Scrutineer: As many losses as wins

Published on Monday 24 November 2008 20:50

STANDARD 725p -34.5p BARCLAYS 146.5p +13.3p

AMIXED bag in the short-term, but keep your fingers crossed for the medium term – that is business's reaction to Alistair Darling's Pre-Budget Report yesterday.

Small business, in particular, was always going to welcome deferring the 1 per cent increase in the rate of corporation tax to 22 per cent until April 2010. Similarly, the new 1 billion temporary loan fund for small firms announced by the Chancellor is welcome, as is Darling's recognition that cashflow is king in our distressed economic climate.

Small businesses will be able to spread their tax payments out across the year in a more flexible timetable than was hitherto the case.

But the sucker punch for business was the 0.5 per cent increase in employer and employee National Insurance contributions from April 2011.

Business did not like the tax-increase-by-another-name when Labour first hoisted NI contributions some years back, and they don't like it now.

Some estimate it will cost the corporate world 2bn, and it certainly took the gloss off some of the more positive measures for business and the City, such as introducing an exemption from corporation tax for foreign dividends.

Similarly, it is clear that business is not overwhelmed by the initially headline-grabbing 2.5 per cent cut in VAT to 15 per cent.

The scepticism is twofold. On the one hand, the jury is out on whether it will actually get people spending more in the shops when there is a nascent deflationary spiral on the high street already.

Secondly, the actual red tape of the VAT cut for retailers could be cumbersome and not what they need amid all their other problems.

That brings us to the business world's understandable nerves about tomorrow's dizzying ascent of public borrowing – 78bn and 118bn over the next two years – to pay for today's fiscal stimulus. It is a worrying watershed.

Gordon Brown and Alistair Darling have crossed a borrowing Rubicon, and business, while grateful for the lifeboat this year and next, is worried that it might be a leaky vessel farther out if the world economy does not pick up. This Pre-Budget Report was a lifejacket: reassuring and worrying at the same time.

COMPARATIVELY speaking, Asia has probably been the least-hit region for sub-prime banking bad debt/toxic assets – call it what you will. As such, banks with significant operations along the Pacific Rim have been judged to be less in need of balance sheet-bolstering.

As a result, their share prices have been hit, but not to the degree Europe and US-focused banks have been. HSBC, with a strong historic Asian exposure, is a good case in point.

It is less high-profile, but Standard Chartered – which is London-quoted but Asia-focused – was also thought to have fallen into this category.

However, the 1.8bn cash call on investors announced yesterday by Standard shows everything is relative in the banking world. No bank is totally immune from the market turbulence.

An individual bank's provisions for bad debt and asset writedowns might be lower; but they still have to borrow on the world's wholesale markets to some extent and cannot be ringfenced from the nervousness among its competitors.

That is the case with Standard. It is raising much less than the likes of Royal Bank of Scotland and HBOS did earlier this summer, or what Barclays is currently doing via its Middle Eastern investors.

But Standard still believes it is necessary. In its case, a minor spree of acquisitions in the past 18 months has somewhat depleted the balance sheet and this will also help replenish it (ironically for what chief executive Peter Sands says might be more acquisition opportunities in these difficult markets).

STILL on the banks: we are getting use to the rules changing as we go along in these extraordinary times.

The US government bailing out its banks; the UK government allowing unheard of market concentrations (any Lloyds TSB/HBOS combination in mortgages and small business lending); and Barclays yesterday winning shareholder approval at its EGM for driving a cart and horses through existing institutional shareholders' pre-emption rights on its new share issue.

Quite simply, the institutions did not like it, but voted not to rock the boat on the capital-raising issue in such turbulent waters.

THE PRE-BUDGET REPORT: FULL COVERAGE