The Intelligent Community Forum is a think tank that studies the economic and social development of the 21st Century community.  Whether in industrial or developing nations, communities are challenged to create prosperity, stability and cultural meaning in a world where jobs, investment and progress increasingly depend on broadband communications.  For the 21st Century community, connectivity is a double-edge sword: threatening established ways of life on the one hand, and offering powerful new tools to build prosperous, inclusive economies on the other.  The Intelligent Community Forum seeks to share the best practices of the world’s Intelligent Communities in adapting to the demands of the Broadband Economy by conducting research, hosting events, publishing newsletters and producing an international awards program. (The Intelligent Community Forum)

This New York based think tank awarded Birmingham the honour of being part of the Smart21 Communities of 2011.

The UK’s second largest city, Birmingham is a study in contrasts that reflects a dramatic history.  It was one of the leading cities of the Industrial Revolution but the devastating decline of manufacturing caused employment to collapse by 200,000 from 1971 to 1984, before a major renewal program grew service-sector employment to 85% of the total while manufacturing shrank to 11%.  Today, Birmingham is home to major universities and has nearly half its workforce employed in knowledge-intensive industries.  But less than a quarter of residents work in these industries, while half of residents live in some of the most deprived neighborhoods in the country.  To spur the next wave of growth, the Digital Birmingham partnership is driving an effort to improve connectivity with development of a fiber-based Digital District.  They are building digital skills with training programs in libraries, computers in low-income homes, and broadband build-outs in Council housing.  Birmingham Science City is building a research cluster focusing on advanced materials, sustainable energy and advanced medicine.  One of the UK’s largest government re-engineering programs promises to achieve £1bn in efficiency gain, while city hospitals are pioneering in wireless decision support systems and digital media education programs for patients and staff. (The Intelligent Community Forum)

Well done Birmingham!

We’re not just going to back the big businesses of today, we’re going to back the big businesses of tomorrow. We are firmly on the side of the high-growth, highly innovative companies of the future. Don’t doubt our ambition.

Here’s our vision for East London tech city – a hub that stretches from Shoreditch and Old Street to the Olympic Park. This is what local businesses are saying they need.

These ambitious plans are further set out in a report – blueprint for technology – which was published today and articulates the government’s strategy to support innovative companies.

• a sole trader, company or partnership that begins to carry on a trade, profession or vocation
• a property business or investment business
• a new trading charity whether or not it is carrying out activities with a view to profit

Business Link provide an overview of the scheme, and HMRC provide further information in the Technical Note, Draft Legislation and Explanatory Notes.

The Future of Public Debt

For the rest of this letter, and probably next week as well, we are going to look at a paper from the Bank of International Settlements, often thought of as the central bankers’ central bank. This paper was written by Stephen G. Cecchetti, M. S. Mohanty, and Fabrizio Zampolli. (http://www.bis.org/publ/work300.pdf?noframes=1)

The paper looks at fiscal policy in a number of countries and, when combined with the implications of age-related spending (public pensions and health care), determines where levels of debt in terms of GDP are going. The authors don’t mince words. They write at the beginning:

“Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.”

Drastic measures is not language you typically see in an economic paper from the BIS. But the picture they paint for the 12 countries they cover is one for which drastic measures is well-warranted. I am going to quote extensively from the paper, as I want their words to speak for themselves, and I’ll add some color and explanation as needed. Also, all emphasis is mine.

“The politics of public debt vary by country. In some, seared by unpleasant experience, there is a culture of frugality. In others, however, profligate official spending is commonplace. In recent years, consolidation has been successful on a number of occasions. But fiscal restraint tends to deliver stable debt; rarely does it produce substantial reductions. And, most critically, swings from deficits to surpluses have tended to come along with either falling nominal interest rates, rising real growth, or both. Today, interest rates are exceptionally low and the growth outlook for advanced economies is modest at best. This leads us to conclude that the question is when markets will start putting pressure on governments, not if.

“When, in the absence of fiscal actions, will investors start demanding a much higher compensation for the risk of holding the increasingly large amounts of public debt that authorities are going to issue to finance their extravagant ways? In some countries, unstable debt dynamics, in which higher debt levels lead to higher interest rates, which then lead to even higher debt levels, are already clearly on the horizon.

“It follows that the fiscal problems currently faced by industrial countries need to be tackled relatively soon and resolutely. Failure to do so will raise the chance of an unexpected and abrupt rise in government bond yields at medium and long maturities, which would put the nascent economic recovery at risk. It will also complicate the task of central banks in controlling inflation in the immediate future and might ultimately threaten the credibility of present monetary policy arrangements.

“While fiscal problems need to be tackled soon, how to do that without seriously jeopardising the incipient economic recovery is the current key challenge for fiscal authorities.”

They start by dealing with the growth in fiscal (government) deficits and the growth in debt. The US has exploded from a fiscal deficit of 2.8% to 10.4% today, with only a small 1.3% reduction for 2011 projected. Debt will explode (the correct word!) from 62% of GDP to an estimated 100% of GDP by the end of 2011. Remember that Rogoff and Reinhart show that when the ratio of debt to GDP rises above 90%, there seems to be a reduction of about 1% in GDP. The authors of this paper, and others, suggest that this might come from the cost of the public debt crowding out productive private investment.

Think about that for a moment. We are on an almost certain path to a debt level of 100% of GDP in less than two years. If trend growth has been a yearly rise of 3.5% in GDP, then we are reducing that growth to 2.5% at best. And 2.5% trend GDP growth will NOT get us back to full employment. We are locking in high unemployment for a very long time, and just when some one million people will soon be falling off the extended unemployment compensation rolls.

Government transfer payments of some type now make up more than 20% of all household income. That is set up to fall rather significantly over the year ahead unless unemployment payments are extended beyond the current 99 weeks. There seems to be little desire in Congress for such a measure. That will be a significant headwind to consumer spending.

Government debt-to-GDP for Britain will double from 47% in 2007 to 94% in 2011 and rise 10% a year unless serious fiscal measures are taken. Greece’s level will swell from 104% to 130%, so the US and Britain are working hard to catch up to Greece, a dubious race indeed. Spain is set to rise from 42% to 74% and “only” 5% a year thereafter; but their economy is in recession, so GDP is shrinking and unemployment is 20%. Portugal? 71% to 97% in the next two years, and there is almost no way Portugal can grow its way out of its problems.

Japan will end 2011 with a debt ratio of 204% and growing by 9% a year. They are taking almost all the savings of the country into government bonds, crowding out productive private capital. Reinhart and Rogoff, with whom you should by now be familiar, note that three years after a typical banking crisis the absolute level of public debt is 86% higher, but in many cases of severe crisis the debt could grow by as much as 300%. Ireland has more than tripled its debt in just five years.

The BIS continues:

“We doubt that the current crisis will be typical in its impact on deficits and debt. The reason is that, in many countries, employment and growth are unlikely to return to their pre-crisis levels in the foreseeable future. As a result, unemployment and other benefits will need to be paid for several years, and high levels of public investment might also have to be maintained.

“The permanent loss of potential output caused by the crisis also means that government revenues may have to be permanently lower in many countries. Between 2007 and 2009, the ratio of government revenue to GDP fell by 2-4 percentage points in Ireland, Spain, the United States and the United Kingdom. It is difficult to know how much of this will be reversed as the recovery progresses. Experience tells us that the longer households and firms are unemployed and underemployed, as well as the longer they are cut off from credit markets, the bigger the shadow economy becomes.”

We are going to skip a few sections and jump to the heart of their debt projections. Again, I am going to quote extensively, and my comments will be in brackets [].Note that these graphs are in color and are easier to read in color (but not too difficult if you are printing it out). Also, I usually summarize, but this is important. I want you to get the full impact. Then I will make some closing observations.

The Future Public Debt Trajectory

“We now turn to a set of 30-year projections for the path of the debt/GDP ratio in a dozen major industrial economies (Austria, France, Germany, Greece, Ireland, Italy, Japan, the Netherlands, Portugal, Spain, the United Kingdom and the United States). We choose a 30-year horizon with a view to capturing the large unfunded liabilities stemming from future age-related expenditure without making overly strong assumptions about the future path of fiscal policy (which is unlikely to be constant). In our baseline case, we assume that government total revenue and non-age-related primary spending remain a constant percentage of GDP at the 2011 level as projected by the OECD. Using the CBO and European Commission projections for age-related spending, we then proceed to generate a path for total primary government spending and the primary balance over the next 30 years. Throughout the projection period, the real interest rate that determines the cost of funding is assumed to remain constant at its 1998-2007 average, and potential real GDP growth is set to the OECD-estimated post-crisis rate.

[That makes these estimates quite conservative, as growth-rate estimates by the OECD are well on the optimistic side.]

Debt Projections

“From this exercise, we are able to come to a number of conclusions. First, in our baseline scenario, conventionally computed deficits will rise precipitously. Unless the stance of fiscal policy changes, or age-related spending is cut, by 2020 the primary deficit/GDP ratio will rise to 13% in Ireland; 8-10% in Japan, Spain, the United Kingdom and the United States; [Wow!] and 3-7% in Austria, Germany, Greece, the Netherlands and Portugal. Only in Italy do these policy settings keep the primary deficits relatively well contained – a consequence of the fact that the country entered the crisis with a nearly balanced budget and did not implement any real stimulus over the past several years.

“But the main point of this exercise is the impact that this will have on debt. The results plotted as the red line in Graph 4 [below] show that, in the baseline scenario, debt/GDP ratios rise rapidly in the next decade, exceeding 300% of GDP in Japan; 200% in the United Kingdom; and 150% in Belgium, France, Ireland, Greece, Italy and the United States. And, as is clear from the slope of the line, without a change in policy, the path is unstable. This is confirmed by the projected interest rate paths, again in our baseline scenario. Graph 5 [below] shows the fraction absorbed by interest payments in each of these countries. From around 5% today, these numbers rise to over 10% in all cases, and as high as 27% in the United Kingdom.

“Seeing that the status quo is untenable, countries are embarking on fiscal consolidation plans. In the United States, the aim is to bring the total federal budget deficit down from 11% to 4% of GDP by 2015. In the United Kingdom, the consolidation plan envisages reducing budget deficits by 1.3 percentage points of GDP each year from 2010 to 2013 (see eg OECD (2009a)).

“To examine the long-run implications of a gradual fiscal adjustment similar to the ones being proposed, we project the debt ratio assuming that the primary balance improves by 1 percentage point of GDP in each year for five years starting in 2012. The results are presented as the green line in Graph 4. Although such an adjustment path would slow the rate of debt accumulation compared with our baseline scenario, it would leave several major industrial economies with substantial debt ratios in the next decade.

“This suggests that consolidations along the lines currently being discussed will not be sufficient to ensure that debt levels remain within reasonable bounds over the next several decades.

“An alternative to traditional spending cuts and revenue increases is to change the promises that are as yet unmet. Here, that means embarking on the politically treacherous task of cutting future age-related liabilities. With this possibility in mind, we construct a third scenario that combines gradual fiscal improvement with a freezing of age-related spending-to-GDP at the projected level for 2011. The blue line in Graph 4 shows the consequences of this draconian policy. Given its severity, the result is no surprise: what was a rising debt/GDP ratio reverses course and starts heading down in Austria, Germany and the Netherlands. In several others, the policy yields a significant slowdown in debt accumulation. Interestingly, in France, Ireland, the United Kingdom and the United States, even this policy is not sufficient to bring rising debt under control.

[And yet, many countries, including the US, will have to contemplate something along these lines. We simply cannot fund entitlement growth at expected levels. Note that in the US, even by "draconian" estimates, debt-to-GDP still grows to 200% in 30 years. That shows you just how out of whack our entitlement programs are.

Sidebar: This also means that if we - the US - decide as a matter of national policy that we do indeed want these entitlements, it will most likely mean a substantial VAT tax, as we will need vast sums to cover the costs, but with that will come slower growth.]

[Long before interest rates rise even to 10% of GDP in the early 2020s, the bond market will have rebeled. This is a chart of things that cannot be. Therefore we should be asking ourselves what is the End Game if the fiscal deficits are not brought under control.]

“All of this leads us to ask: what level of primary balance would be required to bring the debt/GDP ratio in each country back to its pre-crisis, 2007 level? Granted that countries which started with low levels of debt may never need to come back to this point, the question is an interesting one nevertheless. Table 3 presents the average primary surplus target required to bring debt ratios down to their 2007 levels over horizons of 5, 10 and 20 years. An aggressive adjustment path to achieve this objective within five years would mean generating an average annual primary surplus of 8-12% of GDP in the United States, Japan, the United Kingdom and Ireland, and 5-7% in a number of other countries. A preference for smoothing the adjustment over a longer horizon (say, 20 years) reduces the annual surplus target at the cost of leaving governments exposed to high debt ratios in the short to medium term.

[Can you imagine the US being able to run a budget surplus of even 2.4% of GDP? $350 billion-plus a year? That would be a swing in the budget of almost 10% of GDP.]

John Mauldin, Best-Selling author and recognized financial expert, is also editor of the free Thoughts From the Frontline that goes to over 1 million readers each week. For more information on John or his FREE weekly economic letter go to: http://www.frontlinethoughts.com/learnmore

This is an important opportunity for dentists and doctors to get their tax affairs in order before the 31 March deadline. HMRC have done extensive research and hold substantial information on the tax affairs of medical professionals especially now as HMRC have the power to request tax related information from third parties. HMRC have contacted the NHS and Insurance companies to obtain substantial information on payments made to doctors and dentists.  HMRC will use this information for tax enquiries and tax enforcement activities.

Dave Hartnett also said, “We’ve assessed doctors and dentists and we’ve found there is a material level of non-compliance in various ways.” Consequently HMRC believe that the problem of non-tax compliance amongst doctors and dentists is extremely high.

Doctors and dentists need to notify HMRC of their intention to make a disclosure by 31 March 2010 of any undeclared liabilities. If a disclosure is made then any penalty will be fixed at 10 percent and if the liability is less than £1,000 no penalty will be charged. However if medical professionals fail to make a declaration of unpaid taxes and duties then penalties could be up to 100% of the unpaid liabilities and not less than 30 percent.

Therefore its very important for medical professionals to make any disclosure by the deadline of 31 March 2010. After this date HMRC will  start collating information from NHS trusts, private hospitals and medical insurers.

1) Do you retain UK Property?
2) Where your family lives and where you school aged children are educated?
3) Where your business activities are carried out?
4) Purpose of visits to UK and the frequency of visits
5) Lifestyle factors such as membership of clubs, banking/investment activities, registration to vote, doctors, dentists

Once you have satisfied the above you may visit the UK provided that you spend 90 days or less on average a year for the 4 years. If you spend 183 days or more in any tax year you will be deemed UK resident.

It is paramount that you maintain records such as airline tickets to substantiate your claim. Anyone contemplating ceasing to be a UK resident should take detailed advice. Specific to their own personal circumstances. One key aspect of becoming a non UK residence requires forward planning and detailed record keeping.

There are also now two reasons why there is a rising risk of a double-dip W-shaped recession. For a start, there are risks associated with exit strategies from the massive monetary and fiscal easing: policymakers are damned if they do and damned if they don’t. If they take large fiscal deficits seriously and raise taxes, cut spending and mop up excess liquidity soon, they would undermine recovery and tip the economy back into stag-deflation (recession and deflation).

while in a paper published by the IEA, states that Obama is committing the same mistakes made by policymakers during the Great Depression. The paper states that the Obama administration is repeating many of the mistakes made during the Great Depression:

Now is a particularly bad time to enact socialistic reforms to the market for healthcare, pursue wealth-destructive cap and trade environmental programs, or force additional federal tax dollars into state and local education markets. Such policies imply higher government spending and, eventually, either higher taxes or runaway inflation, thus depleting taxpayer and business confidence in the economy…

The paper is given greater weight by the endorsement of Nobel-Prize-winning economist James M. Buchanan.

In contrast to these views the United Nations (UN) forecasts global economic recovery but flags up growing threat of deflation. The report states:

Indeed, deflation – not inflation – is the real danger. Wage deflation is the imminent and most dangerous threat in many countries today, because governments will find it much more difficult to stabilize a tumbling economy when there is a large-scale fall in wages and consumption. However, deflation will not cure itself. Therefore, the most important task is to break the spiral of falling wages, prices and demand as early as possible, and to revive the financial sector’s ability to provide credit for productive investment to stimulate real economic growth. Governments and central banks need to take rapid and strong proactive measures to boost demand and avert the risk of deflation. 

In light of the perplexing range of views and pervasive uncertainty buisnesses need to be even more sensitive to the management of their working capital. We think these reports provide insightful advice in the management of cash:

Winning in Turbulence: Cash is Not Only King, It’s Strategic by Darrell Rigby and David Sweig

Until recently, most senior executives regarded managing cash flow and liquidity as tactical functions, a mundane set of activities left to administrative managers. No more. As the global financial crisis has choked off credit, cash management has become strategic. Companies with weak operating cash flows are finding it more difficult to secure outside funding, just when flows are harder than ever to generate.

Winning in a Downturn: Managing Working Capital

Working capital is an important source of cash throughout the business cycle, but it is especially critical during a downturn, when reduced access to external funding and sharp decreases in sales can greatly limit available cash. Companies must fundamentally change their approach as demand drops, reevaluating and adjusting how they approach each of their working-capital categories—inventory, accounts receivable, and accounts payable.

This is good news for UK business, however business leaders across the SME sector need to increasingly understand and seize opportunties in the emerging BRIC economies. Over the coming years Brazil, Russia, India and China will play a greater role in the global economy.