As a saver whose income is modestly into the higher tax bracket, yesterday’s pre-budget report wasn’t great. Here are the main measures designed to get Labour re-elected and stimulate the economy:

Spend now:

• Temporary cut in VAT, from 17.5% to 15% (until December 2009)
• Extra £60 to pensioners in January
• Early increase in child tax credits
• £120 basic rate tax rebate (introduced after the 10p farce) made permanent, which will increase to £145 in April
• Proposed rise in tax for small businesses from 21p to 22p is deferred
• £3 billion in government spending to be brought forward
• Sundry other minor fiddling designed to get headlines (a green fund, phasing in changes on fuel duty)

Pay later:

• Rise in income tax to 45% for those earning over £150,000 (April 2011)
• National insurance increase of 0.5% for employers and employees (April 2011)
• Cuts in the personal allowance for those earning over £100,000 (April 2010)
• Government borrowing to rise to £118 billion in 2009 (8% of GDP!)
• UK net debt as a share of GDP to rise to 57% by 2011

Why it’s a bad budget for me

Like many Monevator readers, I won’t benefit much from Gordon Brown’s giveaway:

• I don’t benefit from the tax credit giveaways, since I don’t have kids and I’m not a pensioner.
• Most years my income is modestly into the higher-rate tax bracket (around £40,000), which will mean higher taxes in a couple of years due to the National Insurance rise.
• I save rather than spend, which means a VAT cut won’t help.
• Long-term interest rates will rise because of all this borrowing, which means I’ll pay higher interest rates when it finally makes sense to buy a house rather than rent.
• On a brighter note, I’ll see a small reduction in tax next year, due to the 10p rebate going permanent

Since I know my bills and expenses are going to rise in the future, the rational thing for me to do ahead of the downturn to save more today. This is the paradox of thrift, and it explains why I think the budget should have been aimed at getting money moving via infrastructural spending, rather than short-term VAT cuts.

Why it’s not the best budget for the country

I freely admit I’m not an economist, but the ‘big idea’ – the cut in VAT – doesn’t look like the best use of £12 billion from a national point of view, either.

Prices are already plunging in the shops, so who is going to notice a 2.5% reduction? Worse, retailers are going to have to spend money changing their signage and sticker prices. More likely most won’t, which means it’ll just bolster their margins. (Perhaps avoiding retail bankruptcies is the real motivation?)

I wrote before that I didn’t want the Government to cut my taxes, which is effectively what they’ve done with the VAT fiddling. Worse, Gordon Brown and Alistair Darling are actually putting taxes up for higher-rate earners, which might have some redistributive merit but isn’t going to raise much money and will only depress spending at the higher end.

On a more positive note, the Government is going to direct most money to the poor (who will spend it, which is what you want from a stimulus) and bring forward capital investment projects.

It should have done more such investment, targeting its spending to get lasting results as well as a stimulus.

President Elect Obama in the US is proposing to build thousands of wind turbines to create hundreds of thousands of jobs while reducing energy imports and carbon emmissions. Encouraging us to buy more tat in the shops with a VAT cut seems pretty pathetic in comparison.

For individuals, it’s best to ignore the VAT cuts. Instead, get out of debt, save more, and watch your mortgage, as I outlined in my four steps to tackling the credit crunch.

Written in 1989, Liar’s Poker remains one of the best route maps around Wall Street’s corridors of ‘high’ finance: that is, the skullduggery that brought us the credit crunch and destroyed itself in the process.

Now Liar’s Poker author, Michael Lewis, has written on The End of Wall Street’s Boom in Portfolio magazine, and as you’d hope it’s a cracker.

Lewis says he’d hoped Liar’s Poker would warn people away from becoming investment bankers or bond traders, but that it only made people keener to follow the money:

Over and over again, the big Wall Street investment banks would be, in some narrow way, discredited. Yet they just kept on growing, along with the sums of money that they doled out to 26-year-olds to perform tasks of no obvious social utility. The rebellion by American youth against the money culture never happened. Why bother to overturn your parents’ world when you can buy it, slice it up into tranches, and sell off the pieces?

The whole article is a great read, especially the quotes about Steve Eisman, the professional bear who was one of the first to see through the Emperor’s new clothes:

“Steve’s fun to take to any Wall Street meeting. Because he’ll say ‘Explain that to me’ 30 different times. Or ‘Could you explain that more, in English?’ Because once you do that, there’s a few things you learn. For a start, you figure out if they even know what they’re talking about. And a lot of times, they don’t!”

As someone who has got many things wrong in life, but not the sheer absurdity of the global housing booms (my mistake being bearish too soon, but my reasoning that house prices were up to 45% too high was right), I liked the comments from Credit Suisse analyst Ivy Zelman:

There’s a simple measure of sanity in housing prices: the ratio of median home price to income. Historically, it runs around 3 to 1; by late 2004, it had risen nationally to 4 to 1. “All these people were saying it was nearly as high in some other countries,” Zelman says. “But the problem wasn’t just that it was 4 to 1. In Los Angeles, it was 10 to 1, and in Miami, 8.5 to 1. […] “You needed the occasional assurance that you weren’t nuts,” she says. She wasn’t nuts. The world was.

Even Eisman couldn’t figure out the full complicity stupidity of Wall Street, despite the fact he was already shorting sub-prime bonds as quickly as he could:

“We always asked the same question,” says Eisman. “Where are the rating agencies in all of this? And I’d always get the same reaction. It was a smirk.” He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

Read the full story of how Wall Street met its maker, and then come back and be glad that Wall Street is paying the price for its folly.

Blogging for money isn't as hard as some jobs, but it's usually profitless

(Image: WRI)

Like the vast majority of the 100 million bloggers in the world, I earn less than a dollar a day from my own blogs.

That’s an average figure. Some days I earn more, many less. But it currently averages out to about a dollar a day. Blogging for money is a terrible idea.

Blogging is about as profitable as subsistence farming

Half the world’s poor live on a dollar a day or less, and they make their money in more brutal and uncomfortable ways than those blogging for money.

Bloggers have to worry about:

• Inconsistent traffic
• Winner-takes-all competition
• Unreliable monetization

The world’s poorest workers have to worry about:

• Physical exhaustion
• Hand-to-mouth employment
• Physical violence
• Deadly working conditions.

Many would be delighted to earn a dollar sitting at a Mac in their lunch hour, moaning about the blogosphere. So let’s be clear: I’m in no way equating bloggers’ hardship with the suffering of the truly poor.

What interests me is why millions of well-off people would blog to earn as little as a labourer in a rice paddy?

Blogging for money is hard work

Many people blog to share their thoughts, not to earn money. This post isn’t about them. I’m talking about those hundreds of thousands of us who read Darren Rowse’s ProBlogger, who hope to make money from our blogs.

We write decent content, position and promote it, and still find blogging for money sucks. Why do we do it? Given the minimum wage in the US, UK, and Europe, blogging is about the worse way someone could try to make some extra money. Yet it’s perhaps the most discussed and attempted.

Most half-decent bloggers will have jobs paying 10-100 times more per hour than what their blog pays. If they’re blogging for money, why don’t they just work overtime or get a side job? Why are they content to be paid the same as a Somalian sharecropper?

[continue reading…]