In his article for The Observer the Conservative leader starts what he promises will be a number of policy announcements over coming months to help families, homeowners and entrepreneurs.
Today he highlights four ways in which help can and should be delivered to the "small and medium-sized businesses [who] employ over 13 million people and turn over £1,440bn a year":
- More local authorities should make faster payments to small business. Mr Cameron salutes Brentwood and Castlepoint for leading the way in reducing payment periods from 30 to 20 days.
- Better treatment for small business from the banking sector in recognition of the help that the taxpayer has provided for banks.
- Quicker tax rebates for small businesses - delayed by "Bureaucracy in the Treasury".
- Fourthly comes Cameron's main new policy: "Today we are calling on the government to allow small and medium-sized enterprises to defer their VAT bills for up to six months. That means a typical small business with 50 employees, revenues of £5m and an annual net VAT bill of £350,000, doesn't have to find £90,000 to pay the taxman when the bank has just taken away its overdraft."
Mr Cameron's intervention coincides with a declaration by Alistair Darling that Labour aims to spend its way out of recession by fast-tracking expenditures on capital projects.
So small firms can delay payments until Britain is deeper in recession?
I don't get it.
Families and businesses need less tax not a short holiday from it.
Posted by: Vincent Wall | October 19, 2008 at 09:25
It seems no one is showing much of a clue when it comes to having a workable strategy to save the housing market. Homeowners, the building trade, home values, or getting the market started again must be made a prime strategy of government if this downward spiral is to be broken.
The housing market needs buyers.
Buyers need incomes and jobs.
Builders need a growing market and house buyers in order to stay in business.
Homeowners need to know their assets are not withering away due to lack of demand.
Lenders need their money back or they need regular payments from their customers otherwise they'll go down the tubes too.
Without these things it will cost taxpayers even more money and many jobs in building trades, retail, and manufacturing will simply be lost, adding more cost to the public purse and more need for urgent and extreme measure later to rescue our economy.
Homeowners in default with their lender should have their mortgage interest payments backed up by the state quickly. If this is not done then mass selling of underpriced housing will deteriorate the market further. People planning to retire and downsize will lose substantially as a result of a drop in equity, lenders repossessing homes will lose out on the difference between the mortgage amount and what they receive in a deflated market, and this could be a significant amount if prices through auctions were to drop to 60% or less when the mortgage on that property could have represented 95% of its former value. A wipe out of 35% of the lenders asset value would cause severe pain to the lender which it would have no choice but to recoup from others. Equally, a retiring couple planning equity release or downsize would see the value of their asset wiped out too and be forced to delay their retirement.
Many of those planning to retire on equity release may still have a small mortgage, yet because the value of their home has dropped they could be unable to release equity.
Some have said lower values would be good for First Time Buyers, but if FTB's can't get a loan due to having no job, or because the lender has placed a higher loan critera on buyers so they're unable presently to attain a mortgage for reason the lender requires a larger deposit, large arrangement fee and higher interest out of its need to recoup its losses due to a deflated market, then clearly this won't help to generate more sales and will inevitably lead to less jobs, lower values and less people being able to buy houses.
Government should remove stamp duty and place this cost on the seller.
It should also bring back Mortgage Interest Relief at Source for first time buyers.
These two changes would make purchases more affordable for home buyers and help to kick start the market.
I welcome the government having shortened the gap for assistance from 39 weeks but this doesn't inject any motivation into the market it simply increases the size of the state safety net which will incur more cost upon a diminishing number of taxpayers.
They need to get the market 'moving' in order to stabalise home values otherwise the loss in home equity will be a loss to the real economy.
The retired couple for instance who would have downsized but now can't, will not be buying a smaller home, won't be decorating, won't be spending money on DIY, won't be having that once in a lifetime holiday, won't be gifting money to relatives, won't be buying the last car of their dreams, won't be buying a holiday chalet or a caravan or visiting garden centres, and our economy will suffer massively for this lack of consumer spending which will knock on job losses all over the UK.
The first time buyer won't be spending money on DIY, furniture, bathrooms and kitchens, extensions, garden furniture, patio's and drives and garden walling and fencing because they won't be moving anywhere unless houses and the means to buy them are made available and become affordable.
The government HAS to intervene in housing quickly in order to help stabalise our economy as banks won't do it alone !
Posted by: rugfish | October 19, 2008 at 09:39
Ah.. the tax plan...
Here we go, the artillery barrage just before the main attack.
Where's the one place Brown will not go?
Tax cuts.
No, no, we're heading for a 1970s style spend, spend, spend.
Posted by: Mike Thomas | October 19, 2008 at 09:41
Its a step in the right direction, we have to make sure that the small business infrastructure survives the recession and is ready for the new economy. I'm not sure that six months will be enough, but perhaps deferment of VAT bills could be extended beyond the six month period if necessary.
Posted by: Tony Makara | October 19, 2008 at 10:39
Full marks for the VAT deferral proposal, well done Mr Cameron.
"they need to get the market 'moving' in order to stabalise home values otherwise the loss in home equity will be a loss to the real economy."
No,prices should not be meddled with, they should be allowed to find their own level to remove the froth of which there is still lots.
However, clearly struggling homeowners should be helped to avoid repossession so the current house price delation is not converted into a real debt.
In addition, it is about time MEW rules are tightended to stop people treating the unrealised 'value' of their home as an ATM. Surely the aim should be to encourage people to get *out* of debt by paying off their mortgages, rather than increasing it to buy a car etc?
Stability comes from having more homeowners not homeloaners.
Posted by: GB£.com | October 19, 2008 at 10:43
Hardly a tax plan, just fiddling around at the margins.
Mr Cameron could offer real leadership at this juncture. Spending cuts are needed and he could point out the waste and propose an end to Regional Seats of Government, a savage reduction in QUANGOs, an end to employing Consultants, stopping the Identity Card scheme, a freeze on all government recruitment, a 10% cut in MP salaries and all existing budgets and so on.
How trivial his thoughts are and all the while the Party's lead melts away like summer snow.
Posted by: John Coles | October 19, 2008 at 10:53
As a small business owner myself, I welcome the VAT plan made by David Cameron. Most small businesses with turnovers under £1.5M already delay paying VAT - under the cash accounting rules, small companies only pay the VAT when they get paid themselves.
So why not extend the VAT cash accounting scheme to businesses with a turnover of £5M or under.
Posted by: Richard Patient | October 19, 2008 at 11:06
Good plan, but one more thing is needed to enable us to survive the downturn.
Thanks to changes introduced this April, landlords of small businesses now have only 3 months relief paying Non-Domestic Rates on empty units - before that we did not have to pay rates on empty units below a certain size.
It is crazy to charge a landlord crippling rates when he/she is not earning anything on the unit, and during this downturn there will be many units coming empty from businesses in them having trading problems and having to give up. There have been stories on TV of buildings being demolished by Councils, and by landlords who are about to be devastated by rates on non-earning buildings and units - and the one thing we will need for the eventual upturn is plenty of premises for small enterprises to start up in and grow from.
Please push for the Non-Domestic Rates to be returned to the previous situation, of no liability on empty small units, before landlords like me go out of business because of this idiotic new burden and further cripple the economy.
Posted by: Tam Large | October 19, 2008 at 11:09
GB£ - "No,prices should not be meddled with, they should be allowed to find their own level to remove the froth of which there is still lots".
Where is the froth ?
There are many millions of borrowers with loans bigger than the value of their home.
This is a loss to those millions, many of which will become jobless, their homes will be repossessed and the lender will pick up the cost and charge other borrowers more to make their losses up which in turn will make it more unaffordable for others to buy homes.
Society itself and our economy will pick up the cost of less retail consumers, lower rates of saving, job losses, more public borrowing and a depression which will take years of recovery.
Intervention by government to save our economy along with the jobs, assets and savings of millions of our people, isn't "Meddling in prices" it's smart responsible economics.
It is something which all governments need to do in order to get away from the idea that a market can take care of itself, when patently it has already failed to do so.
It's the difference between ideology and practice and personally, I'd vote for someone with a practical solution rather than a sit back and let it happen approach when our whole way of life is at stake.
Posted by: rugfish | October 19, 2008 at 11:28
Re: Richard's comment on the cash accounting rules for VAT. It would be a good idea to increase the cash accounting turnover threshold for tax to the same level. At present, small businesses incur a liability as soon as an invoice is issued even if payment has not been received. This "true and fair" (yes, its real name) basis of accounting is morally unjustified even in a strong economy. In a recession, it will deliver the coup de grace to many traders.
Posted by: Paul Oakley | October 19, 2008 at 11:30
Also, deferment of VAT is not going to accomplish anything for a businessman who knows it just another bubble waiting to burst. This is of no practical help to a business at all except to providing it with a falase cah-flow. In fact what the business would be doing is simply spending the money it collected in VAT, in order to struggle by until the demand came in. i.e. It is robbing Peter to pay Paul !
The ONLY way to achieve a real benefit for business is to reduce taxation, or give tax refunds, or allow it to borrow directly from the government purse through DTI loans at preferential rates and terms.
But these assistances to businesses won't create customers.
The way to create customers is to deliver a practical solution to kick start the housing market, otherwise the only result will be delayed bankruptcy of businesses which spent the VAT in order to keep their business open.
Posted by: rugfish | October 19, 2008 at 11:36
I am the first to admit that I do not know much about economics. I find some of the posts on here about economic matters absolutely baffling, but I suppose that comes from living within the NHS bubble.
That said, as I understand it, small businesses are often not paid on time, or in full, by larger companies such as the supermarkets. Some of the bill is paid and then the remainder is kept back by the larger company while they haggle for a discount on the outstanding sum. Does this actually go on? If it does it is bloody outrageous.
Perhaps a good start is to introduce some law or regulation (backed up by real sanctions) compelling the larger companies to pay in full and on time. Would that not stop many smaller businesses going to the wall?
Posted by: Hardcore Conservative | October 19, 2008 at 11:51
There is something already Hardcore - the Late Payment of Commercial Debts (Interest) Act 1998. It's now time to deal with the bloody outrageous treatment of small businesses by the government.
Posted by: Paul Oakley | October 19, 2008 at 12:37
This is a sensible policy and help for small businesses should be a high priority.
Rugfish, if you try to put the housing market back to what it was in 2007, then you'll make the problem worse. The days when the housing market can get so out of line from the rest of the economy have to be well and truly over, if we are to have any hope of a soundly based recovery in the future.
Posted by: Joe James B | October 19, 2008 at 13:40
Digby Jones praised Cameron's plan today. Is that a good thing?!!
Posted by: Malcolm Dunn | October 19, 2008 at 14:27
Rugfish @ 11:36
You are quite correct. Deferring VAT payments for six months is a waste of time. What would I do with the money I am supposed to have "saved"? I still have to pay it, just a few months later is all.
Reduce small business corporation tax and beef up penalties for late payment. That would be far, far more helpful.
Posted by: Hawkeye | October 19, 2008 at 15:18
Unless we are in for a very long recession, any capital projects can be expected to kick in just as the economy starts to overheat in the next upturn. The only way to get a Keynsian kick at the right time is to cut taxes for both business and individuals. This could be done for a fixed period of one or two years so that the addition to the overall debt would remain within bounds.
Posted by: Forlornehope | October 19, 2008 at 15:36
"Full marks for the VAT deferral proposal, well done Mr Cameron."
VAT is an EU tax, implemented by the 6th VAT Directive. Deferral amounts to a de facto reduction in the rate of tax which is not permissible without the unanimous approval of the EU Council, responding to a proposal from the Commission.
Well done indeed, Mr Cameron - the "elephant" strikes again.
Posted by: Richard North | October 19, 2008 at 16:54
Recession is a cycle of unemployment, lesser spending, businesses failing, that gets worse over time. A recession is not some linear event, you need to look at it like the cycle it is and ways to break the cycle.
I think this is the right way to go about it, the cycle needs to be broken somehow and I think solutions like this are spot on.
Posted by: ToryNorth | October 19, 2008 at 17:01
I don't know what Brown plans to spend money on but it seems pretty clear to me that tax cuts can be made immediately but big project government spending could take years before it provides jobs in any quantity. The exception may be houses but, as observed, it will have the oposite effect on the housing market than required because falling house prices are causing most of the problem.
Posted by: David Sergeant | October 19, 2008 at 17:20
Thank you Richard North..
Just before I read your post, I was going to say that VAT is under sole control of the EU - offer what you like on VAT concessions but it will be cap in hand to our unelected Lords & Masters in Brussels for permission to do so.
Posted by: Bazzer | October 19, 2008 at 17:56
Just to add a tiny little bit of detail to that:
VAT is, of course, an EU tax, implemented via the VAT 6th Directive. A payment holiday on VAT would amount to a de facto reduction in the rate of tax, which is not permissible without the unanimous approval of all 27 EU member states, following a proposal to that effect from the Commission – which it not required to deliver.
That, though, might be the least of Mr Cameron's tiny little problems. Member states are required under EU law to collect VAT, a proportion of which goes to the EU coffers – known as the "own resource".
Collection procedures are also defined by EU law, requiring the imposition of penalties on late payment – typically one percent per month. Changing these procedures unilaterally, guess what, is not permissible without the unanimous approval of all 27 EU member states, following a proposal to that effect from the Commission – which it not required to deliver.
Under certain circumstances, member states are entitled to adopt a simplified procedure for charging VAT, under Directive 2006/69/EC, but that does not include any provision for delaying tax payments. To the contrary, the Directive allows special provision enable member states to "prevent distortion of competition," which rather shows where EU priorities lie.
If these hurdles were somehow to be overcome, however, unilateral action by the UK in offering a tax holiday would certainly be considered a "distortion of competition" under Single Market rules. At the very least, Commission permission would have to be given, which will not necessarily be forthcoming.
And, since Mr Cameron's proposals affect only small and medium-sized businesses, larger firms might be moved to complain. A company like McDonalds, for instance, would have a just complaint. It regards itself as a "group of small businesses" under one banner. Fighting as it does for market share in competition with other high street outlets, it could argue that different rules on payment would most certainly distort competition.
There is also the matter of state aid. Broad-brush aid – which includes tax-breaks of any form, directed at one sector rather than applied uniformly – would most likely be considered illegal. At the very least, Commission approval would be required, which might not be forthcoming.
Then there is one other tiny little detail. Numerous studies – not least this one - have drawn attention to the danger of deferred VAT payments, making the system even more vulnerable to fraud. This is already a massive problem. Would Mr Cameron want to add to that problem?
Apart from that, it is a brilliant idea.
Posted by: Richard North | October 19, 2008 at 18:40
A comprehensive set of measures to help business is key. The deferrment of VAT and the already announced Conservative proposal to cut corporation tax are good moves. More needed. It might be combined with some targeted public projects that can be instituted quickly.
Posted by: Matt Wright | October 19, 2008 at 19:26
Richard North has already covered the European legal problems with Camerloon's proposals on VAT deferment. I could go on at great length about the practicality problems of implementing his proposals. What is a 'small business'. Businesses reclaim 'input VAT' from their suppliers - will they be still reclaiming input VAT from all their suppliers or only those suppliers who are not able to defer VAT themselves. Who is going to check the VAT accounts to see that their are no scams being pulled ie 'the invoice said £100 VAT so I am reclaiming it - I never noticed he didn't actually charge me the VAT !!'. It will be a fraudsters paradise.
Two further points. VAT is a tax on turnover. If a business is in the doldrums because of recession etc there is little if any VAT due. If a business has VAT to defer payment of then it is an active successful business. Fixed costs which apply irrespective of the level of business turnover are better targets for 'deferment' or 'holidays'. Business rates etc are a classic example of fixed costs.
Rugfish has made some excellent comments re the importance of sustaining the housing market. VAT deferment is irrelevant to this. Why ? (New) house building is VAT free and their is no VAT on house sales.
Lord Digby Jones is showing his lack of knowledge of the real business world if he was praising Camerloon's proposals.
Posted by: ivan the yid from bradford | October 19, 2008 at 20:38
John Coles at 10:53 -
"Mr Cameron could offer real leadership at this juncture. Spending cuts are needed and he could point out the waste and propose an end to Regional Seats of Government, a savage reduction in QUANGOs, an end to employing Consultants, stopping the Identity Card scheme, a freeze on all government recruitment"
All good ideas, but would just worsen the problem of unemployment!
Posted by: Andrew S | October 19, 2008 at 20:39
I'm not sure that six months will be enough, but perhaps deferment of VAT bills could be extended beyond the six month period if necessary.
Surely abolishing Employer National Insurance and scrapping The National Minimum Wage and Working Time Regulations would be better. If eligibility to contributory Earnings Support Allowance\Incapacity Benefit was cutback to the same length of time as for Contributory JSA and the State Pension age raised perhaps to 72 and Industrial Injuries Benefits abolished.
Cutbacks in staff of the HSE and merging DWP, Inland Revenue and BERR into one smaller organisation which could be handled by The Chief Secretary to the Treasury and Paymaster General who have Welfare and Business Briefs anyway.
Reintroduce museum charges and cutback spending on the NHS cancelling all new programmes and stopping all new hospital building.
Cutting spending on the NHS would allow the beginning of reversal in the amount of National Insurance money that the NHS was taking, any National Insurance money spent of Healthcare could increasingly be restricted to only be on the basis of people's NI contribution record.
A national scheme of library charges, promises to reintroduce weekly refuse collections might have to be shelved to help save money.
VAT could be extended onto food and children's clothing and unmetred water and sewerage and the threshold of Income Tax hugely raised.
The opportunity could be taken to undertake a radical restructuring and downsizing of the public sector and radical deficit cuts and tax cuts simultaneously.
More money to the railways, Defence, R&D, National Security and policing and radical cuts in Social, Health and Arts spending.
Posted by: Yet Another Anon | October 19, 2008 at 23:33
Rugfish @ 11:36
You are quite correct. Deferring VAT payments for six months is a waste of time. What would I do with the money I am supposed to have "saved"? I still have to pay it, just a few months later is all.
Reduce small business corporation tax and beef up penalties for late payment. That would be far, far more helpful.
Posted by: Hawkeye | October 19, 2008 at 15:18
===============================
Hawkeye,
It seems many have missed the point.
VAT is a regulated tax amd must be collected in accordance with EU directives.
Secondly, "deferrment" may be of immediate benefit but benefit can only be gained if one "spends" it and sees a return.
A business can only see a return if it is able to sell its products or services.
Creating customers is the key and to create customers the government needs to intervene in order to stabilise their assets, savings and jobs.
All things flow from confidence in the housing market and people not losing their assets.
Business rates and taxes should be cut, deferred and even rebated if wanting to help stabilise jobs but VAT alone on goods which are not being sold and collected under EEC VAT rules is a non-starter.
As I said, it's the equivalent of robbing Peter to pay Paul and that's just plain bad business.
Posted by: rugfish | October 20, 2008 at 05:16
LoL. As much as I usually agree with Mr North, sometimes you can be so focussed on the EU "elephant" in the room that you miss the blue whale; Cameron is not going to have a problem with the EU over this as he is not in office to actually implement the idea.
I took the proposal as a simple approach to put the government under pressure to help small business through the recession, which I think is an excellent ides. It shows the Tories want to help small business and also corners "hero" Brown, if he tries to implement the proposal, as he could face rejection by the very EU he is currently claiming to have saved. Hero to zero.
And for those who said that a VAT deferral is no help at all, take it in context with Cameron's other point about late payers.
If you are due to pay a 50k VAT bill next week, but there has been a toxic mix of increase in delays in people paying you and banks refusing increased overdrafts, then clearly a short term deferral will enable you to wait for the late payers to stump up now, and for the banks to get back to lending money to customers.
As for the house market. Let it crash! Prices went up 66% in just three years from end 2000, and you can't buck the market forever. Helping to keep prices inflated will just make the problem worse.
It will also enable me to pick up a cheap pied-a-terre of course! ;-)
Posted by: GB£.com | October 20, 2008 at 07:54
Hunt the elephant is what I do ... It would be nice if some more did it.
As far as the general package goes, it still sucks. I have run several businesses, as a sole trader (as I do now) and one with a fairly sizeable staff. You live or die by your cash-flow and the sole lubrication for that is the overdraft. Without that, most traders are stuffed.
Many of those traders - hundreds of thousands of the most vulnerable - are self-employed and are not VAT registered. Mr Cameron's "proposal" on VAT, therefore, is of very little interest to them. All they want to know is that, when they put their cards in the ATM, while they are under their agreed overdraft limit, that money will come out of the slot.
In running a business, I have been there before. I have had a bank arbitarily call in an overdraft, bringing it down to below the current debt level. Then you go hungry and the only calls you get are from the bailiffs. Believe you me, that is not fun.
Thus, when we listen to politicians tell us what they would do, we expect realistic proposals - not some airy-fairy, wholly unrealistic ideas that simply make good sound bites.
They come even less well from a man who never had to worry about how to pay a phone bill - and has never had his phone cut off because he could not pay, and has had to run a business from a public phone box while the wife and kids are scratching for food, living off charity from relatives.
Been there, done that one.
When we have MPs living off a comfortable wage plus expenses - and a guaranteed pension while I look at the wreck of mine that is worth a fraction now of what it was a few weeks ago - we expect something better of them than we are getting.
Posted by: Richard North | October 20, 2008 at 11:03
Yeah, I am very much in agreement with you Richard really, and it is impossible to know if Team Cameron's thinking is per mine, or if they are actually proposing the unworkable as you suggest. I think Mr C needs to be asked directly.
However, where I welcome the proposal, I'm clinging to the slither of hope that this proposal could get the parties battling to find ways to help small businesses in the same way I hope they will allow those struggling with mortgages to halve their repayment for three years to avoid repossession and being burdened with a huge debt (neg eq on sale of home) for the rest of their lives.
Posted by: GB£.com | October 20, 2008 at 11:13
I agree with you Richard, none of these politicians actually understand the minds of businessmen. Yes of course, deferring VAT is a helpful short-term measure but if the money they are waiting for from a customer isn't paid because that customer went bust, and the business has spent the VAT money, then it can lead to only one result....more bust !
TAX is the way to inject real benefit into business and not a paltry 1% cut on NI contributions but a real cut or a rebate of tax is needed.
Also, GB£, I can fully understand you saying houses should find a level but there is no level if there are no buyers.
Houses will be worthless without buyers and revenues which would otherwise have been received will have to be made up by all taxpayers or borrowed and made up later.
The repercussions of allowing the housing market to crash, are far and wide and totally preventable. The resulst, if no action is taken will be homelessness and unrecoverable debt which will lead to yet more bailouts and higher taxes, and lower pensions for those who planned to use their home for retirement.
If you see that as 'good for our economy' then I think you should be looking to join the Capitalism rules get stuffed to social conscience Party, as mending broken Britain is as far removed from the equation as one could get if failing to offer help to the very people who will be even more broken without it.
Posted by: rugfish | October 20, 2008 at 11:39
Even tax cuts are no answer - you can always hold off payments and take the pain of a penalty. That is a "down the line" solution. Unless it is a cash-in-hand rebate, this is no help at all.
In the here and now, cash flow really is everything. In a recession, the system just freezes up. You have a positive balance sheet, well into the black, a healthy order book and outstanding invoices with a value well in excess of the overdraft. But your esteemed clients put your payments on the back-burner (denying sweetly that they are doing it of course) and the cheques dry up.
Then the bank throws a wobbly and refuses to extend the overdraft or, worse still, cuts it. Then you are totally stuffed - the technical term is "insolvent", but it means the same thing.
Unless that issue is addressed, there is no solution - we go to the wall.
Posted by: Richard North | October 20, 2008 at 12:32
"but there is no level if there are no buyers."
Only because prices are still too high.
Now the buying 'mania' of guaranteed quick profits has evaporated, buyers will be less inclinced to pay over the odds.
If the average home price falls to a reasonable 3x combined median salary + 20% deposit (around 145k), I'm sure you'll see buyers coming back.
As long as those struggling to pay their current mortgage are helped to prevent them realising the negative equity amount, further price falls to a more reasonable level will,on the whole, only be a good thing (well except for bank and government profits).
In short, it's further price falls not government intervention that is needed to bring in the first-time buyers.
Posted by: GB£.com | October 20, 2008 at 12:55
That's all very well, but if you are a small business, like as not your only asset is your house - which you use as collateral for your secured loan from the bank. That is your working capital.
When you get precipitate drops in house values, that "capital" suddenly evaporates and, hey! The bank decides that your are no longer a good risk and pulls the plug.
What is good for the goose is not necessarily good for the gander.
Posted by: Richard North | October 20, 2008 at 13:20
GB£ - "3x combined median salary + 20% deposit (around 145k), I'm sure you'll see buyers coming back".
Er, unemployed people don't receive 'salary', so consequently won't have the means to save a 20% deposit either.
GB£ - "further price falls to a more reasonable level will,on the whole, only be a good thing"
Not to a couple planning to downsize due to retirement or use home equity to fund income, or to the pension company which invested in a property portfolio, or to builders which won't be working building houses because no one can move, or to the economy as a whole which won't be getting the sales on money raised by the sale and purchase of property, or to the business whicdh has to write down a capital asset and can't raise sufficient funds to keep the business going which instead has to lay off staff, or to the many retailers up and down our high streets which were once solvent on the backs of consumers who no longer have the money to spend in DIY, white goods, furniture stores, kitchen and bathroom centres etc etc etc.
There was a builders merchant of the telly a couple of days ago saying roughly this:-
"I've laid off half my people, I haven't had a decent order for 18 months, I've ploughed £453K of my own money into the business to keep it running, I have a bank loan of £2.5 million which I took to expand my business when we were booming, I pay interest only on that loan and I have no business coming in unless the mortgage industry picks up.
He says he'll be bust and left owing £2.5 million to the bank, he'll lose his £453K, and the rest of his workforce will lose their jobs and won't be able to pay their mortgages.
Their debts will all fall to the bank and eventually to the taxpayers which 'could' have given tax relief under MIRAS and switched stamp duty to sellers in order to kickstart the market at little or no cost whatsoever other than a stroke of a pen.
Posted by: rugfish | October 20, 2008 at 13:27
Posted by: Richard North | October 20, 2008 at 13:20 -
"When you get precipitate drops in house values, that "capital" suddenly evaporates and, hey! The bank decides that your are no longer a good risk and pulls the plug".
Exactly the point I was making Richard.
Banks will be loathe to lend in any falling market which places them at a higher risk.
Unless the housing market is kickstarted then businesses up and down the country, AND JOBS and more homeowners, will simply go to the wall.
It is governments responsibility to DO something to prevent this from happening now before it is too late and it is NOT governments responsiblity to make things worse by waffling on about NI contributions for staff who won't exist or on VAT payments on sales of goods and services which haven't been made because stuff is still sat on the shelves unsold or services haven't been conducted because no one has any money to pay for them.
Posted by: rugfish | October 20, 2008 at 13:34
"Er, unemployed people don't receive 'salary', so consequently won't have the means to save a 20% deposit either."
Well then they can't afford a house.
Imagine what would happen if you helped a load of people who couldn't really afford a mortgage to buy a house. Oh, hold on, we don't need to imagine...
"Not to a couple planning to downsize..etc
What about shares? The bedrock of pension investment, endowment policies etc etc. Should the government ensure that share prices stay high too? If not, why not?
Posted by: GB£.com | October 20, 2008 at 14:03
Posted by: GB£.com | October 20, 2008 at 14:03
It appears we have an ideology clash GB and I have some difficulty seeing how allowing more people to go into poverty, more divorce, more stress recognised by the burden of debt and a higher crime rate, is 'mending broken Britain'.
Given that you believe there should be no assistance to homeowners and just let house prices collapse, then would you not also argue that government should also remove the assistance they'll be paying toward the cost of extra social housing and mortgage interest or would you just let that collapse too rather than intervene to allow them to meet the costs themselves ?
What's the difference in government giving tax relief at source ( MIRAS ), which could halt repossessions, unnecessary costs of social housing, unemployment and bankrupticies, stem the divorce rate and likely rise in crime with all the effects those things have on families as opposed to taking no remedial action and picking the bill up and a deepened broken society by failure to act ?
What tangible action would you advocate to meet the needs of a further breaking society which didn't account for an economic downturn when IDS did his report or was that just politics and not a plan to really make a difference to society because government shouldn't 'interfere' in a 'free market' ?
Posted by: rugfish | October 20, 2008 at 14:31
Rugfish - I could weep ... or get very angry - or both.
The problem is either that these Top People either do not know, or do not care, what the real world is like. The issues are, in fact, very, very simple, and very well known to anyone who has run a small business in the hard times. Running it in the easy times is no challenge - wait till it gets hard.
I started my first business in a recession, in the 70s - and the bank nearly broke me ... physically and mentally. I've known people commit suicide after the sort of treatment I took. It nearly happened again in the 90s, although I was a little cuter that time.
When they stitched me up again, I produced a draft press release (circulation, one copy - to the Bank) pointing out that what they were doing was in contravention of their own bank codes. I had an interview with the Regional Director that afternoon and got my overdraft.
This is now my third recession. As they say, I've been round the block a few times and, looking up from the weeds, you tend to learn a thing or two that the Top People don't even notice ... but they're all just Too Grand to listen.
Maybe we should just get angry. Forget the weeping.
Posted by: Richard North | October 20, 2008 at 14:40
"Given that you believe there should be no assistance to homeowners"
I proposed that struggling homeowners should be allowed to halve their mortgage payments for 3 years (interest added to loan and term extended). That's hardly no assistance is it? Don't confuse helping the needy with propping up house values.
There is nothing wrong in people using a sensible amount of 'value' in their homes for other purposes (business funding etc), but from 2003 onwards, house prices values were not realistic, they were in a speculative bubble phase, thus someone taking about a 100% mortgage in 2000, was being told that by 2003 their house was 'worth' 166k whereas a more realist value was 126k.
That house was only 'worth' 166k if liquidated at that point in time. For equity release where the money would be repaid over a long term period, it was mad to use any value other than a more long-term average to determine the house value and thus how much equity was available for further borrowing.
To use a snapshot price for long-term borrowing was nothing short of speculation. I am a big supporter of gambling, but I certainly do not think that gamblers should be prevented from making losses!
However, I'm certainly not blaming borrowers for this, as they are fed the vested interest property propaganda every day, telling them how much their home is now worth etc, so it is no wonder they fall victim to the 'wealth allusion'.
Posted by: GB£.com | October 20, 2008 at 14:59
s/b 'Wealth illusion'! :-)
Posted by: GB£.com | October 20, 2008 at 15:01
"Rugfish - I could weep ... or get very angry - or both.[.....]
Maybe we should just get angry. Forget the weeping".
Posted by: Richard North | October 20, 2008 at 14:40
I'd say get a pitch fork sharpened because none of these baggars seems to know what colour socks they have on when it comes to business or the economy. For one we have Brown, a PhD Historian, Darling his literal sidekick, a Legal guy and opposite them we have David Cameron who seems to have a clue for some basics but no actual experience of running 'one's own business' and the daily grind which goes with that.
Like what you mentioned in relation to putting your house on the line to guarantee a loan from the bank, which requires coverage in Lloyds case of 60% remaining equitable value, but sincde a business has already reached its limit and Lloyds know his house value has dropped [ thus increasing their risk and LOWERING the amount they'll allow which just happens to be MORE than the current loan and overdraft, then Lloyds for example would be wanting to STOP the overdraft, cut the card up, seek some money FROM the business instead of to it and will decline another loan until its risk is minimised by a recovered property market.
Fortunately, I retired from business last year with a wad of cash, no mortgage, free from debt and a great big chunk of experience of how to manage a business through a previous number of bad times, so I understand exactly what you are saying.
I am saying unless the hosuing market is assisted in its recovery then this country is knackered and millions will be thrown out of work and on the street.
Now them up above can take that anyway they please but I know it's the truth and so do millions of other people especially the businesses which went bankrupt and the people who's homes were repossessed last week which were double the rate they were this time last year.
Pretty soon, the likes of Comet, DFS, B&Q, and all sundry of small builders and trades will be GONE unless a homebuyer recovery package is put in place of the kind I'd advocated, and all the debt will fall to the banks and the taxpayers.
Take action now David before those millions turn on you for failing to kill the thing which will break our broken society further.
Posted by: rugfish | October 20, 2008 at 15:14
GB£.com - " I proposed that struggling homeowners should be allowed to halve their mortgage payments for 3 years"
Sounds good but it has flaws.
One, it makes negative equity bigger.
Two, it makes the likelihood of a business loan to an SME less likely, and three it doesn't promote house sales which turn the economy around by releasing capital into it and will prevent that happening fopr longer if equity is eaten away by capitalising payments which are not being made. In short, it would create a trap which would glue up many homes from being sold and lead to higher demand later and therefore higher prices.
Funny old world of economics is what it is where you get the exact opposite result of what you intended GB. lol
Posted by: rugfish | October 20, 2008 at 15:20
Northern Rock has just decreased it's e-saver rate to 4% net.
Inflation is 5.2%, Bank of England borrowing rate is 4.50% and Northern Rock's lending rate is 7.34% or 6.29% with an arrangement fee of £1,995.
Incredible !
Posted by: rugfish | October 20, 2008 at 15:37
"...Like what you mentioned in relation to putting your house on the line to guarantee a loan from the bank, which requires coverage in Lloyds case of 60% remaining equitable value, but sincde a business has already reached its limit and Lloyds know his house value has dropped [ thus increasing their risk and LOWERING the amount they'll allow which just happens to be MORE than the current loan and overdraft, then Lloyds for example would be wanting to STOP the overdraft, cut the card up, seek some money FROM the business instead of to it and will decline another loan until its risk is minimised by a recovered property market."
EXACTLY what happened to me ... Lloyds - helping small businesses! Pah!
I had eight men out on a job, paid day-rate, cash in hand, the job taking two weeks. It was a good contract, very profitable, but I had to take the risk.
Half-way through, just as I was about to leave for the job, got a call from the bank... Mr (as I was then) North, your overdraft limit was X, it is now Y. Since your overdraft is now greater than Y, and it is now unauthorised, you may not draw out any more money until your account is below the new limit.
How do you deal with that?
This was before ATMs, so I went round the cash desks in the local supermarkets and drew out £50 from each to pay the wages. On the sixth time, I got arrested and banged up in the local cells for alleged cheque fraud.
Fortunately, the CID officer had some good sense, talked to the bank, found out what was going on and tore long, bleeding strips off the manager - then let me out of the cells. Never say our coppers are no good.
But that is the reality of running a business in a recession. The banks were playing it absolutely by the rules - and the little man at the bottom gets stuffed.
Posted by: Richard North | October 20, 2008 at 15:38
"On the sixth time, I got arrested and banged up in the local cells for alleged cheque fraud".
ROFLMAO !!
These 'practical' matters have to be experienced in order to understand SME's Richard and that experience has taught you all you need to know I bet.
Unfortunately, there are onlt two choices here. The banks lend money or the taxman gives rebates. [ If it doesn't want recession or slump and wants not to see a broken Britain ]
If the taxman gives a rebate to business that doesn't create customers but it will help a struggling business.
If it gives relief to homeowners then it will create the means for people to spend and then the SME's will have customers which will save the SME's and jobs and society from falling down a big black hole and Tories losing the next election if it happens to be OUR IDEA rather than Labour's.
Posted by: rugfish | October 20, 2008 at 15:52
HINT !
US Federal Reserve chief Ben Bernanke has said :-
"Any government spending would need to kick in quickly to encourage [ people ] and businesses to [ boost spending ] and help the economy during the period in which economic activity would be otherwise weak".
I'd run with the ball if I was George Osborne and immediately issue a housing recovery package. It is both economically and politically prudent to do this QUICKLY and I'd be checking my full diary to see if I could squeeze myself on to the news before 6pm if I wanted to reach the nation and convince the voters I had an answer to the country's problems which Brown created and has talked hot air about ever since.
Posted by: rugfish | October 20, 2008 at 16:03
"One, it makes negative equity bigger."
I'd rather have bigger neg eq than no home and a debt for the difference! That's exactly where I was in the early 90's but being able to keep my home I benefitted from the rises later.
And to repeat, we're not disagreeing about release of capital or its benefits, but the basis of valuations to determine how much can be released.
Otherwise, you might as well extend your argument and say that everyone's home is worth a 10 million quid, let them remortgage to 95% and spend it into the economy. All problems solved... ;-)
Posted by: GB£.com | October 20, 2008 at 16:13
"HINT! US Federal Reserve chief Ben Bernanke has said..
He also said last week that he is considering using interest rates to actively slow future house price inflation!
Posted by: GB£.com | October 20, 2008 at 16:16
Eh ?
Since when have lower mortgage rates ever SLOWED house inflation GB ?
Also, yes I agree with you that mortgages should be to a loan to value ratio acceptable to a lender and in accordance with someone's ability to pay, but I'm not the one who trying to tell lender what risk they should take, whereas you are whilst simultaneously arguing for government not to interfere. QED ?
So, if homeowners are give MIRAS and theur payments are lowered, then some may want to clear mortgages quicker, some may want to pay their gas bill, some may want to put the saving into their business, others may want to go spend it down the high street and others might be jolly better off and able to sell their home to another jolly well opff person who can now afford to buy it because his payments are lower too.
Now if you take away the guys cost of stamp duty [ mostly because the greedy lender is placing as much as an arrangement fee on the guys mortgage which it would claim on repossession if he was unable to pay or from his mortgage payments which they made higher on account of charging a whopping fee ], and placed that stamp duty with the seller who has no trouble paying it because the value of his house has been saved, then the housing recovery package will work and all parties should be happy including the wider economy which may just be rescued by the guy who sold his house and the guy who bought it which went and bought a load of DIY and other stuff down the high street to the shop where the man is still trading on account that he was able to get a loan from his bank which allowed him to stay open.
Posted by: rugfish | October 20, 2008 at 16:32
"Since when have lower mortgage rates ever SLOWED house inflation GB ?"
Bernanke is looking beyond the current mess to what to do when things get better:
"By Craig Torres
Oct. 16 (Bloomberg) -- Federal Reserve Chairman Ben S.
Bernanke signaled an end to the Fed's decades-old aversion to interfering with asset-price bubbles as the financial crisis reshapes some of the central bank's most firmly held views on regulation and monetary policy.
Officials should review how supervision and interest rates can tackle the ``dangerous phenomenon'' of bubbles in housing, stocks and other assets that risk bringing the entire economy down, Bernanke said yesterday.
I take that to mean low rates now, but when the market picks up, rates will be increased quicker to prevent a new bubble.
Posted by: GB£.com | October 20, 2008 at 16:45
"On the sixth time, I got arrested and banged up in the local cells for alleged cheque fraud".
ROFLMAO !!
These 'practical' matters have to be experienced in order to understand SME's Richard and that experience has taught you all you need to know I bet."
That was only the start. It got considerably worse ... I ended up homeless for a short time, running my business from a public telephone box, after the bank had reneged on a refinancing deal.
You can perhaps see why I am not ready to roll over and have my tummy tickled, just because the Top People have uttered a few sound bites.
Posted by: Richard North | October 20, 2008 at 16:45
GB£ - Either you've picked him up wrong, he's been misquoted, or he's talking out the back of his head.
He's wanting lenders to LEND and he's wanting consumers to SPEND and he's wanting businesses to stay open.
Lenders aren't going to lend unsecured loans to people with rising unemployment, or secured loans to people with deflated house values or to businesses with falling capital asset guarantees.
Therefore to say banks should lend in these conditions is just plain daft and the only way to accomplish what he's asking is to change those conditions with tax and lower interest rates.
These two instrumental changes I've asked for, MIRAS and stamp duty together with lower interst rates if applicable, will immediately revive the economy and will enhance spending, bring back confidence, save businesses and jobs and will give MORE in tax revenue than 3.4 million unemployed as now being predicted by Ernst and Young which predicts a DOUBLING of unemployment over 2 years.
Posted by: rugfish | October 20, 2008 at 17:06
Even tax cuts are no answer - you can always hold off payments and take the pain of a penalty.
If the taxes were cut then fewer would end up paying late, because they wouldn't have so much to pay in the first place, and they would be less likely to be fined then for it.
Posted by: Yet Another Anon | October 20, 2008 at 21:55
In the early days of building a business, tax is not really an issue. Investment is high, expenses are relatively high, you are living off partly off capital and paying yourself very little, ploughing everything back into the business.
Later, of course - when you have some wool on your back - it does become a very serious issue but, by the time you are actually in a position to pay any serious tax, the most vulnerable phase of the business is usually over.
Posted by: Richard North | October 21, 2008 at 01:12