Misunderstanding The FTSE 100

There has been much crowing from Brexiters about the recent gains in the FTSE 100, but as ITV's Robert Peston Tweeted the other day, and has been much re-Tweeted:

As The Independent explains: 

The majority of FTSE 100 constituents are multinational companies that make a large proportion of their income overseas. As the pound drops in value, this income is worth more in the UK.

To get a better indication of the UK economy, it is helpful to look at the FTSE 250, or the 250 biggest companies in the UK, which is more dependent on the UK economy than the multinational companies represented in the FTSE 100.

The FTSE 250 fell 13 per cent in two days after the vote came in. It has recovered a little since then, but not on the scale of the FTSE 100. By close on Friday it was trading at 16,465.49, some way off its pre-Brexit high of 17,333.51 on Thursday June 23.

Confidence in domestic companies is low because the outlook for the UK economy doesn't look good. There's a much higher risk of recession, according to Standard & Poor's, who put the likelihood of recession in the next 12 months between 20 and 25 per cent, compared to 15 and 20 per cent in March.

George Osborne, the Chancellor, has abandoned his target of reaching a budget surplus by 2020. That will come as a relief to those who believe greater public sector spending will be necessary to address the knock on effects of the slowing economy.

But it's another indication that the UK's economic recovery has been derailed by the vote to leave the EU, despite how things seem on the FTSE 100.

Perhaps a case of seeing what you want to see, rather than the rather disturbing reality:

It amused me as I scrolled through Twitter tonight, that my timeline had consecutive Tweets on the same topic, with two accounts followed apparently having opposing opinions on the same issue:

Betfair Pro Trader is of course my old friend James, but given Osborne's well publicised failure to understand what a deficit is a little over a year ago, and his mistaken belief that one can be eliminated, I'm inclined to agree with Renegade about this proposed attempt to effectively turn the UK into a fully-fledged tax-haven. While my Economics A Level was rather a long time ago now, according to the rather more current New Economics Foundation, 

1. There’s no evidence that cutting corporation tax has an impact on the real economy

There is no clear evidence that cutting corporation tax leads to improved private sector performance and overall economic competitiveness. In the US for example, corporation tax is the highest in the world (40%) but business investment is far higher than in the UK.

The UK already charges one of the lowest corporation tax rates in the world at 20%. Yet since the financial crisis in 2008, the UK has continued to suffer low growth in productivity, and a lack of fixed capital investment. UK businesses are already sitting on huge cash profits and a cut in taxes may incentivise firms to hold on to more profits.

The chancellor’s proposal, if carried out, would see the UK join a race to the bottom, competing alongside Ireland, Russia and Eastern European countries to be the centre of a low tax, low wage, low productivity economy.

2. Slashing tax for businesses is the wrong incentive

A tax cut would be the government’s attempt to compensate business, especially big business, for the potential loss of easy access to the single market.

But merely changing the tax rate will do little to genuinely improve the economic conditions for business. Instead, its main consequence will be a decline in the total tax take. These kinds of tax incentives can be an incentive to relocate financial operations but rarely do they result in actually operations or manufacturing moving.

With limited resources at the government’s disposal it is highly debatable whether a corporation tax rate cut should be prioritised over other forms of tax incentive, that could have a more direct impact on individuals, or other spending or infrastructure priorities.

3. High taxes for business is not the cause of our unstable economy

The fallout from the Leave vote has thrown the UK's already vulnerable economy into serious jeopardy. It has exposed the flaws of an economic strategy reliant on financial services and high levels of private debt to sustain growth.

But the answer is not to turn the UK into a tax haven. British businesses are aware of the real problems: low public investment, particularly in infrastructure and education, low public support for research and development and stagnant demand in the UK economy, triggered by austerity and the referendum’s result.

As for the claim for a cheap £ being good for exports, no one can deny that. 

Unfortunately, the UK is a net importer. 

Unless the HM Revenue and Customs is taking a leaf out of the Leave campaign's handbook and lying to us or the balance of trade has shifted dramatically since April.