Labour Forced To Drop Stealth Tax Rises

(Telegraph) – LABOUR HAS BEEN FORCED to abandon three stealth tax rises that Alistair Darling unveiled in last month’s Budget.

Following pressure from the Conservatives, the Government agreed to drop plans for a new tax on phone lines to fund super-fast broadband, increased taxes on cider and the scrapping of tax relief on holiday homes.

The tax hikes were abandoned following negotiations to fast-track the Finance Act – which introduces the laws necessary to enact the budget – through Parliament today ahead of the general election.

The Conservatives refused to sanction the fast-tracking of the legislation unless the three tax changes were dropped. The Treasury was forced to back down last night or face the prospect of failing to pass other key budget measures before the election on May 6th.

The move marks a coup for George Osborne, the shadow Chancellor, on the first day of the election campaign. It is understood that Philip Hammond, his deputy, and Conservative aides spent much of the day at the Treasury negotiating the revised budget.

Last night, Mr Hammond, the shadow chief secretary to the Treasury, said: “This is a major victory for businesses and consumers across Britain. The Conservatives have forced the Government to back down on three significant tax hikes.

“But the threat couldn’t be clearer – if Labour is re-elected all three taxes will come back. Only a Conservative Government will stop Labour’s tax increases.”

The tax on phone lines formed a key part of a flagship Labour plan to introduce super-fast broadband throughout Britain. Under the scheme, a new tax of 50p per month would have been introduced for each telephone line. It was estimated that consumers would pay a total of more than £100 million a year.

The Conservatives believe that broadband should be installed and paid for by private firms.

The changes to tax relief on furnished holiday homes were estimated to hit more than 120,000 self-catering holiday businesses – costing the holiday home owners an average of £4,000 each a year. The Conservatives warned it could have a far-reaching impact on the British tourism industry.

The third proposed tax rise to be abandoned was a ten-percent increase, above inflation, on the cost of cider. Mr Darling had argued this was necessary as cider was taxed too lightly compared to other alcoholic drinks. However, it was argued that the sharp tax rise could badly damage the British cider industry.

The Conservatives are expected to increasingly focus on their plans to lower taxes during the election campaign. Some senior Labour figures are concerned about the impact of the Tory pledge to abandon the proposed National Insurance rise next year. David Cameron said yesterday it threatened to “wreck” Britain’s economic recovery.

Conservative plans to offer tax breaks to younger married couples are set to dominate the election campaign next week.

Cheque Guarantee Cards To Be Scrapped By Banks

(Daily Mail) – ONE OF THE BIGGEST BANKS has sounded the death knell for the cheque guarantee card, with rivals set to follow its lead.

Santander, owner of Abbey and Alliance & Leicester, said yesterday that all of its new debit cards will not carry the popular ‘guarantee’.

Rival banks will do the same in the coming months, leaving small businesses which rely on cheques exposed to fraud and financial loss.

At present, most debit cards include a ‘cheque guarantee’ logo on the back.

It features an image of William Shakespeare’s head and usually states it is guaranteed for about £100 or sometimes for up to £250.

This means that anybody from a milkman to a small hotel knows that the cheque is approved by the bank for this amount.

Latest figures from the Payments Council, an umbrella group for British banks and building societies, said four million people regularly use cards to guarantee their cheques.

But in a further sign of the decline of the payment method, months ago the council said that it is going to axe the cheque guarantee service from the end of June next year.

Yesterday Santander, which has around eight million current account customers, announced new debit cards will not include the cheque guarantee logo.

A spokesman for the Spanish firm said it has decided to start replacing all cards when they come up for renewal.

A card typically lasts for up to three years.

‘In light of the need to replace around five million debit cards which have a cheque guarantee logo, Santander is taking a phased approach to make this task more manageable,’ the spokesman added.

‘This approach should ensure that these debit cards are replaced in a measured and efficient way, so customers are not faced with a delay in replacing their card, which would be likely if this phasing didn’t take place.’

Santander said customers can still use cheques despite the scrapping of the guarantee.

When cards come up for renewal, customers will be sent a new one – without the familiar logo on the back.

A Payments Council spokesman said banks are doing what they can to make payment methods safer. The cheque guarantee is being increasingly ignored by people who prefer using a debit card, a credit card or cash, the group’s research suggested.

When people do write a cheque, the typical amount is £268 – above the standard cheque guarantee limit.

The council has said it wants to write off the cheque by October 2018.

The measure has dismayed the elderly, who have used cheques all their lives and are reluctant to switch.

Many are wary of using cash machines, and prefer to withdraw cash by writing themselves a cheque.

At the same time, tradesmen, small shops and builders rely on the cheque as a daily part of their operations.

What Recovery?

(Guardian) – Alistair Darling’s insistence that the economy would still be stuck in recession without a leg-up from the Treasury was boosted today by news that public spending and the car scrappage scheme had been essential to generating a recovery in the final quarter of 2009.

While GDP growth at the end of last year was a better than expected 0.4%, according to the Office for National Statistics – up from its previous estimate of 0.3% – analysts said the detailed new figures revealed that taxpayers’ support had been critical in generating the first quarter of expansion since spring 2008.

"The two sources of growth were government consumption, which will come under pressure after the election, and the household sector," said Danny Gabay, of the City consultancy Fathom. And while household spending expanded by a healthy looking 0.4% in the fourth quarter, much of that appeared to be due to the car scrappage scheme, which is about to end. When spending on transport was excluded, Gabay pointed out, household spending did not grow at all.

Graham Turner, of GFC Economics, said: "The breakdown of the GDP numbers highlights the precarious nature of the UK recovery, with many areas of consumer spending still under pressure, and the economy critically dependent on government support."

At last week’s budget, and in his televised debate with his Conservative and Liberal Democrat shadows George Osborne and Vince Cable on Monday night, the chancellor tried to make the government’s role in securing the fledgling recovery a sharp dividing line with the other parties, and today’s data lent support to that view.

However, although the fourth quarter showed stronger growth than first thought, the ONS painted a picture of an economy that remained dangerously fragile, and at risk of a "double dip" – a return to contraction – in the first quarter of 2010. That news would come in late April, deep into an election campaign, shattering Darling’s claim that the worst is over.

The shadow business secretary, Ken Clarke, seized on the news that despite hopes of an export-led bounce in the economy, the trade deficit actually worsened in the final quarter.

"The economic recovery will have to come from exports. But Britain’s trade gap has widened to £21bn, despite a weak sterling," he said. "We need a more balanced economy based on investment and exports to ensure sustainable growth."

Labour’s election strategists will also have been alarmed that workers’ pay declined last year, by 0.5% — the first fall on record, underlining the heavy toll the crash has taken on the public’s finances, and raising doubts about the prospects of the "feel good factor" returning before voters go to the polls.

Many consumers responded by paying off some of their debts, and setting aside more money for a rainy day. The household savings ratio was 7% over the year as a whole – more than four times the 1.5% seen in 2008, when shoppers were still happily increasing their debts to pay for a home makeover or a holiday.

There was also evidence of the considerable impact of the Bank of England’s unprecedented rate cuts in helping consumers to offset the fall in their incomes. In total, interest payments by households fell by £26bn over the year; though that was partly offset by an £18bn decline in the interest received by savers on their deposits.

End Of Signing-On As Dole Moves Online

(Telegraph) – SIGNING ON – the duty performed by the jobless to qualify for unemployment benefit down the ages – is to be consigned to history under Government plans to save billions of pounds.

Ministers are preparing to move the system of paying Jobseekers’ Allowance (JSA), currently claimed by 1.58 million people, largely online later this year in a major cost-cutting drive.

The aim is to make 80 per cent of JSA payments online within months, with a view to boosting the figure over time to 100 per cent.

Parallel drives will see all employer tax returns for VAT being made online by the end of next year, and all child tax credits being paid online by the middle of the next parliament (around the start of 2013).

The biggest challenge, however, is understood to be Jobseekers’ Allowance because of the complicated nature of the current system, which depends upon regular attendances in person at Jobcentres.

Ministers are considering the best way of making sure someone is available for work if they no longer need to attend Jobcentres.

To qualify for the JSA an individual must be “available for and actively seeking work”, between 18 and State Pension age, and working less than 16 hours per week on average.

Maximum weekly rates are £64.30 for single people aged over 25 and £100.95 for couples and civil partnerships.

Signing on at the dole office, immortalised in films and television dramas such as Boys From the Black Stuff and The Full Monty, is still seen as an unpleasant, dehumanising experience although ministers claim most Jobcentres are now modernised welcoming venues equipped with computer terminals and advertisements for posts offering up to £100,000.

The practice will soon be history – although a Government source admitted that the eventual goal of paying all JSA online will not be achieved “until we get 100 per cent broadband coverage.”

Martha Lane Fox, the internet entrepreneur, currently heads a government task force aiming to get everyone online by 2012.

Currently 10 millions Britons have never used the internet – and four million of these are from the most deprived backgrounds in the country.

It has been calculated that achieving the target will save the public purse £1 billion a year in “customer service costs” and boost the overall economy by more than £20 billion.

Gordon Brown will underline the Government’s desire to move faster towards providing more public services online in a major speech on Monday – although he is not expected to set out specific targets.

In figures released last week, unemployment dropped to 2.45 million in the three months to January, according to the Office for National Statistics.

About 1.58 million people claimed the JSA in February, down from 1.63 million in October last year.

However, the rate of employment, measuring the number of people in work, also fell to a 13-year low of 72.2 per cent.

The number of people in work dropped by 54,000 to 38.8 million in the three months to January.

Government Stealth Tax On Small Businesses Discovered By FSB

THE FEDERATION FOR SMALL BUSINESSES (FSB) has discovered that 48 per cent of business sectors have seen a rise in the level of flat rate VAT they pay.

The Federation has discovered that the flat rate VAT charged by HMRC to the smallest of businesses has risen to a higher level, and the FSB has urged the Government to review the issue in its Budget submission to the Chancellor this week.

Flat rate VAT is charged to the smallest businesses with a turnover of less than £150,000 and aims to minimise the red tape around administering VAT providing a slightly lower rate which varies dependent on the sector the business operates in.

FSB analysis of the rates has found that businesses operating within the agricultural services sector and membership organisations have seen rates increase by a huge 2.5 per cent. For grocers, newsagents, tobacconists and clothing shops: rates have risen by 1.5 per cent – as have those for businesses involved in social work.

At the other end of the scale, estate agency and property management services will see their rate decrease by 0.5 per cent, and computer repair services by 1.5 per cent.

In its Budget submission, sent to the Treasury this week, the FSB has called for the flat rate VAT to be immediately reviewed. Other key asks in the submission included:-

  • A complete freeze on National Insurance Contribution (NIC) rises, and a reverse on the Government’s plan to increase employers’ NICs in 2011
  • An immediate reform of the tax system:
  • Raising the level at which businesses have to register for VAT
    Standardising personal allowances for all forms of NI and income tax
    Improving tax guidance for start-up businesses and new employers
  • Cancellation of the planned one per cent rise in corporation tax in 2011

Essex FSB Chairman, Iain Wicks, said:  “When VAT was lowered in December 2008 many rates stayed the same and some were reduced by up to 2.5 per cent.

“What has become apparent is that after VAT was put back to 17.5 per cent in January this year, nearly half of the flat rate schemes have seen the VAT level rise above the pre-decrease level. 

“While a few sectors have seen a decrease, the majority of businesses from Essex, Havering or Redbridge using this scheme will see their rates rise, which is unacceptable at a time when cash-flow is limited.

“Essex FSB believes that this is a stealth tax, which will affect a firm’s overall profitability, deliberately directed at small businesses during the recession.

“Essex FSB believes there needs to be more openness in how these rates are calculated and when they rise.

“The Budget is the Governments chance to put flat rates back to 2008-levels and remove the additional tax burden imposed on small businesses.”

Pound Slumps Over Fears Of Election Stalemate

(Telegraph) – THE VALUE OF THE POUND fell sharply on Monday as financial markets took fright at the growing possibility of a hung parliament.

Sterling fell by almost 3 cents, ending the day below $1.50 for the first time in nearly a year amid fears that Britain will be left with a weak government unable to cut spending and balance the budget.

Fears that no party would gain an overall Commons majority led to warnings that the pound was “staring into the abyss” and would fall further still. Figures suggest that traders are placing huge bets on more declines.

The markets’ growing fears about Britain’s economic prospects follow a slide in the Conservatives’ opinion poll lead over Labour. Recent surveys have put the Tory lead as low as two percentage points.

An Ipsos MORI poll last week suggested that Labour could cling on as the biggest party in the Commons.

Within minutes of London trading starting on Monday, the pound’s value began to slide.

At one point, it fell as low as $1.4781, the lowest level since May 1 last year. It rose slightly to finish at $1.4939 at 4pm — a fall of 2.85 cents. The slide also showed in the euro, which was worth 90.22p. Traders are unlikely to be reassured by a ComRes/Independent poll today that puts the Tory lead at five points, suggesting Labour would still have the most MPs but fall short of a majority.

Audrey Childe-Freeman, of Brown Brothers Harriman, a New York bank, said: “The risk of a hung parliament is increasing. You will need a government with a strong majority to push ahead with reforms that the UK needs.”

Simon Derrick, a currency strategist at Bank of New York Mellon, said: “The likelihood that we’re going to move to a rapid lessening of the deficit is being taken away.”

Mark O’Sullivan, of Currencies Direct, said: “As the pound drops, the currency markets appear to have run out of patience. Sterling could be staring over the edge of the abyss.”

Some investors fear that a hung parliament and a minority government would lead international credit ratings agencies to downgrade Britain’s status, making it more expensive to raise funds. A weak pound also drives up the cost of imports.

One international bank, Bank of Tokyo-Mitsubishi, predicted the pound would fall towards $1.40 this year.

A bank spokesman, Lee Hardman, said in a report that the worst outcome for the pound would be Labour clinging to power as a minority government because of the party’s high-spending agenda.

He wrote: “A Labour victory would further damage the fiscal credibility of the UK given their reputation for loose fiscal policy.”

Some currency traders also believe that the pound will come under greater threat if Greece’s crisis-stricken government is bailed out by other European Union members.

If Greece is rescued, some investors believe Britain is the European economy most exposed to market concerns about government deficits.

Gordon Brown angrily disputes comparisons between the UK and Greece, but independent analysts point out that the UK budget deficit this year is forecast to be 12.8 per cent of gross domestic product, comparable to Greece’s.

Downing Street and the Treasury refused to comment on the market movements. Privately, senior government officials have been contacting City banks to reassure them about plans to cut the deficit.

In a City speech last night, Lord Mandelson, the Business Secretary, accepted that Britain was “now unavoidably in significant debt”. But he said Labour was right to put off spending cuts until next year.

The Tories declined to comment. But the party has warned that the City will react badly unless they gain a substantial majority.

As the pound falls, the interest rate on gilts, British government bonds, is rising. That will ultimately push up the interest rates for loans.

Data from the Bank of England also showed that foreign investors sold off the most British bonds for nine months in January. Foreign investors sold £1.5 billion of gilts more than they bought during January, the figures showed.

On Tuesday the Treasury will sell off a new tranche of gilts. Investors said the strength of demand for those bonds would be a key indicator of market confidence in Britain.

Spectre Of Double-Dip Recession Looms

(Guardian) – FEARS OF A DOUBLE-DIP RECESSION and a sterling crisis in the run-up to the election were raised last night amid news of collapsing investment in British industry and a warning from one of the world’s leading financiers that the pound could plummet within weeks.

The pound fell sharply on the foreign exchange markets after a day of grim economic news which saw an admission from RBS that it had missed government targets for business lending, a downgrading of the UK growth prospects by the European commission and a warning from the CBI that consumer spending was likely to remain weak ahead of polling day.

Sterling, already down by a cent against the dollar following the release of official figures showing capital expenditure plunging by almost a quarter between late 2008 and late 2009, saw its losses doubled after Jim Rogers, the former business partner of speculator George Soros, said sterling was a potential “basket case”.

“Other currencies aren’t strong and the euro has real problems, with cracks much wider than Greece beginning to show,” Rogers said, “but it’s the pound that’s most vulnerable. In real terms, it’s already devalued against virtually every currency barring the Zimbabwean dollar and it’s especially exposed over the weeks running up to the UK election. In a basket of currencies, the pound is potentially a basket case. That will put Britain in an extremely bad position.”

On the eve of eagerly awaited official growth figures, loss-making RBS said weak demand for finance from companies left it well short of the targets set by Alistair Darling, the chancellor, when he allowed the bank to park troubled assets with the government. Data from the Office for National Statistics showed that investment was 24% lower in the final quarter of 2009 than a year earlier. Hopes that businesses would start to invest again late last year were dashed by a 5.8% drop in capital expenditure during the quarter.

City analysts said it was “touch and go” whether today’s revision to gross domestic product data for the final three months of 2009 would show that growth was stronger than the 0.1% estimated last month. Colin Ellis, European economist at Daiwa Securities, said the investment figures were “consistent with no upward revision to headline GDP growth – although we would not rule out the possibility of changes in either direction.”

Meanwhile, the European commission singled out Britain as one of the few European Union countries where growth prospects had weakened since the autumn. Brussels expects Britain to grow by 0.6% this year, compared with a previous forecast of 0.9%.

Concerns about the durability of the pick-up in activity were not confined to the UK. Shares on Wall Street fell sharply after the weekly jobless figures rose from 474,000 to 496,000. Although some analysts blamed temporary lay-offs caused by the bad weather, the persistence of high unemployment was enough to shave more than 150 points off the Dow Jones industrial average in early trading.

The CBI, despite reporting a bounce-back in high-street spending in the first half of this month, warned that the outlook for consumer spending before the expected May election was unpromising.

Andy Clarke, chairman of the CBI’s distributive trades panel and the chief operating officer at Asda, said: “The next four months are going to be pretty tough. Last year was a challenge. This year will be equally challenging.”

In its quarterly snapshot of spending, the CBI said supermarkets, clothing outlets and stores selling household goods had all enjoyed better trading conditions following the prolonged cold snap in January. But Clarke said rising fuel prices, pay freezes and consumer jitters over the possibility of a post-election rise in VAT meant times were tough for ordinary families.

Further evidence of the fragile state of the economy was displayed when RBS admitted more of its customers had repaid loans than were granted them in 2009. The bank was set targets by Alistair Darling to lend an additional £9bn to the mortgage market and an extra £16bn to creditworthy businesses, in return for being allowed to insure £282bn of troublesome loans in the government’s asset protection scheme.

RBS lent £11.8bn to those seeking home loans, but business lending fell by £12.2bn, as customers raced to repay their debts. Overall, the bank lent £80bn in 2009 but saw £80.4bn repaid.

The data from RBS supported statistics released by the Bank of England last week which showed that lending to companies fell last year for the first time since records began. Chris Sullivan, head of RBS’s corporate banking business, insisted the bank was doing everything it could to lend. “It’s not about the cost of loans, it’s about the confidence of the market,” said Sullivan.