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There‘s one good thing about the prospect of Gordon Brown becoming Prime Minister. It means he won‘t be Chancellor any more.
The annual weigh-in of the latest edition of “accountants’ bible”, Tolley’s Tax Handbook shows that the latest tax guide runs to 9,800 pages, more than twice its 4,555 page length when Labour came to power in 1997.
Bob Rothenberg of accountancy firm Blick Rothenberg told The Telegraph: “So-called simplification of the tax rules has made them substantially more complicated. This has become a form of stealth tax because it is much more difficult for people to deal with their own tax affairs.”
When even the accountants are complaining about all the extra business Mr Brown is putting their way, you know things are bad.
The Treasury, which more than any other Government department, has developed the ability to argue that black is white, said: “The Government takes the issue of complexity very seriously and has a good record on measures to simplify the tax system.”
We’re not sure how they found a spokesman capable of saying this with a straight face. How any Government that produced the lunacy of the tax credits system, which has swept a whole chunk of the working, middle-income population into the benefits system, can talk about simplification is beyond us.
But then, brazen lying has become integral to the culture of the Treasury under Mr Brown. The tax system is now based on finding new ways to increase the tax take without the electorate noticing. That means no income tax hikes, but just about anything else is fair game.
For example, the housing bubble is now a key component of UK tax policy. It’s a taxman’s dream, in fact. While house prices are rising, people are happy, because they think they are becoming more wealthy. That means that no one really complains or notices that the ones really raking it in are the Government.
Take stamp duty for example. During the second three months of this year, the tax raised more than £1bn for Treasury coffers, according to Portman Building Society – that’s up 30% on the same time last year.
And then of course, there’s inheritance tax. Rising house prices are the biggest factor in driving more people into the IHT net, which has also proved to be a nice little earner for the Chancellor and chums since Labour came to power. You can read more about this in an earlier Money Morning – just click here: Why inheritance tax should be scrapped
For a full explanation of why the Government is the biggest beneficiary from rising house prices, just click here: Why housing wealth is an illusion
But moving away from the squalid squabbling on Downing Street to the really important story of the day – what’s going to happen with interest rates? The Bank of England announces its latest decision at noon. Last month’s rate hike took most commentators by surprise, though we predicted it at the time. So what do we think will happen today?
The truth is, it’s too close to call. Almost everyone expects rates to remain on hold – but then that’s what they said last month. And the Bank would be more than justified in raising rates once again. Retail sales data has been surprisingly sturdy, even in the wake of the World Cup, while the housing market is still being over inflated by buy-to-let investors piling in as lenders keep slackening borrowing criteria.
And worryingly for the Bank, shop price inflation rose again last month. The British Retail Consortium said that shop prices in August were up 1.4% on last year. It’s the second month in a row that annual inflation has risen, and the general consensus seems to be that retailers have finally tired of absorbing soaring costs and are now expecting the consumer to shoulder some of the burden.
Of course, Kevin Hawkins at the BRC argues that this doesn’t mean there needs to be an interest rate rise. “Retail inflation…is still well below both the CPI and RPI and likely to remain so.”
But that’s not really the point, Kevin. The Bank has been relying on you and your colleagues to keep slashing prices, in order to offset the inflationary pressures hammering the rest of the economy. Shoes, soft furnishings and the like are about the only things that haven’t been rising in price for the past few years. Once shop prices pick up, there will be nothing left to offset the sharp rises we’ve seen in gas bills, electricity bills, and everything else that can’t be imported from China.
And of course, Bank governor Mervyn King may well want to push through another hike before October sees the Monetary Policy Committee pushed back up to full strength with the appointment of another two Brownite candidates, who are bound to be interest rate doves.
So on balance, the only reason not to expect another rate hike is because it would shock the City and consumers. But given the spectacular levels of complacency demonstrated by both at the moment, that’s exactly what the Bank should be doing.
Turning to the stock markets…
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The FTSE 100 fell 52 points to 5,929 as a spike in US labour costs raised that US interest rates will need to rise further. One of the main losers was Dixons owner, DSG International, which fell 3% to 202.75p, as it reported narrower profit margins. For a more detailed report, see: London market close
Over in continental Europe, the Paris Cac-40 closed 57 points lower at 5,115. The German Dax-30 fell 71 points to 5,813.
Across the Atlantic, US stocks took a hit as data showed a spike in labour costs, reigniting fears about rising inflation. Unit labour costs rose 5% over the past year, the fastest gain since 1990. The Dow Jones Industrial Average fell 63 points to close at 11,406, while the S&P 500 shed 12 points to 1,300. The tech-heavy Nasdaq dived 37 to 2,167.
Over in Asia, US rate fears saw the Nikkei 225 fall 271 points to 16,012, with exporters leading the way down on concerns that US consumers will stop buying their goods.
Oil prices were higher in New York this morning, with crude trading at around $67.85 a barrel. Brent crude was also up, trading at around $66.45.
Meanwhile, spot gold edged lower, as the dollar firmed on the prospect of higher interest rates. The yellow metal was trading at around $635 an ounce this morning.
And in the UK this morning, Halifax reports that UK house prices rose 1% in August, though annual price inflation slipped to 8.2%, from 8.8% in July.
And our two recommended articles for today…
How will the US housing slump affect stock markets?
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The US housing bubble is exploding, say Andrew Selsby and John Robson at RH Asset Management – but what will be the impact on stock markets, and what warning signs do you need to watch out for? To find out, read: How will the US housing slump affect stock markets?
Is timber a good investment?
– The forestry sector saw its best returns in 13 years last year, which has inspired many to take a closer look at the solid investment qualities of timber. In a recent edition of MoneyWeek (now open to non-subscribers), we examined some ways to get exposure to this market without buying a forest. For more, read:
Is timber a good investment?