Posts Tagged ‘Percentage’

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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

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According to a Halifax report, new mortgages are at their cheapest level in 14 years. Mortgages taken out during Q1 accounted for just 27 per cent of borrowers’ net income. In 2007 the ratio was 48 per cent; over the last 30 years the ratio was 36 per cent. Yippee to that.

It is just that…

Remember interest rates are at a record low. They are hardly likely to fall, but they are likely to rise. The Bank of England tries to re-assure us by saying rates are unlikely to go up until 2016. Alas, most new borrowers will not be repaying their mortgage in full between now and 2016. Who knows what rates will be in five years’ time, in ten years’ time or in 20 years’ time? It is anyone’s guess.

Remember that the markets have concluded that rates are rising sooner rather than later. The yield on UK government bonds is now at a two year high. Mortgage costs may rise in their wake.

Above all remember this. Sure, over the last 30 years mortgages on average took a higher proportion of new borrowers’ salary than they do now. But over the last 30 years wage inflation was ever present. Who cares about high borrowing to income ratios when incomes are rising so fast?

It is not like that now. Incomes are no longer rising fast, real incomes are falling. Those who celebrate the low cost of mortgages seem to have forgotten this.

© Investment & Business News 2013

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You may remember the ads – it must have been around 20 years ago. They were for a magazine called ‘Fast Forward’ and for a few months they were on TV all the time – or so it seemed. Jeremy Beadle features in the ads and the jingle went “fast, fast forward, forward forward’ and the tune went like this laa, laa, la, la, la. Okay you may not remember the ads, maybe you have subconsciously blocked them from your memory, but if you do remember them apologies. You may now hear that tune in your head every time you hear the phrase ‘forward guidance’. And so, forward guidance is out and now it appears we have an inkling about how long rates will stay at 0.5 per cent.

The latest inflation report, out yesterday, came with a section talking about forward guidance. The Bank of England says that monetary policy will remain ultra-loose for as long as UK unemployment is greater than 7 per cent.

In forward guidance, if inflation does this, and jobs do that, says the Bank of England we will do as follows.

Accept that it’s forward guidance that may change as we move forward. The 7 per cent unemployment rate does not necessarily represent the end of the line for record low rates; rather it is, as Mark Carney called it, a ‘way station’.

Based on Bank of England predictions, for UK unemployment, it appears the first rate hike will be in late 2015.

Then again, if inflation picks up, and even if unemployment is still quite high, Mr Carney suggested the bank may change policy.

So it is a kind of forward guidance, based on current thinking. Well, Carney is human. He can’t do much more than that, but it does leave you wondering what the fuss is about.

It is tempting to say that forward guidance is little more than PR; a communication tool. But then again, the markets seem to be taking to it like proverbial ducks to water.

It does rather seem that forward guidance means the bank does not need to engage in any more QE. If you see QE as kind of weapon of mass financial destruction, then the threat that you may use it means that it is not necessary to do so.

© Investment & Business News 2013

Back in May 2010, increases in average wages were less than the rate of inflation. It has been that way every month since. Consumers may be feeling more confident, retail sales may be up, but one thing is sure, the improvements in sentiment are not down to rising wages. But in the latest data from the ONS there was a whiff of hope. Is it possible that wages are at last set to rise faster than prices?

In May 2010 inflation was 3.4 per cent. Wages (that’s including bonuses, by the way) rose by 2.5 per cent. Ever since then it has just got worse. The gap peaked in October 2011, when inflation was 5 per cent, and averages wages rose by 2 per cent, and until very recently the gap was almost as large. In March, for example, inflation was 2.8 per cent, while average wages rose by just 0.6 per cent. But since then things have begun to look better – that’s despite inflation getting worse. In May inflation was 2.9 per cent, but wages rose by 1.9 per cent. This was the highest level of annual increase in average wages since January 2012.

Looking forward, inflation may pick up over the next few months, but it is likely to fall later in the year.
So, if the rate of increase in average wages can carry on rising for a little longer, within a few months we might once again find wages are rising faster than inflation.

Many economists believe that a sustainable recovery in the UK economy can only occur once wages rise faster than inflation.

That, by the way, has been the snag with recent reports pointing to rising house prices and retail sales. How can they rise, if real wages – that is wages relative to inflation – are falling? Answer: they can only rise if household debt increases, and as it was told here the other day, UK housholds have enough debt as it is. See: What will happen to households as rates rise? 

In fact the hard data provides the evidence. UK households have been saving a lot less of late and borrowing more.

 

And so returning to wages and inflation, if it is the case that at last wages can rise faster than inflation then that is reason to celebrate.

It is just that in the long run, wages can only rise faster than inflation if productivity is improving. Alas there seems to be precious little evidence of that occurring at the moment.

© Investment & Business News 2013

The rich get richer and the poor get poorer. It sucks, but that is the way of the world. At least that is what most of us assume, but data from the ONS out this week suggests this may be wrong.

Since the start of the economic downturn in 2007/8 the richest 20 per cent of households have seen disposable income fall by 6.8 per cent, the poorest 20 per cent have seen income rise by 6.9 per cent.

It is important that we point out what we mean by disposable income at this point – it’s after taxes and benefits. The ONS has included VAT in the equation, by the way.

In 2011/12 the richest 20 per cent – before taxes and benefits – enjoyed income of £78,300, which is 14 times greater than the poorest fifth, which had an average income of £5,400. That is a ratio of 14 to one.

But take into account taxes and benefits and things look different – very different. The top 20 per cent saw disposable income fall to £57,300, while the bottom 20 per cent saw it rise to £15,800. The ratio changes to just four to one.

So what a bunch of socialists the government of the last few years has been. Except they haven’t really.

For one thing, the data does not tell the full story. It does not tell us about average income in the top 1 per cent quartile.

Besides if you drill down, things look different. If you look over a much longer time period, say from 1977, a quite different picture emerges. Since 1977, disposable income for the bottom 20 per cent has risen by 1.93 per cent, and by 2.49 per cent for the top 20 per cent.

There is in any case a more noticeable gap between the top 20 per cent and the rest of the population.

Average disposable income for the second poorest 20 per cent was £21,373 in the last financial year, or 1.35 times more than the first 20 per cent. Average disposable income for the middle 20 per cent was £27,526, or 1.29 times the average for the second poorest. Average disposable income for the second richest 20 per cent was £34,437, or 1.25 times the average for the middle 20 per cent. And average disposable income for the richest 20 per cent was 1.66 times the second richest.

But then again, so what? Don’t the rules of numbers mean that the average of the top 20 per cent will always be much higher than everyone else for the simple reason there is no upper limit to the top 20 per cent. The lowest disposable income can be is zero, the highest is… well, it’s infinite. Instead let’s look at how things have changed.

Equivalised disposable income, by the way, means: “The total income of a household, after tax and other deductions, that is available for spending or saving, divided by the number of household members converted into equalised adults; household members are equalised or made equivalent by weighting each according to their age, using the so-called modified OECD equivalence scale.” See: Glossary: Equivalised disposable income

And by the way just one more point. The proportion of people in the bottom 20 per cent who are retired has fallen over this time period. . This is because retired households have seen incomes growing at a faster rate than those of non-retired households.

© Investment & Business News 2013

Sometimes data is too good to ignore, and the latest Economics Review from the ONS contains such data. It shows that the star of the recession of 2008 was Canada. In Q1 of this year, Canadian GDP was no less than 5.1 per cent up on the pre-recession high.

US GDP was 3.2 per cent up, German GDP 1.3 per cent up, but French GDP is still 0.8 per cent below the pre-recession peak. In Japan GDP is now 1.3 per cent below peak, and for poor old Blighty, GDP is still 2.6 per cent below peak. Within the G7, Italy has suffered the worst performance, with GDP currently 8.6 per cent below peak.

Japan saw the steepest rate of decline during the recession, however, and at one point GDP was 9.2 per cent below peak before its recovery began.

So far, all is good for Canada. Just bear this mind, however. Levels of household debt in Canada seem high; they have risen since 2007, and are now even higher than in the UK and much higher than in the US. Meanwhile, Canadian house prices to both income and rent, relative to their historic average, seem excessive.

There are parallels between Canada today, and the US and the UK in 2007.

© Investment & Business News 2013

Fancy a glass of wine? Have this then, I bought it from Majestic last week, it is called ‘Chateau North of £20’. Fancy a coffee? Well let’s go out then and buy a cup of ‘Capper Expensive’ from Costa Coffee.

For Majestic and Costa, and indeed for Costa’s parent company Whitbread, these are good times.

Pre-tax profits at Majestic were up 2.1 per cent. Sales of fine wine priced more than £20 rose by 9.2 per cent. For that matter, English sparkling wines were up 200 per cent. Majestic’s boss Steve Lewis puts the popularity of its fine wines down to all those cookery programmes.

At some point in the distant future, if archaeologists discover an old copy of the ‘Radio Times’ circa 2013, do you think they will conclude we are a nation of cooks, who put home cooking, fit to grace any restaurant accompanied with fine wine, above all else?

As for Whitbread, sales in Q1 were up 3.1 per cent, with like for like sales across its Costa Chain up 8 per cent during the 13 weeks to May 30. The group plans to open 300 new Costas this year.

© Investment & Business News 2013