50% Income Tax

The increase in the rate of income tax for the high earners seems to be the most talked about topic of this year's budget. The tax applies to all those who earn £150,000 or more. Add to that the National Insurance contribution and it equates to more than half of one's salary. The aim of this rise, according to the chancellor Alistair Darling, is to contribute to the Treasury coffers to make up for the huge amounts of public sector borrowings, £175 billion this year itself.

But it looks like the aim of this move is to gather support from the majority of the public who seem to hold all those who earn huge amounts of money responsible for all the mess that the economy is in. A poll by the Times newspaper shows that 57% of the respondents back this increase in tax. The accountancy and tax experts will definitely see a rise in business since they will have many clients asking them to look for loop holes allowing them to dodge the tax. And who will then pick up the bill? The hard working majority of course.

A lot of measures have been introduced in the budget to help people, like the scheme for the 18-25 year olds, £2000 car scrappage scheme, ISA allowance, etc. But its one thing to announce something and another thing to actually implement it.

But, its not whats in the budget that's important, but what wasn't included in the budget. If the money coming in is less than the money going out, it may be OK to borrow money in the short term to cover that deficit. But somewhere along the line, cuts in spending will have to be made. There is no clear indication where those cuts will be made.

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To make a start, how about the MPs themselves cutting back on the expenses that they claim from the tax payer. I mean claiming back 88p for a bath plug, how ridiculous is that. Its like almost mocking the tax payers. It is understandable that an MP from, say Newcastle, should be able to stay in London when performing his duties and expect the tax payer to pay for that. But that doesn't mean buying a second home and pocketing the profit made from it. Its means lodging in a hotel during the stay. And if the MPs really care for the taxpayers, why not take a pay cut? Its not a lot to ask. Many workers have taken a pay cut in companies so that their colleagues can keep their jobs.

The Treasury estimates that it will spend £119 billion of the £671 billion on Health services this year. How about asking those who drink excessively and then take up the resources of the NHS when their bodies cant take it to pay for the service. How about allocating resources to curb rising obesity so that money doesn't have to be spent on treating illnesses arising from it. Distributing garden tools and seeds across the schools would provide physical exercise and free produce as well.

People who currently receive help paying their fuel bills could be provided with subsidies allowing them to purchase energy efficient appliances such as electric kettles. This would reduce the energy used which would reduce the bills which would reduce the amount payed by the Government. Subsidies over 50% could also be provided to buy solar panels which would make homes that receive fuel allowance self sufficient which means that they wouldn't be requiring the help from the Government.
There are many other ways that the money can be spent efficiently by the Government. Asking a group of over-paid Government consultants isn't going to help, ask the public for ideas. I am sure that a lot of constructive ideas will emerge.

In hindsight, if the Government had spent their money wisely when it was coming in and saved for a rainy day, there might have been a bit of buffer that the Chancellor could have used. We instead ended up with no savings and a massive hurricane instead of a rainy day. The budget doesn't seem to be based on sound economics, but on hope and a prayer. If the Chancellors own figures are to be believed from last year, we should be in a recovery sometime soon. But instead, we are still in a deep recession. Yet, he hopes the economy will grow by 3.5% in two years time. How? Manufacturing is affected despite the weak pound and the financial sector is not as big as it used to be. Who will then lead the recovery?

Even if the figures are somehow achieved, it is still better to plan for a slow growth and be pleasantly surprised by the massive growth than to plan/hope for massive growth and then get it spectacularly wrong.

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Budget 2009
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Deposits Fall by £2.3 billion

According to the figures released by the BBA (British Bankers Association), deposits in the high street banks fell by £2.3 billion in January alone.

One of the reasons for this is that people who have lost their jobs are having to use their savings to supplement the loss of their income. Even those who are still employed, but have been forced to reduce their working hours or accept a pay cut, have to withdraw from their savings to meet the shortfall. Those who bought houses when the prices were at their peak are having to use their savings to bridge the gap when their mortgage nears renewal. Many are also dipping into their savings to pay off their credit card bills from Christmas and other unsecured loans.

Also, with the base rate at 1% most high street banks are offering almost no significant rewards to savers for their money. There is almost no incentive for people to save. So, those with savings are looking for alternative forms of investment, something that will at least give them a rate of return above or at least matching the inflation rate.

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A typical banking model is banks borrowing money from savers in the form of deposits and lending that money out to borrowers in the form of mortgages, loans, credit cards, overdraft, etc. The bank charges the borrower a fee, in the form of interest, for the sum of money that is lent out. The bank gives the depositor a reward, in the form of interest, for allowing it to use its money. The fee that the bank charges the borrower is slightly higher than the rate which it pays out to its depositor, and the difference is pocketed by the bank.

Banks are still finding it difficult to borrow from the money markets. And even if they can, its going to be really expensive, which means that the extra cost would have to be passed on to the borrower. So, if deposits are decreasing and savers are withdrawing more money, banks have very little to fall back on. Also, savers have, to a great extent, lost faith with the banks. They will no doubt feel that their hard earned cash is being used to pay bonuses and reward failure.

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It seems like banks will have to go a long way in winning the trust of the consumer and offer more than the paltry rewards to attract their savings. Without the deposits, they'll find it really hard to fund the lending. Unless, of course, the name of the bank is Northern Rock which has access to the pockets of the taxpayers. Northern Rock was nationalised and was lent some £28bn by the Government last year. It payed back most of it, around £18bn, by forcing its existing customers to move to other providers. This week it pledged that it would offer new mortgages which will be worth around £14bn over the next two years. It most certainly wont be anywhere near the 100% it used to offer.

The overall sentiment seems to be that if bankers want their customers' money, they will have to work really hard to get it, because the customers would rather spend it on themselves than paying the bankers to spend it for them.

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Unemployment nears 2 million

According to the figures released by the Office of National Statistics, unemployment in the UK rose to 1.97 million this January. This is marginally short of the 2 million predicted by many economists. But with the string of job cuts announced by many businesses like Barrats, Virgin Atlantic, JJB Sports, Royal Mail, this year, there is no doubt that the unemployment figures will bypass 2 million very shortly.

Not to be out done, RBS is doing its bit to add to the unemployment figures. It announced this week that it would be cutting 2,300 jobs. Yet, it is planning a £1 billion bonus package. Why? To retain their talent or they will go elsewhere. Where would they go, when most banks are reducing their staff numbers? When unemployment is increasing, to have a decent job itself is a bonus. Another reason being given to justify a bonus is to reward their staff who have worked hard. No doubt, hard work should be rewarded. But not using the £20 billion lifeline it has received from the taxpayers. And if bank employees should receive a bonus, shouldn’t the doctors and the nurses and the teachers and the army personnel and many others receive a bonus for their hard work as well?

To use the public’s money, which was supposed to be lent to the businesses, to remunerate staff is insulting to those who have lost their jobs and those whose returns on their savings have been eroded. If the head of the banks are indeed impressed and overwhelmed by the hard work of their employees, then they must reward them by putting their hands into their own deep pockets, not the taxpayer’s.

NatWest, owned by RBS, in recent months has launched a MoneySense advice campaign across its branches advising its customers how to manage their money and their debt. This is rather amusing. The very banks that lent more money than the value of their deposit base are trying to teach their customers how not to spend beyond their means. Perhaps the top executives at RBS and other banks should take some time off their busy schedule and pop down to their local NatWest branch and learn a thing or two about managing money and cutting their costs.

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Comet to charge suppliers for shelf space

According to the Financial Times, electronics retailer Kesa, who owns Comet, has asked its suppliers to pay up to £15,000 for the pleasure of having just one of their product lines displayed on Comet's shelves. Why? Well, according to Comet's commercial director Bob Darke, its because of the tough economic times.

Comet must be stocking 100s if not 1000s of products. Do they really think that all the suppliers will pay a huge fee for each and every product displayed? They would have to sell hundreds of units of each product range just to make up this fee, let alone pay their direct and indirect costs. This would be a great strategy if (a) the economy was booming and (b) the amount of product ranges out stripped the amount of shelf space available. It would allow Comet to stock the most profitable product and earn a nice fee at the same time. Sadly though, the economy is not booming nor is it likely that suppliers are dying to have their products displayed on Comet's shelves. Suppliers may in fact be forced to increase their prices to meet this fee otherwise it would add to the heavy losses that they already would be suffering from or they might even have to withdraw their product ranges entirely.

In an economy which is officially in a recession, increasing one's prices is not exactly the best strategy. Everyday there are news of more and more job cuts. Even those who have jobs are spending less because they are worried that they might lose their jobs. At such times, consumers are likely to focus more on necessities and forget about the luxuries. And plasma tvs and mp3 players are not exactly as important as bread and milk such that people will be forced to buy them.

Kesa is not alone, almost all retailers are affected by the tough economic times. Many supermarkets deal with it by squeezing every last penny out of their supplier's profit margins. Others buy on credit and exert their purchasing power by paying their suppliers after a long time. The supplier has no choice, he has to either accept it or lose the order. But I dont think anybody, not lest at this time, would charge their suppliers for shelf space.

I think Kesa's move is akin to digging one's own grave. It might as well just hand over its market share on a silver platter to its rivals.

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Hidden Cost of Redundancies

The number of people unemployed is rising everyday due to firms going bankrupt or businesses making some of their staff redundant as part of a "cost-cutting measure". However, the Chartered Institute of Personnel and Development (CIPD) warned yesterday that redundancies could in fact prove to be a false economy for businesses.

It estimates that the actual cost of redundancy could reach up to £16,000 for each employee made redundant. This figure takes into account the redundancy payment and the costs involved in recruiting and training replacement staff. But, redundancies can also lead to lower staff morale because when employees see some of their colleagues being made redundant, they fear about the security of their own jobs. This leads to a drop in their productivity which in some cases would lead to the business losing its competitive edge over a period of time. The CIPD's figures doesn't take these factors into account.

For most businesses redundancies are the most straight forward ways of cutting down costs in the short term. Less staff means less wages to be paid each month. Although analysts and bankers and politicians cannot agree on how long it will take for the economic condition to improve, they all agree that it will improve in the near future.

When the situation does improve, a business should be in a position to meet the upsurge in demand if it wants a share of the increasing market. This does not only mean having enough number of staff, but staff that are properly trained and equipped with necessary skills to help them do their jobs to the best of their abilities and be efficient. So, when employees are made redundant, they take the skills that they have acquired at the firm's expense with them and this is another indirect cost to the business.

When the economy is booming, there is demand for staff from businesses who want to grow. For those businesses that require staff with special skills, this could prove to be a costly affair because people with those specific skills might be hard to find. Also, if people with a particular skill are in high demand, the business would have to be prepared to pay a higher salary or offer lucrative perks or else the prospective employee might end up working for the competitor.

Most businesses have a Human Resources Department which looks at the company's long term objectives and then works out the staffing needs like the kind of staff required, the kind of skills required, etc., to achieve these objectives. Rather than just making staff redundant, businesses looking to grow in the near future should perhaps evaluate their long term goals and view the currently unemployed people as a pool of highly skilled employees and recruit them cheaply to make the best of the up turn. To help realise the true cost of redundancy, the CIPD has created a formula for employers.

Real cost of redundancy = (n ×R) + (x ×H) + (x ×T) + ny(H + T) + Wz(P - n)

Where:
• n = number of people made redundant
• R = redundancy payments
• x = number of people subsequently hired
• H = hiring costs
• T = induction/training cost
• y = percentage quitting post redundancy
• W= average monthly staff salary
• z = percentage reduction in output per worker caused by lower morale
• P = number of people employed prior to redundancies

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Inflation? Worry about Deflation instead.

It was announced today that the Consumer Price Index (CPI) fell by 0.4% from 4.5% in October to 4.1% in November. The CPI is the official measure of inflation used by the Government. The biggest factor for this fall is being attributed to the fall in crude oil prices. The average price of petrol was 95.2p. On the other hand, prices of fresh fruit and vegetables and non-alcoholic beverages is said to have risen compared to last year.

Although the drop is good news, the rate of inflation is still twice the official target of 2%. So, Mervyn King, the governor of the Bank of England put pen to paper and wrote a letter to the Government explaining why the rate of inflation had not hit the target. The governor of the Bank of England is required to write a letter to the Government whenever the rate of inflation is either 1% above or below the target and explain the possible action the BoE might take to solve it. However, Mervyn King feels that the next time he has to write a letter to the Government, it may not be about the reasons for inflation, but deflation instead.

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What are Inflation and Deflation?

Inflation is regarded to be a bad thing since it means a rise in prices, which is a bad thing for shoppers. Then, deflation must be a good thing, right? In the short term, yes it is. In the long term though, its a dreadful thing. To understand why a drop in prices is such a bad thing, one has to understand the meaning of the terms "inflation" and "deflation" and its causes. Inflation is the general increase in prices or, it is the decrease in the purchasing power of money. There are two possible causes; either the cost of production has increased, like the cost of raw materials or labour, or demand is out stripping supply. Take for example a rise in price of a NintendoWii games console. This may be due to a rise in the cost of materials and parts and workers who produce it. Or it could be that the number of units available is less than the number of people wanting to buy it, so the price goes up. Around Christmas, it is likely for the latter to be true. It wouldn't be unusual around this time to find a NintendoWii on eBay at twice its retail price.

Deflation is the persistent decrease in prices. This happens when supply outstrips demand which could happen due to a surge in productivity. Or, like in the current climate, consumers rein in their spending which means that shops have to cut prices to entice customers to spend. If this happens a couple of times, it creates an anticipation of further cuts in the future. So, although consumers may have the purchasing power, they postpone certain purchases since they would be cheaper in the future. Its a self-fulfilling prophecy where consumers postpone their spending thinking that there would be price cuts, and sure enough, shops cut the prices to persuade shoppers to loosen their purse strings. Good news for shoppers, bad news for businesses. Businesses experience cash flow problems and their staff would have to accept a pay cut or even lose their jobs. So, debt becomes expensive because one owes the same amount of money, but has less income to meet it. Signs of deflation can already be seen on the high-street. Retailers are offering massive discounts, the likes of which are usually seen after Christmas, because they are desperate to clear their stock. And the consumers know this and know that further discounts will follow eventually.

It will be interesting to see how Mervyn King and the Government will go about coaxing the shoppers to spend their money.

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HSBC to increase its lending

The World’s Local Bank HSBC announced on Monday that it aimed to lend next year roughly two times the amount it lent to homeowners in 2007. For this purpose, it has set aside around £15 billion. In an environment where banks are becoming increasingly reluctant to lend money, HSBC hopes to increase its market share by lending, thereby getting a huge slice of a, albeit, small market. It is also hoping that its customers will continue to bank with it even when the climate improves, because they will remember that HSBC was there for them when all the other banks closed their doors. This will mean that when the market does get bigger, they will effectively have a huge slice of a huge pie.

So, how can HSBC afford to increase its lending when other banks have had to be injected with capital by the taxpayers. HSBC is one of the few banks thathasn't gone to the taxpayers cap-in-hand asking for a cash injection, it is in fact well capitalised, according to its CEO Michael Geoghegan . According to its spokesperson, HSBC doesn't have to depend on the two main sources of finance that the banks that were bailed out depended on- the money markets and UK depositors. It will instead fund it internally using its reserves. The reason why other banks are lending less money is because they don't have enough money to lend.

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It is true that last Thursday the MPC (Monetary Policy Committee) cut the base rate by 1% to 2%-the lowest it has been for years. However, the primary source of finance for most banks is not by borrowing from the Bank of England, but from the money markets. The rate of interest in the money marketshasn't gone down at the same rate as the base rate. Hence, the cut in the base rate is unlikely to make the cost of borrowing money any cheaper. Another source of finance for banks is their customers' deposits. However, in recent years, the levels of savings in the UK is said to have decreased. The cut in savings rate by the banks is unlikely toentice people into put their hard earned cash into banks, except for those whom the interest paid is their income.

HSBC also announced a £1 billion fund for lending to small businesses. Small Businesses that are fundamentally sound and only experiencing cash flow problems are the kinds of businesses it is hoping to lend to. The reluctance of banks to lend to sound businesses has been it the news recently, forcing numerous businesses to cease trading just because they have a cash flow problem and not because their business model is fundamentally flawed. The increase in the number of small businesses going bankrupt no doubt puts the jobs of many people at risk and leads to fear amongst those that are in employment. Small business owners, no doubt, will welcome this announcement which will be akin to a lifeline being thrown at them when they are in dire straits.

It has stressed, however, that the lending criteria will still be strict. In other words, they are not planning to throw money at anybody who asks for it.

Even if this announcement does not completely restore confidence, any good news is welcome in these gloomy times. It is unlikely that any other major bank will come forward and increase its lending in the near future, no matter how much Brown, Darling orMandelson threaten or cajole them into doing so. In a way, one cannot blame the banks which have been bailed out for being reluctant or in their words, "careful", of lending. On one hand, they are the subject of many a joke and their "irresponsible" lending is being blamed for all this mess, and on the other hand, they are being pushed to lend at levels of last year.The money which has been lent to the banks on behalf of the taxpayers has not come cheap, the banks have had to pay a hefty price for it.

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Woolworths goes into administration

The high street retailer Woolworths, fondly known as Woolies, has been forced to go into administration after it failed to find a buyer to snap it up for a nominal £1. So, why didn’t anybody buy it, surely £1 for a whole company seems like a bargain? That’s because the buyer would have not only acquired Woolworth’s assets (things it owns), but also its huge liabilities (money it owes), £385 million to be exact.

So, what is administration and when does a business go into administration? With regards to business, it is when a business doesn’t have enough funds to trade, also known a cash flow crisis. Cash flow is not the same as profitability of a business, but refers to the cash flowing into and out of the business. If cash coming in is less than the cash going out, then the cash flow is negative and it means that the business does not have enough funds to meet the current liabilities, like creditors and suppliers.

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However, going into administration isn’t still the end of the story for Woolworths. In fact, administrators, in this case the accountancy firm Deloitte, protect the company from creditors seizing stock to pay off the money that is owed to them. The administrators are trying to find a buyer for Woolworths, failing which it will be forced to go into liquidation. This is where the administrators try to sell off the assets to recover any money they can to pay off the debts. Woolworths competitors are dreading this because although it will mean less competition in the long term, since there is one less player in the market, in the short term, it will mean a price war during Christmas as the administrators will slash prices to sell off all the stock.

So, is the reason for Woolworth’s difficulties due to the credit crunch? Well, the increase in household bills has meant that consumers are spending less. This is evident from the fact that Woolworth’s like-for-like sales have decreased whereas their costs have increased leading to increased losses. Many analysts say that Woolworth’s difficulties should come as no surprise, as Woolworths didn’t have a clear brand image, what its brand stood for, and its purpose in the market. Additionally, suppliers of Woolworths found it expensive to insure themselves against the risk that it wouldn’t be able to pay them and hence, Woolworths had to pay upfront for the supplies, unable to take advantage of buying on credit that some of its competitors enjoy.

Woolworths has around 815 stores and employs around 30,000 employees. If the business does go into liquidation, all these employees stand to lose their jobs. Also, the businesses that supply to Woolworths will also suffer losses. The question many people are asking is why isn’t the Government bailing Woolworths out, after all, it did bail out the banks. Well, the Government can’t bailout every business in difficulty; it’s a natural business process where the one with the weakest business model fails hence making the others stronger due to decreased competition.

Other than its retail business, Woolworths Plc. also owns Entertainment UK and 2Entertain. Entertainment UK specialises in the supply of CDs and DVDs to retailers such as Tesco, Zavvi, W H Smith, Asda, Sainsbury’s, Morrisons and of course Woolworths itself. EUK is said to be a profitable business and the administrators are looking for a buyer for it as well. If EUK is shut down, it will no doubt affect the retailers it supplies, especially during the crucial trading period of Christmas. BBC Worldwide and Woolworths Plc., on the other hand jointly own 2Entertain, and there are talks of BBC Worldwide buying Woolworth’s share of the business.
It has also been reported that MFI is also going into administration, and it looks like a few more will follow, certainly after Christmas. If you want to see Woolworth’s Interim report for 2008, click here.

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First the Chancellor giveth, then the Chancellor taketh away.

Yesterday, the Chancellor Alistair Darling announced in his Pre-Budget Report the much talked about 2.5% cut in the VAT, bringing it down to 15% from 17.5%. In the same breath, he also announced an increase in income tax for those earning £140,000 and above. From April 2011, people falling into this income bracket will have to pay income tax at the rate of 45p.

The cut in VAT is to come into effect from the 1^st of December. This leaves ample time for businesses to revise their prices and change the all the labels in the stores, but at the same time, being just in time before the Christmas shopping.

So, how will the change affect the prices? Will a loaf of bread or a bunch of carrots be any cheaper? No, because food products do not attract VAT. Surely, utility bills as a result will go down. Sadly, no because the VAT on utilities such as gas and electricity already have a lower rate of VAT charged at 5%. A cut of 2.5% doesn’t look as if it will make a huge difference in prices, especially compared to the generous 20%, 35%, 40% discounts offered by the retailers already.

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Then, the motive behind the cut is to give confidence to the consumers to go out and spend. But, confidence cannot be used to pay for a brand new PlayStation 3, can it? You need something else, namely, money. The primary reason why people are spending less money on the high street is because they have very little surplus left over after paying the high utility and food bills. And those who have enough surplus choose to save it for a rainy day.

That’s because it’s almost impossible to see a news report nowadays without it mentioning yet another company announcing job cuts. This creates uncertainty among those who are employed about the security of their jobs. Those who have recently been made redundant have no choice but to save money. But those who have a job also save since they don’t know how they are going to put food on the table next month or meet their mortgage repayments.

Another thing that’s hard to miss in a news report is an interview with the boss of a SME (Small & Medium Enterprise) business who has been denied a loan from his bank, or has had his overdraft facility cancelled. This leads to cash flow problems which means the business cant pay its staff, pay its utility bills, or even buy raw materials to maintain production. In addition, creditors, who owe money to the business, are unable or reluctant to part with their money. As a result, staff numbers have to be cut down adding to the number of unemployed across the country.

How can such news create confidence?

Perhaps, the Chancellor should look at reducing the VAT temporarily on utilities, or even get rid of them for the time being. More importantly perhaps, he should make sure that SMEs, who are perfectly healthy, should have access to loans and overdrafts at a reasonable cost to maintain their cash flow. After all, the SMEs are not asking for charity, just for funds which they are prepared to pay back with due interest. It makes sense for the Government to ensure that businesses that are perfectly sound to not go bankrupt just because they do not have enough cash or credit to meet their current liabilities. After all, the SMEs employ a lot of people in the private sector of the economy and contribute to the Treasury in the form of National Insurance and Corporation Tax. Since people are employed, it saves the Government the trouble of have to pay job seekers allowance, hence reducing its outflow.

So, it is perhaps job security and income security that will encourage the consumers to go out and spend, as Alistair Darling and Gordon Brown along with countless retailers are eagerly hoping, fingers crossed.

But it seems highly unlikely that the cut in VAT will have the intended purpose of instilling confidence among the consumers and going on a spending spree, but for the sake of the economy and the countless people who are unemployed, lets hope its not all in vain. The high earners are certainly hoping for it, since they are going to be paying for it, come 2011.

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Keynes way of kick starting the economy

Home Retail Group, the company that owns the DIY store Homebase and retailer Argos, reported a loss of £450 million in its half-year operating profit. The reason for this loss is attributed not only to consumers restricting their spending, but also the weakening of the Pound which means that it costs more to import products from other countries, add to that the increase in the cost of raw materials, production and transportation. Products that are seen as a luxury have seen their sales and consecutively their profits drop as consumers switch to cheaper value-for-money products. Budget stores, as a result, have seen their sales and profits increase rapidly, in cases like Poundland, even double.

However, a drop in sales at Argos, which is not exactly an upmarket store, should create a little more than just a flutter amongst businesses operating in similar sectors. This is because it suggests that not only have consumers changed their shopping habits and switched to cheaper stores, they have stopped spending altogether on items they deem unnecessary. There are concerns about unemployment as many are worried that they would lose their jobs. The utility bills and mortgage repayments are rising. All this creates an atmosphere of uncertainity and leaves people preferring to save any surplus rather than spend it as they did before.

According to John Maynard Keynes, a well-known British economist, who lived during the Great Depression of the 1930’s, the only way to give the economy a kick-start, is to spend and spend and spend. This is because a recession is caused by a fall in demand, not by the fall in supply. Demand has fell quite a lot recently because the credit that backed it no longer exists. Although Governments around the world have injected banks with capital, banks in turn have effectively turned off the tap of credit. Keynes believed that in the event of consumer spending decreasing, the Government should maintain or even increase its spending rather than cutting back. The people employed in the sectors where the Government spends its money would in turn spend their wages benefiting the local businesses who in turn spend and make investments and that gets the whole economy moving again. That way, a downward spiral of recession could be turned into an upward spiral of growth.

Alistair Darling, the Chancellor of the Exchequer, is adopting Keynes’s ideas. He said that the Government would increase its spending on large scale projects. In the long term, it means increasing the national debt as the Government has to borrow money to keep up its spending. So be it. Keynes said that Governments should think of the short term, because, as he put it, "in the long run we are all dead".

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This isn’t just any gas & electricity; this is M&S gas & electricity

Marks & Spencer announced today (15 Oct) its partnership with Scottish and Southern Energy to launch its new offering- M&S Energy. Customers can sign up in store and online through www.mandsenergy.com which goes live on the 27th of October. M&S plans to reward their customers by offering them M&S vouchers when they sign up, reduce their energy usage or opt for paperless billing. It is relying on its strong brand name to attract customers. However, since M&S is regarded more as an upmarket brand, it is unlikely that people will switch to M&S initially since it will naturally be perceived to be more expensive than its competitors.

Offering vouchers rather than a discount on the bill itself is an interesting way of making people sign up and shop at M&S since shopping at M&S is the only way to redeem the vouchers. This would lead to a rise in sales for M&S, who has seen its sales drop-M&S style, and would ensure that the money stays within the organisation. This is because if you get a £10 voucher, M&S is not actually spending the £10, but the voucher is worth £10 that can only be spent at M&S. This is different to it giving you £10 discount on your bill that it does have to spend and since you are free to spend it anywhere you choose, M&S might not benefit from it. It will be interesting to see if other stores, like Britain’s Biggest Discounter, Tesco, will join M&S to offer gas & electricity to its customers.

Further reading:
M&S Corporate Website: http://corporate.marksandspencer.com/media/press_releases/company/pressrelease_mandsenergy

M&S Sales:
http://business-easy.blogspot.com/2008/10/m-weather-forecast-bleak-in-britain.html

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£37bn Bank Bailout

The UK Government announced on Monday (13 Oct) that it was going to lend £37bn to three of UK’s biggest banks with the aim of “unfreezing” the frozen credit market. The Royal Bank of Scotland (RBS) will receive the biggest cash injection worth £20bn. The Government will buy £5bn worth of preference shares and another £15bn worth of ordinary shares in RBS if they are not bought by ordinary investors, which will give it a healthy 60% share of the business. HBOS and Lloyds TSB will jointly receive £17bn in return for which the Government will receive approximately 43.5% of the merged business. Preference shares, as the name suggests, are given preference when it comes to paying dividends. This means that the Government will be paid the dividends, if there are any, before they are paid to the ordinary shareholders. It also means that the Government will have a say in the operations of the banks.

Although this announcement would have lead to a sigh of relief for some since the banks will get the cash injection they desperately need and give them stability, many investors are worried that the purchase of a huge number of shares by the Government will lead to a dilution of shares of the existing shareholders. Dilution basically means that since the total amount of shares of the banks will increase, this will mean that the existing shareholder’s ownership of the company in terms of percentage will decrease.

There has been support and opposition to the bailout plan proposed by the UK and American Governments. Many people are angry that taxpayers’ money is being used to pay for the mistakes of a few irresponsible bankers especially since most of the bankers got bonuses and left the general public to clear up the mess. However, the bailout is a necessary evil. This is because the credit crunch ultimately affects all of us. If banks are reluctant to lend to each other, it means that banks cannot lend to the general public, which means that the general public cannot spend this money which affects local businesses, this leads to a loss of jobs and goes on and on like a downward spiral. There have been reports recently that many small businesses have seen their overdraft facility severely reduced of even cancelled in certain cases. This has affected their cash flow. Businesses that were sound a month ago are finding it hard even to pay their staff.

The Economist (http://economist.co.uk/) described the lack of credit in an interesting manner by comparing it to air. We always take the air we breathe for granted because it is readily available. When we start drowning, we suddenly realise the true value of air because the lack of air hurts. Similarly, when credit is flowing, everything runs smoothly. However, the lack of credit leads to a lot of problems. The bailout plan is not a silver bullet that will solve all the current problems, but it remains to be seen what effects, if any, it will have in the near future.

The BBC website has an interesting article about past bailout plans and whether they worked. The link can be found below.

Have bailouts worked? http://news.bbc.co.uk/1/hi/business/7648330.stm

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HSBC, Bradford & Bingley and Seagate cut jobs to cut costs.

HSBC announced today that it was going to sack 1,100 of its 335,00 employees employed worldwide. According to the BBC, half of these job losses will be from the investment banking section of HSBC whose headquarters is situated at Canary Wharf.

Mortgage lender Bradford & Bingley announced yesterday that it would sack 370 of its employees in a bid to cut down its costs. 300 of these will be from its mortgage processing centre in Borehamwood, Hertfordshire, while the rest will consist of mortgage advisers and sales staff. Bradford & Bingley believe that these job cuts will save them around £15 million in costs. However, it also plans to add about 70 more staff to collect repayments from their customers who have failed to pay up. B&B specialises in buy-to-let and self-certified mortgages and has been hit heavily by the falling property prices since the fall in price leads to negative equity of its assets, i.e., the value of the property is less than the loan secured against it. B&B is also finding it hard to attract depositors because last week, B&B’s credit rating by the credit rating agencies Fitch, Moody’s and Standard & Poor’s was downgraded to just above junk status.

Electronics company Seagate Technologies, which is one of the world’s largest manufacturer of hard drives, announced yesterday that it is moving its manufacturing from Limavady in Northern Ireland to Malaysia which will see 1000 employees lose their jobs. The factory at Limavady has operated for the last 10 years and was due to be shut down around October end this year but its closure was brought forward. Although Seagate may not be a household name, its hard drives can be found in consumer electronics ranging from computers, portable music players and games consoles such as the PlayStation and Xbox.

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Lloyds TSB confirms HBOS rescue.

Lloyds TSB confirmed the speculations and rumours about the rescue deal of HBOS which is to be worth around £12.2 billion. This deal is still awaiting the approval of the majority of the shareholders and the Financial Services Authority to go ahead. Should this deal go ahead, it will create a bank which will be worth about £30 billion and will have about 28% of the mortgage and savings market.

However, the staff at HBOS may not be celebrating as yet from the news of the takeover since it is very likely that many, some estimates being around 40,000 members of staff, will be made redudant. It is likely that in places where branches of HBOS and Lloyds TSB are too close to one another, the least effective branch will be closed. This will certainly reduce costs for the new bank, something it needs in such times, but will also contribute to unemployment.

http://news.bbc.co.uk/1/hi/scotland/7622711.stm
http://bizeasy.wordpress.com/2008/09/18/lloyds-tsb-confirms-hbos-rescue/