Cuts Could Wipe £1,500 A Year Off Family Finances

Families could be £1,500 worse off every year for the next five years because of Government austerity measures, according to an International Monetary Fund report.

Higher taxes and lower benefits introduced as part of the attempt to slash the national debt will leave households with £35billion less disposable income between them, calculations reveal.

In another blow, the sluggish property market would wipe off more than a tenth of homeowners’ wealth in real terms by 2016, the IMF said.

This devastation to household finances could weigh on the economy's recovery for years, it added, as consumers will have less money to spend on the high street.

It will contribute to a ‘bumpy and uneven recovery’ and ministers must be ready to change economic policy if growth is not as strong as they hope, the report said.

Tax cuts may be necessary

The bleak forecast comes after figures showed the economy grew by just 0.2 per cent in the second three months of the year. As a result, Chancellor George Osborne has come under pressure from the Prime Minister to come up with new ways to kick-start the economy.

Although the IMF said Government cuts had ‘significantly reduced the risk’ of a sovereign debt crisis, it warned cutting tax might be necessary if the rate of economic growth did not improve. It also said the impact of the cuts on households would be significant.

A combination of pressures – such as VAT hikes and higher rate taxpayers losing child benefit payments from 2013 – could have a significant effect on the amount households will be able to save, the IMF warned.

Its report said: ‘The fiscal consolidation will reduce the saving rate by about 3½ percentage points [of disposable income] by 2016.’ With total disposable income at £974billion last year, this estimation puts the cost at around £35billion a year – shared between Britain’s 26million households.

The report also warned that slow-moving house prices would knock 12 per cent off families’ ‘tangible’ wealth over the next five years.
It added that the high rate of inflation and rises in food and energy costs could also threaten recovery.

Bumpy and uneven recovery

Damaged household finances could affect the recovery for years, as consumers will have less to spend. As a result, the IMF is predicting growth this year of 1.5 per cent – at odds with official forecasts of 1.7 per cent.

This weaker than expected growth might mean the Government has to cut tax to stimulate demand, while the Bank of England launches a fresh round of quantitative easing – effectively printing money – the report said.

'The IMF is expecting a bumpy and uneven recovery in the UK... Over the medium term, we expect growth to accelerate gradually to about 2.5 per cent [in 2012].' - Ajai Chopra, deputy director of the IMF's European Department

Ajai Chopra, deputy director of the IMF’s European Department, said the most likely scenario is gradual recovery, with continued problems thanks to the sluggish housing market, Government belt-tightening and businesses and individuals paying off their debts.
But he also said that another possible scenario could see ‘a prolonged period of weak growth, high unemployment, and subdued inflation’.

He said: ‘Currently, we don’t expect this scenario to happen. But if such a scenario appears to be in prospect, we recommend responding quickly with some combination of further quantitative easing by the Bank of England and temporary tax cuts.’
He added: ‘The IMF is expecting a bumpy and uneven recovery in the UK... Over the medium term, we expect growth to accelerate gradually to about 2.5 per cent [in 2012].

‘But volatile commodity prices, the uncertain magnitude of fiscal headwinds, and problems in the eurozone have added a lot of uncertainty to this outlook. It’s not easy to steer a clear course in such circumstances.’

A separate report yesterday showed that the previously strong manufacturing sector slammed into reverse in July, with output from British factories falling for the first time in two years.




(Source Shropshire Star)