The phoney war is over. From today, with the start of the new tax year, many of the cuts required by George Osborne and his Coalition partners will kick in. But so, too, will changes in tax which will mean that this is the moment when people begin to feel the squeeze in earnest – not least the 600,000 people who will find themselves moved into the higher 40p rate of income tax for the first time. Most of the workforce will see their National Insurance rise, though around a third of poorer workers will see it fall. More families will now be in line to lose their child benefit too when that goes in two years' time.
How will people manage? By borrowing more, or so the Chancellor intends. He has not publicly said so, but dig down into the detailed figures of the Budget and that is what you find. The expectation is that average household debt – which includes mortgages and credit cards – will rise to £77,000 by 2015, according to official figures. That is a massive rise over the last prediction of £66,291. It means that, as tax increases and public spending cuts hit, they will so squeeze disposable incomes that families will be forced to take on more and more debt in an attempt to maintain their living standards.
In effect this means that – for all his talk of being a debt-slashing Chancellor – Mr Osborne is shifting debt from the Government's books on to private households. If we don't borrow more, the economy, and the prospects of a recovery in growth, will take a hammering. Yet this exposes a contradiction at the heart of Mr Osborne's thinking. For consumer confidence – which has already been hit hard by the increase in VAT – will be further undermined by tax rises and spending cuts.
Rising inflation could make matters worse, by threatening interest rate rises which will also push up the cost of mortgages. Higher unemployment and slower growth would mean that the Government would have to borrow more. A vicious circle looms. And the idea that people will keep spending and take on yet more debt – thus maintining economic growth and bringing unemployment down – looks increasingly fanciful. The need for a Plan B is greater than ever before.Reuse content