Personal Finance: A privatised welfare state

IT LOOKS increasingly likely that the biggest impact of Tuesday's Budget - the first to combine the Government's spending and tax-gathering plans - is going to come from the benefits end.

The welter of benefits and other statutory provisions provide the background for everyone, not just those who are claiming or using the state's services.

We had begun to grow comfortable with the welfare state. But any complacency has been challenged by the changes in the National Health Service.

The philosophy of the present government has always been explicitly hung on the premise that the state boundaries should be rolled back as far as, if not farther than, public opinion will allow. It happens to fit very nicely with the Government's urgent need to reduce public spending.

Unemployment benefit, invalidity payments, income support (especially mortgage payments) and the rest of the battery of aids are all being held up to the light.

Peter Lilley, the Secretary of State for Social Security, told Young Conservatives last week that in the future 'as the economy grows an increasing share of provision will be made by individuals, families and companies'. His later reassurances that the Government was committed to providing basic levels of old-age pension, child benefit and dole were hardly reassuring at all.

How basic is basic? While employers are likely to have to take a larger role in sickness benefit, it will be down to individuals to cover themselves against long-term disaster. And that's dear.

Friendly societies, those sleeping giants, have been struggling to find a central role since the welfare state got off the ground. They started out as clubs to help people save for their own funerals and expanded into sickness benefit and other savings schemes.

Many of these societies have remained faithful to their roots, centring their activities on small savings and protection policies rather than trying to join the big league. They have found it difficult to compete because, without large volumes of business, the expenses of running the outfit make small policies costly to administer.

Perhaps their day is about to dawn again.

With the politics of fear stalking the land, all insurance companies must be looking forward to some bumper times as people turn from personal pensions to personal sickness, unemployment, health and dental insurance.

HOMEOWNERS should not be fooled by the headlines last week proclaiming cuts in interest rates.

The lenders that have announced reductions in the wake of the base-rate cut of 0.5 per cent have not yet altered the rates charged to their existing customers.

Very few with a running mortgage will see payments fall before the new year. Nationwide, for instance, will change payments in January. The Bank of Ireland, unusually, is dropping its rate to 7.6 per cent from 1 December.

The tempting low rates are there to draw in new homeowners, and won't damage profits much as most borrowers are old customers.

But at least this means that savers are given a reprieve. The warm response to the rate cut is not shared by those with more savings than borrowings. Rate reductions tend to mean a transfer of wealth from the elderly living off savings to young homeowners.

With inflation at just 1.4 per cent, interest rates are not as bad as they seem at first. But somehow the idea of 'real' rates of return - the gain you make over rising prices - seems less real than the headline number. So although interest of 5 per cent with inflation at 1.4 per cent ought to make you feel better off than interest at 10 per cent while inflation is running at 9 per cent, it doesn't seem like that to most people.