There’s a hole in my pocket

By at home

Government finance is talked about in billions and trillions but what does that really mean and how do they get so much money in the first place?

Those of a nervous disposition should turn the page now. We’re about to talk dirty. We’re talking about that horrible three-letter word that makes most of us groan, sits like a parasite in our pay packet and snarls at us in every shop, petrol station and boozer in the country.
The word is – TAX! The government, just like many of its people, has no money. Except the government has the power to enforce taxes on us in one of five ways – income tax, corporation tax, VAT, capital gains and excise duty – so it does have money. Then there are those other taxes, council tax for one, National Insurance also could be seen as a health tax. There’s stamp duty too.

So if the government is struggling to make ends meet then perhaps it comes as no surprise to find its subjects struggling. In the world of politics and budgets they talk in billions that make no sense when you are stuck in the local supermarket with £2 in your pocket and goods worth £2.37 in your basket. The books don’t balance. But what does it mean in everyday terms and just how much are we spending on what through our taxes and on our credit cards? First the bad news.

The amount of money owed by British consumers has broken through the £1trillion barrier for the first time. (A trillion is a one followed by 18 noughts.) And the Bank of England has said that more than £1,000 billion of that is on credit cards, mortgages and loans. If that sounds like an awful lot of money it is – around about £17,000 per man, woman and child in the country.

Apparently we, as a nation, have racked up more debt than the government. In fact, rather alarmingly, our debt exceeds the whole external debt of Africa and South America put together.

In the first three months of this financial year of 2004 – April, May and June – Britons managed to save and invest on average, and a measly average at that, only £262 a head. That’s the equivalent of just £87 per month per person.

And there’s the rub. We are all paying out so much on day-to-day living that we think we can’t afford to save. It is a dangerous road. So where is some of this money disappearing? It can’t all be on champagne living, can it?

We have already mentioned our horrific credit debt, well perhaps it is not so surprising given there are some 35 million debit and credit cards floating around in British pockets. That means most cardholders have at least two in their wallets and purses.

It’s easy money. Easy to spend and easy to steal. According to the Association of Payment Clearing Services (Apacs), a mind-boggling £402 million of fraud was committed on plastic credit cards in 2003. This itself was marginally down on 2002, when £424 million was stolen.

"Cardholder not present" theft, where goods are bought and paid for using someone else’s number, was the biggest single cause of fraud at £116 million. Fraud on lost or stolen cards was the next biggest con, at £106 million. Counterfeit fraud, where your card is cloned and used alongside your own, racked up another £106 million.

In total, card companies lose about £13 in fraud for every card in the UK. The CHIP and pin number system, long used in Europe, is coming in. This is where you have to key in a personal set of numbers at the pay point. The aim is to cut lost or stolen card fraud. Without it, the industry estimates that it would be losing £1billion every year by 2010.

That other noticeable high expense that most of us face is a petrol bill. It’s galling to hear of Americans complaining that they are now paying about the same as the British for their fuel – the only thing is that they get a gallon for their money – we get a litre. In continental Europe a litre costs the same as it does in the UK – only it is priced in Euros so therefore costs around about a third less.

Why is this? Well petrol is easy gushing money for the government coffers. They made £25bn from fuel duty and that means that the Exchequer would take in tax 60p on every 80p litre of fuel.

It is good for the government when there is a leap year – that’s another day for us to spend money filling up – and price rises don’t hurt either because that means the Exchequer’s tax cut from the cost of a litre of fuel also rises.

There are a few things we can do about it. It is estimated that British residents waste an estimated £1.1 billion by not making the most of direct debit discounts. Not only do we lose money but also we lose precious time according to the British Association of Payment Clearing Services (Bacs). It is reckoned we waste 1,600 hours, or almost a year out of our lives, paying household bills by writing cheques or sorting out our obligations over the phone. Bacs say people who pay their bills by direct debit could save up to £203 in discounts. About 47 per cent of household bills in the UK are not currently paid by direct debit.

And we are letting more money through our fingers by not knowing, or using, our tax entitlements. Apparently we pay £5.7 billion more tax than we need to by not making use of our tax allowances. That’s about £132 for every man, woman and child a year.

So how is the government making more money out of us? Since Labour came to power there have been some significant changes in the way we pay our tax – more taxes that is. Here are some of the ways we are made to pay: Mortgage interest relief (Miras) cut and then abolished (1997, 2000 Budgets).

Married Couples Allowance cut and then abolished (1998, 1999). The cuts in Miras and married couples’ allowance were started by the Conservatives but carried on by this government.

Stamp Duty increases on property transfers – up from 1 per cent to 4 per cent on larger properties (1997, 1998, 1999, 2000). Tax on company cars increased through higher car and fuel scale charges (1998).

Dividend Tax Credit withdrawn (1997) – reducing income to – among others – pension funds and the elderly living on dividend income. "Bed and breakfasting" abolished on capital gains tax (1998). High mileage discounts for company car drivers reduced (1999). Excise duties on cigarettes increased above inflation (2000). National Insurance rates rise 1 per cent – and new 1 per cent charge introduced on earnings above upper earnings limit of £31,720 (announced 2002 for 2003).

Stamp Duty Land Tax of 1 per cent levied on accumulated rental premiums over £60,000 (from December 2003). End of 10 per cent tax credit on dividends received in Equity Isas (from 6 April 2004).

Reduction in size of annual Individual Saving Account allowance from £7,000 to £5,000 (from April 2006).

Income tax to be levied on assets transferred into trusts where the original owner continues to use those assets (proposed in 2003 pre-Budget statement). Ending of the flexible rules that enabled people to use up their tax relief on pension contributions in six previous years (from April 2001).

What all this means is that among our EU partners, 13 of them, including all of the major ones, have cut taxes between 1997 and 2002. The amount varies between a lowly 0.3 per cent reduction by Germany, to a huge 6.1 per cent reduction by Finland. The average reduction among the EU countries is 0.2 per cent. Apart from the UK, only Portugal of the EU countries has seen a tax increase over those five years. In Portugal’s case this tax increase has been 1.1 per cent. The UK figure, a tax increase of 1.6 per cent, is nearly 50 per cent higher than Portugal’s. Clearly, UK tax levels have been moving against the European downward trend. They are dressed up a bit like new public transport costs. You might pay a lot more for your ticket but the price hasn’t gone up, it has been "revised". British tax seems to work like that.

Not only is there this national trend of tax increases but also there has been a significant local leap. In ten years the average council tax bill has more than doubled. Earnings, of course, never come near the rising rates of these bills and are pegged back on the strength of an inflation rate that is based on a highly selective criteria.

It is easy to complain and it is easy to make a case against those who we think like to indulge in wanton waste of tax payers’ money. One man’s worthwhile expense is another man’s waste!

But then again, it does seem the British tax squeeze is so hard you can hear the pips squeak.


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