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People Reluctant to Spend Money

Whichever way you look at it, if the consumer feels prosperous, sooner or later it often leads to the dreaded inflation, the thing most governments want to avoid at almost any cost. So, it`s ironic that we are now in the situation in which the economy has ground to a halt, the banks have been forced to lower interests rates to virtually never-known-before lows, inflation in some places is turning to deflation, and many of us have more money in our pockets than before the credit crunch took hold. Paying much less for our mortgages, and with the lower rate of VAT now at the standard rate of 15%, down from 17.5%, has made many people better off. So, why aren’t we doing what the government wants us to do-spend?

First of all, why are we being encouraged to spend our money? Because recovery will be consumer-led. The consumer is the one who will kick start the economy once more. Car sales, house sales, clothing retail, holidays, they all depend on customers being prepared to walk through the door and purchase. Once house sales improve the numerous other items that go along with the buying of property such as home improvements, furnishings, extensions, patios, bathrooms and so on will also start moving properly. Once people start to buy, the government will of course reap the benefits of getting more tax in to the exchequer, mainly in the form of VAT.

The recent reduction of VAT is a two-edged sword. Most of us are acutely aware that as from next year the government will have to recoup what was lost in tax from this year. Whether they do that through direct or indirect taxes we don`t yet exactly know. But, claw the taxes back they will. Add all that to the fact that there`s so much uncertainty on the job front, many are hoarding their new found disposable income and putting their money into savings accounts.