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UK Emergency Tax Cuts to Get Consumers Spending

Economics / UK Economy Nov 24, 2008 - 12:25 AM GMT

By: Nadeem_Walayat

Economics Best Financial Markets Analysis ArticleLater today, Alistair Darling the Chancellor of the Exchequer is expected to announce a series of emergency tax cuts aimed specifically at consumers to get them spending again as the retail sales market falls off the edge of the cliff following hard on the heels of the crash in the banking system that required an emergency £500 billion bailout to prevent a catastrophic collapse of the financial system. This was followed by an emergency 1.5% interest rate cut at the November Bank of England MPC meeting and therefore sets the continuing scene of emergency near panic actions aimed at two primary goals.


1. To prevent the economy from collapsing further than the anticipated 2% contraction during 2009.

2. To lay the ground work for a potential Mid 2009 election.

Have Consumers Stopped Spending?

Whilst official data suggests positive retail sales of 2% year on year as though everything remains rosy on the high streets, the real state of the UK high street as per trend and inflation adjusted data illustrates a slump in retail sales activity that is contracting at the rate of -1.8% year on year and reflects the actual state of the retail sales market. This trend is expected to continue deteriorating for the duration of the recession as more retailers report losses and in fact go bankrupt.

UK Real Retail Sales - Trend Adjusted

More Bargains Coming for Shoppers

The outbreak of panic sales of 20% plus off marks just the first stage of the consumer bust of 2009. Shoppers can expect more discounting the closer we get to Christmas, followed by deeper cuts during the January sales and later in 2009 by the 70% to 80% price cuts in the CLOSING DOWN SALES as many retailers go bust.

Tax Cuts to Get Consumers Spending

The government has done well to leak key elements of the proposed tax cuts targeted at consumers ahead of Mondays announcement, these look set to total in the region of £20 billion and focus on -

  • VAT Cut to 15% - Cost £13 billion, European rules do not allow for a deeper cut.
  • Small Business 1p Tax Rise Postponement- Cost £2 billion
  • Tax Free Allowance Extension - Cost £3 billion - The extension in tax allowances to cover abolition of the 10% band will continue during 2009.
  • Tax Credits - Cost £2 billion - To put money directly into traditional labour voters pay packets that have the greatest propensity to spend.

To counter Monday's borrowing fuelled spending spree and the additional £100 billion of 'officially recorded' net borrowings during 2009, are to be paid for from those earning above £150k by means of a 45% top tax rate. The notion that this will pay for the £20 billion giveaway on Monday is ridiculous, as at most this will raise £1.2 billion per year and therefore the measure is more for political purposes as a message to differentiate Labour from the Conservative party in the build up to a mid 2009 election.

Soaring Government Debt

As my earlier analysis illustrated ( Gordon Brown Bankrupts Britain to Win Next Election Mid 2009), UK real public debt is expected to soar far beyond the 2007 level of £614 billion towards an estimated £1,065 billion this year. This would put UK debt at an eye watering 81% of GDP up from 46% of GDP in 2007. However worse is to come in 2009 and 2010 as the UK economy contracts and the short-fall between tax revenues and government spending is met by ever more government spending.

UK Public Sector Real Debt

UK Real Debt GDP %

Savers Pay the Price for Government Borrowing

Whichever government wins the next election, will be forced into taking measures to bring government borrowing under control to avoid igniting hyper inflation that will destroy the value of savings much as occurred during the 1970's. British savers have already witnessed a loss of value of savings of as much as 20% this year despite receiving interest rate payments of as much as 7% due to the crash in sterling which will filter through into higher headline inflation.

The crash in sterling is not over as more and more investors pull out of the UK in the face of the growing level of borrowing. This puts Britain on a similar path to bankrupt Iceland, unless inflation is brought under control which means much higher interest rates, therefore the deflationary bust of 2009 looks set to be followed by much higher inflation than anyone at this time is forecasting, and especially the Bank of England which forecasts CPI inflation of 1% during 2010. More on the prospects for inflation in the imminent publication of the Market Oracle UK inflation forecast for 2009-2010, to receive this and other forecasts in your inbox subscribe to our always free newsletter.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-08 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 150 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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