Wednesday, December 08, 2010

The night of the living dead

The good news is the economy is growing nicely, spending cuts are not as bad as feared and the Chancellor is talking about tax reductions for big businesses.

The bad news is that nobody's noticed and small businesses are still going to the wall with the Government mainly responsible for the bankruptcies.

Economists tell us they see green shoots of recovery springing up everywhere but most business people think it still feels like bleak mid-winter.

That, I fear, is because economists look at trends over months and years while businesses look at what happened yesterday and the day before.

Official statistics show a drop of 17 per cent in company insolvencies. That sounds like good news, even when you discover that 58 per cent of all winding-up orders come from Her Majesty’s Revenue and Customs.

Alas, the taxman has been bailing out hundreds of companies for a couple of years under its “time to pay” scheme.

The taxman has been holding off asking for the money. It’s now telling companies to pay up the money they owe.

Unfortunately many of them are “zombies” – they look as if they’re still alive but as soon as they have to repay their debts, they’re dead.

True the economy isn't as dire as it was two years ago when the banks looked like they might disappear completely, taking the entire capitalist system with them.

For an economist looking at his graphs and charts, that means things are improving.

For ordinary businesses, it just means utter destruction has been replaced by a never-ending fight for survival.

The Christmas spending binge may be a bit better than last year – but only because the increase in VAT to 20 per cent on January 1 will encourage some people to buy sooner rather than later.

It means sales in the New Year will get off to a slow start. On top of that, public spending cuts are only just starting to bite.

Job-losses in the public sector, we are told by the Office for Budget Responsibility, won't be as high as forecast.

They'll still be huge. Birmingham Council, for instance, announced this week it was axing 7,000 jobs.

To judge the scale of that, remember there’s only one private sector company in the whole city employing more than 7,000 people in total – and that's RBS bank which is actually owned by the taxpayer as well.

And when councils or Government department wield the axe, they start with their private-sector suppliers.

There are thousands of small firms which rely on work from the public sector for their livelihood. That work will, in many cases, dry up completely.

When it doesn't, they face a serious price squeeze. Either way, it makes for grim prospects.

Confidence, we are repeatedly told, is the key. If only businesses had the confidence to expand and consumers had the confidence to spend, all would be well.

But faced with tax rises, spending cuts and the turmoil in the eurozone – where entire countries are teetering on the edge of bankruptcy – it's hard to feel positive.

The Coalition Government is taking heart from the latest surveys saying the economy will carry on growing next year.

It is a vindication of Chancellor George Osborne's decision to get his cuts in as fast as possible.

However unpleasant they may be, at least it means we won't go the way of Ireland, Greece, Portugal and even Spain by begging for help from the EU and the International Monetary Fund.

No wonder that, according to one of the many hilarious WikiLeaks we have enjoyed recently, Bank of England Governor Mervyn King was worried about the inexperience of Mr Osborne and David Cameron.
Mr King is probably right they hadn’t “fully grasped the pressures they will face from different groups when attempting to cut spending”.
Even after the cuts, total Government debt will carry on rising until 2015 when it’s due to hit a staggering £1,300,000,000,000 (we’re talking over a trillion).

The Governor knew we needed to stave off national bankruptcy – but that's no consolation for small businesses.

Already they can see a drop in demand, consumers switching to cheaper goods or saving rather than spending. Even big corporations are now sitting on money rather than investing it.

It doesn't make good economic sense to save when interest rates are low. Savers lose out whereas borrowers get money on the cheap.

But everyone’s nervous. We don't like debt any more. We want cash for a rainy day. It's called lack of confidence.

I was talking to a businessman who does corporate finance deals. He says things are looking up. Investors have money and companies are looking to expand.

To prove it, he told me about one big deal he's working on. The company involved thinks there's a lot more work it can land in the New Year and wants a cash injection to help it grow.

This was excellent news, I thought. At last, signs of life in the economy.

What does the company do? I asked him. He told me: They're insolvency experts.

Welcome to the night of the living dead.

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