Families to be £1,500 a year worse off, IMF warns
Households will be left £1,500 a year worse off for the next five years due to a combination of higher taxes and lower benefits introduced as part of the Government’s austerity drive, the International Monetary Fund warned yesterday.
Households will be left £1,500 a year worse off for the next five years Photo: GETTY IMAGES
In a comprehensive analysis of the state of the British economy, the economic watchdog said that, between them, families would have £35 billion less disposable income due to the Government’s attempts to tackle the deficit. In addition, a fall in the value of houses would wipe off more than a tenth of their “tangible” wealth in real terms by 2016, the IMF said in its report.
The forecast for household finances came amid a growing political row about recent slow growth. George Osborne has come under pressure from David Cameron to come up with new ways to stimulate the economy.
The IMF reiterated its support for the Government’s programme of cuts, which it said had “significantly reduced the risk” of a sovereign debt crisis. However, it warned that tax reductions might be necessary if the rate of economic growth did not improve. And although it said the Government had made the right decisions to tackle the deficit, the impact on households would be significant.
Consumers have already been hit with an increase in VAT from 17.5 per cent to 20 per cent, while families lost £550 million a year from the abolition of the Child Trust Fund. In addition, higher rate taxpayers are due to lose their child benefit from 2013.
This would have a substantial effect on the amount households could save, the IMF said.
“The fiscal consolidation will reduce the saving rate by about 3½ percentage points [of disposable income] by 2016,” the report said.
As total disposable income last year was £974 billion, the IMF estimated that the cost would be roughly £35 billion annually – shared between Britain’s 26 million households.
Alongside the squeeze on savings, it said near-static house prices until 2016 would knock 12 per cent off families’ “tangible” wealth in real terms as the value of property fell in comparison to home owners’ income.
The damage to household finances would weigh on the recovery for years, it warned, as consumers had less money to spend on the high street. Due largely to the weakness of consumer spending, the IMF is predicting growth this year of 1.5 per cent — against official forecasts of 1.7 per cent.
The report also warned that the British economy remained vulnerable to instability in the eurozone due to banks’ exposure to debt-stricken countries such as Greece and because the turmoil threatened trade between Britain and the European Union. The high rate of inflation — forecast to hit 5 per cent by the end of the year — and unexpected rises in the price of food and energy also had the potential to threaten the recovery, it said.
Ajai Chopra, the IMF’s mission chief to the UK, reiterated that the Government would have to cut taxes or otherwise ease policy if the economy suffered one or two more quarters of weak growth.
Last week figures showed the economy grew by just 0.2 per cent in the second three months of the year, following six months of poor results.
“It is clear that the recovery has stalled over the last three quarters,” he said. Although he stressed that the IMF believed that the current weakness was “temporary”, he added: “We do expect growth to pick up in the coming quarters.”
If it does not, the report argued, “it will be important to ensure that the slowdown does not become entrenched”, suggesting a combination of temporary tax cuts and an expansion of the Bank’s quantitative easing policy.
The scale of household debt remained a threat to the recovery, it added, warning that the Bank of England would have to raise interest rates “gradually” due to the “potentially large effects of higher interest rates on growth”.
“In particular, growth remains vulnerable to a steep drop in house prices, which in turn are highly sensitive to short-term interest rates,” said the Article IV notice, the IMF’s annual “health check” on the economy.
“With household debt levels still elevated by historical standards, rapid interest rate hikes could also cut directly into households’ disposable income.”
The market is not expecting the Bank to begin lifting rates from their current 0.5 per cent historic low until February at the earliest.
Mr Osborne has faced repeated calls recently to cut the 50p rate of tax. However, Danny Alexander, the Chief Secretary to the Treasury, described such a move as “cloud cuckoo land”.
Ed Balls, the shadow chancellor, has even proposed cutting VAT, a policy that would cost the Treasury more than £12 billion a year.
The IMF’s comments came alongside fresh evidence that the recovery was stalling.
Manufacturing activity contracted in July for the first time in two years, according to the Purchasing Managers’ Index, which is closely watched.
It prompted economists to warn that growth this year may be as low as 1 per cent.
Despite its concerns, the IMF again threw its weight behind the Government’s austerity measures.
“The weakness in growth and rise in inflation raises the question whether it is time to adjust macroeconomic policies. The answer is no,” it said.
“Recovery from the financial crisis is under way, but is bumpy and incomplete … Fiscal headwinds will continue.”
Vicky Redwood, senior UK economist at Capital Economics, the research consultants, said the analysis demonstrated that “households are in for a tough five years if not more”.
“It’s payback time for the high spending of the past decade,” she said. “It’s going to be a prolonged period of nastiness for households.”
Tuesday, 2 August 2011
Families to be £1,500 a year worse off, IMF warns - Telegraph
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