Deep in debt but borrowing cheap - where will it all end?

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Today, a veritable army of high and middle earners in the UK will find that the pound in their pocket is worth a penny less as the first explicit tax rise of the Chancellor's reign starts having an effect.

Today, a veritable army of high and middle earners in the UK will find that the pound in their pocket is worth a penny less as the first explicit tax rise of the Chancellor's reign starts having an effect.

The increase in National Insurance, announced a year ago, has been the bogey man of the British economy – if you believe some of the City's more bearish cassandras. They argue that taking money away from people who might spend it is hardly the right thing to do when we're teetering on the edge of recession. Look at the dreadful manufacturing figures. Look at the gloom descending on the high street. Look at the slowing housing market. The last thing we need is a tax rise.

The question, though, is how much less wealthy do people feel today than yesterday?

When they get their monthly salary cheques, Britain's wage-earners might see that there's less in the pot. But, on the other hand, anyone with a mortgage is much better off than they were a year ago, thanks to interest rates falling to their lowest level for nearly half a century.

Britons have never been more in debt, owing an average of nearly £40,000 per family, so keeping rates down (something the Chancellor chose to give up the power to do) is probably more important than keeping taxes low.

What also decides how consumers behave is how wealthy they feel. Falling stock markets hit you in the ISA, deflate your endowment and give you a sock in the pension fund. Anyone who pays attention to what is going on in the City will be feeling edgy.

The most important factor is house prices. Nowhere in the Western world do people have a greater exposure to property than in the UK. So the apparently inexorable rise in the value of our homes has made us feel that bit richer and more willing to spend. Now, however, everyone is talking about falling house prices. Will we feel poorer?

Not if you believe the latest stats from two of the UK's biggest mortgage lenders – Nationwide Building Society said house prices went up 1.9 per cent last month, and Halifax was only slightly less bullish, saying prices rose 1.1 per cent.

Of course, there are pockets where prices fell – typically the more affluent parts of London. Which, as it happens, is precisely where most of the gloomy City economists and newspaper columnists have chosen to live.

The Courtney/Wilson family

Who: Clare Courtney, 24, partner Christian Wilson, 27, and their two children Luke, 21 months, and Georgina, four months.

Home: Two-bed semi, Wolverhampton.

Jobs: Christian is a telecommunications engineer and Clare is a housewife.

Earnings: Christian – around £19,000 a year.

Mortgage: About £50,000 (£355 a month).

Council tax: £61 a month.

Food and clothes: £500 a month.

Leisure: Nil.

Pension: £70 a month.

Childcare: Nil.

Bills: £100 a month.

Travel: £50 a month on petrol, £117 a year on classic car insurance for an old Porsche 924.

Tax credits: Worth £6 a month.

Child benefit: Get £103 for the two children.

Politics: Voted Labour in 2001. Thinking of switching to the Conservatives at the next general election.

Clare's hopes: "Paying benefits to women is going to work better. If it was paid to him, I have no independence. Making it payable to me makes me feel a bit more important. It's like getting a wage for being a housewife."

Clare's fears: "It's hard and we struggle some months. People need to start earning more money before they start putting taxes up. Everything's on the increase – even prices in the supermarket – and they just want to take more and more money."

The expert's view: The low-income family will be £21.14 a week – or £1,099.43 a year – better off from this week. Christian will get quite a shock when he receives his next pay packet, however, as the Children's Tax Credit, which was worth £1,049 in 2002/3, due to the new baby, is removed. This is being replaced by the Child Tax Credit, which will be paid directly to the main carer's bank account, in this case Clare's. The family will receive £43.98 a week or £2,287.35 a year under the new Child Tax Credit.

Christian will be affected by the increase in National Insurance contributions. He will be paying an extra £2.76 a week or £143.72 a year. However, the assumed change in the starting-rate tax band from £1,920 to £1,960, means £40 will be taxed at a rate 12 per cent lower, saving £4.80. The couple will also see an increase in child benefit from £26.30 per week to £26.80 per week.

Mike Warburton, senior tax partner at accountancy firm Grant Thornton, says the Chancellor's changes have fallen in a pattern over the years. "He has hit middle-income people hard, but people at the bottom end, with children, have actually done quite well. This is the case here, with this family doing rather well out of the new Child Tax Credit."

Clare's reaction: "Brilliant. Every little helps, definitely. It may not sound like a lot, but it's like £80 a month. That will go a long way. We live by a tight budget anyway. That much extra each month is brilliant."

Jo Dillon

The Stone/Star family

Who: Richard Stone, 26, and his fiancée Fiona Star, 27, both originally from Stafford.

Home: Two-bedroom rented flat in Sydenham, south London. About to move to another two-bed flat in nearby Forest Hill, where they will be paying their first mortgage.

Jobs: Richard is a business development manager at a technology PR company, and Fiona is a nursery nurse.

Earnings: Joint income of £55,000-£60,000 a year, split roughly 50/50.

Mortgage: Currently paying £750 rent a month. New flat has a mortgage of £142,000. They'll pay around £850 a month.

Council tax: About £70 a month.

Food and clothes: £300 a month.

Leisure: £600 a month.

Pension: Richard pays £100 a month. Fiona doesn't have a pension.

Bills: £250 a month.

Travel: Around £230 a month car costs.

Politics: Voted Labour in 2001. Undecided on next general election.

Richard's hopes: I'd like to be able to increase my pension contributions, and save more. Meeting our new mortgage repayments will become a priority. The big hope for the future is to have enough money for Fiona to establish her own nursery.

Richard's fears: "The biggest fear would be the repercussions of another recession. Fiona and I don't worry about how we are going to pay our bills on a monthly basis – it all goes out via direct debit. We are more concerned with future expenses – long-term goals like increasing pension contributions and getting money for our house."

The expert's view: The couple each earn around £30,000 a year, so they will find themselves worse off by £9.57 a week, or £497.84 a year. They are estimated to save £4.80 each in tax (if the bands are changed as expected). But that small saving will be more than cancelled out by the extra 1 per cent in National Insurance contributions on £25,372 of their income. This will cost each of them an extra £253.72 a year.

"Those who fall in the middle-income bracket don't get the new tax credits, but are hit hard by the higher National Insurance contributions," says Grant Thornton's Mr Warburton. "They also earn too much to qualify for the Working Tax Credit because that doesn't go up to reasonably high income levels – unlike the Child Tax Credit."

Richard's reaction: "I'm not that stunned by the figures. The rise in taxes is not that massively out of line with increases in salaries. At the end of the day, we can't influence government economic policy. If taxes are being raised to pay for positive things like education, then I'm in favour of it. If the increases are to fund things I consider negative – like the defence budget – that would affect my vote at the next election."

Jonathan Thompson