The taxing truth behind the Stern report

Anatole Kaletsky has apparently lost his faith in Gordon Brown, disappointed by the Chancellor's lack of commitment to the environment. What took so long? asks John Stepek.

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Anatole Kaletsky has apparently lost his faith in Gordon Brown. We're sure the Chancellor will be upset to hear this.

"I have always believed that Mr Brown could potentially make an excellent prime minister and that he would certainly avoid the most egregious policy errors - higher taxes, increased regulation, kow-towing to trade unions - predicted by his detractors," says Kaletsky in The Times. But following the Pre-Budget Report, his hopes have been dashed.

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We wonder - what took so long? Where has he been for the past nine years?

More on Mr Kaletsky's loss of faith in a moment. But first an apology...

Yesterday's piece contained a mistake in the inflation data. RPIX (the Bank of England's old inflation target) stands at 3.4%, not 3.7% as suggested. So Mervyn King wouldn't have had to write a letter to the Chancellor quite yet - he'd still have a tenth of a percentage point's grace. The point that interest rates might well be higher under the old measure still stands - but sorry for getting the figure wrong.

But back to Mr Kaletsky's broken dreams of a Gordon Brown premiership. As we (and countless others) have pointed out before, the guide to tax law in the UK is now double the size it was when Labour came to power. Meanwhile, the proportion of UK national income taken in tax rose 1.2 percentage points last year to 37.2% - the largest rise in Europe.

So if Gordon Brown has succumbed to the "egregious policy errors" of "higher taxes" and "increased regulation" whilst Chancellor, what on earth made Kaletsky think he would suddenly change after becoming prime minister?

Kaletsky seems to be shocked that Brown's big idea when it comes to education is straightforward - just keep doling out the cash, with no regard to the quality of the ensuing service. But that's precisely what he did with the NHS - or hadn't Kaletsky noticed?

He's also hugely disappointed in Brown's attitude towards the environment. After Brown commissioned the Stern report on climate change, Kaletsky was hoping for "carefully targeted environmental taxes" or perhaps "substantial subsidies for energy efficiency and research." Instead environmentalists were "kicked in the teeth," as the Chancellor failed to "show any active support at all for Stern's main recommendations".

But concern for the environment wasn't the reason Brown commissioned the Stern report. This scaremongering, factually questionable portrait of a global warming apocalypse was put together for one reason - to minimise public objections to higher fuel and airline duty by introducing them under the guise of "green taxation". After all - we all want to do our bit to save the planet, don't we? Besides, air travel was so much more pleasant in the days when it was the preserve of the wealthy.

In any case, we're glad to hear that the scales have lifted from Kaletsky's eyes. If the voting public in the UK can follow suit, we might not be subjected to Mr Brown as prime minister for too long.

Meanwhile, more evidence that one of the props holding up the UK's economic miracle - consumer borrowing - is being pulled away. Banking group HBOS turned in a strong trading update this morning - in fact, bad debt charges are set to come in below City expectations.

So how has this happened? Well, it's pretty straightforward. So far, the surge in bankruptcies and Individual Voluntary Arrangements in the UK has mostly hurt lending on credit cards and personal loans - unsecured lending, in other words.

So HBOS - like most other banks - has tightened up on such lending, and plans to continue doing so. In 2007, "growth will be sought across all markets" - all except for unsecured lending, where it will remain "cautious".

The only trouble is, mortgage arrears and repossessions are also ticking higher - slowly, but surely. The banks and building societies are still competing fiercely for mortgage business to make up for the loss of unsecured lending. But it won't be long before they're facing exactly the same situation with their secured loan books as they have with unsecured lending.

And the implications of a tighter mortgage lending market are much more far-reaching than a tightening up of credit card lending. If fewer people can borrow enough money to buy over-priced houses, the price of houses will have to come down. And the banks will rapidly find that those repossessed houses aren't worth the money they lent against them.

Turning to the wider markets

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The FTSE 100 skirted the 6,200 mark for the first time since November yesterday, climbing 36 points to end the day at 6,192. Sugar producer Tate & Lyle put in a strong performance, climbing nearly 4% on the expectation of good news regarding corn sweetener prices, making it the day's biggest riser. The energy sector also performed well. For a full market report, see: London market close (/file/23034/london-close-power-firms-fuel-footsie-surge.html)

Elsewhere in Europe, the Paris CAC-40 closed higher on bargain-hunting, ending the day 49 points firmer at 5,475. In Frankfurt, the DAX-30 was 44 points higher, at 6,520.

On Wall Street, stocks made minor gains yesterday as stronger-than-expected retail sales were offset by higher crude oil prices. The Dow Jones industrials ended the day 1 point higher, at 12,317. The S&P 500 was also 1 point higher, at 1,413. The tech-heavy Nasdaq, however, was a fraction of a point lower, closing at 2,432.

In Asia, the Nikkei closed 136 points higher, at 16,829.

Crude oil was trading at $61.55 this morning, whilst Brent spot was at $62.03 in London.

Spot gold was down to $627.60 this morning, from $628 in New York late on Wednesday.

And in London this morning, publisher Trinity Mirror announced that it was to sell some of its titles, including the Racing Post and some regional newspapers. The money raised will be re-invested in digital projects or returned to shareholders. Shares in Trinity Mirror had fallen by as much as 2.75p today.

And our two recommended articles for today...

Why emerging markets join the Dollar Club

- The currency peg has been fashionable in Asia for years, and now it's spreading to other parts of the world. Niels C. Jensen explains the atrractions - and drawbacks - of joining the Dollar Club. To find out why he think's the currency peg is unfair, click here: Why emerging markets join the Dollar Club .

Russia's interest in Litvinenko

- The recent death in London of Alexander Litvinenko raises many questions: was he poisoned by the Russian intelligence services? If so, why? And why use Polonium-210? For George Friedman of Stratfor's insights into the present-day role of the Russian intelligence services, read: Russia's interest in Litvinenko .

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.