Darlings Xmas Box

By the end of this coming week we will see what financial goodies are to be delivered in the Pre Budget Statement. I would guess this will be, perhaps, the most important budget statement this century, and nothing like the original intention of a pre - budget statement. The case, as I said in a previous blog, is quite strongly in favour of a robust stimulus package. Initial indications suggest that it needs to be up to 2% of GDP which would mean some £50bn.

There is, however, one big caveat. The Chancellor will have to admit that he is only buying some breathing space and that if he does not also introduce a plan for paying for it by increased taxes and cuts in Government spending in definitive time frames he risks further damage to the beleaguered pound. The breathing space, so created, will almost certainly last until the next election and it will look very much like our votes are being bought.

The most likely course that will be taken is a combination of "carrot and stick" and "buy now while you can." For instance taxes that directly impact on consumption like VAT and Stamp Duty may well be eased during a period of advance notification that they will be increased.

Tax credits could be used to address the 10% problem, although personally I think there would be a good case politically for just accepting that this was a mistake and bringing back the 10% band.

Tax cuts have also got to stem the tide of rising unemployment and so there may be some easing of National Insurance Contributions in certain circumstances. A far sighted policy would be to make pensions saving more attractive in the hope that encouraging higher inflows will help stimulate the equity market or at least increase the demand for gilts which will need to be issued to pay for all of this.

Whatever happens the need to plan your response and long term financial situation will have just become even more imperative!

A whacky week

At the end of last month I was predicting that interest rates could be as low as 1 or 2% by the middle of next year and many thought that this was rather draconian. Last weeks massive cut of 1.5%in base rate does make this seem more likely now. On its own I do not think that this will be enough to get the economy moving but it is a step in the right direction. The next step will be how the Chancellors pre-budget statement proclaims a package of real measures to stimulate the economy. If this is to be effective the only tool in his box is tax cuts, even though these will have to be funded by borrowing. Further relief on stamp duty would be welcome together with a stimulus package for small business.

The best news of the week, of course, is that Libor is steadily moving downwards. Markets at last stabilised although there was a minor setback midweek, however the trend was still positive.

The pound in your pocket, pension and property!

This week has seen us return to a degree of stability in the markets; gains made by and large have been held. The media circus has moved on leaving room for commentators like Newsnight's Paul Mason to dissect and try and draw lessons from what happened. If we have reached the bottom and I am not calling it so, but it looks like it may be so, where does that leave us? My sense is that protecting the value of cash has become much more of an issue, after all we have got used to the idea that equities can go down as well as up. We did not however believe that investments which traditionally had little or no volatility could be at risk. However due to the poor risk management within our banking industry that is exactly what happened. Cash deposits and money market accounts have in some cases suffered unprecedented losses. The amount guaranteed under the Financial Compensation Scheme has increased to a maximum of £50,000 but many will want to take advantage of getting higher returns for investing more. You could take the view that the Government would not let a high street bank but you would still be taking, in my view, an unacceptable risk particularly as interest rates come down as they surely will. Even if you spread your cash around a number of banks you still need to avoid situations where the authorised deposit taker covers more than one Brand. Cash deposits in separate accounts with Bank of Scotland, Halifax and Birmingham Midshires would only result in one protection of £50,000. Paying for advice on how to invest cash has now become more necessary and ever.

What about those who have had their pensions and savings diminished by the crisis? Should they flee the equity markets? Probably not, but it really depends on where you are now and what they were invested in. You should consider how your asset allocation performed during the crunch, did you have all your eggs in one basket? Now is the time to get advice on what you need to do for the future.

If all of this was not enough we are now told that houses prices are falling by more than we are earning. Not much you can do if you are heavily mortgaged but if you own your home outright and are over 55 this might be a good time to consider releasing equity from your home. Valuations are still not reflecting the true downturn in the house market and interest rates are lower than ever.

If there ever was a time to consider the protection of the pound in your pocket, the pound in your pension and the pound in your property now is the time to do so.