Silly Comparisons

I read this report on the BBC's web site recently which is about a supposedly serious study by that eminent public body - the Institute for Fiscal Studies (IFS).

Before I even finished reading what the IFS had to say - I said to myself 'What a load of old  baloney!' - because this study says nothing whatsoever about mortage interest payments and the effects of artificially low interest rates which have benefited certain families in the UK - to the tuneof thousands of pounds a year.

So how can you make a sensible comparison without taking that issue into account?

To my mind it's nonsense, laughable and misleading - a bit like saying that Glasgow and Georgetown (Australia) have both got a lot in common just because both cities have two Gs in their names - and that's complete baloney as well, of course.    

Families to be £1,800 a year worse off by 2015, IFS says

The average middle-income family in Britain is likely to be nearly £1,800 a year worse-off by 2015, according to the Institute for Fiscal Studies (IFS).

Families with two children will see a fall of £34 in their weekly incomes, after adjusting for inflation.

A childless couple is likely to lose £1,248 a year, or £24 a week.

The IFS also said that over the next three years, less well-off families will be hit harder than those with higher incomes.

The cuts in spending power are because incomes are failing to keep pace with inflation, and because of changes to the benefits system.

The study suggests that better-off families suffered disproportionately in the years following the recession.

Those who earn more than £48,000 after tax saw their incomes fall by 6.3% between 2007-08 and 2011-12.

However, people on lower incomes are likely to be hardest-hit between now and 2016.

Those earning less than £12,000 a year will see their spending power fall by 4.5% between 2011-12 and 2015-16.

"Most of the falls in real incomes associated with the recession have now happened for middle- and higher-income groups," said Robert Joyce, a senior economist at the IFS.

"But much of the pain for lower-income groups is occurring now, or is still to come," he said.

The main reason for that, said the IFS, was the changes to benefits which are in the process of being introduced to help cut the government deficit.

Among them are the benefits cap, changes to housing benefit, the localising of council tax benefit, and the end of disability living allowance.

As a result, the IFS says that although income inequality fell in the years after the recession, it is now on the rise again.

Such income inequality is mirrored by a disparity in wealth levels, according to a separate report out today from the Office for National Statistics (ONS).

The study shows that 28% of adults aged 45 to 64 living in south-east England live in households with wealth greater than £1m. The figure includes the value of property.

By contrast, in north-west England, the proportion of people with such wealth is only 14%.

The differing fortunes of pensioners are also highlighted in the ONS report.

In the North East, 24% of pensioners live in households with wealth of less than £50,000. In the South West it is 9% of pensioners.


Great Mortgage Windfall (27 May 2013)

Dominic Lawson had an interesting arcticle in the Sunday Times the other week - on the possibility of a second credit crunch.

But the part of his argument that really caught my attention is the point he made about the great benefit that low interest rates have brought to people paying a mortgage - particularly a large mortgage which could be worth several thousand pounds a year to the typical large mortgage payer.

Not a penny of which is earned of course - the great mortgage windfall has simply fallen out of the sky, metaphorically speaking, and into the laps of people with a mortgage to service.

While their work colleagues - their friends and neighbours - have lost out relatively speaking, if they pay rent, for example, or if they are retired and now live on their savings and/or pensions - which are fast being eaten away by the effects of inflation.

Now I greatly admire Dominic Lawson for his honesty is highlighting the issue as one of those who have benefited from the Government's policy of ultra low interest rates - unlike senior politicians, of all parties, who have remained silent - perhaps because they fear stirring up a hornets' nest.

Yet stirring things up would be a very good idea.

Since this great tax free windfall is one of the great dividing lines in society today - much more significant than effect of the 'so-called' bedroom tax, for example.

But as there is no organised lobby group to speak on behalf of the people who lose out from low interest rates - the issue commands far less attention than a boring UKIP press conference which gets disrupted by a noisy student rabble in an Edinburgh pub.

The trade unions ignore the issue as well when raising their predictable pay demands - yet union members paying mortgages have benefited enormously over the past four or five years - compared to members who live in a rented property.

Sometimes I think the world has gone mad and on this occasion I have all the evidence I need to prove my point - with a little help from Dominic Lawson and the Sunday Times.

Coming soon: Credit Crunch 2 - by Dominic Lawson

Britain’s QE policy (criticised as “the last resort of desperate governments” by George Osborne as shadow chancellor, before he decided to support it when he got to No 11) had two principal stated objectives. One was that the Bank of England wanted to fend off a deflationary spiral — although its concern that we might follow the Japanese example seemed alarmist, even at the time.

The second was that the cash injected into the blood supply of the banks, like an intravenous monetary high, would find its way into real lending to British companies large and small. This seems not to have happened on anything like the scale expected, with the money instead funnelling more obviously into bankers’ bonuses and, of course, the asset base of the banks themselves.

A more cynical interpretation — advanced over the past few years by this column — is that the two unspoken motives were to restore the balance sheets of nationalised banks that the government hoped to sell and to find a way of financing the state’s own enormous expenditure. Of course there have been winners other than the rescued bankers. As Ros Altmann, the former pensions adviser to Tony Blair at No 10, points out, they are principally those of us who have big mortgages — especially now the government has taken the dodgy decision to underwrite home loans.

Speaking personally: whoopee! Yet Altmann’s list of losers is a long one: all savers; pensioners and especially those who have recently retired on savagely reduced annuities; those who have managed to get by without large mortgages.

Bizarrely, given the government’s own slogans, the people who have lost most are those who have “worked hard and done the right thing”, while the biggest winners are precisely the sort of people it spends much of the rest of the time stigmatising: financial engineers rather than those who “make things”.

In the end, all that matters in an economy is what new things it is able to produce and how efficiently it does that. If the real assets remain unimproved either by investment or by advances in productivity, and all that happens is that their monetary value on the markets increases in nominal local currency terms, this is merely the classic recipe for a financial bubble.

It is fashionable to say that the inflationary threat is negligible at about 3% per annum; but 10 years of that sees the real value of £100 falling to below £75 — which is something to bear in mind when you read bouncy pieces about marginal growth in the nominal value of the gross domestic product.

So, no, we are not out of the woods: and bears are prowling.