I don’t think it’s controversial to say that spending cuts are on the way. In mid-September the Institute of Fiscal Studies (IFS) issued a press release regarding leaked spending cut plans. They stated “This would be the tightest squeeze in spending on public services since the UK was negotiating its spending plans with the International Monetary Fund in the late 1970s. The Treasury has said that the second half of the tightening could come either from further tax increases or from further spending cuts.”

Does it matter who’s in charge?

And it won’t matter which political party is in power at the time. “They’re not wrong to be planning cuts, they’re wrong to try to cover up their plans for cuts,” said Mr Cameron.

Will it stunt the recovery?

The worry is that fiscal tightening reduces the amount of money in people’s pockets, potentially increases unemployment and thus reduces consumption and worsens the recession. This would be compounded if other nations, in better fiscal health than ours, continue to stimulate their economies.

Borrowing costs

The issue is complicated by the fact that if UK plc starts to look like a bad credit risk then, just like everybody else, it will have to pay more to borrow money. Even a small increase in borrowing costs can have a huge effect on the total debt accrued.

So it’s a balancing act between being seen to borrow responsibly and not starving the economy at the worst possible time.

The winter of our discontent?

Are you, like me, old enough to remember the winter of discontent? At the time I was eating lunch from a Star Wars lunch box so I didn’t feel quite the same impact it had on adults. But still, I remember the closed down shops, drab peeling paint and strikes just as vividly as the water shortages and sunshine in the summer of ‘76.

Political hot potato

No political party wants to preside over such a state of affairs and it appears Labour want to paper over the cracks for as long as possible. If the Conservatives got in it might make sense for them to get it over with as quickly as possible while still in a position to blame it on the previous government. They have been making some of the right noises but predictably they are light on the details.

In the meantime, those of us who remember the 70s will be making sure that they take precautions to guard against the coming cuts and increased taxes. One precaution is not taking on debt you can’t afford to service and there’s evidence that, for whatever reason, debt is reducing.

This July, personal borrowing fell by £600m, taking the total owed by individuals down to £1.457 trillion. This is the first time the total amount of personal debt in the UK has fallen since records began in 1993. This dip is not just because of reduced mortgage activity but also includes other forms of debt such as bank loans.

The Bank of England stated “Weak consumer credit is consistent with the decline in household consumption this year, and trends seen in the previous recession.” Trends in Lending, September 2009. So we’re spending less but are we saving more? According to the Building Societies Association balances held in savings accounts at building societies fell £202 million in August 2009. That’ll be a ‘no’ then.

Potential tax increases

If government wanted to raise more money rather than just cut spending it might decide to make a few changes to existing taxes:

“By way of illustration, increasing i) the standard rate of VAT, ii) the basic rate of income tax or iii) the main rates of National Insurance Contributions for employees and the self-employed by 1p would each raise roughly £4½ billion or 0.3% of national income in 2011–12. Increasing the higher 40p income tax rate by 1p would raise roughly £1.4 billion. Freezing the income tax personal allowance in cash terms in 2011–12, 2012–13 and 2013–14 would raise roughly £3.7 billion if retail price inflation evolves as the Treasury has assumed in its Budget 2009 forecasts.” IFA Briefing Note BN87, 2009.

All the indications are that both spending cuts and tax increases are coming our way. It is crucial that we make proper preparations for these difficult economic circumstances.

I don’t think it’s controversial to say that spending cuts are on the way. In mid-September the Institute of Fiscal Studies (IFS) issued a press release regarding leaked spending cut plans. They stated:

“This would be the tightest squeeze in spending on public services since the UK was negotiating its spending plans with the International Monetary Fund in the late 1970s. The Treasury has said that the second half of the tightening could come either from further tax increases or from further spending cuts.”

Where will the cuts be? Housing and transport look like softer targets than the NHS...

Does it matter who’s in charge?

And it won’t matter which political party is in power at the time. “They’re not wrong to be planning cuts, they’re wrong to try to cover up their plans for cuts,” said Mr Cameron.

Will it stunt the recovery?

The worry is that fiscal tightening reduces the amount of money in people’s pockets, potentially increases unemployment and thus reduces consumption and worsens the recession. This would be compounded if other nations, in better fiscal health than ours, continue to stimulate their economies.

Borrowing costs

The issue is complicated by the fact that if UK plc starts to look like a bad credit risk then, just like everybody else, it will have to pay more to borrow money. Even a small increase in borrowing costs can have a huge effect on the total debt accrued.

So it’s a balancing act between being seen to borrow responsibly and not starving the economy at the worst possible time.

The winter of our discontent?

Are you, like me, old enough to remember the winter of discontent? At the time I was eating lunch from a Star Wars lunch box so I didn’t feel quite the same impact it had on adults. But still, I remember the closed down shops, drab peeling paint and strikes just as vividly as the water shortages and sunshine in the summer of ‘76.

Political hot potato

No political party wants to preside over such a state of affairs and it appears Labour want to paper over the cracks for as long as possible. If the Conservatives got in it might make sense for them to get it over with as quickly as possible while still in a position to blame it on the previous government.  They have been making the right noises but predictably they are light on the details.

In the meantime, those of us who remember the 70s will be making sure that they take precautions to guard against the coming cuts and increased taxes. One precaution is not taking on debt you can’t afford to service and there’s evidence that, for whatever reason, debt is reducing.

This July, personal borrowing fell by £600m, taking the total owed by individuals down to £1.457 trillion. This is the first time the total amount of personal debt in the UK has fallen since records began in 1993. This dip is not just because of reduced mortgage activity but also includes other forms of debt such as bank loans.

The Bank of England stated “Weak consumer credit is consistent with the decline in household consumption this year, and trends seen in the previous recession.” Trends in Lending, September 2009. So we’re spending less but are we saving more? According to the Building Societies Association balances held in savings accounts at building societies fell £202 million in August 2009. That’ll be a ‘no’ then.

Potential tax increases

If government wanted to raise more money rather than just cut spending it might decide to make a few changes to existing taxes:

“By way of illustration, increasing i) the standard rate of VAT, ii) the basic rate of income tax or iii) the main rates of National Insurance Contributions for employees and the self-employed by 1p would each raise roughly £4½ billion or 0.3% of national income in 2011–12. Increasing the higher 40p income tax rate by 1p would raise roughly £1.4 billion. Freezing the income tax personal allowance in cash terms in 2011–12, 2012–13 and 2013–14 would raise roughly £3.7 billion if retail price inflation evolves as the Treasury has assumed in its Budget 2009 forecasts.”

IFS Briefing Note BN87, 2009.

All the indications are that both spending cuts and tax increases are coming our way. It is crucial that we make proper preparations for these difficult economic circumstances.