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Wednesday, 24 September 2014

Do they really think we are that stupid?

Unfortunately it seems they do.  They of course, being politicians, and in this case, once again, Labour politicians.

Today's idiocy is the notion that the Labour Party will "save the NHS" by spending another £2.5 billion a year on doctor's and nurses.  Let's get this straight.  £2.5 billion is a lot of money, well not so much in the London property market, but in the real world it can buy quite a lot.  But it is less than 2% of national spending on healthcare (about £120bn in the NHS and £25bn in the private sector).

With an ageing and growing population spending on the NHS is going have to increase (or process improvements are going to have to be found) amounting to more than 2% above the rate of inflation to cope. Less than 2% over 5 years just isn't going to cut it.

Worse still, they propose to fund it, at least in part by a levy on the tobacco companies. Now I am not a smoker, and never have been, but smokers have my sympathy. The government already raises £11 in taxes on the sale of cigarettes.  The biggest component of the cost is the tobacco duty, followed by the 20% VAT on the duty.  The cost of the weed is but a miserable 10% of the cost of the cigarette.  Tobacco revenues already far outstrip the cost of treating smokers for lung cancer, but now they are paying handsomely for the rest of us.

The tobacco companies know that their customers are hooked but they will stay in business even if they pass on the cost of the NS levy and as the price for a pack of 20 heads to £10. But it is the Labour Party who really take us for fools, or perhaps in this case take smokers as hopeless addicts.

Prevalance of smoking is much higher among those living on low wages, the unemployed and those on benefits. Essentially this is a policy tht is going to fall harder on those that Labour pretends to be helping.

Crime of the Week: Every little helps

Tesco says it has overstated its half-year profits by an estimated £250m because of irregular movements in “commercial income”, the revenue that it receives from its large multinational suppliers.  But how can that be? Selling (mostly) groceries should be a simple business, with simple accounting. The shopkeeper buys stock from its suppliers and pays for it on normal credit terms.  The stock is then sold for cash (mostly), and the unsold stock is written off.  Simple apart from that it should just be a simple matter of normal corporate items (fixed assets, borrowings, subsidiaries and other investments, minority interests, taxes, unfunded pension commitments etc, etc). Or so you would think. The issue is all in the payments that suppliers make to Tesco,apparently.

Why do suppliers pay Tesco, surely it should be the other way round?

Not so fast dear reader.  Part of the brand management culture that pervades modern grocery is the price that big companies are willing to pay to get the best spot on the supermarkets' shelves.  The premium price that you pay for a tin of Campbell's Soup or Heinz Baked Beans over the equivalent own brand product doesn't just cover the superior ingredients, hand crafted cooking and superior marketing. It also covers the extra cost (listing fee) of having the suppliers' products placed at eye-level, as well as other promtional activity.

Suppliers also often pay to have their products carried in Tesco’s stores, and a higher fee for the smaller Express stores that carry fewer product lines. .

OK, but that doesn't really explain any over-estimation of income. Either the fees are paid or they aren't so what gives?

The accounting problem apears to relate to additional payments called "supplier rebates”. Suppliers will pay Tesco and other supermarkets when they achieve an agreed level of sales in a year. Typically the rebates would kick in when a certain growth level is achieved in annual sales. The few percent rebate may not seem much but when the industry operates on 2-3% margins it goes a long way to explaining how Tesco could achieve high margins while growing.

But Tesco hasn't been growing

Tesco's sales volumes have actually been declining for a few years as it loses market share to Aldi, Lidl (& Poundland and Waitrose), so it will probably receive less in the way of rebates than it did last year. The trouble is that Tesco, and for all I know all the other retailers do the same, has decided that it should book some of the rebate income in its half year profits.

Accountants call this the accrual principle.  I call it fantasy accounting.  Essentially the finance department will ring round all the product managers and ask them to estimate full year sales, and thus guess the amount of the full year rebate.  Now as far as I know nobody at Tesco gets paid bonuses on the basis of full-year sales forecasts, but with stagnant or declining sales the loss of the rebate is going to hit a product line's profitability and may cost someone a job, hence the incentive to make optimistic full year sales forecasts.

Should Tesco’s auditors (PwC) have spotted this issue?

On Monday the new Tesco Chief Executive said that the problems had occurred in its unaudited first-half results. But in the auditor’s report in Tesco’s 2014 Annual Report, PwC highlighted the recognition of commercial income as an area of focus “because of the judgment required in accounting for the commercial income deals and the risk of manipulation of these balances”. “Commercial income (promotional monies, discounts and rebates receivable from suppliers) recognised during the year is material to the income statement and amounts accrued at the end of the year are judgmental.”

So how bad is this?

Even if it is a practice that has been going on for years, if the rebate measurement period matches the accounting period, all this would do is boost the interim results because the full year sales would result in the correct amount of rebate.  If the periods don't match then the £250m writedown would appear to be a correction for a persistent overestimate of rebate values.

A large amount (and certainly enough to warrant serious attention from regulators and possibly prosecutors) but in the context of £45bn of annual sales neither unexpected or unmanageable.  The good news is that it seems to be as a result of a combination of bullishness and incompetence, but at least it doesn't appear to be Enron or Worldcom-style habitual fraud.

Sunday, 21 September 2014

Don't hold your breath

So Ed Miliband has decided that the minimum wage should be £8 per hour. Good for him, standing up for the poor and downtrodden, who will welcome the step up from the £6.50 that they are due to get from 1 October.

Oh, but what's that? He plans to do that by 2020.  I assume that means by 1 October 2020, 6 years from the next increase, which works out at an annual compound rate of 3.52%, comfortably above the 2% inflation target set by the BoE and way above the 3.01% increase between 2013 and 2014.

A whole extra 0.51% more than under the "evil Tories"®.

Sunday, 14 September 2014

What goes around comes around

It is funny how dishonesty can come back and bite you on the bum, but that may be about to happen to the Labour Party.

Back in the years when they were in power the socialists decided that it wold be a neat idea to raise the top rate of income tax from 40% to 50%, but as they didn't really have the courage to implement it during the lifetime of that parliament they legislated that the rise would be effective after the nxt general election. Accordingly, not a penny of tax was ever collected under the Blair and Brown governments at a rate higher than 40%.

Quite predictably, the Conservative government thought about reversing the measure but wimped out and left the rate at 45%. Now in a rational world this would have been accepted as 5% higher than the previous rate, but quite cynically Labour made a great song and dance and called it a tax cut for millionaires.

This meme was then picked up by the Scot Nats and sold to Scots as an example of the sort of inequality that pervades England and would not occur in an independent Scotland.  The net result is that thousands of previously solid Labour supporters have switched to the Yes camp and may bring about independence, in which case the biggest losers will be .... the 40 Scottish Labour MPs at Westminster.

Thursday, 11 September 2014

Some Scottish Fairy Tales

1. Myth: Scotland's global relationships won’t change

Hot air balloons

Fact: Scotland would be a new country. It wouldn’t inherit all the international deals the UK has struck over many years, decades, and even centuries (everything from extradition and trade treaties to the International Declaration Prohibiting the Discharge of Projectiles and Explosives from Balloons). So it would have to start from scratch, negotiating to join everything from the UN to the IOC and NATO (more on NATO later). 
The UK is a well respected power that is a member of all the most powerful international bodies, G5, G7, G20, UN Security Council and by its history lies at the hub of the Commonwealth.  It has a long established alliance with the United States and is respected in the Western World as one of the few countries that has consistently stood against despots and for representative democracy.
An independent Scotland would lie somewhere between Denmark and Moldova.
Source: Scotland analysis: devolution and the implications of Scottish independence, February 2013

2. Myth: Remaining North Sea oil and gas is worth £1.5 trillion - and at least £6.8 billion in Scottish tax revenues in first year of independence

Oil rig

Fact: The Scottish Government assumes that oil and gas can be produced at zero costs (so rigs and pipelines can be built and run for free, and oil workers don’t need to be paid), despite the remaining oil being further off-shore and deeper under the ocean, so it costs more to extract. Over the last 2 years, taxes from the North Sea have been £3 billion below the Scottish Government’s most pessimistic forecast – that’s the same as the entire Scottish education budget.
Sources: Oil and gas analytical briefing, Scottish Government, March 2013, Statistics of Government revenues from UK oil and gas production, HMRC, April 2014

3. Myth: There would be tax cuts and more spending in an independent Scotland

Tax definition in dictionary
Fact: Scotland spent £12 billion more than it raised in taxes last year (that’s from the Scottish Government’s own figures, and includes North Sea revenues). But in fact it is worse than that. An independent Scotland would probably want to join NATO, which means it would have to spend 2% of GDP on Defence (£3 billion), and if it wants to be an international player it needs its own Foreign Office and embassies (the UK spends £1.3 billion).
Add in all the other regulators and institutions that are needed in an independent government and there would be a deficit of something approaching £20 billion. And that's before all the promised tax cuts and the spending increases (£1.6 billion on extra childcare - really?) 

Compare that with North Sea corporation tax revenues which vary from £3 billion to £8 billion in a good year (and were already included in the figures that gave the £12 billion deficit), and it’s hard to see how Scotland would be able cut corporation tax and air passenger duty on one hand but still spend more on benefits and create an oil fund on the other.
Source: The Government Expenditure and Revenue Scotland 2012 - 2013(GERS), Scottish Government; March 2014

4. Myth: Scots will continue to receive BBC programmes for the cost of the license fee


Fact: Alex Salmond wants a Scottish Broadcasting Service after a yes vote in September’s referendum. Fair enough, but he also says that Scots will be able to receive BBC programmes because the BBC will enter into a partnership with the SBS.  Now hang on their a moment. If the SBS is going to make programmes for Scotland, that is going to cost money, so there will be less than the full license fee available to buythe BBC services.  And does Mr Salmond think for a moment that other UK viewers will want BBC programmes to be sold at a discounted price to a foreign country? Dream on.

5. Myth: Scotland will be an EU member (and inherit the same terms and conditions that the UK currently enjoys)

EU flag

Fact: Not so.  The EU has made it quite clear that a new nation such as Scotland would have to apply just like every other new member, and would have to be accepted by unanimous consent (just like every other member). As Scotland is already part of a member state, that might be a quicker process than it would be for other countries, but it is hard to see why newer members would consent to Scotland joining on better terms than themselves, which means that Scotland loses the benefit of the UK's opt-outs and a 10% share of the UK's EUR5.5 billion annual rebate.
Source: Scotland analysis: EU and international issues, January 2014

6. Myth: Scotland will keep the UK pound


Fact: Labour, Conservatives and Lib Dems have all made clear if Scotland leaves the UK we’ll also leave the UK pound. A currency union would not work for the rest of the UK – so it will not happen.  There is nothing stopping Scotland from adopting the pound as a de facto currency, but since it would have no central bank or control over its currency, it wouldn't be admitted into the EU. 
Sources: Scotland analysis: currency and monetary policy, April 2013, Scotland analysis: assessment of a sterling currency union, February 2014

7. Myth: Scots will be able to play the National Lottery and share much-loved national institutions with the UK

National Lottery ticket

Fact: Mr Salmond doesn't seem to understand. The Scottish government says that it is their "intention" that Camelot will operate in Scotland under a new licence.  Fair enough, nothing to stop them doing that, but it doesn't give Scots access to the UK prize fund, nor does it give Scottish organisations access to a share in the profits of the UK National Lottery (it’s called the National Lottery – not the International Lottery). You can’t buy a ticket in France, so why would it run in an independent Scotland? The same goes for everything from the Met Office to the benefits system. Scotland will have to spend millions setting up new institutions.
Source: Scotland analysis: devolution and the implications of Scottish independence, February 2013

8. Myth: Scotland would not have to bail out its banks – international investors bailed them out before

Piggy bank

Fact: During the last crisis the UK taxpayer paid out £66 billion in cash to buy shares in the banks – more than £1,000 for every man, woman and child in the UK. If we include guarantees, UK taxpayers put up more than £320 billion of support to Royal Bank of Scotland alone. Can Scotland afford these sorts of sums on our own? Of course not.

9. Myth: The answers are in the independence white paper and it all adds up

Question mark

Fact: The white paper does not answer the key questions. Many of the independence plans, for example on currency and EU membership, are in the hands of foreign governments who would be acting in the interests of their own citizens ahead of Scotland’s. And the white paper does not add up - the plans to cut taxes and extend childcare need £1.6 billion of additional funding.
Source: Unfunded commitments in “Scotland’s future” HM Treasury, December 2013

10. Myth: Westminster won’t devolve more powers

M90 motorway

Fact: More powers were devolved in the Scotland Act 2012 (the largest devolution of tax powers in the UK’s history). As a result Scotland now sets even more of its own laws, from motorway speed limits to regulating air weapons. All three main UK parties have promised more powers will be devolved in future.

Thursday, 4 September 2014

Exceedingly Gross Domestic Products

I have never been a great fan of using GDP to measure economic activity, and as a result the media hype that revolves around a recession.  The latter depends on so many extraneous factors that as an indicator of economic performance it is quite meaningless - a small variation can mean the difference between a clean bill of health and a diagnosis of decrepitude.  And as I often point out, it is subject to manipulation by politicians in the style of Balls/Brown: viz, if I get you to cut my lawn for £75 billion and you pay me to wash your car for £75billion, we won't have achieved much but apart from boosting GDP by 10%. Well it's not quite that simple but you get my drift.

Now it seems that we were measuring (guessing) the wrong values.  According to the EU, we should be including the turnover of charities, drug dealers, prostitutes and money spent on R&D to get a figure comparable with other European countries.  Well I can see the logic of including R&D, and there are going to be some mafia dominated countries where the drugs trade and prostitution. Including the wholesale as well as the retail business makes sense, but it seems perverse to exclude the related business of people trafficking. And charities are certainly a business these days with CEOs earning big six gigure salaries they must be doing some economic activity.

Adding in all the new factors increases GDP by about £10 billion, and apparently means that the revised GDP started rising earlier than previously reported, so that the recession actually stopped in 2013.