Julian Knight: Your country needs you to spend, spend, spend. Don't

Your country needs you to spend when you should be saving.

Saving for what? Towards paying back those debts that most of us acquired over the past two decades of living beyond our means. I will explain why later.

When I think back on the past couple of years it really is rather amazing that we have got away with as much as we have. Iceland fell at the first puff of wind; Ireland's reckoning has now arrived, and Spain's looks on the cards. Yet in Britain, which has some of the highest personal debt levels in the world, and a public finance system wrecked by Gordon Brown and almost completely reliant on financial services, we are still able to borrow money at only a slightly higher rate of interest than the Germans – now restored to their rightful position as the gold standard in fiscal prudence and economic good sense. Unemployment is climbing again, but is nowhere near as bad as it could have been. As for the public sector cuts – despite the hysterical coverage in some quarters – their effect on the wider economy may prove transitory and, frankly, rather small.

The economy itself is growing at twice the level it was expected to and, despite the VAT rise in January, I can see this trend continuing into the summer.

If the economy is like Houdini performing one of his tricks, to date we have done little more than loosen the handcuffs; we have still to loosen the chains and escape the sack before the flame burns through the rope we're dangling from. I'd have given our chances of reaching this point without mishap as 50:50; but, from here on in, the odds of pulling off the whole trick are narrower still.

Inflation – rather than deflation, as so many mistakenly feared until quite recently – could spoil everything. The retail price index currently stands at around 5 per cent (best forget the CPI measure as this is irrelevant to anyone's real expenditure). Fears of job losses are keeping a cap on wage demands to such an extent that we haven't quite had a 1970s-style wage- price spiral. However, inflation is getting to such a point that it is eroding other assets and values. For instance, if I earn 0.5 per cent on my savings and don't receive a pay rise, yet inflation rises at 5 per cent, I am getting poorer very quickly. This erosion of assets and savings can only go on so long before an attempt (which has no guarantee of working) is made to squeeze this out of the system. The only method the Bank of England has to do this is higher interest rates, which is where all this economics starts to hit you and should dictate your thinking over the next year.

The Bank of England's financial stability report warned last week that seven million Britons are suffering "latent distress", in that they are close to the financial precipice. Any substantial rise in interest rates may either make them unable to meet their repayments or unable to move (because they couldn't possibly borrow to fund a new purchase because of the changed lending criteria that came in after the credit crunch).

What should they do? The only rational thing is to cut right back on spending, try to expand income as much as possible, and hurry to pay down debts, whether mortgage or otherwise; or, at the very least, build up a war chest against potential job loss and the economic shock of higher rates.

But this is the last thing policymakers want you to do. They want you to keep spending through the VAT rise and well into 2012. And what happens then? Well, you'll be on your own. They're just hoping the economy will be robust enough when the lenders start repossessing homes. "Your country needs you." My advice would be to ignore this call.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Arts and Entertainment
Ramsay Bolton in Game of Thrones
tvSeries 5, Episode 3 review
News
peoplePair enliven the Emirates bore-draw
Arts and Entertainment
tv
News
Britain's opposition Labour Party leader Ed Miliband (R) and Boris Johnson, mayor of London, talk on the Andrew Marr show in London April 26
General electionAndrew Marr forced to intervene as Boris and Miliband clash on TV
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

    £24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

    Ashdown Group: Business Analyst - Financial Services - City, London

    £50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

    SThree: Trainee Recruitment Consultant

    £18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

    Day In a Page

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

    How a costume drama became a Sunday night staple
    Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

    Miliband promises no stamp duty for first-time buyers

    Labour leader pushes Tories on housing
    Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

    Aviation history is littered with grand failures

    But what went wrong with the SuperJumbo?
    Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

    Fortress Europe?

    Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
    Never mind what you're wearing, it's what you're reclining on

    Never mind what you're wearing

    It's what you're reclining on that matters
    General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

    Chuka Umunna: A virus of racism runs through Ukip

    The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
    Yemen crisis: This exotic war will soon become Europe's problem

    Yemen's exotic war will soon affect Europe

    Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
    Marginal Streets project aims to document voters in the run-up to the General Election

    Marginal Streets project documents voters

    Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
    Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

    The real-life kingdom of Westeros

    Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
    How to survive a social-media mauling, by the tough women of Twitter

    How to survive a Twitter mauling

    Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
    Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

    At dawn, the young remember the young

    A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

    Follow the money as never before

    Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
    Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

    Samuel West interview

    The actor and director on austerity, unionisation, and not mentioning his famous parents
    General Election 2015: Imagine if the leading political parties were fashion labels

    Imagine if the leading political parties were fashion labels

    Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

    The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence