Posts Tagged ‘April’


April was a good month for bonuses. The reason is not hard to see. The upper tax rate was cut from 50 to 45 per cent in April so a lot of bonuses were deferred from the previous financial year. In all, April saw no less than £4.2 billion paid out in bonuses; that was £1.7 billion up on last year.

Not bad.

Of the total amount paid out, the finance industry saw £1.3 billion. The ‘FT’ reckons that by deferring bonuses in this way, roughly £35 million was saved in tax.

But this begs the question: did the cut in income taxes just impact upon the timing of the bonuses, or, as a result of the lower tax rates, did companies choose to pay out higher bonuses?

The government reckons that by cutting the top tax rate, pay awards will rise, and its tax receipts will increase too. Economic theory has a name for it. It is called the Laffer curve. If the tax rate was say 100 per cent, in a free society no one would bother to work, and tax receipts would be zero. If the tax rate was zero, tax receipts would also be zero. So the government has to find the optimal level.

The current government seems to be saying that level is less than 45 per cent. Is that right?

© Investment & Business News 2013

If it had done something, it would have been a surprise. The Bank of England has chosen to leave monetary policy where it is for another month.

The news on the UK economy has been a touch better of late, with Q1 seeing 0.3 per cent growth and Purchasing Managers’ Indices for April indicating a modest pick-up from there. Besides there is one person missing from the Bank of England’s MPC at the moment and that is its governor to be. Until he joins, the committee is not likely to do much.

Poor old Mervyn King! He voted for more QE in February, March and April. One assumes he voted for it again today. But he is looking like a lame duck governor these days. Apparently, most MPC members are waiting for Mr Carney.

Or maybe not… Martin Beck, UK Economist at Capital Economics, put it this way: “We still anticipate further asset purchases later this year, with the arrival of Mr Carney potentially acting as a catalyst. But it cannot be taken for granted that he will win the day against the inertia and hawkishness of other Committee members.”

© Investment & Business News 2013


In the UK, as this piece shows (see: Is the UK housing market poised for recovery, and is that good or bad news?), there is evidence to suggest that UK house prices are in strong recovery mode. It is quite curious. The UK economy has suffered its worst downturn ever recorded. The FTSE 100 still languishes some 586 points below its all-time high set on December 30 1999 and some 377 points off the century high set in 2007.

The asking prices of average UK homes may be approaching an all-time high, but neither stock markets nor the economy are close to replicating that feat.

In contrast, the US housing market suffered one mother of a crash in 2006/07/08. It does appear the market has hit bottom, and is now in slow recovery mode. But that is the best we can say. US house prices are nowhere near what they were at their peak, and it will probably take years before they are.

At the time of writing (7.30 GMT 16 April) however, the Dow – even after yesterday’s falls – sits 435 points above its 2007 peak, a level that was its all-time high until a few week ago. The index is 11722 above its January 2000 high, which for much of the noughties was its all-time high.

So let’s run that past you again. The FTSE 100 peaked at the end of 1999; the Dow a couple of weeks later. At the time of writing, the FTSE 100 is 8.4 per cent below its 1999 level, while the Dow is 24.5 per cent up on its 2000 high. House prices, on the other hand, are approaching their pre-recession high in the UK, but are way below peak in the US. GDP in the UK is languishing at almost 3 per cent below the prerecession peak. GDP in the US surged past the pre-recession peak a couple of years ago.

The UK’s strategy may have won friends with a property obsessed electorate. The US experience instead has just created more production.

The US model may well create more sustainable growth. But the UK model creates votes in elections. Mr Osborne may try to present the veneer of a man making tough, unpopular but necessary decisions, which will create long term benefits. In reality, he is bribing the electorate with the promise of rising house prices, and in the process putting short term and transient benefits before long term resilience.

©2013 Investment and Business News.

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