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The missing middle

It appears that our economic future relies on the less well-off spending us out of recession.

Middle England and the aspirational classes, faced with a massive increase in their income tax liability from 2011, are not going to do it.

They will use the significant savings they are making on their recently reduced mortgage rates to save for this increase rather than enjoy the minimal benefits of a 2.5 per cent reduction in VAT to shop till they drop.

The Government clearly feels that only those who are less well-off will kickstart the economy and so the whole balance of the pre-Budget report is focused on them.

The lower-paid are not exposed to significant further tax increases so will be happy to take advantage of the 2.5 per cent VAT cut as the small cost benefit that this and several other minor factors such as the deferral of car tax rises are far more material to this sector of the economy.

They are also likely to borrow to fund their spending in the short term. A proportion will get into further debt problems, hence the need for a further 15m funding for debt advice, while the money guidance pathfinder will come too late for them.

The best part of the PBR is the funding for small business, notably through the deferral of tax payments, which should at least help stem redundancies.

For the lower-paid homeowners who keep their jobs, the boost from lower interest rates will, the Government hopes, be channelled back into spending.

Even the help for borrowers losing their jobs is focused at this end, notably the maintenance of support at current interest rates for existing claimants which may bring relief for those in this category with non-conforming loans and higher interest rates.

As a stimulus to the economy, to consumer confidence and thus the housing market, this fiscal package, which is more threat than promise, fails the test. It is too early to tell whether the 2 per cent drop in bank rate will do the trick but, in housing terms, further cuts are of little consequence due to the floors in many tracker products.

Perhaps the next initiative from Government-supported banks will be for HBOS to show the way to the rest of the market by ignoring the floor. After all, dropping interest rates puts spending power into the economy with no cost to the Government.


Back to basic

A few weeks ago, in the wake of my column on the issue of whether Skandia ought to be allowed to join Aifa, I got two emails. One was from the redoubtable Harry Katz, at Norwest Consultants, who took me to task for my negative comment and said Skandia has merely joined Aifa an “associate member”.

Pru Protect boom after premium cuts

IFA quote activity and applications for Pru Protect’s life cover, serious illness cover and income protection has trebled since it announced product enhancements last week.


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