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Just keep calm, that’s all. By Simon Sweetman

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4th Dec 2008
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Simon Sweetman thinks that we are talking ourselves into a recession...

Before the PBR everybody put in their wish lists to the Chancellor. In most cases these are a mixture of fairly sensible suggestions and special pleading on behalf of the groups they represent. Some of these can only be regarded in this context as ritualistic, since they run counter to government policy (sometimes to the policies of all possible governments) and are mainly included to make activists among the members feel good.

There are the cries for abolition of things we know will not be abolished (Class 4 NIC, IR35). There is a call for drastic change to the VAT threshold (but that may be down to £1 or up to £120,000, depending on mood).

Then there is the call for a reduction on the small companies’ rate of CT, a call which in the end was partly answered. This helps to confuse the situation, because it is constantly important to remind politicians, civil servants, tax experts and so on that the majority of businesses are not incorporated at all and the CT rate means nothing to them. And indeed that it means very little to small companies, most of whom pay very little corporation tax because they are not in a position to accumulate profits, especially when times are hard.

The Treasury puts the first year cost of the delay in implementing the 1% increase at £640 million. If there are about a million companies (which for all intents and purposes can be taken as the small company figure) that’s £640 each so average profits of £64,000. Now in my experience most small companies remunerating their directors by salary make no profits at all or very small profits : most of them struggled to find £10,000 of profit when the 0% band was available. Does this in fact mean that dividend payment strategies are very widespread?

And then the cut in VAT. Before the PBR almost everybody wanted a cut in VAT and there was talk of “VAT holidays”. There have been two VAT rate changes before – when Geoffrey Howe doubled it from 7.5% to 15% and when Nigel Lawson raised it to 17.5%. I do not recall a fuss being made about the problems for business in implementing the change. Why is it so much more difficult now? Some businesses, we are told, have software packages which hard wired in the 17.5% rate. Why?

The VAT change is admittedly small beer and apparently will be much more burdensome than was thought. The fact that flat scheme rates went down by varying amounts less than 2.5% made people enormously excited, with the fact that the net increase (if prices are unchanged) in business cashflow is more like 2.1% because you have to take input tax into account apparently being too complicated for many people, including the BBC.

Which brings me to wonder just how much impact some of these changes can have: CAMRA is righteously incensed by a rise in beer duty, but what possible difference can 5p on a pint of beer make when the pub is selling it to you for £3? And the fuel price changes too vanish almost completely in the face of price cuts already happening as the oil price falls.

Is information overload making us all too excited? Should we all just calm down? Clearly the recession is being accelerated by everyone reacting much more quickly than they used to – or perhaps than they need?

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By baseline
09th Dec 2008 16:57

Why?
When Robert Peston says:

"The trigger of the closing down of wholesale markets was the horrifying realisation by financial institutions in every country that hundreds of billions of dollars lent to US home-owners in the form of low quality sub prime loans – and repackaged into putatively high quality investments as collateralised debt obligations – were going bad."

My understanding is that sub prime home owners in the US did something strange. Instead of defaulting on unsecured loans they opted to default on secured loans tied to their properties.

I have not seen any academic studies on this and its worrying because the same mechanism may come into play here if the dynamics are the same.

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David Winch
By David Winch
08th Dec 2008 22:51

Talking about the recession

On one view, the BBC correspondent Robert Peston could be seen as carrying some responsibility for us all getting too excited about recession.

He has posted a thoughtful article on the BBC website (in PDF format) at
http://www.bbc.co.uk/blogs/thereporters/robertpeston/thenewcapitalism.pdf

He sees major global transitional problems in sorting out the current mess - caused by bingeing on too much borrowing (in his view).

Interestingly he sees small business as an oasis - one area which has not over-borrowed, in contrast to big businesses and individual consumers.

However small businesses cannot isolate themselves from the adverse effects of the over-borrowing of others.

If he is right, we are going to suffer the mother of all hangovers over the coming months, and we need to give some serious thought to fashioning a 'new capitalism' for the post-binge age!

David

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By baseline
04th Dec 2008 18:51

Clinton Economics?
When you say:

"Is information overload making us all too excited? Should we all just calm down? Clearly the recession is being accelerated by everyone reacting much more quickly than they used to – or perhaps than they need?"

Sorry Simon these problems are not going to go away any time soon.

Its just too complicated, convoluted and reactive for anybody to get a handle on. Hence the information overload.

Its a disease that started in America. Alan Greenspan in trying to deal with it made the operation a success but killed the patient in the process. He called the disease "irrational exuberance" and the whole planet is ill with its pleasurable effects.

Whole new generations are relearning lessons that most us had forgotten. Let it happen the quicker the better and then let us all move on being wiser for it.

Clinton's Economic Legacy January 9, 2001
http://www.commondreams.org/views01/0109-04.htm

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