Lack of posts

Apologies for the lack of posts in the past week or so, I have been extremely with work. Service will now resume as usual and I will be posting several times a week throughout the christmas holidays. I would also like to extend a massive thank you for 2,000 page views !

U/E falling

Interesting news from the Independent which suggests an upturn in the fortunes of the UK economy :

"Britain's unemployment rate has slipped to a four-and-a-half year low of 7.4%, edging closer to the "threshold" at which the Bank of England has said it will consider raising interest rates.

The Office for National Statistics (ONS) said on Wednesday that unemployment in the three months to October was 2.39 million, or 7.4% of the working age population, down from 7.6% in the three months to September.

Under the Bank's policy of forward guidance, governor Mark Carneypromised that borrowing costs would remain on hold at least until unemployment has fallen below 7%.

When the policy was announced in August, the Bank's monetary policy committee expected that to take three years; but its latest prediction is that this could be as soon as 2015.

"The jobless rate is falling far faster towards the Bank of England's 7% threshold than policymakers envisaged when establishing the marker back in the summer," said Chris Williamson, chief economist at City data provider Markit. "Employment is surging higher and unemployment collapsing in the UK as the economic recovery has moved into a higher gear."

Sterling jumped after the unemployment data was released, rising by almost a cent against the dollar, to $1.635, as investors bet on an earlier-than-expected rate rise. A stronger pound was one of the concerns of the Bank's nine-member monetary policy committee at its December meeting, according to minutes also published on Wednesday.

The MPC pointed out that the value of sterling has risen by 9% against the currencies of the UK's major trading partners since March, and warned that "any further substantial appreciation of sterling would pose additional risks to the balance of demand growth and to the recovery".

The minutes suggested that the latest evidence pointed to a "burgeoning recovery" in the UK, but one which was unlikely to prove sustainable unless productivity picked up, finally lifting real incomes. The MPC voted unanimously to leave rates on hold at their record low of 0.5%, and the stock of assets bought under quantitative easing unchanged at £375bn.

MPC member Martin Weale suggested last week that if unemployment is falling rapidly at the point when the 7% threshold is breached, he would regard that as a reason to tighten policy.

The details of the jobs data reinforced the view that the labour market has strengthened markedly over the past six months. The number of people employed across the economy has hit a fresh record high above 30 million, while there are more vacancies than at any time since the summer of 2008, before the UK slipped into recession.

On the claimant count, which measures the number of people in receipt of out-of-work benefits, unemployment fell to 1.27 million in November, its lowest level since January 2009.

John Philpott, director of the Jobs Economist consultancy, described the data as "wonderful". "The quarterly 250,000 net increase in total employment is as big as one might once have expected in a full year. Employment is up in all parts of the UK, except Northern Ireland, with a sharp rise in job vacancies helping an additional 50,000 16 to 24-year-olds into work. And while the overall figure of more than 30 million people in work still leaves the UK employment rate (72%) below the pre-recession rate (73%) it is a landmark worth celebrating," he said.

Despite the improving conditions in the labour market, there is little evidence that the prolonged squeeze on wages is easing. The ONS said total pay rose at an annual rate of 0.9% in October, or 0.8% including bonuses. That compares with an inflation rate of 2.2% in the same month, suggesting that on average, living standards are continuing to fall. Frances O'Grady, general secretary of the TUC, said: "These are undoubtedly positive figures, but we should not forget how far we still have to go to restore pre-crash living standrards through better pay and jobs."

Rachel Reeves, the shadow work and pensions secretary, said: "Today's fall in unemployment is welcome, but families are facing a cost-of-living crisis and on average working people are now £1,600 a year worse off under this out-of-touch government."

Accounting for Growth

Just a quick post to let you know that I have been reading, and highly recommend , the book "Accounting for Growth" and terrysmithblog.com,  both of which by Terry Smith, head of Tullett Prebon  . They are  excellent reading for anyone with even a passing interest in Accounting, Finance or Economics.

Innovation stagnant

An interesting article was published on the Independent today regarding the lack of innovation within UK industry, largely as a result of a lack of capital. As one of last week’s posts following the festival of economics reported, only 0.35 % of banks’ overall assets were distributed to “innovative “companies, which is particularly revealing and pertinent to the article.

The basic premise is that innovation is not prospering within the current economy , largely due to a lack of funding from banks. The evidence behind this is strong and decisive:  A Grant Thornton study states that one third of London’s promising technology companies are missing out on growth due to a lack of capital. Despite promising government initiatives such as the SEIS raising £82 million from investors and helping 1100 small businesses , many of which being in the technology sector , the UK is ultimately lacking in the high-risk, high-reward, high-growth Venture Capital sector which helps to drive growth within the US economy, for example.

The reason that banks are hesitant to lend to small, risky companies is because they are just that: risky. As a result, banks are much more happy offering highly-collateralised loans to established companies or mortgages to people whose houses can be repossessed, whereas innovative new companies have value because of the ideas that drive them ; Not the assets which underline them. Of course, ideas are much more prone to failure and value fluctuation than tangible assets.

In my opinion, more government initiatives such as the SEIS should be created in order to help these ailing innovative companies, for, at the present state of bank lending, we will never be able to keep up with the heaps of innovation arising from areas such as America’s “Silicon Valley “. 

Gold depreciation

Whilst reading the Guardian today, I came across an interesting article which states that Gold is set to decrease in price, as demand from institutional investors switches to other assets such as stocks, which are now thought to offer better risk-adjusted returns. This is significant for a number of reasons : Firstly, this means that stocks are deemed to offer better risk-adjusted returns, which are broadly calculated by the asset’s beta rating. Furthermore, Gold is seen largely to be a safer alternative to stocks and derivatives. This is demonstrated by the following graphs showing Gold prices and the FTSE 100 index:

 Note the inverse relationship between Gold price changes and the FTSE index in the midst of the financial crisis and subsequent recession. As such, one can interpret the Gold depreciation as being ultimately a good indicator of economic recovery, or at the very least, increasing confidence.

Royal Mail underpricing

As I predicted just a few weeks ago, Royal Mail shares have proven to be, at least for the time being, to be chronically under-priced., not only due to the aforementioned property assets held by Royal Mail, but also for the recent revelation that pre-tax profits at the postal giant have more than doubled this year.

“Royal Mail investors who bought large stakes in the postal service following its £3.3bn privatisation last month are to be asked by MPs why they have staked hundreds of millions of pounds on the view that the government sold the firm on the cheap.

The news emerged after the Commons business committee investigating the Royal Mail flotation questioned the business secretary, Vince Cable, and his ministerial colleague Michael Fallon how the offer was valued, prompting an assertion from Cable that there was no need for an independent inquiry into the process.

Committee chairman Adrian Bailey said he will be writing to the The Children's Investment Fund (TCI) and GIC, Singapore's sovereign wealth fund, which have built up their Royal Mail stakes since its listing to more than 6% and 4%, respectively – having decided the shares would rise far above their 330p flotation price.

He said: "Yes, we might well want to [write to major new shareholders to ask why they value Royal Mail so highly]. We are reviewing the transcript [of evidence] to identify areas to follow up."

The committee has been investigating whether the taxpayer has been shortchanged by the Royal Mail flotation, in which 60% of the shares were sold to outside investors last month. The share price has since soared by about 70%, prompting criticisms that the government could have demanded a higher price. The Bow Group, a thinktank led by former prime minister Sir John Major, has called for an independent inquiry into the privatisation.

When asked if he thought an inquiry was required, Cable replied: "Absolutely not. We think this is a good process for the taxpayer."

He added that the valuation was only one criteria in deciding whether or not the taxpayer had received value for money, as the company could have withered – and its services put at risk – without access to private capital to invest in its future.

"Bearing in mind the set of objectives which we set at the very beginning ... the value for money is partly dependent on the offer price, it's partly dependent on the continuing value of the state's [30%] share, and it's partly dependent on what happens to the company. If the company isn't able to invest successfully [in its business], you could be left with a serious casualty. When we take all those things together, I think the conclusion will be, when people have settled down, that this has been a very professional well-managed and successful operation."

Royal Mail floated at 330p a share when the government sold 600m shares last month. Once the shares began trading on the stock exchange, they quickly soared. The shares were up 5% on Wednesday afternoon following the group's first results statement as a public company, changing hands at around 563p.

Also being questioned alongside Cable and Fallon were Mark Russell, the chief executive of Shareholder Executive which holds state stakes in businesses, and William Rucker, the chief executive of the government's main financial adviser, Lazard.

Russell said the government had been taken by surprise by the surge in the share price, telling the committee: "We did not anticipate the share price to move to the extent that it did."

He added, however, it had been anticipated that the shares would rise following privatisation, which was part of the reason why the government had retained a 30% Royal Mail stake. Typically, the City hopes the shares rise by around 10% on the first few days of trading following a flotation.

Bailey also asked the witnesses if it was predictable that Royal Mail shares would surge so strongly, with the offer was 20 times oversubscribed by investors.

Lazard's Rucker claimed not: "A lot of the orders [for shares] that go into the books ... there is a heavy element of gaming. The three biggest orders were $1bn each. That would have represented 20% of the company. Those institutions had no expectations of ever receiving anything like that quantity of the stock.”

Margaret Hodge on tax avoidance.

Yet another indictment of the UK tax system with regards to high-income individuals and large multinational corporations has come to light to day, as Margaret Hodge has attacked the increasingly flexible taxation laws which are pertinent to these individuals and companies. As the research I conducted during my EPQ project on corporate tax avoidance correlates , despite much noise surrounding corporate tax avoidance , little to nothing has actually been done to address the tacit complicity which permeates the tax avoidance culture of large companies and HMRC alike.

“The chair of parliament's public accounts committee, Margaret Hodge, has delivered her most outspoken attack to date on the coalition's tax policies, describing the tax system for corporations and the super-rich as "increasingly voluntary".
She also criticised the "growing gap between rhetoric and reality" coming from David Cameron on tax reform.
Speaking at an event organised by tax campaigning charities in London, Hodge said: "They [ministers] believe we should engage fully in the global race to the bottom … I now believe David Cameron doesn't mean what he says when he says multinational companies should 'wake up and smell the coffee'."
Despite tough language on combating tax avoidance, the coalition government has been acknowledged among tax professionals as accelerating the pace of tax competition in a drive to lure in foreign investment. Measures such as new rules for overseas finance subsidiaries, tax breaks for groups owning patents in the UK, and the plunging corporation tax rate, have been cited by critics of Cameron's approach to tax reform.
Hodge's attack on Cameron harked back to a speech he gave at the World Economic Forum in Davos in January, shortly after the use of aggressive tax avoidance strategies at Starbucks' UK operations had been exposed by a Reuters investigation. The coffee chain had taken £3bn of sales in the UK over 14 years, but paid only £8.6m in tax.
Cameron told the audience of business leaders in the luxury Swiss resort: "When some businesses aren't seen to pay their taxes, that's corrosive to the public trust … Some forms of avoidance have become so aggressive that I think it is right to say these are ethical issues and it is time to call for more responsibility."
In a blunt jibe at Starbucks, he urged multinationals to "wake up and smell the coffee".
Hodge has spent the last two years leading the cross-party committee of MPs through a wide-ranging investigation into how multinational firms pay UK tax. Her tough questioning of company executives, big-four accountancy partners and HMRC bosses has played a major role in keeping tax reform high on the political agenda.
After firms such as Google and Amazon were subjected to a barrage of angry questioning from Hodge's committee, George Osborne responded a year ago by issuing a joint statement with his German counterpart Wolfgang Schäuble, calling for urgent reform of the international tax rules. "Some multinational businesses are able to shift the taxation of their profits away from the jurisdictions where they are being generated, thus minimising their tax payments compared to smaller, less international companies," they said. "We want global companies to pay those taxes."
Since then, however, Schäuble has dramatically switched his view of Britain's commitment to shoring up the integrity of international tax regimes, attacking Osborne's "patent box" tax break. "That's no European spirit," he said. "You could get the idea they are doing it just to attract companies."
Behind the scenes, a growing number of fellow G8 nations have also become increasingly irritated at the apparent gap between Cameron's use, on the one hand, of a language of ethics on tax reform, and, on the other, what some see as begger-thy-neighbour measures to poach business activity from rival economies.
"You are fast turning the UK into a tax haven, aren't you?" one senior tax treaty negotiator privately told the Guardian this summer.”

Festival of Economics

Recently I attended a talk entitled “The State of Economic Recovery “ at the Bristol Festival of Economics. Speakers included Will Hutton, Margaret Heffernan, Andrew Sentence and Simon Wren-Lewis. The premise of the talk was whether the current economic “recovery” we are going through in the UK is both real and sustainable , or indeed if it can even truly be deemed a “recovery “ given the apparent structural weaknesses which are prevalent in our increasingly disparate economy.

Not only were the points raised fascinating from an economics perspective , but there were also many revelations about the finances of the banking sector, which is particularly pertinent and interesting for me given my desire to study accounting and finance related subjects at university and perhaps enter the city or entrepreneurship subsequently.

Whilst it would be difficult to succinctly and concisely summarise the divergent arguments presented by the speakers, I can list and explain some of the points which I think are paramount to understanding what is, in my opinion, merely an illusion of a recovery. Without further a due :

Banks hold Assets and Liabilities of 4.5 X GDP

The current value of the assets and liabilities held by investment banks is 4.5 X the UK’s annual GDP of £1.5 trillion. This is, in my opinion, a frightening statistic which demonstrates how much wealth and income is in the pockets of institutions, which as we have seen before, don’t really act in the public’s best interests.

5 % of these assets are linked to corporations and only 0.35 % of assets are deemed to be “innovative”

Of the huge assets owned by banks, only 5 % of them are derived from corporations, and only 7 % of this 5 %, or 0.35 % of total assets, are deemed to be derived from “ innovative “ companies. The reason for this is that “innovative “ companies present a far greater risk to banks than collateralised loans such as mortgages, and as such, given the current economic climate, banks are not willing to take excessive risks to generate profit. Instead, they would rather make loans with less risk and hence less reward to more proven consumers.

The worldwide value of derivatives is $700 billion

Another huge figure which is difficult to really explain or draw any meaningful conclusions from, but which truly demonstrates the scale of the economic behemoth which is the global financial system.

Productivity growth is decreasing

Productivity, the gap between unemployment decreases and GDP increases, is increasing at a decreasing rate, likely due to reduced investment in capital goods as a result of decreased bank lending. Productivity is of course crucial to the economic well-being of a country, an example illustrated by Henry Ford, the US industrialist who raised his worker’s wages and slashed their hours.

London can be considered a separate economy

London house prices have risen by around 10 % in a month, and wages in London eclipse the rest of the country, swaying wealth and income statistics greatly.  Perhaps an interesting indicator of how skewed economic data is, despite the average wage being £26,500 per annum, 2/3rds of people actually earn less than this

Bank balance sheets are too opaque

Banks own and use a series of complicated financial instruments which are not easy to quantify and place on a balance sheet. As a result, it is becoming increasingly difficult for regulators to monitor banks and ascertain their financial health , which is almost certainly an aggravating factor when considering the risk of another major bank collapse such as the Northern Rock fiasco of recent years.

Help-to-buy is as much a political as an economic policy

In the run-up to an election, it is of course in any politicians’ best interest to portray himself as best as possible to his electorate. As such, Right-to-buy is an excellent policy for David Cameron, raising house prices and allowing more people to get onto the property ladder. From an objective economic perspective, however, Right-to-buy is actually a profoundly flawed policy, with critics citing the possible overheating of the housing market.

The Horsemeat saga continues !

Alas, there is nothing pertinent or useful with regards to Accounting and Finance or ultimately business in this article. I am posting because it is either funny, tragic or worrying depending on your perspective.

 “The environment secretary is due to meet the Food Standards Agency, food suppliers and retailers on Saturday to discuss the horsemeat scandal after Aldi became the latest supermarket to confirm its withdrawn beef products contained up to 100% horsemeat.

Owen Paterson said it was unacceptable that consumers were mis-sold products, but that the problems originated overseas.

"We believe that the two particular cases of the frozen burgers from Tesco and the lasagne from Findus are linked to suppliers in Ireland and France respectively. We and the Food Standards Agency are working closely with the authorities in these countries, as well as with Europol, to get to the root of the problem," he said.

Paterson said he believed the food was safe but urged consumers to return products to the retailers. "The French authorities are saying they are viewing the issue as a case of fraud rather than food safety. Anyone who has these products in their freezer should return them to retailers as a precaution.".

Findus denied reports that the company first knew there was horsemeat in its products last year.

"Findus want to be absolutely explicit that they were not aware of any issue of contamination with horsemeat last year," it said in a statement. "They were only made aware of a possible August 2012 date through a letter dated 2 February 2013 from the supplier Comigel. By then Findus was already conducting a full supply chain traceability review and had pro-actively initiated DNA testing."

The Metropolitan police said in a statement it was not carrying out a criminal investigation. "Although we have met with the FSA we have not started an investigation and will not do so unless it becomes clear there has been any criminality under the jurisdiction of the Metropolitan police service."

Aldi said it felt "angry and let down" by its French supplier Comigel after tests on Today's Special frozen beef lasagne and Today's Special frozen spaghetti bolognese found they contained between 30% and 100% horsemeat.

Comigel, which also produced the contaminated Findus beef lasagnes, has blamed its suppliers. Erick Lehagre said he believed his company was buying French beef from a company called Spanghero but it had since told him it had come from Romania.

A spokesman for Aldi said random tests had shown that the products they had withdrawn contained between 30% and 100% horsemeat.

"This is completely unacceptable and like other affected companies, we feel angry and let down by our supplier. If the label says beef, our customers expect it to be beef. Suppliers are absolutely clear that they are required to meet our stringent specifications and that we do not tolerate any failure to do so," he said.

The company added that it would test the meals for the veterinary drug phenylbutazone, often referred to as bute, but said it was confident the meals were safe.

Hospitals and education authorities were also checking the food they provide for traces of horsemeat. A spokeswoman for the Local Authority Caterers Association said: "We are as sure as we can be that this is not affecting the school catering area."

She said there were strict guidelines around food safety and supplying dinners in schools, including transparency and traceability of ingredient provenance, and this was written into contracts.

Food businesses have been told to send test results on all their products to the FSA by Friday but Paterson is expected to tell MPs in a statement on Monday that some suppliers have been complaining to departmental officials that they have come under pressure from supermarket suppliers to cut corners.

As David Cameron indicated that he would have no qualms about eating the sort of processed meat dishes that have been at the heart of the recent scare, authorities insisted there was no evidence that frozen food in general was a risk to human health.

But the FSA advised consumers who had bought affected beef lines from Findus not to eat them. They had not been tested for the presence of phenylbutazone, which is banned in the human food chain. It can cause a serious blood disorder in rare cases.

The Guardian has also established that the FSA has been unable to trace all the horses slaughtered in the UK that tested positive for bute last year. The agency has routinely been testing less than 1% of slaughtered horses for the drug, but found four positives in a sample of 82 carcasses in 2012. It carried out a special additional survey on a further 63 horses last year and found 5% of those contained residues, bringing the total of positives to nine.

The Red Lion abattoir, owned by High Peak Meat Exports, has admitted that two of its slaughtered horses had tested positive for bute "historically" but said this was typical of the industry as a whole and that residue levels were so low as not to be a public health issue. The abattoir is currently under investigation by the FSA for alleged animal welfare abuses, and three of its slaughterers have had their licences to kill horses rescinded. The company said it was the FSA's responsibility to inspect horses at abattoirs and decide whether they were fit for the human food chain.

The FSA found six of the horses found to contain bute last year had been exported to France, two were still being traced, and one had been allegedly returned to two owners in the north of England for personal consumption. However the family of one of the owners, in Chorley, Lancashire, told officials they had never received the carcass nor expected to receive it.

Some companies have told the Guardian they began testing their own products soon after the first cases were reported in Ireland in mid-January. Full details of the testing requirements will be sent to the industry on Monday, although the agency says companies already have enough information to get on with the job and return results by next Friday.

The agency said evidence of the significant amounts of horsemeat in burgers and lasagne pointed "to either gross negligence or deliberate contamination in the food chain".

It said two particular cases of horse DNA in frozen burgers from Tesco and the lasagne from Findus were linked to suppliers in Ireland and France respectively. "We are working closely with the authorities in these countries to get to the root of the problem. Our priority remains to protect UK consumers."

Tesco – which withdrew burger lines after one of its products made at an Irish plant had 29% equine DNA and withdrew lasagne made by Comigel – said it had already begun testing other beef lines at independent laboratories.

Cow and Gate, one of the UK's major baby food companies, began testing its 14 lines containing beef in the second half of last month. The results were due soon, it said. The company, part of the French-based multinational Danone, has no production plants in Britain but has factories in France and Spain. It insists it can trace meat back to a specific cow. Heinz said it did not source from Comigel and would be responding to the request for testing.

"We only source beef for our baby food recipes as whole muscle meat. We are continuing to keep the issue under close review with our suppliers as more information becomes available about the incident and root cause."

Baxters and Bird's Eye were among other companies who said they had begun their own tests. Both said none of their products came from any suppliers so far implicated. The Food and Drink Federation, which represents the interests of the UK food industry, emphasised the "small number" of products where significant levels of horsemeat had been detected so far and said it was "unlikely" the national testing programme would reveal negligence or fraud by other suppliers.

Meanwhile Findus said it knew there was a potential problem with its lasagnes two days before the products were withdrawn. It was looking into claims by the Labour MP Tom Watson that meat used by Comigel may have been suspect since August last year.

Labour has claimed the loss of 700 trading standards officers in three years has made this type of consumer fraud more widespread.

It also points to FSA's Meat Hygiene Service suffering cuts of £12m in the four years to 2014, with the result that the amount of food checked in laboratories has gone down by as much as 30%”

Inflation

In contemporary economies, inflation ( a rise in the general price level of an economy ) is often seen negatively, for it erodes the purchasing power of money and may lead to a knock in confidence for consumers, investors and speculators alike.

To simply regard inflation as an absolute negative for a given economy or economic region, is however, incorrect and ignorant of the positive benefits and intricacies that can be associated with a small amount of inflation. Firstly, there are two ways in which inflation is instigated; There is both cost-push, and demand-pull inflation, which, as their respective names suggest, denote differing causes for rising prices. Cost-push inflation is generally seen as a negative, as the cost of production for a given economy has increased , which could insinuate productive or allocative inefficiency. On the contrary, demand-pull inflation is inflation caused by increases in aggregate demand and by extension GDP/ economic growth, which is crucial to any economy and manifests itself in some inflation due to the basic supply and demand mechanism.

Furthermore, inflation is often targeted by central banks and governments; The Bank of England , for example, aims to keep inflation below a certain rate and manipulates monetary policy to do so. Inflation targeting brings with it the obvious benefits of transparency and accountability, which can infuse the economy with confidence and promote spending. A perfect example of how a small amount of healthy inflation can be beneficial to an economy would be the recent deflationary pressure negatively impacting confidence of investors.

FTSE CEO Statistics

Should auditor rotation be compulsory ?

After  a delay due to preparation for the ubiquitous UCAS applications, I have found time to comment on an article regarding the calls for the auditors of large companies to switch every ten years in the midst of the £1.1 billion Olympus fraud which was perpetrated over a long period of time and exacerbated by the “cosy relationship “ which was cultivated with its auditors, one of the big four firms, KPMG.

The Guardian article, and former Olympus president Michael Woodford, cite the need to change auditors frequently due to the decreased risk of such frauds occurring as an indirect result of an arguably too cosy relationship between companies and their auditors.

Whilst I unequivocally agree with the sentiment of changing auditors frequently to minimise internal fraud risk, there are also a host of other benefits attributable to changing auditors. The first is an increase in competition, not only between the big four auditors, but an increase in competition which could potentially also “second –tier “ firms such as BDO to compete for lucrative auditing contracts. An increase in competition drives productivity and standards and will help to prevent the “big four “ from becoming complacent and resting on their laurels and becoming complacent.

Furthermore, an increase in second-tier firms competing for large contracts could potentially mean that the big-four would have resources free to help HMRC fight the ever-increasing problem of tax avoidance and fraud. Corporate Tax Fraud is almost impossible to accurately estimate, VAT Fraud is estimated at over 9 billion a year, and is now the preserve of organised criminal gangs, and there are over 14,000 methods of tax avoidance employed by high-net-worth individuals. It is not unreasonable to conclude that a decrease in the aforementioned “cosy “ relationships between companies and their auditors would also decrease the prevalence of tax-avoidance /evasion schemes employed by these same companies too. 

AccountingWeb article : Corporate Tax Avoidance.

I’ve just stumbled upon an insightful article on AccountingWeb, one of my favourite sites with regards to learning more about tax policy , accounting practice and HMRC.

This article is mostly factual and centres around HMRCs new policy of targeting SMEs in a government initiated “crackdown “ on tax avoidance. As someone who has been researching and writing about the sizeable damage done to the economy by large, transnational corporations, this confuses and surprises me.

Small and medium sized businesses are the lifeblood of the economy. Research has shown that they are amongst the main employers and drivers of growth within our economy, yet lending to small businesses has declined consistently over recent years , and more than ever, large businesses are exploiting tax loopholes and abuses such as transfer pricing , exacerbating the advantage they already have over small businesses by means of their economies of scale and ability to hire the most skilled and experienced accountants and financial services professionals.

As such, when we consider not only this, but HMRCs hugely inaccurate estimates on the scale of corporate tax avoidance (article forthcoming ) , one can only reasonably conclude that HMRC ultimately cannot tackle the problem of corporate tax avoidance by large corporations. Here is the pertinent extract from the article :

“HMRC’s tax receipts from investigations into small and medium-sized businesses have increased by 31% in the last year, according to figures obtained by accountancy firm UHY Hacker Young.

“Compliance” investigations into SMEs raised £565m for HMRC in 2012-13, up from £434m in 2011-12 (year ending March 31), Hacker Young said.

In the 2010 Spending Review, the Chancellor set a target to net an extra £7bn a year in additional tax revenues from compliance activity.

“Small businesses are bearing the brunt of HMRC’s tougher approach to tax investigations,” said Roy Maugham, Tax Partner at UHY Hacker Young.”

Royal Mail update

An interesting follow up to the recent Royal Mail article suggesting a significant undervaluation of the distinctly British institution. It is important to note that simply because the company’s market value has increased on its first day of public trading, that does not mean that it was inherently undervalued. An example of this would be Facebook, which after a sharp initial increase in value, suffered a major plunge and has only recently recovered to reach its IPO (initial public offering ) value.

“Private investors who bought their shares directly from the government will have to wait until at least Tuesday if they want to sell. About 690,000 people were granted 227 Royal Mail shares worth £749.10 (at the 330p float price) following overwhelming public demand for the shares. The public applied for more than seven times the number of shares available to them, which meant nearly everyone did not get as many shares as they had asked for.

More than 36,000 people who applied for more than £10,000 worth of shares were prevented from buying any at all. About 40 people applied for shares worth £1m or more.

Cable said the government told the "very big wealthy investors … you wanted a big chuck, we can't give it to you".

City investors, hedge funds and pension funds applied for more than 20 times the number of shares available to them. More than 800 City investors applied for shares, with 500 being left empty-handed.

Sources said 90% of the shares reserved for the City went to "responsible institutional investors" such as pension funds. Investors include Threadneedle, Fidelity, Blackrock and Standard Life.

However, the remaining 10% of shares have been granted to "other investors", including hedge funds. Cable had said the government would prevent the shares from going to "spivs and speculators".

It is understood that about 20% of the shares available have gone to sovereign wealth funds – including those of Kuwait, Norway and Singapore – and other foreign funds. Royal Mail's 150,000 employees collected 10% of the shares free of charge, worth about £2,200 each at the flotation price and now worth £2,900. Employees were also allowed to buy a further £10,000 worth, but are not allowed to sell for three years.

Hayes said the share price rise would not make "one scintilla of difference" to employees' widely expected intention to vote for strike action on Wednesday. Days of nationwide industrial action could start as soon as 23 October.”

Royal Mail Privatisation

In the 1980s, the cost of keeping a miner in work for one year would have been enough to pay off his mortgage in its entirety and buy him a new Rolls Royce; Privatisation was the answer to Britains economic woes then, but it is not now.

The Royal Mail privatisation is, In my opinion , fraught with inherent flaws. For starters, it is undervalued hugely. Experts have placed the market capitalisation of Royal Mail at around £4.5 billion, yet the value estimate given by the government is £2.6 billion, a decrease of around 40%. The £2.6 billion valuation is of course hugely flawed, as it appears not to accommodate or account for the $1 billion in property assets and $2.8 billion in tax credits , meaning that it won’t have to pay tax for the foreseeable future. Furthermore, the government has retained the huge liability of its pensions, giving an even sweeter deal to investors.

It is, however in these investors that we see the biggest flaw of it’s privatisation : The government anticipates 70 % of the shares to be purchased by “large institutions “, or in other words, large banks and investment firms. The shares are forecasted to rise, leaving big banks in the red and many individual investors in the black. If the sale is to benefit the public, why is it the big banks that have helped no end in creating the financial crisis and subsequent recession which apparently necessitates its sale ?

Proponents of the Royal Mail privatisation cite it as being a convenient and effective way to reduce the budget deficit, which I find ridiculous.$2.6 billion is a drop in the ocean that is British national debt, which is forecasted to hit £1.5 trillion in 2015. Furthermore, the company recorded a £400 million profit last year, and , in the words of the government, is “on the road to sustained profitability”, and by extension, is on the road to contributing nicely to corporate tax receipts.

Now, however, it is on the road to large investors who will profit from the government’s incompetent valuation skills, and private investors who will end up buying into something which they already own, and end up not really owning it.

Retail sales falling

An interesting article from the Guardian which aptly illustrates the huge number of factors which influence consumer expenditure, an important component of Aggregate Demand.

“Retail sales growth eased back last month as clothes stores suffered amid volatile weather, according to new figures.

BDO's monthly high street tracker showed like-for-like sales across the retail sector, excluding grocery and online sales, increased by 0.6% last month - down sharply on the 3.5% surge recorded in August. Fashionsales fell 2.1% in September in a "challenging" month for clothing retailers as they were buffeted by changeable weather conditions, according to the accountancy and business advisory firm BDO.

It added that sales progress was held back as many firms chose not to launch heavy discounts in favour of protecting their profits. Retailers were also up against strong comparatives from a year earlier, when widespread discounting saw sales leap 3.5% higher.

Don Williams, national head of retail and wholesale at BDO, said: "September saw a game of nerve being played, with bolder retailers driving footfall and conversion imaginatively rather than resorting solely to price led promotion."

BDO added that retail sales were moving back into a "more regular pattern of growth". Homewares retailers continued to enjoy double digit sales growth, up 12.8%, thanks to Britain's housing market revival, helping non-fashion sales overall rise 3.7%. Online sales growth slipped to 23.7% from 26.7% in August, the report found.

BDO tracked sales at around 85 non-grocery retailers with annual sales of between £5m and £500m.

Official figures showed retail sales volumes fell 0.9% month-on-month in August as spend on food slumped after the barbecue boost from July's heatwave.”

Just read an interesting article which I found surprising, for one would of course expect markets to lose confidence and react negatively to such a piece of news :

"US stock markets recovered their losses Tuesday morning even as thebiggest government shutdown in close to 20 years began.

All the major US markets opened up after falling sharply Monday as it became clear Washington was at an impasse. Most of the major European and Asian markets were also rising.

The Dow Jones was up 48 points, or 0.3%, to 15,179 after the first hour of trading. The Standard & Poor's 500 rose nine points, or 0.6%, to 1,690. The Nasdaq composite rose 23 points, or 0.6%, to 3,795.

The dollar, however, took a hit — it fell 0.5% against the Japanese yen, to 97.78 yen, while the euro rose 0.1% to $1.3544.

The federal shutdown will send more than 800,000 federal workers home without pay, close national parks – and has been predicted to have a negative impact on the still insipid recovery in the housing market.

In a note to investors, Dan Greenhaus, the chief strategist at broker BTIG, said investors were more concerned over the looming row over raising the US debt ceiling than the shutdown. He said a common view "which has grown considerably in acceptance, is that the House is 'getting it out of their system' now so the eventual debt ceiling debate can be solved more easily."

Greenhaus said a short-term shutdown of one week would have little impact on growth, "but the longer this drags on, the more impactful it will be," he warned. And he added that he was "growing increasingly nervous" about the upcoming debt ceiling debate.

Bruce Bittles, the chief investment strategist at RW Baird & Co, said it was clear that investors were discounting the row and any potential clash over the debt ceiling. "We have been through this several times before. Markets reacted well yesterday, after the initial sell off there was virtually no selling in the US. The assumption is that it won't last that long and that it won't be that damaging to the markets," he said.

Bittles said the larger danger was "complacency".

"Investor complacency is widespread and deep-seated," he said.

He said the Federal Reserve's recent decision to keep up its $85bn a month quantitative easing programme may have underpinned investor confidence but that if the debt ceiling talks collapse, that confidence could be shaken and lead to a selloff."

Energy price caps

Labour leader Ed Miliband has recently announced that is Labour were to be elected, there would be a 14 month cap on energy prices. Anyone with a keen eye on business or an interest in economics will no doubt be intrigued as to the underlying business and economics behind this.

The first thing which strikes me about the price caps is that energy is a fairly competitive marketplace. There is no one company with a monopoly and a number of companies compete for customers’ revenues.  One must assume that the price caps would allow companies to operate and generate profit, and if this is the case, why does one company not simply drop its prices and take the business of competing firms?  Whilst one can assume that a start-up company cannot compete in the market due to the extortionate barriers of entry, namely capital investment and the infrastructure required, one could reason that a large company, such as Centrica could afford to be dominant in terms of price due to the economies of scale which they utilise to lower the cost of production.

The next pertinent question is whether the companies actually can afford to lower their prices. Centrica made £2.5 billion profit on a £23 billion turnover last year ; an 11.5 % net profit, meaning that if revenue were to decrease by about 10 % due to price caps, and costs of factors of production were to rise , Centrica would almost certainly be making a loss. It would then be likely that mass layoffs and downsizing would be necessary , to mitigate the diseconomies of scale which raise costs and alter the Marginal Cost curve for firms, which is again untenable as more companies would need to be created to fulfil consumer demand , which they cannot do due to the aforementioned barriers to entry.

Either way, the energy price cap gives us a fascinating insight into the economics and finances of large energy corporations.

Graduate employment in the city

Is the city the best place for our best and brightest mathematicians and economists ?

It is the year 2013 and bonuses are firmly back in the city. With them, incentives for bright and motivated individuals are back, with pay packets standing at multiples of the salaries offered in other industries such as engineering and medicine.

Concurrent to this, the city is beginning to become more and more quantitatively difficult market, replaced with a mathematically-able “quant “ who uses complicated algorithms to determine success. Maths plays a bigger role in the city than ever, with strong pHD level mathematical ability a pre-requisite for many jobs in the city.

As such, mathematics and economics graduates are being tempted into the city, lured by an image of glamour, prestige and high pay. Any student at a top UK university is almost guaranteed to have seen or have been inundated by offers for employment from top investment banks, many of whom going on to accept these same offers.

One has to question whether the abilities of these graduates could be employed better elsewhere. Does the city really contribute that much to us both as a society and as an economy? Whilst bankers are often in the highest tax band, banks and other large corporations have employed complex tax avoidance methods and, of course, have speculated wildly, precipitating the financial crisis, causing untold economic and social woe both nationally and globally.

Whilst speculation is a valid profit-generating activity for banks and other investors, we must be careful to regulate it so as to prevent another crisis. One has to question whether bright minds could be employed more creatively, and we must ensure that they are not employed destructively.

The North/South divide and Economic Growth

Here is a  fascinating article from Larry Elliott, economics editor at the Guardian newspaper, which highlights the illusion that is  UK  economic  recovery  :

"Go to Preston and tell them that Britain is booming and the notion will be greeted with a hollow laugh. Tell the folks in Hull that the housing markethas caught fire and they will assume you have taken leave of your senses. Mention in Rochdale that a corner has been turned and you are likely to be run out of town.

Ed Miliband's big idea at last year's Labour conference was One Nation Britain. This is a nice as an aspiration but bears no relation to the country we actually inhabit.

The latest growth figures are a classic example of Disraeli's dictum that there are three sorts of falsehoods: lies, damned lies and statistics. Sure, if you take the UK as a whole it is true that growth has returned. National output is expanding by 3% a year, slightly above its long-term trend.

But the country-wide average disguises considerable regional disparities, which are reflected in Britain's political make-up. Areas where the Conservatives are strong tend to have above-average prosperity; areas where Labour is strong tend to be poorer than the average. Marginal seats are clustered in those areas where the two nations collide.

House prices are one example of how regional economic performance varies. The Office for National Statistics said last week that property was 3.3% dearer in July 2013 than it had been a year earlier. But strip out London, where the cost of a home increased by almost 10%, and the south-east, and in the rest of the country prices were up by just 0.8%. That's below inflation, meaning that property prices are falling in real terms. In Scotland and Northern Ireland they are falling in absolute terms.

Now look at the regional breakdown for workless households, where the five areas with the worst record are all former industrial powerhouses lying north of a line drawn from the Severn estuary to the Wash: Glasgow, Liverpool, Hull, Birmingham and Wolverhampton. For the UK as a whole, 18% of households do not have anyone in work; in the unemployment blackspots it ranges from 27% to 30%.

At the other end of the scale, the areas with the fewest workless households are all in the south of England. Hampshire has the lowest percentage, at 10.6%, followed by North Northamptonshire (11.2%), Buckinghamshire (11.3%), West Sussex (11.3%) and Surrey (11.4%).

The north-south divide is not new. Far from it. There has been a prosperity gap for at least a century, ever since the industries that were at the forefront of the first industrial revolution went into decline. But the disparity between a thriving London and the rest has never been greater.

On past form, there will be a ripple effect from the south-east and there are tentative signs that this may be happening. But it is early days and, understandably, there is concern in the rest of the UK when it is mooted that economic policy needs to be tightened to tackle a problem that is chronic and heavily localised.

This is well illustrated in an article by Paul Ormerod published in Applied Economics Letters. Ormerod drills down into the UK labour market to see what has been happening to unemployment at the local authority level.

He notes that most labour market economists have seen the cure for unemployment as a good dose of "flexibility".

According to this approach, joblessness will only persist over time due to "rigidities" in the labour market. Remove the rigidities – such as over-generous welfare systems, employment security provisions, working time regulations, national pay bargaining – and the price of employing workers will adjust (ie reduce) to a level that will ensure that everybody who wants to work can find a job.

Unemployment blackspots

That's the theory. Ormerod tests it by looking at what has happened to unemployment over time. If greater labour market flexibility is the answer, then local authority areas with high levels of unemployment 20 years ago should have witnessed an improvement. But Ormerod finds no such correlations.

Those parts of the country that had relatively high levels of unemployment in 1990 still had them in 2010, even though the rates of joblessness went up or down according to whether the national economy was booming or struggling. "The striking feature of the results is the strength of persistence over time in patterns of relative unemployment at local level," Ormerod said.

Those who say flexibility is the answer may counter that the problem with Britain is that the labour market is still not flexible enough, and that only by making the UK more like the US can the problem of persistent unemployment be tackled. The only difficulty with this argument is that high levels of unemployment persist in America as well, although the correlation is not quite so strong as it is in Britain. This, though, may have more to do with the willingness and the ability of Americans to move than it does with the flexibility of the labour market.

Ormerod concludes: "The labour market flexibility of the theorists, beloved by policymakers, appears to be at odds with reality. This is especially the case in the UK, where relative unemployment levels persist very strongly over long periods of time. The findings certainly call into question the efficacy of policies that were designed to increase flexibility and to improve the relative performance of regions."

The cross-party support for a new high-speed rail link to the Midlands and the north is one attempt to find new ways to tackle the two nations problem. Supporters of HS2 say the cost will be worth it because the new line will lead to higher investment, increased rates of business creation and enhanced spending power in the northern regions.

Another solution to the north-south divide would be for London, rather than Scotland, to get its independence. Although Britain is not part of the single currency, London is Europe's unrivalled financial capital. From the dealing floors of Canary Wharf in the east to the hedge-fund cluster in Mayfair to the west, London is where the action is. Upmarket estate agents can tell where the world's latest troublespot is by the source of the foreign cash buying up properties in Belgravia and south Kensington: currently, it is Syria.

Were the government to publish regional trade figures, they would show that London runs a current account surplus with the rest of the UK, offset by capital transfers from the rich south to the poorer north. As an independent city state, London would have a higher exchange rate and higher borrowing costs. The rest of the country would, by contrast, get a competitive boost.

The reality is that London is a separate country. Perhaps we should make it official."