Monday, June 27, 2011

Spanish protesters are indignant about the wrong things

Anti-Crisis protesters, indignados ("indignants"), have been marching across Spain to express their frustration and outrage at the country's economic situation - and the measures being taken to tackle it.

You can understand why people are out on the streets, particularly the young, with even a university education proving almost useless in the face of 20% unemployment. On top of that there are public spending cuts biting and laws being passed to erode pension and employment rights. People feel they are being punished with austerity and economic misery for the sins of others, mainly bankers and politicians.

Do the indignados have a point? What are their arguments and do they stack up?

Protesting “against” the crisis is pretty pointless because you can’t protest against an economic state, but that’s what a lot of the indignation seems to boil down to – a need to let off steam and vent frustration. Some protesters though have articulated anger against specific policies, people or institutions they hold responsible for causing the crisis or worsening its effects. From what I have read these are the main grievances:

- Unemployment

- Reduced pensions

- Reduced employment protection

- Austerity in the form of tax increases and spending cuts

- Corruption

In terms of who they are angry with, apart from the politicians and banks, it is chiefly Europe because of a "Euro Pact" made in the spring forcing deficit countries to reform and enforce fiscal discipline (as one Spanish paper sees it The European Pact punishes workers and social spending)

My problem with these protests is that they protest against the problem and the most likely solutions at the same time. By all means be angry about unemployment but don't then complain about changes to worker protection laws because these are desperately needed to increase employment. Similarly it is dubious to protest about public spending cuts when it should be quite obvious from the Greece situation that things could be much worse for Spain without some short term pain now. Also attacking Europe as if it is some kind of Thatcherite institution administering harsh economic medicine is ridiculous - they should not be attacking the Euro Pact, which is just what Spain needs, but challenging the Euro which is at the root of a lot of the misery.

Reading one website's description of the protests (Indignation against the crisis and for a general strike) I was struck by the truth of one reader's comment in reply-

"The indignation is against a lot of things And for that they are? What specific solutions do you propose? What will you do to feel represented? The solutions are not free rain from the sky"

I quite agree. At this stage the protests merely look like a disorganised and contradictory series of gripes. I too feel the politicians of Spain have let the country down (although the country was happy to play along during the boom), but actually now they need to be more radical and stick with a reform agenda rather than cave into these woolly headed indignados.

Thursday, June 16, 2011

Arise Sir Mervyn! No, really, we're serious.

When I first read that Mervyn King, governor of the Bank of England, was getting a knighthood, I thought it was a joke. Like Gadaffi getting the Nobel Peace Prize or Gary Glitter being honored for his work with children. It is an extraordinary decision even allowing for the fact that any senior figure in the public sector seems to get a gong whatever their track record (how long before it’s Lord Brown of Deficitshire?). Talk about rewards for failure.

He certainly can’t have got it for doing the job he is officially charged with. According to their website, the Bank of England’s mission is:

“Setting interest rates to keep inflation low.”

Look a little lower down and you see the current stats: Bank interest rate 0.5% Inflation 4.5%. It is clear that the Bank has thrown away its mission statement and adopted a stance more like “setting interest rates ludicrously low to guarantee high inflation”. Inflation has now been above target for nearly 3 ½ years.

Pensioners, savers and charitable trusts are being mugged with negative interest rates that are quickly eroding the value of their money. Ordinary workers are getting pay rises of 0-2% and are having to cope with food and energy price rises into double figures.

The argument that inflation is down to temporary factors like high oil prices wore thin long ago. It was four years ago when Mervyn wrote this, in a letter to the Chancellor :

“an unexpectedly sharp increase in domestic energy prices” and “weather-induced” high “food prices” had pushed inflation over target, but the Bank could safely “look through the short term volatility in inflation” and was “on track to meet its target in the medium term”.

He said pretty much the same at the Mansion House this week. Four years of the same tired old excuses. If they were serious about inflation, the MPC could put up interest rates, strengthen sterling and lower imported food and energy prices at a stroke.

He has practically admitted that the inflation remit has been sacrificed but claims that the economy simply cannot stand higher interest rates. He thinks we should gladly accept an insidious transfer of wealth from savers to borrowers as the price of recovery. But how strong will that recovery be when the supposed demand boost from low rates is offset by higher prices? Retailers have been lining up to complain about the effect of high inflation (particularly petrol prices) on the spending power of their customers, and this is a direct result of the falling pound, the very thing King and the MPC have been seeking.

But my real problem with Mervyn King is not his current policy choices which are admittedly tricky given that the country is practically bust. It is the choices and miscalculations he made during the boom which preceded the recession and directly led us to this point.

He and Gordon Brown may propagate the myth that some overpaid bankers and sub prime Americans ended the apparently golden economic decade prior to 2007. But the credit crunch did no more than expose the fact that most of the economic growth during that time was illusory - built on a flood of debt and precious little else. Money supply grew by an average 11.9% p.a. between 1996 and 2007.

King was in charge during the boom but did nothing to try and calm it, despite warning signs flashing red: soaring house prices, a credit binge that saw households triple their debts to £1,500 billion, gaping balance of payments deficits, crazy bank excesses and highly leveraged takeovers.

The hangover from all this is what underlies all the economic suffering today. Why did he do nothing? He miscalculated that because retail price inflation wasn't rising too fast then everything was OK. He had his eye on one gauge of monetary health and ignored the bubbles and credit build up around him.

It's a bit like a man driving through a built up area with a dead pedestrian on the bonnet and carrying on as normal because he is travelling under 30 miles an hour: one thing is right so everything must be alright.

You might have thought that the 2008/9 recession would have caused a rethink but, apart from some scapegoating with the banks, nothing has changed. We have the same governor peddling the same low interest rate policy to encourage households to take on even more debt – the goal is £2,100 billion according to government forecasts.

The more astute readers will have spotted that my blog’s picture is not actually Sir Mervyn but his double, Benny Hill. Benny never got a knighthood but perhaps he should have – his comedy might have been bawdy and corny but at least he reliably delivered what was expected of him: laughs. King has been deputy governor or governor for 14 years now and has, by slavishly adhering to the low interest rate orthodoxy of the age, delivered an unsustainable boom, a foreseeable bust and now seemingly endless stagflation. Of course he hasn’t done it all on his own but, after honouring him for this colossal failure, the joke is on us.

Sunday, June 5, 2011

Avoid child savings account rip offs

Child savings accounts should be a rare win-win-win situation in the world of personal finance. The child gets a handy lump sum on reaching maturity perhaps to go towards Uni or a gap year. Parents and grandparents get a warm glow every time they contribute towards their loved one's nest egg. And the bank or building society gets a chance to forge a financial relationship for life.

But like most relationships, a banker's relationship with a child is open to abuse. It would appear that some of the UK's beloved financial institutions are not above picking the pockets of children just as they the adults when their backs are turned. Consider this story of the kid who entrusted £100 with tax payer owned Lloyds and got 5p interest (0.05%) in a year:

Or the Sky Blues account from Coventry Building Society that entices kids in with a link to the local football team but then offers then a miserable 0.5% annual interest. True there are better deals around, such as the Halifax Regular Saver offering 6% annually (with conditions), but these - just like adult accounts - have to be watched like hawks as the interest rate is sure to drop to nothing once the offer period is up. Indeed the Halifax account reverts to the "easy access" rate after a year, currently 0.5%

The way banks and building societies lower the rates on these accounts is particularly cynical as they know that they are the most likely to be "forgotten about". They are mostly opened with the intention of being untouched for 15 years or more and are often added to by direct debit and are rarely inspected. A perfect fleecing opportunity.

Some better alternatives than trusting the banks:

  1. Getting the best rate on a children's account and then teaching your kid to check the rate every few months and move the account when the rate changes. This will educate them in the weasley ways of financial institutions.
  2. Invest in shares instead. Choose a couple of high yielding blue chips like Shell and Tescos and avoid high management charges of fund managers.
  3. Buy NS&I index linked bonds which guarantee to beat inflation and which do not have tax deducted
  4. Invest outside the UK. Take a long term bet on an area of the world which isn't weighed down by our "rich world" problems. It's risky but maybe a long term bet on Africa or Latin America might be better than sitting on deposit and collecting below inflation returns in the UK.

Friday, June 3, 2011

Things to remember about your Spanish tax return

AA very Spain-centric blog this week and at that one that will only be of any interest to people who are Spanish tax resident, declare their taxes and have not already done so. A few reminders:

Everyone who lived in Spain for 183 or more days in 2010 should be submitting a tax return. There are exceptions and if your income is below certain levels then you don't have to declare (but see below). To see these levels visit Spanish income tax rates 2011

If your income is too low to declare it may still be wise or even obligatory to do so: wise because you may have a tax rebate due; obligatory in your first year of residence regardless of income levels. If you never declare La Renta you will never be considered tax resident which can put you at a disadvantage when it comes to paying other taxes like capital gains and inheritance.

The deadline for submitting your Spanish tax declaration "La Renta" is the end of June but to submit allowing the tax office to take your tax (or repay your tax) directly from your bank account, as opposed to paying cash, you should declare by 27th June.

If you are tax resident but have the non resident tax exemption (Beckham's Law) and have been paying the flat rate 24% all year you do not have to do a tax declaration; any non Spanish income is not taxable.

You can pay in two installments to spread the tax burden - 60% at the end of June and 40% in November.

Deductions are available for rent and housing costs paid, including mortgage repayments, if income is below 24.000 level

Mothers of young children (under three) who are working can claim an extra allowance (see Spanish maternity benefit)

If you have rental income it must be declared but if you are renting out a property as a dwelling ("vivienda") you can claim a deduction of up to 60%. If you are renting out a foreign property (e.g. UK) but pay the tax on it in that country you can leave it off your Spanish tax return.

If you have foreign income (i.e. non Spanish) which is not denominated in Euros it needs to be translated at the exchange rate prevailing at the point at which you earned the income. For regular receipts through the year an average rate is acceptable.

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