Resist the oily logic on interest rates

It doesn't seem so long ago that petrol was under 90 cents a litre in Spain and the international oil price had slid below 40$ from its peak of over 140$ Actually that oil price low was around 2 years ago and prices have climbed steadily since until, with the crisis in the Arab world, crude went close to 120$ yesterday - Oil prices hit fresh high on Libya fears

Nomura are warning of oil prices above 220$ I am not in the oil price guessing game - who knows? All sorts of things, good and bad, could come out of the crisis in North Africa and the Middle East. Who can predict what discoveries will be made on the supply side.

But one thing I would take odds on is that many commentators and policymakers will use the oil price spike to justify interest rate cuts or, in the case of most countries, to justify delay raising them from near zero.

I have long argued that the deeply negative real interest rates (the UK rate is 0.5% versus inflation of 4-5% depending on the inflation measure you use) is a weapon to be used in extreme circumstances only and for only short periods to get through a crisis. Holding rates too low for too long is extremely dangerous and asking for bubbles and bad lending which store up future crashes and disaster - just ask Spain and Ireland.

The oil price rise will strengthen the hand of the oil price doves on the Monetary Policy Committee of the Bank of England who have been under pressure of late. They will be able to blame high inflation on this "one off, temporary" factor and will point to the danger of raising interest rates when the economy is struggling to deal with an oil price shock. Rising oil prices drain demand from the rest of the economy and higher rates risk doubling the demand shock - households get hit at the pumps and the monthly mortgage statement.

There will be a lot of this kind of talk in coming weeks and no doubt many will refer back to 2008 when many Central Banks raised rates during the last oil spike which some blame for precipitating the economic crisis.

There are several reasons to resist this pernicious logic. One is technical: if monetary policy is to be used at all to control inflation it should be aimed at a general level of prices across the range of sectors which make up our cost of living. Specific rises in one area - energy for example - are not should not be inflationary in general terms. They are a signal that we should use less energy and find more sources of energy to reduce its price. In the meantime we will reduce our spending on other things which should then fall in price. IE a rising oil price should be neutral overall but be a powerful incentive to do the right things to correct the problem (e.g. invest in energy saving ideas).

If we constantly "fight" oil price rises which owe more to long term issues of supply and demand (particularly from the developing economies) with low interest rates we will stop this natural market process from occurring and risk a very serious bout of stagflation like we saw in the 1970s when the biggest ever oil price shock occurred.

Think of the main cause of oil price rises - China. That country's incredible growth (e.g. doubling of car sales in 5 years) is driven by loose money both at home - negative real interest rates while growing at 10%! - and in its main markets in the West. That wild and unsustainable growth in turn causes oil price inflation which causes, um you guessed it, more calls for loose money policies. And it goes on.

We need to recognise that low interest rates are not a panacea. If anything is going to get the Western economies in particular through the economic and energy problems it faces it is more saving and investment, less consumption and debt. Ludicrously low rates are not the answer.

From our website Authorities tackle tax avoidance in Spain

Electric cars: pie in the sky or investors' heaven?

Electric cars have been the stuff of fiction and speculation for as long as I can remember but, in practice, have posed little threat to the standard gas guzzlers. There are over 600 million combustion engine cars in the world but only a tiny number of electric cars, a fact which is unlikely to change dramatically despite an apparent surge in interest from governments and carmakers.

There are issues of consumer resistance, battery technology, recharging infrastructure, price (including uncertainty over government subsidy) and economies of scale. But there are plenty of interesting initiatives out there : Denmark and Israel are building a network of charging points and "switching stations" where you swap your flat battery for a charged one in less time than it takes to fill a tank. The 2011 Car of the Year was the electric Nissan Leaf which the UK government is trying to get manufactured in the UK. Spain is aiming for 1 million electric or hybrid cars by 2015 though there are doubts about electric car sales in Spain taking off to this extent. One of the main issues in scaling up electric car fleets in Europe is the lack of a common standard for plug sockets.

But despite all the doubts, there is a future for electric cars simply because the alternative of burning through the planet's oil is not going to be viable for much longer. Exhibit 1 - oil price back over 100$ despite a weak economic recovery in most countries. Exhibit 2 - China. Already the world's biggest car market and growing at 50% (and it has a long way to go - only 2% of Chinese own cars). Exhibit 3 - other emerging markets. As India and the rest follow China's path their middle classes will want cars just like everyone else.

Yes, there are bio fuels, hydrogen cells, liquified gas and other alternatives but I suspect that electric will be the biggest part of the solution. In 2010 the Chinese government threw its weight behind the electric car and aims to be the world's biggest producer by 2012. This will be decisive. Which of course means a massive increase in the need for electric power generating capacity which in turn suggests some investment themes:

- forget the prospect of windturbines and solar powering all the new cars; the world will have to turn to the fuels it has in abundance to achieve the necessary scale. That means coal and gas whatever the carbon consequences might be.

- the electric grids themselves will need expanding and upgrading and will be even more important to the economies they serve. This will mean governments have to allow these monopolies to charge inflation-beating prices for decades. Great if you think like me that stagflation is the main threat and need to find good dividend payers (see what do with your savings in 2011)

- presumably controversial nuclear power will have a role. Uranium miners should benefit though their share prices have already surged in recent times.

- battery makers and battery technology companies but you need to do your research. Warren Buffet, the greatest investor of all time, is a fan - see http://www.rationalwalk.com/?p=11079

This is just a thought to tuck away for the long term (and a fairly obvious one at that) not specific investment advice - a lot of related shares in this area have shot up recently any way. One FTSE share that I would be quite keen on for a variety of reasons as a long term play is National Grid.

Latest from the Advoco website: Spanish income tax rates 2011

Big brother is watching your Spanish bank account

The Spanish authorities must be getting desperate for money - the papers have been full of scary stories about the tax office (Agencia Tributaria) saying how they are going to raise billions of Euros by cracking down on tax fraud. News of last year's haul even made the New York Times as everyone worries about the prospect of Spain struggling to finance its budget deficit (Spanish fraud crackdown nets 10 billion). This year's priority is to cooperate with the Social Security department to catch people operating in the, erm, "informal" economy without registering for tax. The intention is to use new powers to demand information from utility companies, credit card providers and banks.

The full story is on our website Authorities tackle tax avoidance in Spain but a couple of aspects to all this are worth highlighting. The first is a new rule in force from 2011 but applying to transactions that go back to 2010, that all banks report all transactions over 3.000 with the following details:

- name and NIE (or company name and CIF) of payer/recipient

- amount

- whether deposit, withdrawal or transfer

- date account

Worth bearing in mind if you are paying for a property partly in cash or making a gift transfer which should be declared for gift tax (see explanation Spanish Gift Tax).

Also the Agencia Tributaria are keen on catching more people who don't declare rental income. Already they boast of trapping 200.000 shifty landlords by simply requiring that anyone claiming a tax deduction for rent paid has to state the catastral reference (Land Registry number) of the house or apartment on their tax return. This is used to check the owner's tax return to see if they have declared the income. The once sleepy Spanish tax authorities are waking up!

The smoke clears

After several years of having a half-baked and ill-enforced smoking ban (which basically exempted 90% of the cafes and bars in Spain) the real thing came into force this month and Spanish public premises are all now supposed to be smoke free.

For all the complaints from bar owners worried about a loss of business and predictions of economic ruin, it was an inevitable move. It's only a few years since the UK got its ban but a reversal back to the old, smoky ways is unthinkable. I am sure that in Spain too it will seem incredible within a couple of years that it was once acceptable to make non smoking customers sit wreathed in the second hand smoke of others. But ...

It appears Spain's conversion to a smoke free environment is not happening without a fight. It's partly down to the economy (a fear that bars and cafes will lose business and an important sector will shed jobs and income) but also fairness.

Not so much the old libertarian position that bar owners should be able to set their own rules, passive smoking fears trumped that a long time ago. The real fairness argument links back to the old law. This stated that bars and cafes over 100 square meters had to be smoke free or have a separately closed off area for smokers with extractor fans. Some owners invested considerable sums (35,000€ in this case - Marbella Smoking Rebel) all of which is now wasted. Worse still they may have taken out loans to finance the changes which they will have to pay back from reduced income. The industry is sure that takings will be permanently down because so many Spaniards smoke.

A recent demonstration by hoteliers, cafe owners etc in Palencia featured banners saying things like "If you don't smoke, we don't get paid. Let us live" and "Total ban, sector ruined.".

You can understand the anger. Regardless of whether smoking bans are fair or not, inconsistent and careless law-making is certainly unwelcome.

Latest article from the main site Do I have to do a Spanish tax return?

Are price comparison sites a rip-off?

One of the big benefits of the internet is price transparency - quickly being able to see comparative prices and grab the best deal. The price comparison site has sprung up to make this easier and they are now a routine part of life for most of us. But are they to be trusted?

One reason for doubt has to do with a certain cuddly meerkat and an annoying opera singer. PC sites spend a fortune on advertising suggesting they are chasing a very profitable slice of business. If companies can afford saturation TV advertising it usually means they have very high profit margins and you should be wary. Examples are online Bingo, 118 services and certain car insurance companies - it is their customers' cash they are splashing with these campaigns.

So without having any direct information about the profitability of PC sites I can be pretty confident they make a lot of money and this is reflected in the prices. Perhaps it is no coincidence that motor insurance premiums are reported to be rocketing (33% rise in premiums). Direct line, which doesn't use PC sites, uses that fact in its advertising saying that you can save money by cutting out the middle men and their fees.

Another point of concern is how broad the coverage of a site is. You assume that quotes are gathered widely from all market participants but sometimes only 10 or 15 are actually featured out of hundreds of possibles. Some companies besides Direct Line generally don't deal with PC sites - RBS, Green Flag, Tesco, Churchill.

When you consider the ownership of some sites then things can become even murkier. For example Admiral, a FTSE 100 insurance giant, owns Confused.com and some customers have complained "Admiral always come out top of their comparisons". The meerkat company is owned by insurance group BGI.

The papers have been full of reports recently about boilerjuice.com which claims to find the best price on heating oil. It is PC site owned by an Irish company that also delivers heating oil and has ten different brands which are all featured on the site. Some newspapers have conducted tests and found that the site has directed customers to their own brands even when much more expensive than rivals. It is an apparent conflict of interest which the government is looking at - Energy Minister demands heating oil enquiry.

Another danger was highlighted by the Telegraph last week:

Biba, the British Insurance Brokers' Association, claimed this week that some sites were giving people insurance quotes that did not reflect their individual requirements owing to the focus on the lowest headline price. This has led to customers buying products with higher than expected excesses, or which are unsuitable.

"They [comparison sites] have become the tail that wags the insurance industry dog," warned Biba's head of corporate affairs, Graeme Trudgill. "They have made it all about the price and not the cover."

A final conclusion: it's pretty simple really - don't forgo price comparison sites if you find them useful, just don't assume that they are the last word on price and do at least some shopping around, including offline in some cases.

Latest article at Advoco (my Spanish tax site) What should you do with your savings in 2011?

Can you do business in Spain without registering?

In my experience as an accountant most people wish to play by the rules, do the right thing, fulfil their responsibilities etc ... so long as doing so is not unduly complicated or punitively expensive.

A consequence, which I see a lot, is a frustration among people in Spain who want to do business legally but are put off by the red tape and tax implications, especially social security and IVA (spanish VAT). The problem applies mainly to small part time businesses where the income is expected to be patchy or very low. If you are only expecting to earn a couple of hundred euros a month or are doing something which brings in revenue periodically (e.g. running courses) then it is totally infeasible to set up as properly registered business with the following expenses:

monthly social security

accountancy costs

quarterly taxes

In addition all businesses have to charge IVA which, while it should not be an expense of the business, nevertheless results in higher charges to the customers and a lot of admin.

Also you can't declare income for tax unless it has been earned through a registered business with the IVA accounted for. It's like the old saying about it not being possible to be "a bit pregnant". You can't be "a bit legal" - it's all or nothing. If you want to make your small business earnings legal you have to do all three things - start paying the social security, deal with IVA and pay income tax.

The situation is a bit more complicated than this (see the autonomo guide on our website) but in essence that is the situation - it is totally uneconomic to legalise a small business unless you expect to earn a decent income right away - you either don't start up in business at all or do so on a cash in hand basis.

And lots of people in Spain do. Much more so than in the UK. One of the reasons for this is that in the UK there is a threshold of 70.000 before which businesses do not have to register for VAT. This means small businesses do not have to worry about one of the main business headaches until they are well-established. Imagine if Spain had a similar system - some IVA would be lost to the government but many more businesses would go legal and pay income tax and social security. Some would grow big enough to start paying IVA.

In the UK some voices are calling for the VAT threshold to be raised even further. The Federation of Small Businesses has suggested a rise to 90.000£ would create 35,000 new jobs according to the BBC. Spain can only dream of such a windfall. But this is what Spain badly needs. With so many people unemployed and the Spanish economy stagnating, making it easier to initiate LEGAL new businesses is essential.

The UK also has national insurance breaks for small businesses and is much more flexible in allowing income to be declared when there is no job or registered business involved. Spain desperately needs a similar approach.

From the main website What should you do with your savings in 2011

Are public sector pensions really gold-plated?

You can usually tell when the British press have stumbled onto a big issue that strikes a chord with the public - not only is there a rash of stories on the theme but there is usually an emotive word or phrase which crops up in all the headlines: scrounger, fat cat, asylum seeker, hoodie, dodgy expenses etc Recently "gold plated" pensions supposedly awarded to public sector workers have been in vogue.

As an article just published on our main website ("Prospects for the UK State Pension") explains, government attempts to control the state pension are only part of the battle to stop the UK's long term finances collapsing. The growing amounts they pay to retired public sector workers pose almost as great a risk; the system is forecast to be in deficit by 14 billion pounds a year within the current decade.

Some economists and ministers call the final salary pensions paid to public sector retirees unaffordable and unjustifiable; a time bomb ticking under the already rickety national finances.

But union spokesmen defend the pensions referring to their members as mostly "low paid" and resisting calls for pension contributions made by their members to be raised and for pensions to be based on average career, not final salaries.

"Public sector workers already pay a sizeable amount into their pension schemes year in, year out," said one. "All workers deserve a good workplace pension, whether private or public sector."

Sounds reasonable but in reality the private sector pension system has been eroded for years under attack from public policy and low returns in the equity and bond markets (themselves largely the result of government interest rate policy). Low interest rates, touted as a great way to revive the economy, are actually a transfer of wealth from savers and pensioners (anyone who doubts this should check out the current annuity rates) to bail out debtors, including the government. Why should the public sector be shielded from these realities?

The argument that public sector workers are low paid no longer really stacks up. The Labour years were generous to public sector budgets and mostly went on increased salaries. 38.000 public sector employees get over £100.000 a year. The average pensions received seem quite low (see table below) in some jobs but these averages include people who have worked for a short time in the public sector and are not the rewards for full lifetimes of employment.

My own view is that the government should honour the commitments they have made to public sector employees so far - many of these have worked for much of their careers with lower salaries in times gone by when public sector pay did lag behind. In future though they should move, as many private sector, employers have, to defined contribution, fully funded pension schemes which do not pose a threat to future taxpayers.

Public sector pensions (England, Wales)
Worker	% salary paid*	Employer contribution*	Pension age*	Average pension
* Depending on scheme Source: Independent Public Service Pensions Commission report, government departments
Police	9.5% - 11%	24.2%	55	£14,000
Firefighter	8.5% - 11%	14.2% - 26.5%	55 or 60	£12,000
Teacher	6.4%	14.1%	60 or 65	£10,000
Military	0%	29.4%	55	£8,693
NHS	5% - 8.5%	14%	60 or 65	£7,000
Civil servant	1.5% - 3.5%	3% - 18.9%	60 or 65	£6,200
Local government	5.5% - 7.5%	13.20%	65	£4,044