Superb thoughts from Guest Blogger John Laity.

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Britain remains in recession, yet Germany and France recover……Fiscal Stimulus or Tax Breaks?

The Office for National Statistics (ONS) today (23/10/09) said British gross domestic product fell by 0.4 per cent between July and September, meaning the economy has contracted for six successive quarters for the first time since records began in 1955.

With an election due by next June, the length of the downturn must be worrying for Gordo and the Labour Party, particularly as Germany and France are already out of recession. Does this show that the Labour spin machine is way off the mark:

“This Chancellor is leading the rest of the world in taking us out of recession.” Gordon Brown, Hansard, 3 June 09

Following publication of the ONS report sterling fell by more than a cent against the dollar, providing no relief for Chancellor Darling, who has forecast that UK growth will resume by the end of the year and is counting on a stronger rebound in the coming years than most independent forecasts.

UK Services contracted by 0.2 percent over the quarter, with the distribution, hotels and catering sub-sector leading the decline with a 1 per cent quarterly drop. This can only be bad news for Unemployment figures, hidden perhaps by the news that Royal Mail workers will strike for a second time…not good for business…

The ONS also showed industrial output to be weak, following a sharp monthly drop in August, and the GDP data bore this out. Industrial production fell by 0.7 per cent over the quarter, taking its annual decline to 10.4 per cent.

Commenting on growth figures released by the Office of National Statistics (ONS) the TUC General Secretary Brendan Barber said:

‘This is now the longest recession in modern economic history. Even the co-ordinated world-wide stimulus has not been able to halt the damage done by the financial crash.

Even if we had achieved a technical recovery today, it would not feel like a recovery to the thousands losing their jobs or afraid that they will join the dole queue in the months ahead when unemployment will continue rising. It takes more than a statistical read out and the return of big bank bonuses for a real recovery.

These worse than expected figures should head off the growing signs of complacency. The economy is still extremely fragile. Any halt in economic stimulus – or even worse, cuts in spending in a premature effort to close the deficit – could easily send us into another downwards spiral.

Politicians cannot now say that the recession is over so we can go back to treating the unemployed as work-shy scroungers rather than victims of the financial crash. Fighting unemployment – particularly among the young – must be national priority number one.’

Ouch…pokes in the eye for Gordo and Darling…best wear safety specs from now on in…

So why is it that Germany and France have recovered sooner than the UK?

The quick answer is that the UK economy was in a worse state than the rest of the world. Something I am sure all opposition parties will want to highlight.

HOWEVER, on the run up to an election we should look to dig deeper.

As late as April 2009, analysts were predicting that the outlook for the German Economy was gloomiest of all states:

“Berlin, 8 April, 2009 The outlook for Europe’s largest economy is nothing less than catastrophic. For an economy that has been historically strong, never contracting more than 1% a year since World War II, the Commerzbank forecast that it would shrink 7-9% in 2009 is not encouraging.”

However, as part of Germany’s recovery plan they instigated a sweeping range of Tax Breaks, including allowing companies to write off interest payments more easily, as well as the loosening of Gewerbesteuer, which is a local trade tax.

In addition to reducing the tax burden on business, Germany instigated a range of Tax Breaks for individuals including a measure to reduce “cold progression” — where workers’ income tax brackets rise with pay increases.

Indeed while the UK Government has pledged to remove tax breaks for Child Care Vouchers, the German Government has plans to raise child-support payments to 200 euros a month from 154 euros and lift the tax exemption for dependent children to 8,004 euros from 6,024 euros annually.

To be fair, these plans were shelved from immediate implementation on 10/10/09 by the German Government, but the difference in approach between the UK and Germany is clear.

Meanwhile, France’s Culture Minister Renaud Donnedieu de Vabres has classified video gaming as art. In doing so, the French gaming industry including Ubisoft, Vivendi and Infogrames received a 20 percent tax break. Gaming Projects were pre-approved to ensure they provided cultural diversity, but this is still a smart move as the Gaming Market seems to be recession proof, so a great thing to promote within your economy.

Of the projects approved, 45 per cent were Nintendo DS projects with an average budget of EUR 281,000 (GBP 250,000), 20 per cent were Wii projects for EUR 2.7 million (GBP 2.3 million), 16 per cent PC projects for 2.5 million (GBP 2.2 million), while PlayStation 3 and Xbox 360 projects accounted for a further 15 per cent, averaging at EUR 11.2 million (GBP 9.9 million).

A similar project is underway for film makers, where foreign film makers can recoup up to 20 per cent of their production budget in France, up to a maximum of four million euros. The BBC have already taken advantage of this on it’s series ‘Merlin’, which is being filmed in a chateau in northern France…It seems somehow wrong that King Arthur isn’t supporting English Heritage sites…

But it is not all culture, one of the main forms of assistance granted to address the recession is an exemption from the French business rates, the taxe professionnelle.

The extent of the exemption depends on the type of business and the decisions of the local, county and regional councils, but in those ZRR communes with less than 2000 habitants, all new start-ups with less than 5 employees can get complete exemption for a period of 5 years. Similar assistance is provided in Local property taxes, but the most interesting assistance is provided in the form of employer social security contributions.

If you are proposing to take on staff in France, then there is complete exemption from the payment of employer social security contributions for any new employees, for up to 12 months, capped at 150% of the level of the basic wage…A measure that is very similar to that proposed by the UK Conservative Party, who plan to provide National Insurance exemption for new company start ups.

What has the UK done?

Chancellor Darling did implement a reduction in Value Added Tax (Input Tax / VAT) by 2.5%. However, you have to consider that many companies and organisations annually reclaim VAT as part of business expences. As such, although the stimulus is effective in passing individual households savings on everyday items, those business reclaiming VAT skew the picture. More over, as the stimulus is time limited it does little to mitigate VAT charged on long term leasing or outsourcing contracts. If you leased plant in 2009, you know that it will cost more in 2010.

The Chancellor also implemented the green car incentive program, similar to that in place in Germany…Sadly, too late for the LDV Maxus Van, but then I am not sure that the scheme would have applied in any case…

One thing is for sure. With Election 2010 looming and the difference between Tory 10% Cuts and Labour 9.8% Cuts to Public Services is so small, that the matter of taxation breaks and incentives is sure to be an interesting discussion area!

Some other things to digest:

The Australian Government announced a tax break as an ‘investment allowance’ in December 2008 aimed at helping businesses meet the challenges of the economic downturn. The government later extended this tax break in the May Budget to allow small businesses to claim a 50% tax deduction on eligible assets bought by 31 December 2009.

In New Zealand Offshore oil and gas explorers will have their tax breaks (due to expire in 2009) extended for another five years to bring additional revenues into the economy.