What does this mean? Most people would have some of each. If you are a typical wage or salary earner with a gross income of £10k to £30k per year with the usual family responsibilities the chances are that money doesn’t stay around very long. It moves pretty fast. For a start, the Government will take its cut of, 35% or so, tax and National Insurance contributions, That has moved so fast that you’ve never seen it! Then each week or month there will be grocery bills, garage bills, bills for school trips and uniforms etc. You’ll probably be very familiar with all this. Much of what you buy will be subject to 20% VAT and that will quickly go back to the government.
As money is received by the Supermarkets, garages etc it will be used again to pay their staff and replenish their stocks. Their staff will also do with their wages and salaries exactly what you have done with yours, after the government has taken its cut, and in turn those who receive what is left will do the same.
This kind of money, fast money, has an enormous effect on the economy.
Then, on the other hand, you may have some money in an old National Savings account or Premium Bonds which you’ve half forgotten about. That’s very slow money. You may need it some day or maybe you’ll forget about it completely. There’s £ billions of unclaimed money in bank accounts everywhere which is so slow that its actually stopped.
This kind of money, slow money, has very little effect on the economy.
Is it important to know the difference? Well yes it certainly is when listening to politicians. Suppose they are advocating cutting the top rate of tax which may cost a certain amount. Say £10 billion. They might claim that they can balance this by making £10 billion of ‘savings’ elsewhere. In reality they will mean not employing, or cutting the wages of, teachers, nurses, firemen. Exactly the kind of people who will go out and spend their money.
For a start the Government won’t get back their £3.5 billion in tax and national insurance contributions. So, the saving is now only £7.5 billion. Then they will lose all the 20% VAT payments they would otherwise have had. Similarly they will lose the tax and NI contributions of the next down the line and the ones after that. Cutting £10 billion in this way will probably cost much more than £10 billion in the final analysis as the economy spirals downwards and the government has to pay out extra unemployment benefits.
And what about the £10 billion which goes to the top tax earners? Well of course some of it will be spent, but a high proportion won’t. It is much more likely to end up saved in a superannuation scheme. It is much more likely to end up as slow money having little or no effect on the economy.
This means that some thought is needed when proposing an exchange of fast money for slow money in any economy. That could be appropriate if inflation was a problem and the government wanted to cool down the economy. It certainly doesn’t look to be appropriate right now.
This isn’t hard to understand, in my opinion. Yet, you may well have a local MP, who won’t necessarily be a Tory, who doesn’t seem to be at all aware of this. If so maybe you could have a try at explaining it to them?
(c) Copyright 2013 Peter Martin. All Rights Reserved.