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First published 10/3/08
It’s Alistair Darling’s first big Budget day on Wednesday.
Normally you’d expect this to be a momentous day in the career of a Chancellor. It’s his chance to make his mark, to steal the spotlight from the Prime Minister for a short period of time. It’s his chance to grab some glory.
But in Mr Darling’s case, I imagine that the end of his speech won’t come fast enough…
Alistair Darling has spent rather too long in the spotlight in recent months – and none of it for the right reasons.
He’s been blamed for Northern Rock; he’s been lambasted over changes to capital gains tax; and he’s been attacked over plans to charge non-doms a negligible fee (for the genuinely wealthy at least) to preserve their privileged tax status.
To be fair to Mr Darling, none of these things is really his fault. It’s really the fault of his boss, Gordon Brown. The reason there was such confusion about responsibility when Northern Rock went to the wall was directly down to Mr Brown fiddling with the banking oversight system in 1997.
As for capital gains tax, the loopholes that Mr Darling is trying to iron out were originally introduced by Mr Brown. And Mr Brown was happy enough to leave non-doms well alone until it looked as though attacking them might be a vote-winner.
But luckily for Mr Brown, Mr Darling’s the one in the firing line now, and that’s where he’ll stay, despite constant rumours he’ll be reshuffled. He might not be a great Chancellor, but he’s a dab hand at taking bullets for the Prime Minister.
And he’ll be taking even more this week. It’s Mr Darling who’ll have to admit that the Treasury has broken its golden rule; that things are looking pretty grim on the economic growth front; that no matter what he does, there’s not enough money in the kitty for any nice little giveaways. So what can he do to offset the bad news?
Can Darling prop up the property market?
The truth is that Mr Darling should do exactly what Richard Lambert at the CBI suggests: nothing. A little bit of stability would go a long way to helping us all through the hard times ahead. But that’s unlikely. What we can expect instead no doubt, is higher taxes. With the Government short of cash, some easy targets include alcohol and green taxes. With ‘Binge Britain’ stories all across the papers, it’s hard not to conclude that we are being softened up for an attempt by the Treasury to turn alcohol into a cash cow like tobacco. “This tax hike is good for you,” has always been a difficult argument to counter.
But the biggest question is about what happens to the housing market. The British economy unquestionably rests on property. As property prices fall, so will our leveraged economy. So what can he do? We’ve already seen one idea being floated, that of “kitemarking” mortgages. One reason that mortgages are getting more expensive is because lenders can no longer parcel them up and sell them to investors, because no one wants to buy them. The “kitemark” would give a government stamp of approval to certain mortgages. The idea is that this would give investors the confidence to buy them.
Nice idea, but utter nonsense. These “gold standard” mortgages would require higher deposits and lower income multiples to get the kitemark – tighter lending criteria, in other words. But tighter lending criteria are precisely what’s demolishing the housing market. Unless the Government can somehow make lenders dish out even more money to people who haven’t got the means to pay it back, then any attempt to re-inflate the bubble via the mortgage market is doomed.
Keeping the buy-to-letters waiting
A more attractive option (for the Chancellor at least) would be to delay the capital gains tax changes, perhaps for “further consultations”. At the moment, if the CGT change goes through, property investors (on whom the market boom has been built) will see the tax on their profits fall from 40% to 18%. Many buy-to-let investors must be itching to cash in, and just waiting for the change before putting their portfolio on the market. I know this is true, because property pundits such as Stuart Law at Assetz are screaming for the CGT changes to be delayed, clearly worried about the impact on prices.
If the Chancellor does indeed put this change off, without scrapping it entirely, he could dangle the carrot of an 18% rate in front of property investors for another year. That might encourage them to hold on to their properties for longer than they’d otherwise deem wise, and prevent a massive fire sale this spring. The move would also garner plaudits from pressure groups such as private equity investors and wealthy entrepreneurs who have condemned the changes.
So if there’s one measure I can see coming out of this Budget, it’s that buy-to-let investors will find that come April 6th, they’ll still have to pay 40% on any profits they make from selling their properties.
By the way, I would suggest selling them anyway. After all, you can only get charged CGT if you’ve actually made a profit.
Turning to the wider markets…
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US payroll data hammers markets
In London, after a volatile day on Friday, the FTSE 100 lost 66 points to end the day at 9,853 as grim US unemployment data prompted an early fall on Wall Street. And renewed fears of a US recession saw investors pile out of miners including BHP Billiton and Antofagasta. For a full market report, see: London market close
On the Continent, the Paris CAC-40 closed 59 points lower, at 4,618. And in Frankfurt, the DAX-30 fell 77 points to end the day at 6,513.
On Wall Street, the news that non-farm payrolls had fallen for the second consecutive month – this time by 63,000 – saw the Dow Jones slump 146 points to close below the key 12,000 mark, at 11,893. The S&P 500 was 10 points lower, at 1,293. And the tech-rich Nasdaq was down 8 points at 2,212.
In Asia, the Japanese Nikkei was down 250 points 12,532. In Hong Kong, the Hang Seng was 203 points higher, at 22,705.
Bovis tumbles on profit falls
Crude oil was trading at $105.40 this morning, below Friday’s record high of $106.54. Brent spot was at $102.80 in London.
Spot gold was trading at $979.60 this morning. Silver, meanwhile, had risen to $20.33.
In the currency markets, sterling remained above 2.01 against the dollar this morning – last trading at 2.0176 – and was at 1.3314 against the euro. And the dollar was at 0.6495 against the euro and 101.99 against the Japanese yen.
And in London this morning, homebuilder Bovis fell by as much as 8.9% – its biggest one-day fall in eight months – after announcing an 8.6% fall in full-year profit. CEO Michael Harris said that it was taking longer to convert buyer interest into sales and called for ‘decisive action’ to reduce interest rates.
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