Personal Finance: Adieu to the welfare state

JOHN MAJOR says, 'It is time to put the pessimists in their box.' But should we actually believe him?

For those in debt and for those with savings, the difference between disregarding or taking on board what Mr Major has to say about the future of the British economy could make the difference between surviving and going under.

into The tone for the New Year was set by the Government's expressed policy of taking a shrinking role in all our lives.

But this did not stop it from squeezing a bit more in taxes out of our incomes to take care of past spending.

The higher tax burden comes partly because personal allowances were not increased, and partly because tax allowances such as mortgage tax relief and the married couple's allowance were cut back - in keeping with the Government's less interventionist stance.

But the big change signalled for 1994 was that we can no longer rely on the Government to provide the range of welfare benefits that we have come to take for granted.

The first of these is a pension large enough to live on, followed by a comprehensive health service, sickness and unemployment benefits.

So if the Government is not going to do it for us, there's no very pretty alternative to doing it for ourselves.

The insurance salesmen embraced the pensions message from the Government five years ago, with such enthusiasm that they were selling personal pensions to anything that grew older.

But distaste for the hard sell will not reverse the more individualist approach to pensions - away from reliance on the state and from confidence that employers will get it right.

And pensions will soon be joined by sickness and unemployment insurance as staple ingredients of a secure life - for both pessimists and optimists alike.

The higher taxes coming our way in April will be partly offset by lower mortgage payments. Mortgage rates have been coming down throughout the year, but those on annual review will only see the benefit in the New Year as the annual change is put into action in the spring.

Most lenders will allow borrowers to lower their payments immediately rather than wait for the yearly change. But an increasing number of home-owners have joined the pessimistic tendency and prefer to try to get ahead of their debts and pay off the mortgage quickly.

The Government, on the other hand, would like to see a bit more spending to keep the weak economic recovery trundling along.

But with the threat of a tiny, and in places threadbare, safety net for old age, sickness and unemployment, the rational person will not banish all pessimistic thoughts and will try to save a little for those rainy days.

But if you cannot be rich enough to weather the rocky patches in your life, it is very tempting indeed to play a high-risk game. Even the Government is tempting us with both the National Lottery and the new pounds 1m prize on Premium Bonds.

Savers who see tiny returns in the safe havens of banks and building societies are turning increasingly to the equities market.

Sales of unit trusts in 1994 surged ahead, and the value of unit trusts pushed comfortably ahead of building society returns, with some UK equity growth trusts putting on nearly 20 per cent and equity income trusts up by nearly 25 per cent.

Those are the sort of signals that are bound to entice more cash out of deposit accounts. The danger is that the trickle of cash will turn into an avalanche which will push share prices so high that fear of a terrible tumble overtakes optimism and confidence. All novice investors should approach gently and use savings schemes, rather than plunge in headlong.

Have a very happy and bright - but not too optimistic - 1994.