Today is being dubbed ‘Black Wednesday’, or ‘worse-off Wednesday’, by various sections of the press.
But let’s ignore the catchphrases and call it what it is. The start of the new tax year.
The reason this particular tax year is so grim is because most of us will be worse off. More people will be dragged into the higher rate tax net. We’ll be paying more National Insurance. And various benefits will be cut.
But we already knew that. The real problem is that, while our pay packets are by and large shrinking, the price of everything we have to buy is rising.
So what can you do about it?
Happy new tax year – or not, as the case may be
Chances are that, unless you’re a low earner, you’ll be worse off from today, as you’ll be paying more tax and receiving fewer benefits.
Meanwhile, the latest news onhouse prices from the Halifax index won’t make anyone feel any wealthier. Prices in March were up 0.1% on the month, but are still down 2.9% year-on-year. So with annual inflation running at 4.4% (and that’s using the consumer price index (CPI) – the retail price index (RPI) is rising at more than 5% a year), house prices are down by more than 7% in real terms.
And just when you thought things couldn’t get any worse, it looks like petrol prices are going to keep heading higher too. My colleague David Stevenson has just informed me that the oil price in sterling is up by 24% since the start of this year alone. Indeed, petrol prices hit record highs yesterday, reports The Times.
It all adds up to a big squeeze on consumers. So how can you try to protect yourself?
Don’t expect help from the government or the Bank of England
You can’t look to the government for help. For now, the coalition’s best idea for improving the economy seems to be to give children from low-income families the chance to work for lawyers and bankers and media groups for free. This is a privilege that has thus far apparently been monopolised by the pushy middle classes.
Now perhaps increasing the pool of free labour available to the country’s professionals is the way to get the UK economy back on track. But I’ll believe it when I see it.
And don’t expect the Bank of England to help either. It’s paralysed. The reality is that unless the Bank sets the bank rate (what we used to call the ‘base’ rate) high enough to almost guarantee a recession, it won’t have any real impact on inflation. So while I wouldn’t rule out a modest rise this year, don’t expect to get an inflation-beating interest rate on your savings in the near future.
The good news is that you can help yourself. For a start, you can take advantage of one of the few benefits of this new tax year. Your individual savings account (Isa) allowance for this year has risen in line with inflation from £10,200 last year to £10,680 this year. You can put up to £5,340 of this in cash.
It might not sound like much of a rise. But bear in mind that up until very recently, the Isa allowance was only £7,000 and hadn’t changed at all since its introduction in 1999.
So what should you invest in?
But what should you be buying with it? Well, in the current issue of MoneyWeek magazine, David runs through the sorts of shares that can thrive in an austerity Britain being squeezed between tax hikes and inflation. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
David talks mainly about defensive stocks – companies that can keep paying out dividends and stand up to the toughest economic conditions. But getting back to petrol prices, I think another area is worth looking at – the energy sector.
In the latest edition of his newsletter The Price Report, my colleague Tim Price notes that prospects for ‘traditional’ oil and gas companies currently look very promising. The disaster in Japan has certainly made it less likely that nuclear power will be the energy of the future, as my colleague Dominic Frisby noted last week.
The Telegraph notes this morning that the Health and Safety Executive (HSE) will delay its verdict on reactor designs for new nuclear plants in the UK by at least three months. The HSE is waiting on a government safety review which was commissioned in the wake of Fukushima hitting the headlines. And Britain is one of the few countries whose reaction to the disaster has been relatively sober.
Now, I don’t think it’s game over for nuclear. It’s too early to tell. But in the meantime, even if it’s only delayed, then as Tim points out, “what is going to make up for the shortfall, given the world’s chronic energy shortage?” We have to get our energy from somewhere. Oil and gas are the obvious sources.
And Japan isn’t the only concern on the supply side. There’s the upheaval in the Middle East too. Tim adds: “As we know from the experience of Iraq and Afghanistan, it is easier to enter a war than to exit from one. And if the resource-rich countries affected by the Arab Spring decide to try and buy off their disaffected populations via oil wealth, Opec members may be that much more willing to see higher, rather than lower, oil prices well into the future.”
As regular MoneyWeek readers will know from his many appearances at our Roundtables, Tim is a fan of ‘picks and shovels’ oil stocks, such as engineer Weir Group. You can read his most recent Roundtable appearance here.
Our recommended article for today
Invest in democracies, not autocracies: they offer better returns
If world events have taught us anything about investing, it’s that your money is better off in democracies. Dictatorships may appear pro-business on the surface, says Matthew Lynn, but when the tension breaks, there is chaos.