than 10-15 shares. This is not based on any complicated formula or mathematical theory; it’s based merely on my experience.
A portfolio of this size will allow you to keep abreast of developments at all the companies you own. It makes it easier to manage and spot any potential trouble spots before you lose a lot of money.
Warren Buffet does not invest in a business without understanding it thoroughly. This is good advice. If you have a portfolio of 50 stocks, this task is almost impossible for an individual investor."
Got a question?
If you have a question about investment, send it to the team at askfleetstreet@fspinvest.co.uk. Each week we pick out the best and publish our answers.
That’s all for today
Until tomorrow
Ben Traynor
Editor
The Daily Reckoning — Creating money from thin air
First, a quick look at the markets. The Dow rose 185 points yesterday, continuing its rally. Oil gained $4 too — and is now trading at $126. Gold dropped $13 and seems ready to fall below $900. We wondered if we would ever again see gold below $900. Looks like the answer is ‘yes.’
Yesterday, George W. Bush signed the housing bill — in which up to $300 billion is to be spent bailing out naïve homeowners, caddish mortgage lenders and Wall Street geniuses. It is packaged as a reserve against catastrophe. If everything is hunky dory from here on, only a few billion here and there will be spent. If housing continues to sink, on the other hand, the bill starts toting up. The Congressional Budget Office gave the odds at only 1-in-20 that $100 billion of this money would be spent propping up mortgages. The bill also allows the feds to give money to state and local governments, so they can buy houses and fix them up themselves.
You can read today’s Daily Reckoning in full here. P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.
