CloserStill and Nineteen Group chairman Phil Soar shares his views on the Autumn budget and the next US President
It has been an unusually portentous month with Rachel Reeves’ fun-packed budget and Donald Trump’s election. The simple answer to the question is always: “We don’t know yet”, but we can hazard some discussion points.
Reeves (no member of the cabinet has ever worked in a private company – surprise) is more straightforward. The large rise in employer’s National Insurance, plus the hefty rise in the minimum wage, plus the pro-union changes to employment legislation, has raised howls of protest, particularly from the broader hospitality industry. We are certainly deeply associated with hospitality, in terms of food and drink at our events and the business models of our venues.
For one of my companies, the NI rises will cost £550,000 next year. This is not the end of the world – it is around 0.8% of the company’s UK turnover. But it is a large extra cost and it is hard to see how it is a positive.
Wage increases will not be higher, on our current margins new staff will not be employed, and price increases will be more likely. None of this will bring joy to the nation.
Clearly inflation will be higher and interest rates will come down more slowly as a result of the budget. That will have a knock-on effect on mortgages, household budgets, and the ability of companies borrowing to expand.
No tears can be expected over capital gains
The increase in capital gains tax (when one sells shares or a company) from 20% to 24% was lower than feared, but it must still have an impact. Similarly, the increase which private equity investors pay on their personal profits from 28% to (eventually) 36% is not going to cost the Labour Party any votes.
However, we should not pretend that there are not consequences. These tax rates may not be punitive, but they are not irrelevant. They obviously reduce the returns investors make when they back companies (or launch events) and they damage the risk/reward ratio when an individual is deciding where to invest. Plus, they make other countries – particularly the US – rather more attractive.
The real problem is ‘direction of travel’
The much bigger problem, I think, is “the perception of the direction of travel”: personal investors have a long-time horizon. They don’t back a new company (or a new trade show) and expect a return in 12 months. Any government which can increase a tax rate to 24% one year might well increase it to 27% and then 35% in the next two or three years. That perception and uncertainty becomes a disincentive and an unknown when writing an investment cheque today.
Basically, Rachel Reeves’ decisions all increase the costs, reduce the rewards and accelerate the unease of investing in UK trade show companies. I stress, not by a massive amount, but let us not bury heads in the sand.
Although the world’s trade show industry is based in West London, our big ten companies have, in aggregate, considerably less than 20% of their turnover in the UK. (Excluding the Messen and similar venue owned organisers, 10 of the world’s 13 largest trade show companies are based in West London). This much reduces the overall effects for our own organiser businesses, though it does not encourage us to put the UK any higher on our list of priorities markets.
If the real cost of any item increases then (generally) the sales of that item decrease. I certainly don’t see any dramatic changes, but over time our UK industry is likely to be smaller than it might have been. That is Reeves’ direction of travel.
What really happens when investment is penalised
All of this illustrates the major conundrum in assessing the effects of government policies. It is NOT that companies already in existence might close down or flee to Paris. It is the investment which MIGHT have happened, but now doesn’t, which is lost.
Those numbers can obviously never be proven – we can never prove that a company might have set up in the UK but didn’t because of government tax policy.
We have seen just the same with Brexit. By comparing relative investment and growth rates against France, Germany, Italy and Spain since the disaster of 2016, it is clear that the UK economy is at least 4% or 5% smaller than it would have been had the British people not have been conned by silly numbers on the sides of buses.
Around 5% of British annual GDP this year is some £150 bn, of which the Government would have normally taken an additional £60 bn in taxes annually (income tax, VAT etc). If you are looking for Rachel Reeves’ £22 bn or £40 bn government black holes, then Brexit is a good place to start.
Trump’s election is the bigger unknown
To begin with, does he mean what he says or says what he means? Indeed, does he himself know? In September 2016, Salena Zito wrote of then-candidate Donald Trump, in a column for The Atlantic: “The press takes him literally, but not seriously; his supporters take him seriously, but not literally.” This brilliant insight has rightly become immortal.
But there is the question – seriously, literally or neither?
We don’t know what effect appointing anti-vaxer Robert Kennedy to the Department of Health will have, nor the really wild suggestion that Matt Gaetz becomes Attorney General. But the one thing we do know is that Trump regards tariffs as his number one priority.
It is not clear whether Trump has any understanding of the dynamics of trade, but his single most persistent obsession has long been tariffs and protectionism.
His view appears simple – if Chinese cars cost twice as much, then American consumers will buy American cars instead. He apparently believes that by putting a 60% tax on all imports from China (say) he will magically create jobs, cars and heaven knows what else in the USA.
Trump’s first long-term obsession is tariffs
The question, then, is “How would this work?”
New factories cost money and investment. Who is going to spend billions on new car or solar panel factories knowing that they will take thre or four years to come into production, and then there may be a new President who is quite likely to reverse Trump’s tariffs?
The assumption is also that these tariffs will create a stronger dollar as the US buys less, and so the US will be able to buy imports cheaper. But other countries will retaliate with their own tariffs against US goods, thus making it harder for US companies to export – so the tax on imports becomes a tax on exports. A stronger dollar will make US exports more expensive and relatively less attractive anyway.
We can go deeply into the theory of the balance of trade being the difference between aggregate incomes and spending in any economy, but that isn’t necessary. The US already runs a massive balance of trade deficit, financed by foreign buying of US dollars, which today averages 3.9% of US GDP.
The culprit here is the US government deficit – which currently shows expenditure (as a percentage of GDP) being 6.7% larger than government income. The only time this has ever been higher was in 1945, for obvious reasons.
If Trump is to keep cutting taxes, as he says, and ups spending on Medicare and Social Security (pensions etc) as the population ages, and makes tips non-taxable, and at the same time somehow trying to reduce the government deficit, it means that household spending will have to bear the brunt of all this pressure.
It is reasonably obvious to most economists that all of this cannot ultimately happen. Reducing taxes while at the same time increasing the cost of imported goods will create rapid inflation. Domestic producers will react by increasing their prices to match the higher prices of imports (and their cost of imported raw materials). The Fed must then react by increasing interest rates, which will hit mortgages and long-term investment in particular.
The likely medium-term impact on our industry?
I apologise for simplifying a complex debate, but most of the effects are relatively simple. If Trump tries to impose 60% tariffs on Chinese goods and 20% on all others (as he has proposed), then there will be retaliation.
Other countries will do the same to US goods. So not only will prices to US domestic consumers rise (10% of all the containers which arrive at US ports are destined for WalMart – the biggest US retail chain – alone) automatically, but US exporters will find it harder sell abroad because the higher tariffs will reduce demand for their wares.
The National Institute of Social and Economic Research estimates that the US economy would be 4% smaller in the medium term than it would have been if the Trump tariffs are imposed.
Commentators like Martin Wolf think 4% may be optimistic. Tariffs and their effects would quickly spread around the world, just as they did in the early 1930s – though probably not with the same terrible effects.
All this is speculation. Tariffs are one of the areas where the President does not need the approval of Congress, which is one reason why commentators are focusing on it.
We are a proxy for the world economy
As I have said many times, the trade show business is in many ways a proxy for world trade and the world economy. Our organisers may be based in the UK but they are worldwide entities and can invest their money anywhere. This is not true of our venues or our suppliers. But the flexibility we have internationally, and the fact that we do not export manufactured goods, suggests that we should be able to avoid most of the effects of the two political shocks of late 2024
But these are early days, so we might sensibly prepare for a rocky ride.
The post What Reeves and Trump could mean for the trade show industry appeared first on EN.