The main financial news at the start of the week was a significant change of direction by the Labour Government, in terms of economic policy as announced by Chancellor, Alistair Darling, in his pre-Budget report at 3.30 p.m. on Monday. As widely anticipated – but nevertheless perceived as a economic gamble, in some quarters – Mr. Darling's major announcement was a cut in VAT from 17.5% to 15% (the lowest rate permitted by the European Union) for a period of one year, to be funded in part by a new income tax rate of 45%, for those earning £150,000 or more per annum. Other measures include a 0.5% increase in National Insurance contributions, a one-off Christmas present of £60 for pensioners, and increases in the duty levied on alcohol, petrol and tobacco, to compensate for the cut in VAT. Immediate tax cuts are intended to bolster the flagging economy by encouraging consumer spending but – with public borrowing expected to reach £120 billion (€143 billion) during 2009 – it is estimated that between 400,000 and 500,000 will be affected by the new 45% tax band, to the tune of £1.2 billion (€1.4 billion). Mr. Darling was quoted on the Mirror website saying "These are exceptional times and require exceptional measures. If we did nothing we would have a deeper recession that would cost the country more."
Mr. Darling also announced plans to help small businesses during the economic downturn namely an expansion of government guarantees for loans, a postponement of the proposed increase in corporation tax for small business and the deferment of tax obligations for small companies experiencing financial hardship. These measures were broadly welcomed by business groups, including the Federation of Small Businesses which that small businesses would receive "a welcome breather", according to the BBC website.
Not such good news for some larger businesses in the United Kingdom for the rest of the week, however, with retailers engaged in a savage price war as Christmas approaches, and several household names in crisis. On Tuesday, for example, it was announced that supermarket giant, Tesco, would be cutting prices by up to 50%, including on some of it larger, and consumer electronic, items, while House of Fraser announced 40% reductions for a two-day period, and Marks and Spencer and Debenhams revealed plans to repeat their recent discount days.
Later in the week Clinton Cards reported a sharp fall in retail sales – down 6% for the 4-month period to mid-November – and admitted that trading remained "very challenging" in the lead up to Christmas. The company was, unfortunately not alone, with furniture chain MFI and Woolworths facing problems of their own.
MFI had been embroiled in a row with its landlords over unpaid rents for some time, and poor trading figures – despite a management buyout of the company in September when 33% of its stores closed – as a result of the downturn in the housing market, led the company to call in the administrators on Thursday. MFI – originally founded as "Mullard Furniture Industries" more than 40 years ago – is the largest company of its kind in the UK, but has seen its trade decline in recent years with the growth of the likes of IKEA, B&Q, and major supermarket chains such as Tesco, as suppliers of furniture.
Woolworths too, was placed in the hands of administrator Deloitte on Thursday, although the administrator did reveal that it had received interest from a "number of parties", regarding the sale of the business. The company, which operates more than 800 stores in the United Kingdom and employs 30,000 staff is intending to trade as normally as possible whilst in administration. Dan Butters, Reorganisation Services Partner with Deloitte, was quoted on the Independent website, saying "We are working hard to ensure that any sale of the business, in whole or part will preserve jobs."
In other news, Governor of the Bank of England, Mervyn King, issued a stern warning to the Treasury Select Committee that the economy "would see deflation come to pass", according to the Mail website unless banks return to the normal flow of lending. Whilst supporting the pre-Budget report from Alistair Darling he stressed that a return to normal bank lending was "more important than anything else at present" and refused to rule out further Government aid or nationalisation as a means to achieve this end. Mr. King's sentiments were echoed to some extent, later in the week by the Financial Services Authority (FSA), although in this case in relation to mortgage lenders. The FSA has written to the chief executives of all mortgage lenders informing them to review their policies on mortgage arrears and repossessions by 31st January 2009 or face fines for the unfair treatment of customers.
On the subject of banks and lending, the share issue of Royal Bank of Scotland (RBS) – part of Government plans to recapitalise banks – proved, as widely predicted something of the proverbial "damp squib" with shareholders. Only a tiny proportion of the shares – offered at £0.10 above the current market value – were bought, leaving the Government with a stake of almost 60% in the Bank, which is to be purchased for a figure of around £15 billion (€17.9 billion), along with a further £5 billion (€6 billion) in preference shares.
The week ended with some encouraging – but not that encouraging – news for the UK housing market, insofar as housing prices fell by just 0.4% during November according to Nationwide. This is the smallest fall for 12 months but of course a fall is still a fall, and Nationwide was keen to stress that should not be taken as a sign of swift recovery in the housing market in the near future; the price of an average house fell by just over £400 in November, making it worth £25,000 less than at the same time last year.