Leading article: Welcome to 2011: a year of living frugally

Saturday 01 January 2011 01:00

In his New Year's message David Cameron warns that a lot of economic "heavy lifting" will take place in 2011.

The Prime Minister is right about that. And ordinary households will take on most of the burden. A great deal remains uncertain about the economic outlook over the next 12 months. But one thing of which we can be sure is that 2011 will see the cost of living rise significantly.

VAT will go up to 20 per cent from Tuesday. This will mean an increase on already record petrol prices. Domestic fuel will remain taxed at 5 per cent, but thanks to the profiteering of the large power firms and the severity of the winter, many families will get an unpleasant surprise when they receive their next energy bills all the same. Public transport will become more expensive too. Train fares will increase from this month by an average of 6 per cent.

Most incomes will not keep pace with outgoings. Wages are likely to be stagnant, kept down by the looming threat of redundancy. And National Insurance contributions for employees will increase from April. There could be worse to come. Inflation remains above the Bank of England's 2 per cent target thanks to the rising cost of food and oil imports. And the general price level will rise higher still due to the VAT increase. If the Bank's Monetary Policy Committee decides that inflation is getting out of hand, it could raise interest rates. If this happens, private banks will increase their mortgage rates, further squeezing household incomes.

As we report today, a new poll suggests the British public is pessimistic about 2011. This hardly suggests that consumer confidence is about to come flooding back. And indeed it is doubtful whether it would be desirable for consumers to start spending freely again. The public have paid off mortgage and credit card debt in 2010, rather than spending it in the shops. This is sensible considering the excessive levels of debt many households accumulated in the years leading up to the recession.

The problem is that the state is joining in with the fiscal retrenchment. George Osborne's emergency Budget in June announced that there will be £22bn in spending cuts in the coming financial year (and some £80bn over the course of the Parliament). If private households are not spending, the state is cutting its expenditure and our trading partners in Europe are retrenching too, it remains a mystery as to where the demand that our economy needs to grow will come from.

The Labour leader, Ed Miliband, is correct that 2011 will be a year of economic consequences. These will be the consequences of decisions taken by the Coalition Government on dealing with the deficit. If Labour had formed a government after last year's general election it is true there would still have been spending cuts and tax rises. But the Coalition has chosen to eliminate the biggest deficit in post-war history over just five years and explicitly ruled out the idea of a contingency plan should the recovery stumble.

Moreover, the VAT rise, the raising of the cap on rail fare increases and the potentially destabilising pace of the spending cuts are decisions for which the Coalition cannot slough off responsibility. By the end of this year we will have a clearer idea of just how much of Mr Cameron's heavy lifting this country can, or is willing to, bear.

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