Tax increases will leave families pounds 600 worse off: Average levels of disposable income are set to fall, writes Martin Whitfield

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The Independent Online
THE average family will be more than pounds 600 a year or about pounds 12 a week worse off this month as a result of extra taxes imposed on income, fuel, transport, insurance, tobacco, drink and local services.

According to figures produced by leading accountant Ernst & Young, even those on household incomes of half the national average or pounds 12,000 a year, will see a tax rise of pounds 444 a year, or pounds 8.50 a week. Richer families will suffer proportionately less as many of the biggest tax increases come on indirect taxes, like VAT on domestic fuel or rises in road fund duty.

A family on pounds 45,000, for example, will pay an extra pounds 918 a year which represents two per cent of their earnings. For the family on pounds 12,000, the figure is 3.7 per cent.

Although many taxpayers are aware of the bad news to come, large numbers will not discover the true extent of the rises until they see pay slips at the end of the month and bills start arriving.

James Barty, senior UK economist at Morgan Grenfell, the merchant banker, said the taxes had to result in a slowdown in consumer spending. The tax rises, plus the likely rate of inflation, easily outweigh any predicted increase in wages for the next two years. Morgan Grenfell estimates that average disposable incomes will fall 1.7 per cent this year and 1.5 per cent next.

'Last year everything was going for the consumer,' Mr Barty said. 'Inflation was low and mortgage rates were going down. Consumer spending accounted for 90 per cent of all growth in the economy. Take that away and there is not much left unless other items pick up.'

Tight budgets in the next few months mean lower spending on traditional luxuries, such as eating out and the purchase of electrical goods. Private sales of new cars, recovering well from the dark days of recession, could also be vulnerable.

Signs of the slowdown started to show in the latest retail sales figures for February which fell by 0.5 per cent compared to a rise of 1.9 per cent in January. Annual growth has dropped to about 2 per cent compared to more than 2.5 per cent in the last three months of 1993.

Patrick Foley, chief economic adviser at Lloyds Bank, believes consumers have already changed their behaviour in the expectation of the tax rises and spending will not fall much further. 'People with mortgages have had a large rise in disposable income which far exceeds the effect of the tax increases,' he said.

Brian Pearce, chief economist of the Ernst & Young ITEM Club, the sole private sector operator of the Treasury economic model, believed that the tax rises had not yet been fully discounted by consumers.

But he saw some indication that business investment was growing to replace lower consumer activity although the position was still precarious. 'The recovery is fragile as it really depends on confidence in the business and consumer markets. Everybody is very nervous about the prospect of higher interest rates.'

Hitting the Treasury's growth rate target of about 2.5 per cent is vital for the Government or else further tax rises or cuts in public spending will be needed to keep public borrowing under control.

Such macro-economic niceties will seem a long way from the average taxpayer as they struggle with the family bill. 'Unless people think their income can be made up from elsewhere, they always cut out the luxuries,' said Mr Pearce.

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