Page last updated at 23:47 GMT, Thursday, 18 March 2010

City Diaries: 19 March

Man looking at a falling graph

This week our City Diarists discuss what they would like to see in the next budget.

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.

ANTHONY

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

Chancellor of the Exchequer Alistair Darling
"Raising VAT would be a brave move"

Alistair Darling has a difficult balancing act to perform in the budget.

The Bank of England has warned that sluggish consumer demand is likely to lead to a further sharp rise in unemployment. Public spending cuts will take money out of the economy and in doing so risk a double dip recession, so he must be very careful when choosing cuts to minimise that risk. I have long since warned of the dangers of a double dip but now I am more optimistic that it can be avoided. To that point, the government should be praised for the actions it has taken so far but it cannot go on inflating the economy for ever. Indeed, on the other side of the argument, the ratings agencies expect a more concerted effort to reduce the deficit.

The City fears that the chancellor will bottle out of major spending cuts to win voter approval

Markets hate uncertainty and while we wait for the election they are hitting sterling hard because they fear a hung parliament. They also do not expect rates to rise. For a foreign investor a falling currency is a good thing because he will get more sterling assets for his dollars. Although we have not yet seen growth in exports as a result of sterling's weakness, I am sure it is assisting in the government debt auctions. The over reliance on financial services as opposed to manufacturing will make it difficult for exports to respond quickly to the falling currency but in time I am sure we will see exports improve.

Increase VAT

So what should the chancellor do? First, the City fears that he will bottle out of major spending cuts because he needs to win voter approval. To win the electorate over while appeasing the rating agencies he needs to make cuts which the public won't care about. So the priority must be to cut out waste in government. Sack all the consultants and cancel expensive computer projects which are nice to haves but are not essential. He should choose a course of action that gains the biggest headlines but causes the minimum pain for the voters, like abolishing quangos which the public hate.

A much braver decision would be to raise VAT to 20%. Raising VAT is not as bad as it seems because a tax of £2.50 in a £100 of expenditure is not going to discourage consumers from buying something they really want.

Low interest rates

What will really hit consumer confidence is raising interest rates and a related fall in house prices. The UK has high owner occupancy and high mortgages. A 1% increase in rates will hit people hard. House prices can fall a little and people won't worry too much but if there is a big fall, people will feel less confident and spend less.

In summary, keeping interest rates low must be the number one priority. There are two ways that can be achieved. First show the markets, that you mean business about cutting the deficit and second let exchange rates fall.

Politically, raising VAT would be a brave move but that might just steal the Tories thunder and at the same time be accepted by the electorate. It does not necessarily have to be a vote loser if the chancellor is honest. With the expenses scandal still fresh in peoples' minds, honesty really is the best policy.

LAURA

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

petrol pump
"Many business will feel the effect of record fuel prices"

Q: When is a budget not a budget but a manifesto?
A: When it is delivered 14 days before a general election is announced.

It is therefore quite likely that much of the pain will be either hidden or non-existent as the chancellor - if it's the same guy after May 6th - will be able to have a second "emergency" budget after the election if he so chooses, rather than spooking the electorate now.

I don't expect much from the upcoming budget but am prepared to give the chancellor the benefit of the doubt as it seems he is much more inclined to give a more honest picture than the prime minister or party machine.

Volatility in the markets in recent weeks and the continued hammering of sterling do not bode well for the economy if the election is hung or if the budget fails to outline a credible plan to cut the deficit and wean the economy off state handouts relatively quickly. We are already paying a higher rate of interest on our public debt than other G7 nations, something which undermines our continued AAA credit rating and global position.

The public sector needs a reality check

One thing which is unlikely to be changed is the 3p increase in fuel duty earmarked for the 1st April after the last budget. Retail, manufacturing, tourism and discretionary spending will all suffer as a result of record fuel prices, particularly when coupled with electricity and heating bills which have not come down by anywhere near the amount wholesale energy prices have. After April 1st 74% of the price at the pump will be tax, which is a disgrace and hugely damaging for people who just want to go about their daily lives.

I would like to see not only some recognition that the public sector needs a reality check in line with that seen by the private sector, but also action on fuel poverty, and declining rates of private pensions and savings amongst younger people. A general simplification of the tax system for both businesses and individuals would go a long way to eliminate tax evasion and bureaucracy. It is probably too much to hope that the 1% increase in NI next year for employers and employees is scrapped but I believe this will prolong a slow recovery of the economy in the medium term.

Private sector pain

Conservative plans for a reduction in small business tax in their post election budget in June/July (if elected) are the right way to go to ensure private business can flourish in the years ahead and should prove cost neutral if not income generative for the Treasury.

Companies I have seen recently for bank lending have mostly implemented the job losses and restructure they have needed to stave off immediate threat to their balance sheet but many have yet to get to the low point in their sales downturns so more may need to be done. What is apparent is that the wage largesse seen pre the credit crunch is unlikely to return and employees should expect their pay freezes to continue into next year if not beyond.

It seems strange that unemployment claimants are going down but over 100,000 people have added themselves to the economically inactive column at the same time. Unless there is a structural shift in the UK economy it is difficult to see how many of the now 8 million people who are out of work (through choice, illness, training or other) are going to be brought back into economic productivity anytime soon.

MARK

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

Lord Ashcroft
" I hope that the non-dom issue will be cleared up"

I love the budget. No, I really do. It is a day when politicians pull out all the stops to win over voters. They bicker, criticise, confuse and at the end of it all alcohol is more expensive and petrol is more expensive. The hauliers will be up in arms, the pubs going out of business and the consumers going to all conquering supermarkets for everything.

The television cameras will be meeting families on sink estates that are worse off because their daily intake of cigarettes has increased while increases in tax credits are eroded by the fact that alcohol is more expensive. Small business directors will accuse the government of stifling growth while the hauliers will be on, again, telling us that petrol is just too expensive and they are going out of business, again. A slight bible misquotation, but the "chancellor giveth, and the chancellor taketh away".

Green economy

For me, I want the budget to be about those that attempt to avoid tax. I am hopeful that the non-dom issue will be cleared up and the HMRC are given greater powers to chase those that have significant wealth from the UK but reside in other areas to avoid the UK tax. As everyone jumped on the (very fast) Lewis Hamilton band wagon and he earned millions from patriotic Brits, it always troubled me that he chose not to live and pay tax in the UK. However, I appreciate that the government dithering and recent rulings make it difficult to fully understand UK tax!

I'm in favour of green taxes but I want to see sustainable development rather than just taxing the polluters

As the general election is just around the corner, we might see green taxes in favour of the usual suspects such as a 1p on beers, wines and spirits. I am in favour of the push to a greener society but I want sustainable development rather than just tax polluters. There has to be something done about the unemployment levels among 18-24 year olds and I would like a link between the push to greener solutions and reducing unemployment. After all, we are supposedly saving the world for the generation to come - shouldn't they be part of the solution?

Finally, if I had one wish, it would be that someone with charisma delivered the budget. I realise it is a serious subject, but get someone like Michael McIntyre or Jason Manford to tell us what is in it, it would be much more entertaining.



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