The Bank of England has just cut its base rate by 0.25 per cent amongst a raft of measures to ‘increase monetary stimulus.’ It thinks that the economy is in bad shape and is trying to make it better.
Let’s think about FirmFix Fasteners, a small manufacturer in the West Midlands. Last year its turnover was £450,000 and it made a profit of £40,000. Like all such companies it borrows for capital expenditure and for the time between buying its supplies and getting paid for its goods. Its average debt is £100,000 and the saving of £250 with the latest cut is a drop in the ocean.
FirmFix has six staff who do very simple jobs of assembly and floor sweeping. They are paid the minimum wage, rebranded from April as the National Living Wage. It rose by 50p per hour and FirmFix had to pay National Insurance insurance on top of that. When differentials were restored, the total increase for FirmFix was £12,000. On top of that there was the new compulsory pension scheme.
By 2020 the National Living Wage will go up a further £2 and pension contributions will treble. That’s £48,000 off the profit. The company will plunge into the red and will close. Like so many industrial units in the West Midlands, its business land will be sold for housing.
Why, may you ask, can’t FirmFix increase its prices to make up the difference? The answer is simple. FirmFix supplies to the motor industry. If it can’t supply at the same price as it did last year, the motor manufacturer has said that he will go elsewhere for the parts. (Its chief competitor has already opened up in Turkey.)
Forget the Osborne boom: it was a flash in the pan. Forget the low unemployment levels: they were massaged by further raising of the school leaving age and far too many people going to university. There are serious problems on the horizon.
We tinker with interest rates but meddle big time in those things we should leave well alone. It is economic madness. Our businesses compete against those in other countries. Yet in these hard times our lords and masters decide that we will impose extra costs on industries which are only just managing to keep afloat. The Government has decided that it is better to have no jobs than low-paid jobs. Even the Office for Budget Responsibility says that it will cost 60,000 jobs. I’m betting it will be half a million. Any takers? It will give me a better return than anything I put in the bank.
(Image: Gareth Milner)