Small Cap Value Report (9 Jul 2015) - Budget, PLUS, GOAL

9th Jul '15 by Paul Scott

45 comments 27245 reads

Good morning!

There's been a big rebound (about 10%) in the Chinese stock market overnight, although whether it can be considered a fair market is open to question, since the Govt has banned major shareholders from selling their shares for the next 6 months. As with everything in China, it's best to assume that it's not capitalism as we understand it in the West.

I get the feeling that the market crash in China was beginning to affect confidence in Western stock markets, but who knows? Sometimes people look for any excuse to sell positions after a long bull run.

Yesterday's Budget from Mr Osborne was radical, and contained some big changes. There are plenty of Budget reviews online, so I won't replicate that, but my initial thoughts for how it might affect shares/investors are:

Housebuilders & estate agents shares took a knock of about 5% last night - perhaps the future reduction in BTL interest relief, and tightening of Non-Dom status might reduce demand for property?

A big rise in Minimum Wage to £9/hr by 2020 is surely to be welcomed, in terms of making society a little fairer, I think so anyway. Yes, smaller businesses will perhaps struggle, but the £9 rate only applies to over 25s. They will still be able to pay lower wages to younger people. I think the macro effects will be very positive, as the low paid tend to spend all their income, and very fast, so it will boost overall demand in the economy well I think - so the gainers will generally be retailers, in terms of increased sales.

The losers will also include sectors where a lot of staff are paid Minimum Wage - so retailers, hospitality, and the care sector, spring to mind. So it will be interesting to see how the gains and losses will compare for retailers - will they be net losers or gainers? I think they will gain from lower staff turnover, from paying staff a decent wage, and staff feeling more motivated to give decent customer service too, so overall it gets a big thumbs up from me.

What else? The phasing out of the bank levy, and introduction of an 8% Corp Tax surcharge seems a good idea to me, as banks should pay more for the State guarantee which props them up when needed. I see that shares in challenger bank Aldermore …

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Cleeve

9th Jul '15

I agree with the principle but its cheaper to live in the country than it is in London so this should be taken into account with different wage bands. You could argue of course that the economy sets the wages for example chefs are very very tough to get in Norfolk so they command big money and hence should governments be meddling in any of it as in a free market which should sort itself out. I hate the idea of any child living in poverty but at the same time we must not incentivise people to have lots of children knowing that the state would pay, I had a bar maid who had 7 kids and her state support is something like 40k a year, I could not afford 7 kids (nor do I want I hasten to add) but why should she be able to have so many knowing that the state will pick up the tab. It's a debate that could be had for years with no real winner but in essence I hate all government meddling in business as they normally have no idea what they are doing and it has limited advantages so I much prefer a free market. Surely it should be up to the employers what they pay their staff not George Osbourne and of course its up to the staff to want to work at the rates being offered! I would not feel right taking advantage of someone and I am sure most business owners (of small companies) would feel the same way.

Rusty2

Yes I agree about London but to do it fairly you would have to do on a regional basis even then housing costs vary so much, if you go 1 mile up the road houses can be x2 the price. But I agree London should be higher than say Lincolnshire or Middlesborough.

Graham Neary

Bonitabeach,

I think you are talking about a very distinct issue (and some would question whether immigration is a source of "oversupply", or merely an increased supply) but I do agree with you that immigration is a very important factor in the determination of wages and am sympathetic to your point of view.

It is an interesting point about immigration, will this not just encourage more people to come to live in the UK?

cig

Couldn't you simply pass through wage increases into your prices? All your competitors will have the same problem so your competitive position is unchanged. People who use hotels and restaurants are unlikely to all switch to take-away sandwiches and camping just because of a say 10% price increase. Being able to afford that kind of thing is a key part of maintaining a middle or upper class status. Also if this industry's employees have more money, they might come more often as guests...

Immigration also greatly increases the supply of consumers. The basic effect of adding an immigrant to an economy is essentially nil, as you add 1 consumer at the same time as you add 1 worker.

Yes but we did that this year, adding a service charge (discretionary) and giving staff decent contracts with no zero hours employees. We have had lots of complaints on trip advisor, 99% of people are happy and indeed if we have something expensive on the menu like local lobster it sells out but the sandwich buyers are the ones that complain and that in turn puts others off. Sadly trip advisor gives too many people who should not have a voice a large shout at how your business performs although you do get the odd useful comment. We are almost at the stage of dropping sandwiches we make nothing on them and those that eat them take up valuable space. I personally don't care if I pay £ 6 or £ 12 for a sandwich as long as its local fresh and good but there are many who think that £ 6 should be a maximum and when they don't get it they shout from the rooftops which damages the reputation of the place!

underscored

Not if they are here to live in beds in sheds, save serious money and return to their home land, all while living working and spending within their own language group. They also send lots of cash home to family and relatives, whilst undermining wages and living conditions.

That maybe so if they are working but it does cause problems such as housing, pressure on schools, hospitals etc. Demand for housing will push up prices which we have seen recently in rents. Think 65m people in this country is probably enough, problem is the south east has about 25m

Bonitabeach

Hi dangersimpson,

Excellent points made on the reality of tax credits being subsidies for companies paying low wages rather than welfare receipients. A billionaire from an earlier generation showed the economic sense of increasing pay to retain trained and motivated workers.Henry Ford's $5 A Day

I am not in favour of a minimum wage or a living wage. The minimum wage has in far too many sectors become the maximum wage, or as close to it as to make no discernable difference. All these different attempts to "fix" the market for labour shows how broken it is. Pity the unskilled 25 year old competing with younger competion!

Osborne is just tinkering at the edges - creating as many problems as he purports to fix - the whole system has become obese and corrupted.

Employer National Insurance is a tax on employment. He should have looked at divesting some of this, rather than cutting corporation tax, as a means of reducing (he's too timid to eliminate) the "need" for tax credits.

Beginner

MESSAGE FOR CLEVE (the reply button will not work, apologies).

I am in the same business as you, but as an employee. I could not agree more with the last comments. As a tip, do as our boss did: drop the sarnies and bring in a 'lite bites' such as soup and bread and fish strips. Raise the price, improve the margin, get rid of the whining trip advisor numpties.

The so-called living wage, which is just another level on the national minimum wage, will cripple the business where I work. Margins have become very slim. The likely outcome is that no-one over 24 will be employed in the industry!!! I have good bosses who look after us all, but this is simply unfair. Nobody here is on the minimum wage, but nine quid iscrazy unless we have massive inflation. Anybody who thinks this is a good idea is unconnected to the realitiesof low-skilled working life.

Good luck,my friend.

Whether they spend their wages on themselves or send them to relatives overseas does not ultimately make a difference. A pound sterling is really a voucher for UK Plc products, it's not useful for anything else but buying UK products. So the relatives will either spend it on UK exports, or sell their pounds to someone who needs them to pay for UK products. What else could they do with them?

As for undermining wages, you can as well see migrants at the bottom end as liberating UK incumbents from menial jobs, allowing them to switch to more interesting, better paid and more productive occupations. Division of labour is one of the few really positive sum games in economics.

Don't understand that. So if they build houses in Eastern Europe its still the same as spending it in the UK? They will not be buying many UK products in eastern europe.

10th Jul '15

Sorry you lost me completely! So money remitted abroad directly from wages is spent in the UK economy, because it was earned in sterling?

Mark Simpson

Employer National Insurance is a tax on employment.

Although I understand where you are coming from I think some kind of Employer National Insurance makes sense. The Employer does get a benefit from this becasue they can claim some money back for employees on sick leave, maternity leave etc. Most choose to enhance above the statutory but it means that SME are not unduly penalised since they don't have the number of staff to mitigate a sick employee. So to keep effective equal opportunities etc. and let SME's compete we need a system of Employers NI.

Also in the global world where the likes of starbucks reduce their corporationtax by buying the branded beans from a luxembourg subsiduary so making minimal profit in the UK to pay corporation tax there needs to be some kind of tax on companies that is based on economic activity not profit. This could be VAT or Employers NI or Business Rates. But given that business have differnt characteristics of their need for employees, land and sales then a mix of the three makes sense. I think this is probably the real reason that they have changes corporation tax not NI even though the latter feels like a 'tax on jobs'.

Where I think we could simplify things is Employees NI. Apart form a few benfits most don't use/get anyway like contribution based jobseekers this is really just an income tax. Given that the thresholds go from 12% to 2% around the 40% income tax threshold the true tax rate goes from 32% to 42%. However most people don't realise this so simplifying things but making it obvious that the lower rate tax is actually 32% not 20% would be politically tricky imo. Therefore we are stuck with the system we have.

Lets take a extreme example, say 2m greeks come and work in UK, they spend hardly anything and send on average £10k home each year, so that is that £20,000,000,000 so that will benefit the UK economy and not benefit Greece?

Why is that extreme? http://www.theguardian.com/global-development/2013/jan/30/migrants-billions-overshadow-aid

"The UK is the the fourth biggest sender of remittances in the world, the sixth most popular place to emigrate to and the eighth most common place to emigrate from.

There are 7m immigrants living in the UK – about 11% of the population, notably from India (658k),Poland (521k) and Pakistan (452k).

4.7m Brits live overseas, particularly in Australia (1.2m), the US (701k) and Canada (675k)."

Money in $7.9 Billion

Money out $23.2 Billion

Well extreme as 2m from one country, Greece. Brits living abroad probably are not sending much money back to the UK. Unlike many from Europe and Asia.

As for immigrants in UK you should look at towns like Boston to see the impact. Yes they do jobs that people here are not keen to do, problem is we are bringing from abroad and our people are not working.

Sorry, I updated the post with numbers we are looking at a net loss of $16 billion in 2013! This from the low paid sectors that Paul points out are most likely to spend back into the economy.

I am not an immigrant basher, indeed I am a 2nd generation immigrant! Price of Empire ;)

I just don't think that the whole mass immigration thing has been allowed to be thought through in public and smells of Ponzi economics.

I'm not against immigration either, I just think we need to have some control over who comes to our country and I'm not in favour of just picking the most qualified (points based system) either. What happens if 30m people turn up?

Small Cap Value Report (9 Jul 2015) - Budget, PLUS, GOAL

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Paul Scott

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