Taxation As Punishment

There is a profound dishonesty about Alistair Darling's pre-budget report. It didn't suprise anybody, but as usual with New Labour, anywhere there is substance, there is also obfuscation. Stealth is the norm.

But even the substance lacked substance. The big ticket items, i.e. a 1% increase in National Insurance and the freezing of personal allowances, will raise an estimated £4.4bn and £2.2bn respectively. Against a backdrop of a £178bn deficit, these are paltry. But the NI increase, to all intents and purposes an increase in income tax, can be disguised as omething else, and few will spot the freeze in personal allowances at all.

At the same time Darling has actually loosened the purse-strings in his ludicrous ring-fencing of what he calls 'front-line' spending, in a midly offensive military analogy.

But the high-profile items, such as a tax on evil bankers, are simply designed to please the electorate. And this is becoming a theme. The government has begun taxing unpopular people (mainly bankers and the rich) because they must be wicked and therefore they deserve to be taxed. Never mind if the new tax actually loses the exchequer funds, as is likely with the bank bonus tax.

Whether we like bankers or not this should worry us. Tax is for the purpose of allowing government to fufill its responsibilities. Full-stop. It should not be used as a punishment, or even worse, as social engineering (a tax on fizzy drinks is now being enthusiastically discussed. Save our teeth, Alistair!)

The electoral dividing line is whether VAT will go up or not. Labour have hamstrung the country by promising it will not. They have therefore committed themseleves to years of swingeing taxes on jobs and production.

But if there have to be tax increases, and the enormous debt mountain burgeoning under us mandate that, then wouldn't a tax on consumption be better? That would be green, right? And what's the best way to achieve this? A hike in VAT. It's the 'least bad option'.

But don't expect the debate to be honest. As we hit election season, truth is always the first casualty. The first real budget will be the one after the election, regardless of who gets in.

Goodbye, Dubai

How can such a tiny place as Dubai cause such amazing ructions in world markets? My little bro, BalancedPaul, has long worked with Middle Eastern investment organisations and he has unique knowledge to share. Here's his brief but insightful take:

Before...

I have been asked to guest this week on the subject of Dubai. This raises two thoughts: one, I'm flattered and two, Ubergrumpy doesn't know me very well. Nevertheless having pretended some inside knowledge I'd better deliver something. So here goes.

Dubai is one of seven autonomous Emirates that makes up the UAE. Together with Abu Dhabi, Dubai dominates the UAE. That is, however, rather like saying that Canada dominates the Americas along with the USA. No prizes for guessing which Emirate is the USA.

Up until the 1920's Dubai's main source of income was pearling - the Great War saw an end to that however the discovery of oil (the UAE has the sixth largest proven oil reserves) gave Dubai an economic leg up. The rulers of Dubai (the Al Maktoums, of horse racing fame) foresaw the end of oil and wanted to diversify. They chose finance and construction.

The construction boom was so successful that oil only contributes 6% of GDP. This is a good thing as Dubai is running out of the stuff, and all the real oil wealth belongs to Abu Dhabi.

...and after.

The construction boom gave us the palm island development and the Al Burg, the world's tallest freestanding hotel; seven stars! It also landed Dubai with eye watering debts in excess of $100bn. This may not seem so huge compared to the UK national debt of $1.3 tn or so, but per capita (Dubai contains a shade over a million souls) this equates to near $100,000 a head.

Of Dubai's $100 bn debt, only a small proportion is sovereign. This is important; the confusion between sovereign and quasi-sovereign is what causes the uncertainty and it is uncertainty that spooks the market. It is this opacity, often a feature of Middle Eastern enterprises, that militates against western style dealing. Take your pick - structural opacity or complex instruments that lead to unquantifiable risk. The fundamental issue is that business in the Middle East is not as straightforward as some overpaid bankers think it is!

Luckily it is always good to have a rich brother¹ so the Central Bank of UAE has guaranteed Dubai's banks liquidity in case of a run. Nakheel (effectively a state construction company) has asked for a moratorium on its debts and the amount in global terms is small but, bankers being bankers, it has caused panic around the world's financial markets.

Could it be that they are waking up to the fact that Dubai is an Empire that is, literally, built on sand?

---

1 - Whatever could you mean? - UG

An Englishman's Home

Whither house prices? There's never a dull moment in the UK housing market. Recent stats have shown that our prices, already bloated, are moving upwards again. Will that continue? Is it time to swallow hard and move from renting to buying?

Not in my view, at least not for the next year, and possibly longer. Consider the following:

• If you are a first-time buyer in the UK who does not have rich parents or relatives to help you, then you are in a group whose mean age is 37. Even if you do get help from Dad, you are on average 31.


• House prices are still well above their long-term average expressed as a multiple of average earnings


• Mortgage funding, although improving slowly, is still very tight and will remain so while the banks continue to build their balance sheets.


• A UK election in the middle of next year will give potential buyers (and sellers) the jitters. In uncertain times people tend to stay put. Although this will hurt supply, it will also hurt demand.


• At some point, the cost of money is going to rise, and with inflationary pressures building, this may be sooner than later.


• Unemployment is still climbing and although the rate is slower than forecast, it will continue to climb for a while yet.


• The stamp duty reduction for prices below £175,000 finishes at the end of this year, although the pre-budget report may extend that, given the increasingly desperate tone of government.

The fundamentals from the data above point to a 20-30% crash. But my gut feel is that they will fall by 10% or so because of counter-pressures:

• Inadequate supply of new and existing housing.


• A desire on the part of government to retain the entirely artificial 'feel-good' factor that comes from houses that are ludicrously overpriced, reflected in policy, such as key worker projects, provision of 'affordable' housing that allows general prices to remain inflated, and harebrained co-funding schemes.

I've got a nice house near Winchester. No forward chain. Anyone want to buy it?

Can the Footsie go up forever?

No.

National Savings Goodies

3.95% 1-year bond from NS&I. By a long chalk this is the best 1-year rate on the market. If I was a cynic I'd say the government is a bit desperate for funds...

Dividends - Where There's Stodge There's Brass

We live in strange times. Interest rates are scraping along the floor, and the stock market is performing exuberant aerobatics daily. Where does the risk-averse average Joe or Joess put his or her cash for a couple of years without worrying too much about it?

There are lots of possibilities, like gilts (government debt) or corporate bonds (loans to companies). But one that is often overlooked is investing for dividends. Dividends are paid by companies to shareholders when they wish to pay out some profits (assuming they've made any). Dividend yield is the latest annual dividend divided by the share price. For example, a company with a share price of 200p that's paid out a dividend of 15p has a dividend yield of (15 / 200) = 7.5%.

So a high dividend yield means a company is paying good profits relative to its share price; and the dividend yield is effectively your rate of return. Be careful though! High dividends can tell another story; sometimes a high dividend yield can mean that the share price is depressed, which in turn may mean that the company is underperforming. And an unprofitable company won't be paying any dividends at all, regardless of what it paid in the past.

Dividends are simple, but like many things financial, are surrounded by jargon like EPS and dividend cover, designed to put you off so that you'll rely on some overpaid underperforming 'professional' instead. Don't be discouraged. If you want to know all you need to here is an old but excellent primer from the top people at The Motley Fool.

Some of our dullest companies pay a good dividend, year-in, year-out. You simply buy the shares and wait for the cheque to arrive. So which company to choose? In the good old days banks were stolid and uninteresting, and always profitable. How times change. Some of the banks look cheap now, but our objective today is to find something unexciting.

British American Tobacco (LSE:BATS) might be a good choice, if you're happy with an outfit whose long-term aim is to give lung cancer to every child in the Far East. But there are even duller companies. My strategy is to choose household names who I feel will be around for a year or two, and do a bit of basic research including looking at their web-site. Utilities like Scottish and Southern Energy (LSE:SSE) are paying good dividends. Even here you need to do your research. For example, look at United Utilities (LSE:UU.) who look good at first glance; until you start looking at their recent press. If you're feeling a bit tastier how about BP (LSE:BP.)? We'll always need oil. Right?

So there are no easy answers, and your own research and gut feel are critical. So where do you research beyond simple press articles? The LSE web-site is a mine of information; and there are sites like Dividend Investor which provide a free basic service.

And where do you buy your shares? The web is a good place to start; there are many execution-only (i.e. no advice) sites. They'll charge about a tenner, and you pay 0.5% stamp duty to Gordon and Alistair, bless 'em. It's a mild pain because you'll have to open an account and deposit funds before you trade. If instead you want to talk to a human being, or failing that a trader, most banks provide a (more expensive) share-dealing service, such as Nationwide's.

If you do decide to invest for dividends, plan to hold on to them for a while; it'll take some time to wipe out the cost of buying and selling the shares, and if you've chosen right, you may even get a bit of capital growth as the shares grow in value. Good hunting.

(Slim) bonanza for the over-50s!

Today's the day. You lucky older peeps can now put £5,100 each year into a cash ISA if you wish. And there's no shortage of choice. There are plenty of great Q&A sheets and comparison sites on the web that'll put you in the picture, and answer any question you may have.

Except this one. Why do the rates stink?

You may well ask. The average cash ISA rate is now a ghastly 0.41%. Adverts for cash ISAs all read something like "Pick up a great tax-free rate with instant access!" Well, I don't call 0.41%, or even 2-3% if you shop around, a great rate, tax or no tax.

So what's going on? I have a theory. Have you tried to open or move an account recently? The bonkers money-laundering rules that the government have spent years embellishing have made it ridiculously difficult; you will generally need to send off two pieces of identification including passport, if you trust the Royal Mail (which I don't) or a notarised copy of your passport.

Obtaining these is time-consuming and expensive, and therefore a barrier to changing at all. Banks love inertia. They have long used accounts which gradually erode your rate of interest; witness Nationwide's e-Savings, which now pays virtually nothing; if you want money you'll have to open e-Savings Plus or the slightly barmy Champion Saver. And next year something different, no doubt.

So ISAs are a godsend to them. You can't take your money out or you lose the tax advantage; and as already noted accounts are difficult to shift between banks. If you don't put money in each year then you'll lose the tax shelter for that year; so banks, ever logical, are offering rates less than those you'd get if you paid the tax on a normal savings account.

So what to do if you want to stick to cash? Shop around. There are still a few reasonable rates, particularly if you're happy to lock your money up for a while. Bradford & Bingley 2 Year Fixed Rate Postal ISA offers 3.75% for example. Now I'm not offering advice, and rates can go down as well as up etc., but I think two years is long enough. These woeful rates can't last for ever. Can they?