Emergency Budget 2010: effect on consumers
When I was serving in the Metropolitan Police I often quipped that no matter what happened to the UK economy, the government would always want police officers: our job was always safe. You can imagine how astounded I was when I heard thousands of police officer jobs are on the line as part of the recently announced Budget cutbacks. When this happens we know matters are bad.
The Budget was certainly a tough one and only time will tell whether the measures announced are the right call. I don’t know enough about the economy to make an informed judgment but I do know a bit about consumers and their debts and I am worried.
I help individuals and families restructure their debts and I see the pain caused through debt. My role is to offer guidance and support and provide viable solutions to help resolve those debt issues. The reduction in disposable income - the money people have left after paying essential living costs - as a result of cuts in pay, benefits and job losses will force many thousands of people into debt crisis. Mark my words, many will freefall into insolvencies or debt management plans.
House repossessions are also likely to rise due to the proposed cut backs on mortgage support currently paid to those on benefits, with the most vulnerable homeowners losing around £140 per month in payments.
Over the past 15 years, morally and socially, through slick marketing and the easy availability of credit, consumers have been encouraged to spend now and pay later. From this a culture of ‘must have now’ has developed, much like it did in the state too. Now the party has ended and the hangover will last for several years.
I think everyone needs to take a close look at their income and what they are able to spend. Anyone thinking of borrowing money now must make sure they have the means to pay it back.
As a country we lost that ability to pay back, which is why such drastic measures have been implemented to control the debt. It’s no different for families.
When I’m helping someone re organise their finances, and they are thinking of buying something, I tell them to ask themselves how it is going to be paid for and what is the cheapest way of doing it.
Always remember - if you don't need it and can't afford it then don't buy it!
Most Limited companies have finance directors to run their affairs and if things get tough they prune back with redundancies, buy cheaper raw materials and stop advertising. They have to balance the books to stay profitable or at least stay afloat and it’s a criminal offence for any director of a limited company to trade whilst insolvent.
But isn’t this basically what consumers and the government been doing over the past 15 years or so?
As for those working in the public sector, if they earn more than £21,000 per year then they are not just getting a pay freeze, but a pay cut because with inflation, their salary will buy less over the next two years.
Then there are those who rely on benefits such as tax credits and child benefit. The former will only be available to those earning below £40,000 (joint income) reducing to £30,000 in the year 2011 -12 with the latter is to be frozen for 3 years. Why not make child benefit means tested? Is it fair that footballers like Wayne Rooney and John Terry, earning circa £120,000 per week, can still receive this benefit? Should it not be means tested and given to the poorest families?
In addition, the impact of the VAT increase to 20% - due on the 4 January 2011 – will be to penalise the poorest in society. According to the Centre of Economics and Business Research, the richest 10 per cent spend £1 on VAT for every £25 of their income whilst the poorest 10 per cent spend £1 for every £7 of income.
What does the future hold for consumers?
I see that the budget measures will slowly squeeze any disposable income from families and individuals and belts will have to be tightened. We are all in this together, however, and the cutbacks will affect the poorest through to the richest in somehow or another.
But there are some positives. Council tax is to be frozen for two years and Housing Benefit is to be pegged to a maximum of just under £21,000 per year, aimed at saving the Country £1.8 billion and in future will be linked to the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI). The threshold for those paying income tax has increased by £1,000 to £7,475 and is targeted to be at £10,000 by the end of this parliament.
The Citizens Advice Bureau is currently seeing just under 10,000 new debt cases every day and they will find out after the spending review on 20 October 2010, whether they are to receive a 25% or 33% cut in funding.
Great, debt help enquiries about to go through the roof and the service helpers are about to get smaller! So, if you happen to have any spare cash, you may want to think about buying shares in a debt management company, as that particular industry is going to be very busy over the next few years.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
Replaced as the official measure of inflation by the consumer prices index (CPI) in December 2003. Both the Retail Price Index and CPI are attempts to estimate inflation in the UK, but they come up with different values because there are slight differences in what goods and services they cover, and how they are calculated. Unlike the CPI, the RPI includes a measure of housing costs, such as mortgage interest payments, council tax, house depreciation and buildings insurance, so changes in the interest rates affect the RPI. If interest rates are cut, it will reduce mortgage interest payments, so the RPI will fall but not the CPI. The RPI is sometimes referred to as the “headline” rate of inflation and the CPI as the “underlying” rate.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
The Consumer Price Index is the official measure of inflation adopted by the government to set its target. When commentators refer to changes in inflation, they’re actually referring to the CPI. In the June 2010 Budget, Chancellor announced the government’s intention to also use the CPI for the price indexation of benefits, tax credits and public sector pensions from April 2011. (See also Retail Prices Index).