What Rishi Sunak needs to know before he announces his third round of coronavirus crisis measures in little more than a week is some quite basic accounting that I suspect no one has ever explained to him.
Accounts should include three financial statements. One is the profit and loss account, or income statement. The next is the cash flow statement. The last is the balance sheet.
Right now his job is to support the cash flow of people and companies in the UK. Nothing else matters if survival is to be ensured. Money has to be injected, now.
When we get through the pandemic he has to boost demand that drives the income statement. That will mean households may well need more cash boosts then, or VAT cuts will be required.
At the same time he has to ensure companies can survive the pressures of that period. That means they may well still need cash injections via grants and tax holidays, because they will need to boost their balance sheet strength after the battering they will have had. Loans are liabilities and invariably weaken balance sheets so they are the wrong solution.
And he will have to ensure banks survive, even if I would add considerable conditions to their doing so. Without their balance sheets the UK has no economy. Like it or not, more bail outs for them are coming.
So it's cash flow first.
Then it's boosting demand to drive up incomes and so profit.
But he has to shore up balance sheets to make sure business can get through this, and loans can never do that.
Only tax holidays and wage subsidies can keep UK households and businesses going now. But does Sunak know enough accounting to realise that?
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Hi Richard,
To clarify, by tax holiday do you mean a tax payment deferral i.e. the tax that would ordinarily be due to be paid over to HMRC/Local Councils over the next 2-3 months under ‘normal’ circumstances – for example PAYE, VAT, rates etc – will be suspended but will still be payable at some point in the future when things return to ‘normal’, or waived completely i.e. never needs to be paid?
Secondly, re: one of your earlier posts, would the director owners of small/medium sized businesses be eligible for the wage support that you proposed? The reason I ask is that today a number of those people – for tax planning purposes – would pay themselves a minimal salary (e.g. minimum wage) and then take dividends out of their business to support themselves financially. Clearly they are not going to be taking dividends now so as to retain as much of their profits in their businesses in an attempt to save their businesses. Most likely they may need more than a minimal salary to survive personally as they may not have sufficient cash reserves personally to pay their personal bills.
Thanks,
Robin
Robin
I am proposing cancellation unless at a later balance sheet data it is clear that a phased repayment is possible
This would be based on a ration of repayment to reserves with dividends taken knocked out of the account to remove distortion
In most cases this would mean cancellation
I am afraid directors would get a proportion of their pay
i am on £100 week esa with support, i have to pay bedroom tax, council tax and bills, plus food. If i do not pay them i get evicted and cut off. People are getting used to staying at home not socialising. For the first time in 15 years my neighbours asked how i am. No heating on i do not cook food, too expensive. Then on top of that i have my children. I have 5 when i had all of them i had to pay for travel, food and travel back on the above. You think its a lie i kid you not, i am used to be out side of society, no stake in it. So all the new social restrictions does not affect me one bit. i have never able to part take in society. I can be in my house for weeks and not see a soul and i am used to it.
Darren
I am sorry to hear that
You’re welcome here
Richard
Would it not make sense to immediately take certain actions, like paying child benefit fortnightly, instead of monthly; making the NI rate negative for the initial personal rate (increasing it for the higher earning bracket, if desired), making employer rate negative (provided employees have not been laid off compared to twelve months previously), paying appropriate benefits more frequently at the same level, ban bank interest (lending or saving), etc…
Not particularly focused, but surely achievable within current systems in the immediate crisis.
I’d propose a mechanism to turn any extra down too, or pass it to charity.
These are all too small to make much difference
I have explained at length much more radical plans on here
J F Kennedy famously said “ask not what your country can do for you, ask what you can do for your country”
But the pre-requisite for this to come about, is that both people and government (on behalf of the country) have to know and understand that the country will – somehow – do and provide the essentials.
And at present too many fear that it will not.
“Only tax holidays and wage subsidies can keep UK households and businesses going now but does Sunak know enough accounting to realise that?”
The question I would ask is does he know it will take more than a plutocratic arrangement where money can only come from the rich to tackle the global pandemic recession because the government has no money of its own?
I doubt it, given the Tory government response to the Great 2007/2008 Recession where they immediately launched into a decade of austerity cuts once they gained office.
Indeed you only have to lesson to Ian Duncan Smith’s recent Malthusian rant this week about the importance of not giving the workers too much of a bail-out because it will ruin their incentive to work to confirm the mindless austerity mentality is still in place!
https://www.independent.co.uk/news/uk/politics/coronavirus-uk-update-universal-basic-income-iain-duncan-smith-a9411251.html
He of the £39 breakfast Parliamentary expenses claim!
https://www.mirror.co.uk/news/uk-news/iain-duncan-smith-claimed-breakfast-1810086
Didn’t Rishi Sunak work for Goldman Sachs? Which probably means he is clueless.
What about inviting companies to create new shares for The Government to buy, this would then create a ‘Sovereign Wealth Fund’ and mean The Companies would not be loaded with debt?
See my blog this morning….