The Chariots of Fire moment that revealed Gordon’s 10p tax timebomb
The abolition of the 10p starter rate of income tax in Gordon Brown’s last Budget has a special significance in recent Spectator history: coming only a month after our move from Doughty Street in Bloomsbury to Old Queen Street in Westminster, it was the event which made us realise how useful it is to operate within sprinting distance of the Palace of Westminster. There we were, rushing to complete an editorial that had to go to press minutes after the end of the Budget speech; and like David Cameron in his response in the House, we had been momentarily wrongfooted by Brown’s final coup de théâtre, the 2p cut in basic-rate income tax. We were about to say that this was a bold boost to the spending power of families on modest incomes — when our political editor Fraser Nelson burst in, having legged it across Parliament Square in the manner of Eric Liddell, the righteously inspired Scottish athlete in Chariots of Fire whom he closely resembles.
Fraser was clutching the ‘red book’, the volume of Budget detail that is released only as the Chancellor rises to speak — and which Cameron had not seen before he responded. ‘Hold the front page,’ Fraser gasped, metaphorically, ‘it’s a trick.’ Sure enough, the incriminating evidence stared out from a table on page 13: the £8.1 billion first-year benefit of the basic-rate cut was more than wiped out by the abolition of the 10p rate (£7.3 billion) plus some jiggery-pokery labelled ‘phased alignment of higher thresholds’ (£1.1 billion). Thus we were able to declare in our editorial that the tax cut was ‘just smoke and mirrors’; and more importantly we had a sudden, cruel insight into how Brown’s mind really works. In order to knock Cameron off-balance at the despatch box and bask briefly in the adulation of his own backbenchers, he had set aside the interests of millions of low-income earners and, we may guess, brusquely dismissed anyone in the Treasury who had spotted the 10p timebomb in the arithmetic. It was an act of pettiness, petulance and vanity; the act of a man who, as the nation now seems to have concluded, was not psychologically fit to be Prime Minister. It has come back to haunt him, and even if he is forced into a graceless U-turn before Monday’s crucial Commons vote, the memory of it will not go away.
Rights issues by banks are often controversial, it must be said, because of two kinds of dilution effect: the one that leaves loyal shareholders owning smaller portions of the company if they do not take up their rights, and the one famously labelled here by Christopher Fildes as Sibley’s Law: ‘Giving capital to a bank is like giving a gallon of beer to a drunk,’ it begins, and Fildes fans will, I’m sure, be able to recite the rest by heart. Perhaps the most notorious example of its application was in 1988, when Barclays enraged shareholders by launching a deeply discounted rights issue to raise the then colossal sum of £924 million — how the City’s orders of magnitude have changed in 20 years — to fund expansion in the all-too-exciting areas of property lending and investment banking. The internal slogan for the campaign to persuade institutions to look favourably on the issue was ‘Number One by ’91’, which was later transmuted by City wags, with justification, to ‘In the poo by ’92’ and ‘On the floor by ’94’. But arguably there is some comfort for investors in subscribing to a rights issue such as RBS’s which is designed to fill an existing hole rather than to give the bankers the wherewithal to dig a new one and relieve themselves into it.
And as Michael Hughes — recently retired as chief investment officer of Baring Asset Management — explained to me, the shares of banks with broadly based business models (as opposed to pure mortgage-lenders, for example) are currently perceived by the City to be cheap, standing at a discount to their net asset values and offering yields well ahead of bond and cash rates. What’s more, raising new ‘Tier 1’ equity capital ‘can create a virtuous circle’ by reducing the banks’ day-to-day cost of funding and thereby boosting their profit margins. So I suspect institutional investors are not as offended by the RBS proposition as some media coverage has suggested and I’m betting on Fred to hang on to his job: he is, after all, best known for his skill in reviving banks with bad hangovers.
For the truly intrepid
If democracy and justice don’t topple Robert Mugabe soon, the grim reaper surely will — and if, God willing, a successor emerges who is not just another half-mad megalomaniac backed by a viciously corrupt military elite, then foreign aid, investment and expertise will pour in to Zimbabwe. For the truly intrepid investor, that makes this tragically ruined country’s mineral sector well worth watching: a report by George J. Coakley for the US Geological Survey in 2000 counted 1,000 mines employing 60,000 people and producing 35 commodities — including gold, copper, platinum and ferrochromium. Global demand for these materials is insatiable, yet Zimbabwe’s exports of them have been declining since at least 1995, and a mining guru tells me the entire industry is now close to dereliction, with many viable mines shut for simple lack of electricity to operate. The investment expert Michael Orme, writing on this theme at the Daily Reckoning, offers a quote from a fund manager which also throws an interesting sidelight on the RBS rights issue: ‘Given the choice between investing in Africa — conflict or no conflict, corruption, epic or otherwise — and a basket of Western banks, Africa wins every time.’