Why your tax bill could be rising for decades
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Associate Editor
David Stevenson Jan 30, 2009
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Forget the economic slump. The only real problem with Britain today is that people like you don't understand what's going on. At least, that's the theory in some parts of the Labour party, it seems.
The Independent reported this week it had been told by a "senior ally" of Gordon Brown that the Prime Minister "needs to use simpler language to explain the measures we are taking." Apparently phrases like 'global recession' are "too much jargon" for the electorate to grasp.
Instead, according to the source, Mr Brown "needs to say – 'We're facing problems. The whole world is facing problems. But we're helping to sort it out.' The average man is not going to understand our message if it contains too much economics".
Now we suspect that the average man has a pretty good idea of what's going on – the slump in Mr Brown's popularity demonstrates that only too well.
But just in case you were still unclear, let's take a closer look at just how much trouble we're in…
Many more job losses are still to come - is any sector safe?
If the government thinks its problems are simply down to communication, it's clearly in denial. However Gordon Brown tries to play down the mess we're in, or to play up his "solutions", there's no shortage of voices this week warning about how bad it's going to get in Britain.
The International Monetary Fund (IMF) expects the UK will be hit harder by the downturn than any other developed nation. It now sees Britain's economy shrinking by almost 3% this year, more than twice as much as it previously thought.
And that means more job losses – we can expect at least 1.5m more jobs to be cut over the next few years, on top of the 50,000 that have already gone this year.
So which sectors are most vulnerable? There's retail of course, as we said yesterday (Don't be fooled - commercial property is no bargain) - the CEBR expects up to 135,000 positions will be cut in 2009. Then there's financial services, where Capital Economics has forecast 100,000 job losses. And the Federation of Master Builders sees 90,000 construction redundancies in the next six months alone.
If you're wondering which posts will be safest, Yahoo Finance thinks it's come up with the top 10 (The ten safest jobs in a recession). Unsurprisingly, the public sector features highly. Top of the pops comes teaching, with working in the NHS next. Strangely enough, the insolvency profession doesn't appear… yet.
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We'll still be paying for this in 20 years' time
But the public sector may face more of a squeeze than you might expect. Because Mr Brown and Alistair Darling's attempts to "sort out" the financial crisis are going to land us with a bill that we'll still be paying in 20 years' time. And that means we'll be seeing spending cuts and tax rises for decades to come.
The Institute of Fiscal Studies (IFS) reports that even if the Chancellor sticks to his November Pre-Budget Report plans (and that's by no means certain), it's going to take over two decades for the country's annual budget deficit to drop back to 'pre-crisis' levels.
Further, a massive £20bn a year 'black hole' has already appeared in the November numbers because of the "double whammy" of lower-than-expected revenue (lower stamp duty on properties for example) and higher payouts (more unemployment benefit).
What does that actually mean?
Well, it's so bad, it's actually quite hard to take in. The Treasury already expects Britain's budget deficit to climb to 9% of GDP next year – the highest of any major country – with overall national debt topping £1.1 trillion by 2014. To put that into context, it's 70% of the total amount we produce as a nation each year – the highest level seen outside wartime.
And remember those are the official forecasts – so it could easily turn out to be much worse. And the eventual shortfall will have to be made up somehow.
We've already been warned that taxes must rise in two years' time, and also that spending will have to be slashed. Now, says the IFS, the government will need to do much more of both to make the books more balanced.
So just at the point when most people are hoping we'll be starting to escape from recession, the private sector will be battered by higher taxes, ensuring any recovery will be sluggish.
Why you should avoid gilts
Further, the government will have to try to borrow a lot more than it was planning in the global bond markets. Note the word "try". Because the OECD is now cautioning that Gordon Brown & Co. will find that very tough. "When you're dealing with numbers that big", says OECD secretary-general Angel Gurria, "there has to be a credible policy in place so people can see fiscal stimulus package money being paid back after the crisis. The markets are going to set a limit to all this borrowing and they're not going to wait a long time".
In other words, there's a risk of a "gilts strike", says The Telegraph's Ambrose Evans-Pritchard. That would mean Britain having to pay more in interest payments on the bonds it issues to raise the cash it needs. Which means the yield on UK government bonds will have to rise. And when yields rise, prices fall – so don't buy gilts.
Is there anything you can invest in? Well, we've taken a look at some relatively low-risk ways to earn a decent return on your money while the economy is on the slide in the latest issue of MoneyWeek (out today – you can get your first three issues free here.)
But a higher priority should be to ensure you have an 'emergency fund' of at least three months' savings – and preferably more – built up. Like it or not, job security will be the big issue for the coming year. Of course, you could always cross your fingers and hope that the Government's attempts to 'save' the economy will work, but we'd rather have a safety cushion ready – just in case.
Our recommended article for today
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