Are the pips squeaking yet?

Lime being squeezed Squeezy does it - families are facing a six per cent cut on average

The child benefit cut, saving for an evaporating pension while paying for parents in long-term care, not to mention helping the children pay for university. Is this the end of being comfortably off, asks Michael Blastland in his regular column.

Put it this way: every £1bn is the equivalent of taking away services or money worth £1,000 from one million people, every year.

Which one million people would you have in mind?

And that's just the first billion. There are another 84-ish to go. Which is why the politics of cuts grows nasty. The Chancellor says we are all in it together, invoking a sense of collective sacrifice. Your country needs you, says David Cameron, pointing our way.

But I see no volunteers. Instead, the one collective effort on view is to duck - and point elsewhere. The "middle" points at the "scroungers" at the "bottom". The "bottom" points to the broader shoulders higher up. Both point to the "top". And the "top" says it pays for everything already and should get something back.

Start Quote

Michael Blastland

Do you cut your standard of living or dip into the house that you hoped would bolster your pension?”

End Quote Michael Blastland

Well, it could be worse. Actually, it will be worse. There are bills not yet fully in the equation, like that for long-term care as the population ages.

Everyone points out that life is expensive enough already. If you are in the middle or perhaps above, do you save for the children's university fees, or your mother's long-term care, or maybe your own? If you lose universal benefits, like child benefit - worth £1,750 a year for two children - that adds up over 18 years to about another £35,000 gone.

Do you cut your standard of living or dip into the house that you hoped would bolster your pension, a pension that might be looking less healthy than it once did.

The squeeze seems to come from every side. Where will the money come from?

Meanwhile, many look over their shoulders at those who, by some anomaly, manage to escape the cut in child benefit despite being well off, for example. It is as if we're all in the workhouse, green eyed, comparing portions.

At the root, though, is a simple problem: arithmetic. Eliminating what's known as the structural deficit in the next few years, as the government aims to do, requires cuts worth about 12% of total government spending in today's terms, though some departmental budgets will be hit harder than others. Twelve per cent of government spending is equal to about six per cent of national spending (see box, below, for explanation).

Billion here, billion there

It sounds manageable, until you remember that spread in equal proportion across the population, six per cent - for someone on £40,000 - is the equivalent of lost money or services worth nearly £2,400 every year.

Why 12% of govt spending is 6% of national spending

  • If the whole country produces £100 of goods and services...
  • ...and the government takes about 50% in taxes to spend
  • So, a 12% cut in government spending equals six per cent, or £6
  • Spread that £6 (six per cent) across every equally to feel the pain

In that context, an extra £3 - 4,000 for university fees, for typically just three years, is only a beginning, while the idea that most of this could be found from efficiency seems to have evaporated faster than the sweat of the general election.

There's a well-known saying: "a billion here, a billion there and pretty soon it adds up to real money".

Let me to adapt it to the national finances: "a billion here, a billion there and still it adds up to not nearly enough".

Are there any calculations that offer grounds for optimism? Here's one. Economic growth of 2.5% - roughly the long-term trend - equals about £36bn in one year. About 28 months of that - remember that we're looking for about £85bn - and the economy is richer to the tune of everything we're about to lose. So growth is - potentially - big money.

With caveats: some economic growth - or rather the increased tax receipts that it yields - has already been factored into the calculation about closing the deficit in this Parliament. It will take a few years until growth repairs our sense of prosperity.

It's not all gloom

And some think that the prospects for growth are permanently damaged, as if the recession changed the game; others that the recession is a normal part of the game and that too many people are in the bad habit of extrapolating into the future from bad years, just as they once extrapolated from the good.

So there are three possible - and perhaps obvious - answers to the question: "where will the money come from?"

Spending review branding

A special BBC News season examining the approaching cuts to public sector spending

  1. Either it won't, and there'll be lower standards of living for everyone
  2. It will come from a decline in services people receive
  3. It will come by waiting, and hoping for increased national prosperity in the future will give us back what we've now lost, and we will all share in it
  4. Sorry, did I not mention a fourth option? Option four is the most likely - a scenario which combines options one, two and three

A few months ago, I interviewed Howard Glennerster, a professor of social policy, who said that the numbers were unachievable unless the government also took aim at the middle classes.

He predicted precisely the current confrontation: "The challenge is to threaten the interests of the median middle class voter on whom the Conservative party and the Liberal Democrats depend. Only by challenging their core vote, it seems to me, can they deliver."

Below is a selection of your comments

The problem with this financial crisis is that 'ordinary poeple' are going to be asked to pay for the mistakes of others. All things considered, it does not seem fair to these ordinary people that they can suffer years of wrong decisions and profligate outlooks, and then be made to give up their hard-earned comforts to sort the mess out.

Steve Stacey, Portsmouth, England

Why is it that there's never any talk of what happens to the cuts after the deficit is paid for? Would the outlook on spending cuts not look so gloomy if the Government announced that it was to increase spending once all is done and paid for?

Joe, Cambridge

The problem the government has is managing expectations. My grandparents never expected to have foreign holidays, or to have a car, or to receive benefits (they hadn't been invented when they were young) and they also lived through two world wars. Yet they had a happy life (most of the time). I have worked in the Third World and learned what poverty really was like and to fear it. As a result have have become parsimonius when it comes to treating myself, but also this has made me totally unsympathetic to individuals who are unable to manage their own money when they have some. I have been made redundant twice and survived the experience eventually working for myself. Life isn't easy, but no-one owes you a living, not anywhere on this planet. The government isn't cutting benefits and raising taxes with any malice, only correcting the mismanagement of past overspending.

Paul Steverson, Matlock

The reason we got into this mess is because the electorate don't like hearing bad news and apparently prefer to be lied to. Honest politicians who try to confront difficult realities are generally hounded out of office (if they even get that far). We end up being ruled by people who excel in delivering sugar-coated palliatives, merely digging us deeper into the mess. It would be refreshing to see a government ignore its constituents on many of these issues.

Neil, Devon, UK

If you're going to mention tuition fees then you should also mention they are capped in Wales and NI and paid for by the state in Scotland.

Julian Asher, Birmingham

I'd like to suggest an addition or two to the "It's not all gloom" section. First, house prices might finally come back down from the frankly silly heights they've reached from the mid-late 90s. I don't understand why every financial observer wants to see them increasing again already when the first-time buyers are still priced out of the market three times over. Second, the decline in living standards we're about to see will mean we'll have a period of austerity in living memory. Hopefully this will serve as discouragement for the political trick of dramatically overspending when things are good, knowing that their opposition will need to take the unpopular decisions to pick up the pieces a few years later.

Mike, Travelling constantly

One of the main problems is that we spend a lot more on housing as a proportion of income than the other North European economies (who share a roughly similar idea about tax and public services) or the Americans (who don't, but who then have to buy private health care, etc). We've treated property as a form of savings, but now the rainy day is here, we find that it's not liquid, and it's value goes down in the rain. Unfortunately, the mortgage lenders that stoked this up are unwilling to write off the required loss of value - which keeps price falls linked to the amount of equity sellers have built up. Personally, I think this is the only area that can give - incomes aren't going to increase, the tax burden isn't going to come down until the structural deficit is reduced - but it won't be quick - I think we will see house prices staying still until inflation does the job of adjusting the proportion of income we spend to something more realistic.

Jules, Leeds

The problem we have is that the UK Balance of payments is set permanently at deficit. The country is buying far more than it can afford from abroad.This trait started during the Thatcherite attack on manufacturing, well intentioned but utterly misguided. The continued obsession with services and use of part time working as a lever to increase liquidity in the labor pool has caused a huge reliance on debt to offset the real term decline in wealth. Add to this toxic mix, an ill informed electorate suffering from a poor education that until a few years ago had the UK at 19th in the international league and a labour government over reliant on a over powerful financial services industry and it is not hard to see that there is.

Alan Hallewell, St John NB

I think there is some hope for us judging by some of the recent comments. I echo Paul Steverson is saying that the public's sense of entitlement is a problem. I, too, am thrifty, and feel unsympathetic when I see people who can't manage their finances. Most of the time, it is the result of indulgence and overspending on unnecessary goods and services. Interestingly enough, I, too, have spent time in the Third World, and, because of the experience, have come to the same conclusion that no one owes you a living.

Stefan, Taipei, Taiwan

Perhaps one good thing about all this is that it will teach people to be less wasteful and think more carefully about how they spend their money. For instance - do you really need that expensive designer outfit, or that ridicously over-priced, over polluting SUV or that holiday to the Bahamas? A lot of middle class people up until now have spent money recklessly and it is these luxuries which should be cut.

Emily, UK

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