Darling, what have you done now?
It’s a question that many of us are asking right now after seeing the Chancellor’s Pre Budget Report!
The Chancellor Alistair Darling has gambled the Government's political future on a "spend now, pay later" £21 billion package of tax cuts and spending increases that he hopes will lift our battered economy out of recession by next year.
Insisting that he was not prepared to ignore the suffering of families in "exceptional circumstances", Darling stated that he would borrow £78 billion this year and £118 billion next year to fund a 13-month VAT holiday, cuts in income tax, more generous payments to pensioners and parents, and a £3 billion boost to infrastructure.
All this sounds encouraging but what does it mean to you?
As an average family which spends £455.90 a week, you will be approximately £42 better off a month because of the VAT reduction.
The key question for you is whether to spend, save or invest your mini-windfall?
Certainly our glorious Chancellor would like us all to start spending so we can help kick start the economy, but is that the best option?
Before we answer that question, its important to look at the key points from the Pre Budget Report:
New tax rate of 45% on top 1% of us earning over £150,000 from April 2011. Personal income tax allowances scrapped for those earning more than £140,000 from 2010.
Temporary tax benefit of £120 a year for basic rate payers introduced in May is to be made permanent and increased to £145 a year in April. This will benefit 22 million basic rate tax payers.
- Duty up on drink and fuel
VAT reduction on tobacco, alcohol and petrol to be offset by increasing duties on these products so they do not fall in price.
Plans for polluting cars to pay more are off until 2010 and increases for worst polluters capped at £30.
Our National insurance contributions will go up 0.5% from April 2011, but level at which it kicks in increased so those of us earning under £20,000 will not contribute more.
VAT cut from 17.5% to 15% from next Monday 1 December, for 13 months.
- Spending rise cut to 1.2%
Increase in spending slashed to 1.2% in real terms by 2012. £3 billion of capital spending brought forward from 2010 for this year and next. This will go on motorway network, social housing, primary and secondary schools and creating fuel efficient housing.
Weekly pension will increase from £90.70 to £95.25. Pensioners on modest incomes will get increase in pension credits from £124 to £130 and for couples, this will rise from £189 to £198.
Pensioners will gain an extra £60 to go towards energy bills from January next year, on top of a £10 Christmas energy bill bonus. This will reach £120 for retired couples.
Extraordinary times require an extraordinary response
Mr Darling's argument for his Report is that extraordinary times require an extraordinary response (even though he dodged the government's role in creating the crisis).
The Shadow Chancellor George Osborne said the measures would double our national debt to £1 trillion and leave a "tax bomb" ticking under the public purse:
"The chancellor has just announced the largest amount of borrowing ever undertaken by a British government. To pay for it he has placed a huge unexploded tax bombshell timed to go off underneath the future economic recovery."
Although the 800,000 of you earning more than £100,000 will provide £3 billion of the £4 billion in extra income tax revenue, it is clear that the average earners among us will be stung as well.
The Treasury claimed that those of us earning less than £40,000 would be better off while those earning £40,000 to £100,000 would pay just £3 more a week. But the Tories challenged those figures saying only those of us earning less than £19,000 would be spared.
George Osborne said that the best way to stimulate the economy was through "radical" cuts in interest rates:
"We have got to get lending going in this economy again, you have got to get credit to small businesses, that is where the action is needed, not, frankly, taking a huge risk with the public finances."
Are we back in the driving seat?
So what does the Pre Budget Report mean for the average person?
A reduction in indirect taxes has put us back in control of our finances, albeit in a small way.
The cut in VAT from 17.5% to 15% will mean that items that previously cost £100 including VAT, will cost £97.87 from 1 December.
Though it is unlikely to get us all rushing down to the shops to fill our shopping baskets, this, together with competitive pricing on the high street, should ensure a gradual relaxing of our already strained household finances.
Better off by £42 a week?
That said, it is vital not to drop your guard now!
If you are an average family, which spends £455.90 a week, you will find you will be approximately £42 better off a month because of the reduction in VAT.
The key for most of us is whether to spend, save or invest your mini-windfall, which could amount to £504 a year.
A valid argument can be made for all three options, but those of you with debts should first consider paying down your outstanding loans.
For instance overpaying a typical £180,000 mortgage at an interest rate of 7.5% by as little as £42 a month will shorten your mortgage term by as much as 2 years. It will also slash your interest bill by almost £22,000 over 25 years.
Stashing away the unexpected windfall is another option, as is taking advantage of the depressed stock market.
Putting the money away into a savings account paying interest at 4% a year would give you £22,000 and investing in shares could produce a pot of money worth around £40,000 over the same period.
Time to switch your savings?
The Pre Budget Report has been described by many as proof that the Government thinks it can spend and borrow its way out of the recession; but unlike the Government, we don’t have a limitless credit card to fall back on!
Saving, investing and paying down debt seem like the best ways to survive this recession.
Is that what you think though?
Are you going to spend or save your extra £42 a week?
Let us know in the comments below.
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