'Tame' budget forecast

There is unlikley to be any surprises from George Osbornes budget as he delivers his 'budget for growth'. There is talk of raising the tax threshold by £600, which is worth about £45 per year... Slightly more interesting is the speculation that the government may push for National Insurance to be integrated into income tax. The difficulty here though, is that there are significant numbers of people paying NI who don't pay tax, the NI payments entitle them to benefits and state pension should they need them.

There will be small movements on fuel duty, first reports coming out of Westminster suggest a cut of 1p in duty from this evening, most of the rest of the budget has been aimed at encouraging investment - or maybe just not discouraging investment... some changes to gift aid to encourage giving, more money to be spent tackling tax-avoidence.

No doubt a fuller picture will emerge soon...

Loans

With the Bank of England base interest rates keeping low, it is still a good time to get a short -term loan although it is worth noting that a low base-rate does not mean that ALL interest rates are automatically reduced to such a low level.

Specialist short-term lenders still charge a premium for their services because they are specifically addressing the need for rapidly approved loans for the duration of just a few short weeks or months.

Such services are offered by payday loan lenders uk and frequently are able to approve a loan automatically online via a website. Although payday loans in the uk would not be the solution to all lending needs, they may be ideal for a short term where a payment is expected imminently, hence the name 'pay day loans'.

Project Merlin

The idea of Project Merlin held some hope of holding the banks to account for the misery they have spread through the economy, although in reality the measures could never be as punitive as the larger population would like.
We rely too much on our financial trading to make it unprofitable, it is one of the few remaining sectors that the modern UK now excels at...

What concessions have been drawn out of Project Merlin?

• To lend more money in 2011
• To lend more to small businesses
• To pay less in bonuses than they did last year
• To be more transparent about their pay packages
• To make a greater contribution to regional economies and society.
  

Who has signed up?

• HSBC
• Barclays
• Royal Bank of Scotland
• Lloyds Banking Group

Santander have also been involved in the project

To add in some specifics, the banks that have signed up will commit to making £190bn of credit available to businesses in 2011, up by £11bn, £76bn will be made available specifically to smaller businesses.

The banks will also provide £200m capital to David Cameron's Big Society Bank, which is supposed to finance community projects, and they will provide an extra £1bn over three years to the Business Growth Fund, which aims to help small business in hard-pressed parts of the UK.

And bonuses?

To be fair the banks have agreed some realistic controls, but there is not going to be a huge reversal of the bonus culture. Millions will still be earned by the few in salaries and bonuses

Was it worth the effort?

The agreement is a realistic 'moral victory', something was required politically, and this was the result. It will not make tremendous waves through the financial sector, and as one of the leading 'industries' of the UK, it makes little sense to 'hamstring' the banks. The banks have been in the spotlight, they created much of the mess, they have been the first to see a turn-around in fortunes. It would make little economic sense to stamp on the growth that is now starting to show. On the other hand, the banks have been caught out, and made to publicly acknowledge their part in the financial crisis - it's time to move on.

Spectacular Bank Failures

Economist John Vickers, chairman of the Independent Commission on Banking has slammed the British banking sector in a speech to the London School of Economics, he said:

"Ultimately, financial risks have to be borne, and in a market system they should not be borne by the taxpayer providing a generous safety net."

This at a time where banks feel they are ready to start paying themselves huge bonuses again, many CEO's already raking in millions in so-called 'performance-related' payments. The question that the nation is asking is "what do you give back when your performance is so dismal that the nation ends up footing the biggest tax bill ever generated?", the answer is of course, a resounding 'nothing' - even those who have skulked away in disgrace have already feathered their nests to such an extent that they are in danger of choking on their own hollow affluence.

In the meantime, the nation suffers with cuts to services in every sector, industries losing workers and long-established companies failing. Whilst many will regard this as just 'politics' or 'economics', for some this is their life... Some families will suffer hardships, real hardships - the cause of which can (whether it be directly or indirectly) be traced back to foolhardy, gung-ho actions of the financial institutions.

Admittedly, the economy had become over-inflated and therefore some workers owe a few years wages to the over-inflation, nonetheless, I believe on balance, it is likely that there has been more harm done than good.

Interest rates set to rise

It looks like the Bank Of England is trying to prepare the public for a rise in interest rates back up to what it feels is a normal level - which will mean the rates returning to a level of about 5% from the current 0.5%...

BoE official Paul Fisher is quoted as saying:

"...what we need to do is to trigger the mindset in people that that's where rates will eventually go back to,"

As if 'people' were stupid enough to think that this artificially low figure is the norm... I would have thought that the message would have been loud and clear if the BoE simply raised the level by 0.25% or 0.5% rather than just talked about it... If they were worried about 'people' panicking, they could have always stated that their 'target' figure is 5% at the same time as announcing an actual raise.

The way this has been done makes it sound like they are unsure of the impact of raising the rate and want to get an idea of what the reaction will be before they do it. The likelihood is that the raise will be implemented in small steps, but no indication whatsoever is given over how long this will take.

The background to policy changes are a relatively static economy showing little growth, a low sterling market value and creeping inflation - with the VAT hike about to strike, one must question the impact this statement by Paul Fisher will have on the householder. There is not much in the economic climate that is going to encourage householders to part with their cash (other than Christmas, which as far as I am aware is not as a result of Government policy..)

Personally, I think we are still in uncertain territory here in economic terms with the threat of the dreaded 'double-dip' still a possibility. I am making the most of the low interest rates by overpaying my mortgage, not by consuming more goods - any change in the interest rate for me will just mean an adjustment to my overpayment.

£7bn from UK to bail out Ireland

Chancellor George Osborne has said that Britain was prepared to commit seven billion to the Irish bail-out plan. The EU and IMF agreed on Sunday to help bail out Ireland with loans to tackle its banking and budget crisis in a bid to protect Europe's financial stability.

"What we have committed to do is to obviously be partners as shareholders in the IMF in an international rescue of the Irish economy,"

Osborne told BBC Radio 4....

"But we have also made a commitment to consider a bilateral loan that reflects the fact we are not part of the Euro ... but Ireland is our very closest economic neighbour."

Osborne was questioned about reports that Britain was going to contribute around seven billion pounds to Ireland, he replied:

"It's around that (figure), it's in the order of billions not tens of billions but the details of the entire package, not just the UK contribution, but the euro zone and IMF contribution, that is all being worked out as we speak and we should by the end of the month have the details on that."

Osborne was keen to stress that Britain should not have to provide further help to Ireland or any other Euro zone countries that got into trouble. However this contribution by Britain is causing trouble at home amid an atmosphere of spending cuts - there are claims that this bail out makes a mockery of the hardships Britain will endure as a result self-imposed austerity measures. The criticism is heightened by claims that this is a problem that arguably should be resolved primarily by the Euro-currency countries.

Short-term debt

As the economic crisis reaches a new stage, many individuals may suffer from unemployment and loss of earnings in the coming months. In many cases, workers may be forced to take lower-paid jobs and be forced into debt whilst trying to adjust to the new level of income.

In most cases, significant changes to life-style will be required, others may consider a short-term debt solutions like pay day loans. There are problems with this type of borrowing in that it can be a relatively expensive way to borrow and may result in several loans being taken out without the principal being effectively cleared. This type of debt should be cleared promptly and may require payday loan consolidation.

You may need payday loan help if your borrowing has got out of hand, and the only long-term solution is to seriously curb your spending. If you are experiencing problems with short-term (expensive) debt, you should make this a priority. Take an overview of your total income and outgoings and make adjustments that will allow you to love within your means.

Interest Rate warning!

Official figures just released show that the economy is growing at its fastest rate for a decade. Growth over the past six months reached 2 per cent, the fastest pace of expansion over two consecutive quarters since 2000, according to the Office for National Statistics .

Economists warned that the 'good news' could be result in interest rates rising earlier than expected. Andrew Sentance, a member of the Bank of England's monetary policy committee, said "I am in favour of gradually moving interest rates up from their very low level which I think can be done without disrupting business or consumer confidence."

Interest rates have been at historically low levels since the credit crisis took hold, with the Bank of England keeping rates at 0.5 per cent since March 2009. It had been previously reported that there would be little chance of a change before the end of next year, but on the back of yesterday's strong growth figures some economists are now predicting a base rate of at least 1 per cent by the end of 2011.

As always with interest rate rises, the bad news for borrowers is good news for savers. The majority of savings accounts currently on the market fall some way short of offering customers a decent return on investment. Recently I came across a saver who had £11return on a three year bond of £3000.

David Kern, chief economist at the British Chambers of Commerce, reminded us that we have not yet seen the real impact of the Governments deficit cutting measures. True to form, the coalition are claiming the upturn as a result of their actions whilst the previous administration claim that this is as the belated result of their actions... The truth is that few people (from either party) predicted these most recent results, and at the end of the day, the economy wends its own merry way regardless of those that believe they are at the helm of national affairs.

Inflation Steady at 3.1%

Inflation has continued to exceed the Bank of Englands target of 2%, standing at over 3% since July in line with market expectations.

Lower prices for air fares, petrol and second-hand cars were offset by rising costs for clothing, footwear, food and drinks. For individual families, the worrying trend indicated here is the fact that 'luxuries' are getting cheaper, necessities are becoming more expensive...

The BoE have continued to hold the base interest rate at 0.5% (as they have for the last 19 months), but opted against pumping out more cash. Nevertheless, the threat of the return of 'Quantitative Easing' is ever-present. To date, the bank has injected £200 billion into the economy, by purchasing government bonds and high-quality private sector assets to boost lending.

Base Rate holds at 0.5%

The record low rate of 0.5% is set to stay for another 12 months or so according to best estimates. It is felt that 2011 could see a rise, but it is far too early to make a realistic prediction.

This is good news for variable rate mortgage owners, but I guess a bit of a sickener for those with a fixed rate, as it looks unlikely that they will get any benefit from their fixed rate for quite a while. Of course, most new mortgages are fixed rate as the bank have no wish to pass on the benefits of the Bank of England base rate. This in itself is a topic worthy of a great deal of debate....

For those who are benefiting from a variable rate, my advice is to overpay your mortgage (subject to advice from your properly qualified advisor of course!!) if you can. I switched to a variable rate mortgage shortly before the financial crisis took hold, so my repayments are extremely low. However I have taken the step of deliberately paying a similar rate to what I was paying before the crisis in an effort to pay off more of the principal debt.

The uncertainty around what will happen to the rate is heightened by the uncertainty about the knock-on effects of Government cutbacks which must be made by this new administration.

The mood for now seems to be 'steady as she goes' as we launch our economic ship into uncharted and potentially stormy seas...

Our 'shallow' economy

I don't really want to come across all left wing and anti-capitalist, but there is a worrying element to the drivers behind the Western economy that may indicate that it is becoming unsustainable.

In thinking about what drives us to earn and consume, it is becoming clear that it is 'unsustainable' consumer behaviour that drives larger and larger sections of our economy. These can be illustrated by the clamour to posess the latest 'Apple' product whether it be a phone (never knowingly advertised as a device for making phone calls of course..) computer, or media player. It is also illustrated by our taste in transport, ever faster, slicker, uber-designed capsules for transporting us around the globe - in reality used for dropping the kids off at school and getting in the shopping. Do we need to spend between £10,000 and £20,000 for a main vehicle let alone a 'second' car that will be the kids taxi and motorised shopping cart?
Have you also noticed that a TV used to cost a little over £100, yet now you can get a 'bargain' widescreen HD-ready TV for just £500?

Don't get me wrong, I am not knocking consumerism, I am a 'victim' and active participant... I am trying to point out that one day we might wake up to the reality, and stop buying these luxuries, at which point, our entire economy is in danger. The additional point to make is that the products themselves are contributing to the demise of the species. I don't have figures for the damage done to the environment by cars alone, but you don't have to be a greenpeace protester to be aware of these facts:

• We have too many cars
• Cars are bad for the environment
• Any 'convenience' factor of having access to a motor vehicle is now surely seriously outweighed by the damage it does to our planet.

The problem is that the voices of reason will not be heard above the clamour for the latest gizmo or gadget that is going to make one individuals life so much better at the expense of everyone else. This is where democracy fails us, no politician can speak up against the manufacturers that fuel the economy. The battle can only be won, one consumer at a time...if we all stopped doing it tomorrow, the economy would stall catastrophically - every great 'empire' has it's weakness in the end - I believe that this is the major weakness in the Western World, our rapidly increasing desire for bigger, better, faster, more advanced 'stuff' will end up with consumers eventually questioning their own sanity.

The Recovery

The recent financial crisis is becoming a faded memory, but there are some significant points about what has just happened that will have an impact on the coming years. Oddly enough, during the recession, UK householders actually experienced a significant increase in spending power because of the incredibly low interest rates. Any mortgages that have been linked to the Bank of England base rate have dropped significantly allowing families to ride the storm with comparitive ease (assuming that income has been maintained).
Mortgage rates are not set to move just yet, but it must be accepted that these low rates cannot be retained indefinitely and sooner or later will rise at least part way back to the previous level. THIS is when the impact will start to hit home a little more. Personally I have decided to overpay my mortgage while the level is so artificially low, in my opinion, regarding this boost as avaiable income may be a huge mistake. The rate has been below 1% for nearly 18 months, and I am guessing that this has put a couple of hundred pounds or more into many households pockets during the recession. If this money has been incorporated into the household spending, when the base rates resumes it's previous levels, this extra budget will have disappeared, and spending must follow suit otherwise we may find ourselves exposed to debt.
My own plan is to gradually cut back on the overpayment as the interest rises until I am left with no overpayment. The added bonus of the overpayment is of course, that I am paying off the capital at a faster rate than if I pay the minimum rate that my mortgage demands. The result of this is that the actual interest on the diminishing principal is falling too.
In the light of financial measures that will be taken to resolve the national debt issues, average incomes are likely to be more or less static for the next few years, a rising interest rate may leave families feeling the effects of the recession that they previously managed to avoid.

related posts:
bank rate drops to 1% (Jan 2009)
declining base rate (Feb 2009)
interest rate news (Jan 2009)