Tag Archives: unemployment

UK unemployment, VAT, consumer pressures and the banking sector

Unemployment in the UK increased by 35,000 in the three months to October to 2.5 million, the Office for National Statistics (ONS) has said. It is the first time that the jobless measure has risen for six months however 33,000 of the increase was in the public sector, raising the overall unemployment rate up to 7.9%. It has been assumed that the private sector will mitigate many, if not all, of all current and future losses now resulting from the full impact of public sector cuts………..but with UK retailers suffering, VAT rising in January and businesses holding on to cash rather than investing there is a fragility to the economic recovery.

Millions of families are struggling to pay their bills — and the number is likely to increase in the new year, according to analysis from the Bank of England. The report published this week shows that two fifths of households have difficulty from time to time or constantly in meeting their monthly bills, compared with a third last year, and more than half regard their overdrafts or credit cards as a burden.

More than three years after the start of the credit crunch, the Bank of England warns today that a lack of available credit “continues to be one of the main factors holding back the economic recovery” and repeat warnings about the size and concentration of Britain’s banking sector.

The Bank of England is forcing high street lenders to repay £185 bn of emergency loans in an attempt to avert a new market meltdown next year. Bank officials have recently held meetings with four major banking groups and the biggest building societies demanding that the loans, which were handed out at the peak of the financial crisis, be paid back sooner than planned. Analysts warn that the tough line could stop banks lending to small businesses and slow down Britain’s economic recovery.

The messages therefore for a UK economic recovery are not looking good for 2011.

UK coalition emergency budget – All Pain and No Gain?

The much awaited “austerity budget” is due on 22nd June and both individuals and business communities await the various instruments of torture to be applied to direct and indirect taxation, benefits and spending cuts. There will be a lot of pain but how much can the electorate stand, noting that even if the election had provided another result the same impact would have resulted in the attempts to repair the damaged economy.

Key issues – repayment of UK debt whilst keeping inflation down, (currently around 3.5%), and interest rates as low as possible, (base rate at 0.5% for 15 months), and growing the economy. 

The backdrop to achieving target reductions are;-

Public Sector Pensions – in the past these have been self balancing within a few million £ but the current deficit is about £4 billion per annum with this rising to £10bn by 2015. The questions are; – why the situation has been allowed to get “out of control”, why should the private sector subsidise this and the whole population suffer cuts in public spending and tax increases. It is understood that private sector pensions have been dealing with deficits and surpluses for many years, but Government has never addressed the issue or even appeared concerned.

Unemployment – officially 2.5 million but with another 8.2 million, (over 20% of the working age population) unable to or not wanting to work – with the former being a significantly higher proportion!! Tax increases mooted in VAT, CGT and benefit reductions may provide a temporary boost in spending prior to their introduction, but then there is the re-stagnation of the economy with unemployment likely to rise even more. 

Interest Rates – at 0.5% for over a year and in theory great for those able to borrow, (albeit that rates are well over the base rate), and remaining at this level possibly into 2011, but a pittance for savers.

Inflation – even if it falls to the 2% target, (currently 3.5%), this is well over the ability of many people to maintain real income, with pitiful savings rates and many in employment already suffering wage cuts or freezes.

The above shows some of the pain but with so much uncertainty for the consumer, business, the economy in general and the ongoing Eurozone debt crisis posing threats to UK growth prospects, there is no real sign of when the gains will be seen by the private individual or business community.

The latest set of indifferent UK economic statistics – Unemployment, Inflation and the Bank of England

The headlines are that unemployment has fallen again in February, by a whopping 3,000 and added to the fall of 7,000 in January is being highlighted as a sign that the things are getting better in the UK economy. The base on which the fall has taken place is around 2.5 million so the impact is really negligible. There are more serious issues behind the numbers such as; those receiving job seekers allowance rising by 23,500 to 1.64 million, and the consistently high figures of longer term unemployed. The hidden figures which are not counted are the “underemployed”, where employers have had to scale back hours in an effort to keep all their employees in work. The impact is lower take home incomes adding to the pressures on individual households and consequently lower consumer spending.

On the other hand, the head of the Bank of England, Mervyn King, had to officially write to the Chancellor again as inflation has risen to 3.5%, above the 2% Government target. Many expect this to be a temporary increase driven by factors such as the rise in VAT to 17.5% and higher fuel and transport costs.

Higher inflation and low interest rates – whilst good for those with mortgages and property in general is bad for consumers as the cost of living increases and the value of savings is eroded.