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Schoolboy error?

As the cuts come, has the UK's coalition government done its homework on their effect on market growth?

A male wearing school uniformThis coalition government is beginning to resemble the team of prefects overlooking a school.

Not a day goes by without one, or another, of the fresh-faced prefects emerging to pronounce some enormous changes without the least explanation of the knock on effects further down the line. Head boy Cameron and vice captain Clegg appear daily from No 10 Downing Street – the house itself having been built by William Downing as a speculative property development back in the 17th century.

Boldly, the dynamic duo are keen to go down the corridors of history as having done more than any other government to tackle the national debt by cutting back on public services to a diminished rump which would look more at home in early Victorian Britain. One can imagine the other prefects chorusing: "Oh well done, Nick, let's go for that."

The trouble is that the enormous attack on the public sector will lead to enormous troubles in the winter and throughout the next couple of years.

We are looking at massive job losses, particularly among public sector employees. We are looking at an enormous cut in defence spending, driving Britain to becoming a very junior partner in any war in which the other members of NATO become involved.

And we are looking at that vital index which, as far as homeowners are concerned, measures property prices. Apart from an atypical October, prices are steadily sliding. Our most recent experiences of housing bear markets (a prolonged period where investment prices fall) were 1973-1978 when house prices fell by a whopping 36 per cent; the early 1990s when under the reign of the Prime Minister John Major, and his Chancellor of the Exchequer, Norman Lamont, property prices dropped by 26 per cent. This time around, in a bear market likely to last for four to five years, we could well see those figures beaten in the downward slide.

In the stock market, analysts and dealers alike, have noted that the coalition government plans to outlaw hostile takeover bids. This will cause chaos not only on the stock market, but also in the wider economy. Pharmaceutical companies, with their cash generation powers and treasury war chests of even more cash, would be banned from taking over other pharmaceutical companies or biotechnology companies other than in a chummy way. If the directors of bid targets choose to say 'no' to a bid the bidder will no longer be able to appeal to the shareholders of the companies direct. The result: companies run by poorly performing directors would become bid proof, with said directors remaining in office throughout their working lives.

The pharmaceutical industry and biotechnology companies will also be harmed as resources will no longer flow to those companies doing particularly well because their boards of directors are men and women with vigour and imagination.

The capitalist system of economic management to which we adhere in this country would be harmed for years to come.

Meanwhile that oft quoted index of the stockmarket's health, or lack of it, the FTSE100 share index is still moving sideways at what seems to be a reasonable level. The trouble is that level is massively below the all time peak of 6,930 reached back on the last dealing day of 1999. Adjusted for inflation that rate would be around the 8,000 level by now. Technically we are still in a bear market, and this is likely to get worse as the massive changes called for by the coalition government become a reality.

The Author
Malcolm Craig is a freelance financial journalist and respected investment commentator.

To comment on this article, email editor@pmlive.com

26th October 2010

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