Show me Numbers

Today’s announcement of £37bn of investment in British banks was accompanied by words from Gordon Brown at his press conference about rewarding “hard work, effort and enterprise” rather than “irresponsibility and risk taking”.

This is a sentiment I agree with wholeheartedly but one I find very strange coming from the government who only a year ago scrapped Taper Relief, effectively increasing the CGT rate for hard working and enterprising small business owners by 80% from 10% to 18%. Given the number of SME’s in the PR industry this is particularly pertinent to this sector.

At the same time they reduced the rate on speculative asset transactions e.g. share sales and buy-to-let from a maximum rate of 40% to the same new rate of 18%. The overall benefit to the Treasury? A reported “massive” £350m – small beer these days!

The government subsequently made a small gesture to the SME community by introducing entrepreneur relief on the first £1m of gains by owner managers – arguably peanuts in the scheme of things.

So at a time when the country needs, as the PM rightly points out, “hard work, effort and enterprise”, they have created a tax environment that draws no distinction between this and “irresponsibility and risk taking” in asset markets. Unless this decision is reversed in the pre-budget report I find I cannot take these messages seriously.

According to various sources the nitty gritty of the Government’s bank recapitalisation plan is going to be announced tomorrow morning. The coverage reminds me of a quote from The West Wing “A billion here a billion there. Sooner or later it starts to add up to real money.” The important point is what will our £39bn/£50bn get us? By my back of an envelope calculations, based on Friday’s closing share prices and the current rumours, taxpayers are indeed (as per ft.com) about to become the controlling shareholders in HBOS and RBS.

Royal Bank of Scotland

Market capitalisation on Friday £11.9bn.
Rumoured ordinary share investment (according to ft.com) £15bn
Post investment shareholding = 15/(15+11.9) = 56%

HBOS

Market capitalisation on Friday £6.5bn.
Rumoured ordinary share investment (according to ft.com) £9bn
Post investment shareholding = 9/(9+6.5) = 58%

Of course the HBOS situation will then be further confused by the rumoured £5bn investment in Lloyds TSB and the (apparently) still planned merger of the two.

Finally there is the issue of whether given the current investment environment we should even be investing on the basis of Friday’s closing price anyway? Shrewd investors know how to take advantage of weakness. It will be interesting to see what deal Gordon Brown will have negotiated for us as his track record isn’t the best or perhaps he is already in bed.

There was a lot of talk during the Olympics about how the Chinese consider the number 8 to be lucky as the word for “8″ sounds very similar to wealth. Well following on from my post on Tuesday about financial media language I couldn’t go home without a quick word on today’s events on the stock market. Shares have surged today with the FTSE-100 closing 8.8% up, it’s single biggest gain in a day and for once, unlike my earlier comments, any hyperbole will get no argument from me. In fact surged seems a little conservative, rocketed wouldn’t be overdoing it.

Will this “double 8″ change prove to be lucky? We can only wait and see, but I suspect we may not find out the answer to that question for quite a while yet. In the meantime we may all need to keep a thesaurus close at hand

That’s what I ask for when I go to get my haircut – next one is due on Friday as it happens. Lee, who cuts my hair, understands what I mean by a “trim”. I don’t walk out looking like I’ve just been scalped – I have little enough hair as it is

With all the excitement yesterday over Lehman Brothers, the announcement that China was reducing interest rates got a little lost in the mix. The announcement was significant though as it represents China’s first cut in interest rates in 6 years. The cut was 0.27% from 7.47% to 7.20%; however two pieces of media coverage described this change in very different ways. The BBC described the change as a “trim”; however The Times view was that China had “slashed” rates. Now I don’t know about you, but if my bank told me that my mortgage interest payment had fallen by 3.6% (0.27%/7.47%) I wouldn’t really consider it had been slashed.

The serious point here is that in my experience the language that is used in reporting economic and financial matters can sometimes suffer from a lack of consistency. Share prices “plummet” when the fall is a little over 1%, house prices “crash” when they fall 2%, but oil prices only “fall” when they reduce by 5%.

The lesson this has taught me though is if I ever need to get a haircut anywhere else I need to check first if the person about to cut my hair ever reads The Times!

Today’s announcement that the stamp duty threshold has been increased to £175,000 for the next year raises some interesting questions. Was it a coincidence that this announcement came on the same day as the OECD announced the UK would go into recession in the second half of the year? Let’s be generous and say that it was. However the wonders of the stamp duty system leads to this creating some interesting numerical anomalies. The stamp duty bands will now be as follows if I understand correctly:

0% – up to £175,000
1% – £175,001 – £250,000
3% – £250,001 – £500,000
4% – £500,001+

This means that if I buy a property for £175,000 I pay no stamp duty. But if I buy a property for £250,001 I pay £7,500 in stamp duty. This means I have to pay £7,500 more to buy a property that is £75,000 more expensive i.e. 10% of the extra cost of this property. Pressure had already existed on sellers just above the £250,000 level to reduced their price with the previous increases of the exemption in the last three years to £120,000 and then £125,000, but this change just made that pressure even greater.

The change may benefit housebuilders of properties between £125,000 and £175,000 as effectively the taxpayer has just subsidised the sale of those houses in that price bracket by 1% of their value, but it probably won’t help chains greatly due to the presence of the same substantial level of stamp duty on properties greater than £250,000.

The estimate of £600m also only represents less than 10% of the tax receipts from residential sales – a relative drop in the ocean. Delving further highlights the Treasury’s reliance on the tax generated from the higher bands. In 2006-7 (the last year I can find this analysis for) the stamp duty generated on sales of properties above £250,000 was £5.07bn of a total of £6.45bn, nearly 80% of the receipts. This compares with only £1.64bn of a total of £2.69bn in 2001-2, approx 60% of receipts.

This means that of the £3.7bn of additional receipts in 2006-7, £3.4bn came from the higher bands.

Conclusion – today’s announcement is all about trying to create a perception of action, when in reality the Government has become so reliant on this income stream that it can’t afford to reduce the amount it receives by very much so it looks for the way that will create the biggest headline for the smallest cost.