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Friday, January 2, 2009

Britain's stimulus plan examined PT3--"Supporting Business"

THIS, the third part of my four part budget analysis of the UK pre-budget report- the much vaunted part of the report which is supposed to counteract the current global economic and financial crisis on business- "Supporting Business" and, this part, where the budget allocations are supposed to be geared towards stimulating the economy through business incentives, is where we would see if there is anything dynamic which would in fact do just that.

Pre-Budget Report here:

See chapter here:

The first part of the supporting business section, speaks to some of the things that have already been addressed; responding to the financial crisis, reduction in the VAT and securing means to proper lending.

While it appears as if Chancellor Darling and PM Brown would be stuck on their one trick slogan; "a reduction in the VAT", it appears as if there will be a fast track system, put in place in order to assist small business in this crucial time.

I personally don't see how the VAT in particular would help businesses, in particular anyway. For one, they pass this on to consumers in any event. Also, a small reduction, will do little to actually help the consumer confidence and increase their intentions to spend, any more or any less than they have. If you really want to help the small businesses in getting more sales--which is their job in any event-- give them a massive tax break/reduction week, with special self pick tax break days out of the year, while at the same time you hand out welfare checks or tax rebates to consumers. Don't call them exactly welfare checks, but rebates or something of that nature like what we have seen with the Bush stimulus checks. This would create and induce greater activity in the exchange. Stimulating the increases in exchanges, is what we really want from the stimulus package.

It has been evident that allot of small businesses however, depend on short term credit for even their basic operations. They don't have a swath of capital and savings built up over time and are living from day to day for the most part. Also, small businesses, for the most part, are not capital market animals and driven to grow by the stock market. They are small family businesses, which are very private and very exclusive. While medium sized businesses are a little different and are a mix between the large and small, small businesses, primarily, hire more people on average than do large and some of the the medium sized companies that are on the verge of being gigantic market share firms.

Helping all small businesses and even some medium sized business, would keep more people in jobs. So, it is a no brainier that they need specific help. Specific help in the form of a new panel from the Small Business forum, created and funded specifically for creating a medium where small business and regulatory agencies, can talk about the issues in particular, which they can work together in order to make this situation less painful.

While it is a good step, one can only hope that this business panel, will take the form of a fast track agency, where they would have the Chancellor's ear and not be stymied by loads of bureaucracy. It would be awful, if this new panel is just a panel in name and not in actual duty where they would actually do something with a hands on approach. A waste of money it would be without that sort of power.

These, in my opinion, are extraordinary times. The actual day to day fusses of government bureaucracy, would be of no good use to this Small Business panel and one can only hope that the UK government, finds out that it needs to have that panel act, swiftly, on the issues discussed and solutions agreed upon on how to move forward.

Another issue with this chapter, deals with the part discussed about creating a panel for dialogue for small business needs and that is an actual creation of a fund to secure credit to small business. The fund, is stated to be at 2.05 billion pounds for companies that are in need of credit, export finance and debt to equity capitalization. All sponsored by the UK government and to be administered by the local credit institutions, for the better part.

The first 1 billion pounds takes a great step and it threads the needle right between government action, government overreaction and assisting the private banks, all in one swoop, for them to deal hands on with small businesses. Not doing the obvious first response in providing for a loan facility in the government for small businesses to get loans directly from treasury, is a smart move. You don't want the government to replace the private market in facilitating loans. When you take the confidence away from the private market to do it's work, you in obvious turn reduce the private market by showing a vote of no confidence first and then second, taking away business from them--essentially, making the situation worse, in a capitalist society where funding and access to funding, is what makes the system tick and is what is the heart of the problem as it is now; lack of credit and confidence to extend credit. Creating a separate lending window and by proxy, creating another form of currency which would in effect detract from a regular private bank's usefulness in supplying the market with credit. Also, at the same time, putting more burden on the state to do something the private market has had a history of doing better--in all sense of the term.

The second 1 billion pound allocation is where it gets a little dodgy. It basically secures export finance for exporting companies in need of short term credit. Subsidizing UK exports in nut shell. Bad economically, because an export subsidy, drives down the price the foreign consumer while putting money in the pockets of domestic business. While we all want to pay smaller prices for goods, I think the UK would like for UK residents, to actually be paying for lower prices.

The trap here is, will you be able to shut off the export subsidy tap once you turned it on? Always a risky venture and you would just have the American farm lobby, as an example, of how hard it can be in regards to shutting off export subsidies and subsidies on the whole.

In addition to that stream of thought; how will there be an avenue for distributive effects to hit the local British consumer? There may be an incentive to hoard the subsidies, keep regular export prices and still have the British consumer pay for the entire kit and kaboodle! The rationale is; if you already have an international market share presence, this means that people are buying your goods because you produce them better and of better more efficient quality in the first place--especially if we are talking of a global slump, which would mean that in actuality, while you may lose money in export markets, your market share, will be affected just like every other foreign competitor is. An export subsidy, especially in a time of global financial crisis, would do little to actually help that situation. It would just be a tax break, at the expense of the British tax payer.

Also, at a time where businesses are losing their jobs--and while I admit that exporting companies are ones that have mastered the art of domestic production and marketing patterns-- there is also a consolidation of firms phenomenon going on presently in the private market, which is an attempt for the private market to solving some of its own credit dilemmas on its own. While an export subsidy is supposed to be broad scaled, if there is massive consolidation going on in the market, then, we have less of a re-distributive effect and a concentration in British taxes to a small and increasingly decreasing, on scale, business class. This is not the type of intervention distortion, a government would want in a case scenario like this.

This leads to the last bit of the 2.05 billion finance scheme for small business. And, that is, a debt to equity finance scheme for companies that are over leveraged. This would speed up the consolidation on a protracted level. This would increase corporate take overs and smaller firms, will be swallowed up in the tide.

Small business are generally not capital market and stock market savvy. Small businesses owners, if they take the bait and provide equity shares on a greater scale, could very well, lose their companies to other larger and more efficient running organizations; investment bank's, investment management firms and; private equity firms. While you are enticing them to enter into the stock market and capital markets more easily, you would have to create the type of education mechanisms to secure their success at keeping their business. The Madoff fraud scandal, is a stark and current example at how the best of them, can be victims of fraud by the best of them. Putting the least of us, in the mix with the best of them, in hopes they would cater to our niche needs, at a time like this where the regulation on the financial system is still thin--with no sight in the future for a better more transparent regulatory system--is too dangerous in my opinion.

This is dangerous for the future of Britain and folks should take heed. Perhaps the global power structure and the significance of it, would not make a difference to the system in the UK, with them being a global power player with established an power base? But, if Britons are going to lose their way of life, even in a psychological manner, then, it could spell a ubiquitous disaster to clean up for years to come with any British government.

Just to mention however, there is an additional fund created for Regional Development Agencies, mini-governmental business friendly agencies, worth over 25 million pounds. Welfare for small businesses. Nothing more to be said on this.

Also, there is more international debt in this arrangement as well. Just when you thought it was no more debt, the UK government is set to secure about 4 billion in lending from the European Investment Bank. Nothing particularly major has been identified for that 4 billion. However, it is noted that the EIB would work towards funding projects in the UI with Private Equity Funds for consolidation efforts and re-financing efforts for all businesses. Is Britain selling it's soul to Europe?

The report moves on with another plug for the VAT cut. But, also, a major relief effort for people who have lost tenants in commercial property. The UK government is exempting persons from paying taxes on empty properties. This is a huge relief. Psychological and fiscal. The exemption if for properties that are under 15 k, estimated at over 70% of all commercial property.

This should get folks back into at least looking for a place to house their business. This would do more than a VAT cut, because this stimulates exchanges in the area most affected by the financial crisis-- real estate.

Tax Reform and Competition:
No budget is a budget without sweeping tax reform. And, this stimulus package, warns you that there will be tax reform on top of their much ballyhooed VAT cuts.

Nothing is specific on what type of new tax structure is to come out of the reduction and now, the simplification in VAT administration--it can't be that much of an administrative burden to small businesses, in the first place. It may be a pain to know that you have to spend money to the government, but it is something, like regular business purchases, you would have to do--the government has to get the money back some way.

One way of getting their dime back, is a tax on capital gains and foreign owned businesses. Also, their will be a tax cap on foreign dividends. However, they did not say if whether or not the tax cap will be rounded upwards or downwards.

Just to note, when you hear the word "reform" in a budget speech, it most usually means a hike in taxes or a spreading of the tax burden. When they want to cut taxes, they emphatically say "tax cuts"...never "tax hikes" the other way around.

In the same token, they are providing an exemption window for foreign dividends, but also reforming the controlled foreign companies act, which would examine the tax payments of foreign businesses owned by British citizens.

Just when you have a break, they hit you with another tax. This is a tax on foreign jurisdictions, where the UK government is making profit off of foreign tax payers. In fact, any country, with a foreign tax treaty, is, in effect, taxing foreign consumers.

All in all, there are further tax reforms mentioned for and on energy and the like. Best of all of what is left of this section is a decrease in the administrative costs. This would have little effect on the businessman, but a huge effect on the operational cost for the government. But, we hope, the new "de-regulation" or "simplification" - simplification is what is said specifically in the budget- won't lead to massive tax loopholes and legal loopholes, which would raise the cost of legal services for other forms of tax and responsibility evasions.

Lastly, a premium was placed on energy market regulation- paving the way for energy market diversification I am assuming- and also, a high premium on competition. Water, energy and the public sector markets, were mentioned specifically and to some measure on how to go about doing this competition promotion.

While it is no secret that very little can be done about public sector markets, doing something about natural resource related markets--like water, oil and gas (energy)- we can see a very stark growth if the right tax incentives are there, coupled with the openness to new ways and methodologies to using those forms of natural resource commodities.

Nothing was mentioned in the report about that in particular. However, the EU, through the Lisbon treaty, is mentioned last and at best, suggested as a means to driving this development in the completion market. Selling your soul to the EU, again, Brown?

While it is amazing that the EU and the Lisbon treaty were mentioned last and directly after the report on competition. If the UK, is going to borrow up to 4 billion pounds in EU finance, then the EU countries, had better find a way into UK markets-- as they would have wanted it.

While the UK seems to be pushing smaller firms into competitive capital and stock market avenue's through their debt for equity, at the same time, they are exposing the British market to increased business competition facilitation to the EU--while the consolidation and the bankruptcies of small and medium businesses, are in full swing.

This is not an impressive part of the pre-budget. It says allot, but does very little.

Just my opinion!
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