Merryn's Blog

The middle class is being squeezed out of existence

There has been much talk about how the poor are bearing the brunt of the government's austerity measures. But it's the middle classes who are losing out the most.

More than a third of UK adults withdrew money from their savings accounts in the last six months of 2010. Given my tendency to think that the Western world's ongoing debt crisis will end in a bout of hyperinflation, it is tempting to see this as the beginning of a flight from cash: when people lose faith in fiat money they withdraw it and spend it, first on useful things and then on any old thing that might be tradable in the future. However, that isn't what this was.

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Instead, the majority of those surveyed said they were withdrawing money to pay for day-to-day life and to pay their mortgages. This should come as no surprise given the massive rise in living costs over the last year.

In July 2009, Andrew Verity was able to say on the BBC that, thanks to the recession (and the fall in store prices and mortgage payments it brought) the average family was "in fact £1,080 better off". And of course Lord Young was absolutely right, if tactless, when he pointed out in late 2010 that for much of the recession most people had never had it so good.

No more. According to Sainsbury's Finance, in December last year, if the average UK household wanted to maintain the same standard of living it held a mere two years ago, it would have to come up with an extra £1,133 in post-tax income (over the year). Or, if they have the misfortune to live in London, even more £1,342.63.

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A month on, and anyone recalculating those numbers will find they have risen substantially, thanks to fast-rising inflation. But the squeezing of household incomes doesn't stop there. Contrary to popular belief and to its own PR this government appears to have chosen to deal with the deficit more by raising taxes than by cutting spending. And huge swathes of the middle classes are about to feel the pain of that decision.

From April, an extra 750,000 people will find that they are paying 40% tax despite earning no more than they were before: the threshold is about to be cut from around £44,000 to £42,000. Not long now, says the Institute of Fiscal Studies, and around one in five people, most of whom do not consider themselves remotely rich, will be paying higher-rate tax.

Then there are the 175,000 people earning around £40,000 who, thanks to changes in the child tax credit system, will find that their marginal tax rate suddenly leaps from 30% or so to more like 70%.

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Overall, the top 10% of the population (in terms of income) will lose 3% of their net income in April, thanks to tax and benefit changes. And that of course comes on top of the cuts in living standards imposed by rising import costs.

The rest of the population will be suffering from the latter as well. And they may also be disproportionately hit by the caps on public spending across the board. But their net income? It will only go down 1%, according to the IFS.

There has been much talk about how the poor are the ones taking most of the hits from austerity. But assuming these numbers are correct that doesn't appear to be the case. I've written here before about the slow death of the middle classes. Things aren't getting any better for them.

Look at it like this and, the odd senior banker, CEOs and top ranking council employee apart, perhaps we are all in this together?


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