When the last raven leaves the Tower of London and it is time to engrave an epitaph on the nation’s headstone, there is no doubt what it will say: “Britain: the country that liked to spend now and pay later.”

Today’s pre-budget report is all about the government’s attempt to exploit this deep-rooted character trait. Assuming the nudges and winks from Whitehall are correct, VAT will be cut to entice consumers back into the shops for a pre-Christmas spending splurge. The theory is that behaviour will be driven more by lower prices today than by the threat of higher taxes at some point in the future. On past form, that looks a reasonable bet.

This is not the pre-budget report that was envisaged three months ago, but since the summer the skies have darkened. The financial crisis has led to the first synchronised global recession since the early 1980s and to the threat of the triple-zero economy.

Growth rates are turning negative and that will drag down the inflation rate. It is likely that the cost of living in Britain, as measured by the retail prices index, will fall next year as a result of lower interest rates and tumbling commodity prices. It will take longer for the consumer prices index yardstick of inflation to decline because it doesn’t include housing costs, but there is a chance that it too will drop below zero in 2010.

As far as the modern age is concerned, this is uncharted waters for Britain. Periods of deflation were common up until the second world war, but for the past 70 years policymakers have not had to contemplate what the impact of falling inflation would be on a nation mortgaged up to the eyeballs. It is not an alluring prospect, because deflation increases the real value of a debt.

Should sub-zero growth lead to sub-zero inflation, the pressure will be on the Bank of England to cut interest rates as close to zero as possible. Lower VAT will add to that pressure since it will cut prices in the shops. Clearly, it is impossible for bank rates to fall below zero, but there is no reason why they should not be reduced to 0.5% next year, should the deflationary threat materialise. Japan already has rates below 0.5% and the US is heading in that direction.

Policymakers in Tokyo have had experience of dealing with the triple-zero economy (zero growth, interest rates and inflation) but their counterparts in the west have not. The go-for-broke nature of the pre-budget report is indicative of the mood of desperation: all the conventional policy responses have been tried and, so far, failed. Episodes of severe dislocation go through five distinct phases: bubble years, when everybody assumes the good times go on for ever; the denial stage, when it is assumed any problem from the bursting bubble will be localised; the acceptance phase, when policymakers finally realise they have a real problem on their hands; the panic stage, where nothing seems to work; and the recovery phase, when the cycle eventually starts to turn. We entered the panic phase in mid-September and, to be frank, the recovery phase still looks a long way off.

US housing crisis

This is not surprising, given the scale of the economic shock caused by the deflation of the biggest housing bubble in the US’s history. Banks used leverage (borrowing to invest) to inflate their profits in the boom and are now deleveraging in the bust. Credit flows have dried up and the impact is working its way down from retailers to manufacturers. Even dramatic initiatives, such as October’s recapitalisation of the banks had only a temporary effect on sentiment.

The assumption is that eventually policymakers will hit on the right policy, or the right combination of policies, and that all will be well. But maybe they won’t. And maybe all of us need to be a little more honest with ourselves. To be sure, it was daft of former US federal reserve chairman Alan Greenspan to try to mitigate the effects of one burst bubble by creating another one. Yes, the Bank of England has made a pig’s ear of setting interest rates, but ultimately it is not just policymakers who have questions to answer, but every one of us. All of us (or nearly all of us) are to blame.

Banks may have aggressively marketed debt in the boom years, but nobody was actually forced to take out loans at gunpoint. It was a choice. Consumers did not have to rack up credit card debts on trinkets they did not really need. One of the better soundbites trotted out by the Conservatives is that Gordon Brown has maxed out on one credit card and is now starting another one. This resonates with the public because they know it is true and feel shame-faced. The wise thing for debtors to have done in the period when the economy was growing was to pay off their credit cards and reduce their mortgages. Taking their cue from the government, which kept on borrowing heavily even at the top of the boom, consumers got deeper into debt.

What the world is going through now is a gigantic bout of cold turkey as it works off the excesses of the bubble years. Debt was like a drug: bigger doses were needed to get the same buzz. It was a time of binge consumerism and rocketing house prices, and it could not go on. This is true on two levels. It is true for individuals, who found they could not cope with ever-higher debt and true for the planet, which will be on a one-way ticket to nowhere if the policymakers succeed in recreating the bubble mentality that existed up until 18 months ago.

Today’s pre-budget report is an opportunity for the government to chart a different course. In the short term, the priority is to get through the economic emergency: to slow down the increase in unemployment, to prevent small businesses going bust and to keep people in their homes. But with consumers in rehab as they seek to wean themselves off their debt habit, tax cuts - even assuming they work - will prove to be the equivalent of giving the junkie another fix unless the chancellor, Alistair Darling, takes the opportunity to look beyond the short term and lay the foundations for a saner economy.

Forward planning

The real point of the pre-budget report should be to make Britain more sustainable, through a period of low interest rates and controls on consumer credit that will encourage heavy investment in energy efficiency and renewables rather than another mindless spending spree.

To be fair, Darling has never sought to minimise the scale of the crisis. He has treated the electorate as grown-ups and deserves credit for insisting that Britain has to live within its means. He will now leave consumers in little doubt that today’s tax cuts are tomorrow’s tax increases. But living within our means does not just mean getting the nation’s overdraft back to a reasonable level; it means re-thinking whether shop-until-you-drop, live-now-pay-never consumerism is entirely appropriate for our personal finances, for our wellbeing and for the future of the planet.

Article courtesy of guardian.com…

The Conservatives have warned that Gordon Brown could precipitate a “collapse of sterling” through excessive borrowing, in an apparent breach of the convention that senior politicians avoid talking down the pound.

George Osborne, the shadow chancellor, said the weight of debt being created by the government would slow the eventual economic recovery, as well as damage the currency.

“Sterling has devalued rapidly against the euro and the dollar. We are in danger, if the government is not careful, of having a proper sterling collapse, a run on the pound,” he said in an interview in today’s Times.

“The danger of a run on the pound . . . is that it pushes up long-term interest rates, which is a huge burden on the economy. The more you borrow as a government the more you have to sell that debt and the less attractive your currency seems.”

The shadow chancellor accused the prime minister of a deliberate “scorched-earth policy”, racking up debts that would intensify the economic pressures on an incoming Conservative government. “His view is he probably won’t win the next election. The Tories can clear this mess up after I’ve gone. That is deeply irresponsible,” said Mr Osborne. “It’s a scorched-earth policy, which I think the history books will write up as a total disaster and which the public will see through between now and the election.”

The Tories would continue to oppose unfunded tax cuts, he said. This stance has created the potential political problem for the Conservatives, historically advocates of lower taxes, of being the only main party to oppose the tax cuts that Alistair Darling, the chancellor, is expected to unveil in the pre-Budget report a week on Monday.

But Mr Osborne appeared in the interview to be trying to create some room for manoeuvre in his response to the government announcement. While stressing that “what we are in favour of is funded tax cuts”, he added: “I’m not going to prejudge the pre-Budget report. I’m going to wait and see what he has to say.”

The shadow chancellor, who has come under fire from within his own party for his perceived mishandling of the economic downturn as well as his socialising with a Russian oligarch this summer, suggested he was confident of keeping his job. “David Cameron decides who is in the shadow cabinet and what jobs we do. But we are working very closely together on economic policy not just for now, but for the election to come.”

Some of the internal criticisms of Mr Osborne have stemmed from his perceived distance from backbench Tory MPs. But he said his “door is completely open” to anyone in the party who wanted to talk to him.

Article courtesy of ft.com…

WITH household budgets suffocating and Christmas approaching, more shoppers look certain to take advantage of store cards to boost their seasonal spending.
But many cards charge high rates of interest and consumers have been warned that a short-term Christmas shopping fix might exacerbate long-term debt problems.

Store cards are effectively credit cards that can be used only for one store or brand, as opposed to credit cards issued by stores such as Marks & Spencer and Asda that can be used anywhere.

They are used by over 16 million shoppers in Britain, according to the most recent research by comparison site uSwitch.com, which found that users collectively owe £2.17 billion on store cards.

Many shoppers are lured by the discounts on offer for taking one out at the point of sale, usually 10 per cent or so off the item being bought at the time. For many, however, those discounts are wiped out by excessive interest rates of up to 30 per cent APR (annual percentage rate).

Three years ago, a Competition Commission inquiry estimated that store card users were being overcharged to the tune of £100 million. As a result, it forced companies with interest rates of 25 per cent or more to warn customers there were cheaper ways to borrow and to spell out the consequences of only making the minimum payment.

This initially led to a fall in interest rates, but a host of store cards continue to levy charges of more than 25 per cent.

With Christmas around the corner and stores desperate for revenue, some rates have already increased, according to Moneyfacts. “As everyone feels the pinch, many customers may be tempted by the offer of a discount on their first purchases,” said Michelle Slade, an analyst at Moneyfacts. “However, this could end up costing customers hundreds in additional interest.

“By also cutting the minimum repayment required, some customers may think it a good opportunity to reduce their monthly outgoings, but in the long run they will end up paying much more in additional interest.”

Store cards can be helpful, but only for users who understand the repayment rates, can afford them and who pay off the interest on time, said a spokesperson for Consumer Focus Scotland.

“Read the small print and look carefully at your statement. Even if you managed to pay off last Christmas’s debts, you should look again to check that the rates haven’t gone up or the introductory offer period hasn’t now run out. It may well be that your credit card offers a better deal.”

The interest-free repayment period is typically between 35 and 56 days. The implications for not paying off a statement in full can be serious, warned Andrew Hagger, head of communications at Moneynet.

“For example, if you purchased a £500 TV from Argos at 27.9 per cent and repaid just 5 per cent of your balance each month, you’d pay back a total of £848.15 and it would take seven years. If that TV had a price ticket of £848 on it in the first place, I’m sure 99 per cent of people wouldn’t buy it.”

With financial institutions increasingly jittery about giving credit to anyone perceived as a risk, it’s also worth bearing in mind that signing up for a plethora of cards in a short space of time looks bad on your credit file.

Article courtesy of scotsman.com…

Up to half a million people will be overwhelmed by their debts over the next three years, a leading City economist warned today.

Levels of personal insolvency are expected to rise to record levels as the recession takes hold and unemployment soars.

Official figures today show the number of insolvencies rose nine per cent to 27,087 in the third quarter.

The total is expected to hit around 110,000 for the year as a whole and at current rates 275 people a day are falling into insolvency or bankruptcy.

This is likely to be the start of an insolvency explosion as consumers who took on too much mortgage, bank and credit card debt find they are unable to cope.

Vicky Redwood, UK economist at Capital Economics, predicted the total will hit 140,000 next year, rising again in 2010 before peaking in 2011. Over the three years it is likely that as many as 500,000 people will have been forced into bankruptcy or other forms of personal insolvency, she said.

The figures are far higher than in the last recession in the early Nineties, partly because levels of debt are much higher, but also because new laws have made it easier to recover from bankruptcy. Outstanding personal debt now stands at just under £1.5trillion.

The expected wave of insolvencies will place extra strains on banks as they are forced to write off billions of pounds of loans.

Banks are also taking a harder line with borrowers who might previously have been able to take out new loans to tide themselves over.

Stephen Grant, insolvency partner at accountants Wilkins Kennedy, said: “The number of personal insolvencies is likely to go through the roof as falling house prices and rising unemployment begin to bite.”

Louise Bond, personal finance manager at comparison website uSwitch.com, said insolvency or bankruptcy should “be the last resort for anyone with financial problems as they have a very serious impact on people’s credit histories”.

Today’s figures from the Government’s Insolvency Service also show a rise in the number of company liquidations, up 26.3 per cent in a year to 4,001 in the three months to the end of September. The number of larger firms going into receivership or administration is up 70 per cent to 1,277.

Article courtesy of thisislondon.co.uk…