Wednesday, 9 January 2013

The four horsemen of the apocalypse

In my blog  I looked at how private sector balances fluctuate through the business cycle and made the point that high levels of surplus are a reflection of savings (in the bad times) rather than spending – to get consumers consuming the % rate of surpluses needs to fall (as it is in the US).

The problem in the UK is that the coalition Government sees the working middle classes as both the solution to the debt crisis (soft picking for increased taxes) and the engine for consumer growth.  Sadly for their electoral chances this group cannot occupy both roles. 

Getting the squeezed middle to start spending is a vexed issue.  Cash surpluses have risen from minus 0.2% in the final stages of the Blair / Brown boom (q1 2008) to 7.7 % today.  But why the prudent middle classes would start to spend, when they are being hounded on all fronts, is less than clear.  Specifically this group are being trampled under foot by the Four Horsemen of the Apocalypes -  tax changes on income and expenditure, loss of pensions, inflationary pressure on goods and services and low interest rates.

1.      Marginal tax rates have gone through the roof for this group with the removal of the child allowance and increased rates of income tax
2.    Pensions are being eroded  by loss of allowances and increased tax rates

3.    Also the cost of services have gone through the roof – commuter travel, energy costs, etc

4.      The Coalition Government’s policy of keeping Bank of England base rate frozen below inflation reduced the value of savings by £43bn to the end of 2011 we could safely estimate this reduction at over £50bn today.

To create growth by freeing the private sector from the tyranny for living within their means will take a radical change in course. 

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