Budget will force ‘squeezed middle’ to muddle through

March 21, 2011

By John Evans, CEO of Incahoot.com. The opinions expressed are his own.

It’s a cold November morning last year, and in the Today programme studio Ed Miliband sits across the desk from John Humphrys.

John: “So Mr Miliband, can you tell us exactly what you mean by the ‘squeezed middle’?”

Ed: “Well John, we mean those above and below the median salary and, in particular, those earning less than £45,000 and therefore on the basic rate of income tax. This is a separate group from what we would normally call the ‘middle classes’.”

If that definition seemed vague, five months later we are getting a clearer picture of who falls into this group – and it’s clear they will suffer the most when the Budget is announced.

While some of the Budget’s finer details will only be revealed on 24 March, what appears certain is that favourable tax breaks will only benefit the wealthy, and the less well off.

It’s not such good news for those earning from £40,000 to just under £44,000. The reduction in the higher-rate threshold will mean basic-rate taxpayers with incomes just below the current £43,875 figure will become 40 percent taxpayers this year. I’ve seen figures bandied about in the press that lowering the threshold to £42,375 could add around 700,000 individuals to the 40 percent tax bracket. This would push the total number of higher-rate taxpayers to nearly 4 million.

Further squeezes will come from a fuel duty escalator that is pushing prices at the pump to astronomical levels (it now costs the best part of £70 to fill a 50 litre tank), rising food costs and inflation, which is increasing more than wages.

So how will this group offset the multiple raids on their take home pay?

One way will be to demand for greater value on household bills. While people want ways to save money on bills, the belt-tightening that has been a feature of the ‘age of austerity’, has meant that negotiating discounts on gas, electricity, mobile bills and insurance is a priority. With a bit of negotiation, people are realising they can trim hundreds – if not thousands – off the bills they have paid blithely for years.

Another way will be to downgrade holidays. Global oil prices have hit flight prices on long haul flights, and with Sterling practically on parity with the Euro, short haul trips to the Eurozone are cripplingly expensive for families. With UK tourism working harder than ever before to get its house in order ahead of the 2012 Olympics, a UK ‘staycation’ has rarely looked so attractive.

‘Big ticket’ household purchases are likely to drop off too. The flurry at the end of last year prompted by people beating the VAT rise has dropped to a trickle, and consumers are going to want retailers to work much harder to make them part with their cash.

Ed Miliband may have had trouble defining the ‘squeezed middle’ last year, but as ever, economics triumphs over politics when it comes to demographic profiling.

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