Page last updated at 22:50 GMT, Thursday, 23 April 2009 23:50 UK

City Diaries: 23 April 2009

Man looking at a falling graph

This week, in his Budget announcement, Alistair Darling said the UK would have to borrow a record £175bn as the economy faces its worst year since the Second World War.

The Budget and its implications are some of the issues covered in this week's instalment.

These diaries are written by people who work in finance and have had a front row seat as their industry goes through the biggest changes in decades.

They give us regular insiders' updates on the mood in the City of London and the dramatic changes in the world of finance.

LAURA

Laura (not her real name) works for a commercial bank in London.

With the news that the government is going to increase our debt by another £606bn I thought I would turn to a favourite bankers training method (the role-play) to give our response:


Customer: "I would like to have a loan of £30,000 for each member of my family please."

Manager: "Hmm, sir I see you are in a lot of debt already, how are you going to pay this back - are your finances improving over the next 12 months?"

Customer: "Well no, but my current outgoings are only going to increase by 1.6% next year, although I do have some other expenditure I've just agreed."

Manager: "So you have no money, you are already borrowing beyond what you can repay and you want another £30,000 each? Sir, I'm afraid you have a debt addiction problem. I recommend Citizens Advice as being a good place to start getting counselling. Bankruptcy is a possibility although it will impact your credit rating for some time."

In business banking, if someone presents you with a business plan and you find out that their previous one was way off, you don't generally take a positive view on the figures.

Looking at so many of our customers books recently, it is apparent the previous gimmick to help business (the VAT cut) has ended up costing most of them money, and there were no savings for companies that sell to other companies.

Ordinary people know that if you don't pay your debts someone might just turn up and take your house

Add to that burden a 0.5% increase in national insurance next year, higher transport costs for getting your goods and supplies about with the fuel tax hike, and it is difficult to see what help has been given to the sector of our private economy which employs the most people.

The financial sector has been criticised for not coming clean on their debts sooner but it seems this is perfectly fine for the chancellor to act in this way. Newsround on Children's BBC gave an unintentionally good summary of the Budget on Wednesday by highlighting all sorts of 'new' 'investments' which are made possible by borrowing more - and yet no mention was made of the consequences or of having to pay this back.

Perhaps Labour believes that the average citizen has a similar intellectual capacity and will think that everything is great because we'll just take out a new loan. Ordinary people know that if you don't pay your debts someone might just turn up and take your house.


MARK

Mark (not his real name) works for a stockbroker outside London.

Sitting in a cafe in London recently, utilising the free wi-fi and enjoying a latte, I experienced what is probably the most surreal experience of my life.

Sir Fred Goodwin
Is Sir Fred Goodwin to blame?
Next to me, two City professionals, reading in between discussions, the City Diaries! My City Diary! Of particular interest was my comment 'we all contributed to this disaster'. As I began listening, now abandoning any work I was trying to do and now solely focussing on swan-necking and listening to their conversation, it disappointed me that they did not like my comments.


According to them: "It was that Fred the Shred or whatever they call him and all the rest of those bankers."

Reassuring nodding came from her colleague who then added: "My bank charged me £35 because I was overdrawn by £80. I mean, it was only £80." Colleague Number One, as I will call her, then added: "Yes, my credit card was maxed out, I have bought some shoes and a new dress for this cocktail party, and I forgot to make the minimum payment. It was shocking the amount they charged me." Colleague Number Two looked on in disgust before going to collect two further coffees.

Attitude change

It took all my powers of restraint not to mention that these two, in many ways, were those I was referring to.

A colleague seemed disappointed recently that they were turned down for a loan. It was hardly surprising, with a bank account constantly overdrawn and a high credit card debt, why would someone lend? Her response "well they used to".

Attitudes most definitely need to change. It was therefore, with a curious eye that I switched on the Budget in hope that the government would realise that these attitudes would have to be changed and not just in the short term.

G20 march in London
I expect more gimmicks, such as the VAT reduction, to come out from Number 11 depending on how the economy responds

It was therefore, slightly disappointing that the Budget contained just the usual tax increases of cigarette, alcohol and fuel. The slight mitigating factor was the increase in the ISA allowance to £10,200, although this was made unnecessarily complex by allowing over 50s to use that allowance this year with the rest of following later.

ISA are big business for stockbrokers and it is a welcome boost that the allowance has increased.

However, I think more could have been done for savers. Obviously, the government wants people to spend to help the economy through this difficult period but ultimately, you need savers.

You also need to encourage saving throughout the economy and not just for high-rate tax payers. Perhaps there was an opportunity to give basic rate tax payers a break on the tax on savings and to help them build their nest eggs which are currently depleted and yielding low rates of interest.

I have not been blown away by the Budget and I think the most interesting part of it was the level of debt and the economy contractions. I expect more gimmicks, such as the VAT reduction, to come out from Number 11 depending on how the economy responds. Some firms would have been looking to the budget to give them some relief but I don't think there was a lot.

For some, the tough decisions now have to be made.


ANTHONY

Anthony (not his real name) works for an investment bank in the City

It is very difficult to believe the Budget forecast that the recession will end this year. Even more improbable is the chancellor's forecasts for growth in 2010 of 1.25% and 3.5% in 2011. He had to say that because there is an election coming in 2010. His previous forecasts on public sector borrowing have been grossly understated and now he owes up to £175 billion.

Alistair Darling
The City did not like this Budget. The increase of the tax rate to 50% did not help, but more important is the lack of a clearly defined plan to make public expenditure savings. Yes - Darling mentioned savings of £9 billion but did not say when. Call me a cynic - but after the election seems likely?

I know you all think bankers are the lowest of the low and won't care if we have to pay more tax but, excuse the pun, bankers would not sink to such a level as to claim for a bath plug!

Taxing the wealthy will not increase the overall tax take. It will just encourage people to ply their wares in other countries. It all comes down to trust about the motivations for this Budget being election driven rather than thinking what is best for the country. This is why I don't believe the chancellor's forecasts.

Disappeared permanently

The prime minister has also stretched his credibility with his earlier statement that Britain was better placed than other countries to cope with the recession. I think not. I prefer to believe the IMF who said the exact opposite.

We rely too much on financial services to power our economy. Jobs have disappeared permanently in this industry.

Twenty pound notes being handed over

If I was David Cameron, I would not be looking forward to being prime minister

A new report published this week by Greater London Authority Economics said that London's growth rate would continue to fall until 2011. It also predicted that 290,000 jobs would be lost in financial services over the next two years. Where will all those redundant bankers find new jobs? It is still early days for the effects of the recent sharp rises in unemployment to filter through into the economy. Financial services companies are usually generous with redundancy pay offs.

This money would delay the immediate impact until it runs out and when there is no job on the horizon, the only alternative is to sell your property or default which will drive prices down further.
One reason why the chancellor may be right about the recession in the short term is that he still has not done anything about public finances. The music has to stop and the medicine has to be administered. Fancy ideas like the car scrapping scheme only delay the inevitable. The increase in capital allowances is to be welcomed but only if it is offset by proper savings like stopping the ID card scheme.

This Budget has not made concrete plans to cut spending only slow down the rate of growth from 1.1% to 0.7%. Cutting spending may save on tax rises but it still makes civil servants redundant who spend their wages in the real economy.

When the government cuts expenditure it takes money out of the economy in just the same way as tax rises. Take out the stimulus and the economy will contract and the recession will go on.

This is why we still wait for these cuts until after the election. It would be ironic if the British people re-elected them to sort out the mess.

If I was David Cameron, I would not be looking forward to being prime minister.




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