Is it Boom or Bust for the UK Government, Darling?

One can only feel dismay at the government's latest proposals to dig the country out of the threat of a deep recession. Whilst the government is not solely to blame for the problems we face - there are undoubtedly global issues over which we had little control - the government has been responsible for fuelling an economy centred on rising consumer debt and the belief that house prices will always go up. Unfortunately we believe that having allowed house prices to boom out of control, some adjustment downwards is essential - it is, afterall, the best way to help first time buyers onto the housing ladder.

Yesterday's pre-budget report was meant to deliver a range of stimuli to the economy that would see a return to more stable economic conditions. The fundamentals of the package saw large increases to government debt in the short term, funded by tax increases a little way after.

None of that sounds particularly appealing, so the good news must be hidden away somewhere, isn't it? The Collective believes that the single biggest challenge to the UK economy at the moment is not just that we all stay in work; it's also that our wages are sufficient to fund the current cost of living. Therefore the policy changes should, in our opinion, have been designed to ease the burden on ordinary households. Will these achieve their aim?

To an extent this is true - a reduction in the standard rate of VAT should see some consumer prices come down. That being said, some of our largest expenditure is unaffected such as many types of food, and gas and electricity bills. The cost of a litre of petrol will also not change because, whilst this is affected by the VAT reduction, this is offset by a rise in duty.

What will be affected is the bigger ticket items - furniture, consumer electronics, cars. For us this is where the problem lies: the government is making cheaper those items which rely either (a) on the housing market or (b) being able to take some form of credit. If we have borrowed excessively to get into this mess, why is it good to borrow more to get out of it?

The government will further stimulate the economy by taking on massive debt to fund infrastructure projects. In their view, such expenditure will provide a catalyst for a recovery, but it seems to us to be full of risks. If excessive, ill-judged credit behaviour both by banks and consumers is a bad thing, why is excessive borrowing by our government a good thing?

Of course it's easy to criticise, and much harder to offer an alternative. We don't pretend to have all the answers, but here's a few suggestions of how to help the UK family:

• Reduce the VAT rate on domestic utility bills to 0% for 24 months
• Double the personal allowance, taking a far larger slice of low paid workers' wages out of the income tax arena

And how would we increase government revenues?

• Put airline fuel on a level playing field as regards fuel duty

Good luck in the coming months.

Enterprise Week

Last night's Wales@work programme on BBC Radio Wales asked the following:

Yesterday saw the beginning of Enterprise week in schools and colleges around the UK. Students from around the country are being challenged to come up with successful business ideas to teach them more about entrepreneurship and commerce.

• But are events like this worthwhile - can you really teach children how to become entrepreneurs? Or is it something that you are born with?
• And as these teenagers start out in the big wide world shouldn’t we be giving them a financial education as well as an academic one?
• In the current climate with money being tight shouldn’t our children be taught how to manage money and not get into debt?

So this week Wales@work goes on the road to Neath Port Talbot College to ask guests and a young audience whether business and finance is a worthwhile education.

We sent our thoughts to the show...

You can move towards an answer to all three questions by teaching children to understand "the bigger picture", and how debt and risk fit in to it. History talks about three ways to get wealth - steal it, earn it or marry it. Borrowing money without understanding its consequences was never the answer. However we shouldn't assume that debt is fundamentally bad - it isn't, but we have to recognize that it comes with consequences.

For example, businesses may take on debt as an investment in their future profitability; likewise our parents took on debt to fund the purchase of a long term asset (their house) which over the period of the debt (25 years) would increase in value. Debt to fund a short term lifestyle boost is plain daft - it doesn't deliver any long term benefits and simply makes securing debts for those things that do (such as a mortgage) more difficult. You wouldn't see a business taking out a loan to fund entertaining at a rugby international, for example (and nor would you find a bank willing to give one!). But that shouldn't stop individuals gearing up to drive future wealth creation opportunities - by all means borrow to set up a business, if you can demonstrate your belief that in doing so you'll be better off in the long term.

Being a successful entrepreneur is partly about identifying what you or your idea can do that gives you an advantage over what's already in the market, and then doing it profitably. It's also about knowing your weaknesses and either learning to address them, or getting people and resources around you to mitigate against them.

Fundamentally all of this is an understanding of risk - what's the risk of me not being able to pay my debts, what's the risk of my business idea failing - and having a strategy to deal with it.

Put it this way, borrowing money to buy a second property on an interest only basis only just covered by the rent is only GUARANTEED to deliver profit if you can say with certainty that (A) you will always have a paying tenant, (B) rent will go up at least in line with rises in interest rates and (C) property always goes up, not just in the long term but also in the short term. Sounds obvious, but amazing how many people didn't apply this thinking over the last 5 years...

Finally, for a broader look at how education stifles creativity, I can thoroughly recommend this lecture by Sir Ken Robinson.