Way, way back in September 2009 I made 10 economic & political predictions for the 2010/11 financial year. Now, that period has been over for a good few months, but as with all good fortune tellers, my predictions came with a certain amount of leeway.

It’s still an insightful read if you have 10 minutes, but I will do my best to make what the prediction was as I’m discussing them if you don’t.

Am I the next world-class financial guru, or am I truly hopeless? There’s only one way to find out! Let’s revisit and update that post…

1. Politics Will Matter to You

My first prediction was that even if politics wasn’t important to you at the time I wrote the article, my prediction was that it soon would be. The General Election had not yet happened and we didn’t have a hung parliament, or the joint ConDem alliance of today.

Whether you are a public or private sector employee; high paid; low paid; unemployed or a student; I reckon you’re paying at least more of a passing attention to politics than you were in 2009. Politics has not played such a direct role in people’s lives for at least a decade and for almost two decades on an economic and personal finance level. I’m too young to remember much about the recession of the 90′s but my parents still remember it vividly. In 20 years time, will you remember who was in power, and just how it affected you?

I suspect you will.

Score: 1/1.

2. Future Defaults Will Bring Credit Crunch Part Deux

I predicted that the fragile state of the lending-side of our economy would have a cascade effect, bringing around a second credit crunch. I reckoned that mortgages and loans at the very beginning of the recovery phase where money was being handed out somewhat freely on advice from the government to businesses to aid the recovery, would go toxic when one of my other predictions happened (I’ll come to this later).

It’s a fine stack of cards that will only take a few loose ones to bring the whole lot down. Money loaned to businesses anew, which then go out of business because of reduced trade, cause a fresh wave of bad debt on banking books. This has always been a possibility but even more so in these times. 15 years ago if someone said to you “In 2010, Woolworths will not exist”, would you have laughed at the absurdity?

So far this prediction has yet to happen, and I am pleased to be wrong on this count. I am going to award myself a minor point though, because I can still see it being l a real possibility.

Score: 1.2/2

3. Government Public Sector Cuts Will Backfire

Unprecedented cuts to all areas of the public sector are currently underway.

While concrete data and statistics are hard to come by, snippets suggest that perhaps more than 250,000 jobs have been lost from the public sector since my post was made. The private sector has taken up less than a quarter of those if the same figures are to be believed.

What happened to the remaining three-quarters? Statistically some will have retired, died, emigrated or otherwise not fall within the purview of my prediction, but I reasonably suspect the vast majority will have ended up on benefits. With Job-Seekers Allowance, Housing Benefit, Council Tax Benefit and other widely available benefits being claimed by a good proportion of those, all the government has effectively done is moved the cost of these people from one budget to another, but also reduced productivity by not having those man-hours available to them for work purposes.

This is a double-whammy for the Government. They’re not saving anything overall, and yet do not have as many people to work at the same time.

A resounding win for me on this prediction, sadly.

Score: 2.2/3

4. The Thrift Paradox Will Hit The UK

This may be a new term to some readers, so a quick overview of the paradox first:

The paradox states that if everyone tries to save more money during times of recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.

Or, when people have a sharp financial shock, they start saving like crazy, and paying down debt. This causes the economy to contract further because people are not spending what they earn. The contraction of the economy causes more financial shock, causing people to save harder. Ad infinitum.

One of David Cameron’s speeches at the Tory Party conference was for consumers, businesses and the government alike to pay off their debts. Well intentioned I am sure, but really, really dumb for the overall good of our economy.

Consumer spending in the second quarter of 2011 amounted to £230bn, easily the biggest component of gross domestic product, which stood at £374bn. Now imagine that consumers heeded the prime minister’s advice and paid off just their credit card bills. If they did it all in one quarter, the result would be a 25% drop in consumption and a 15% contraction in the economy. Repayment of credit card bills over a year would mean consumer spending would fall by 6% a quarter and GDP by 4% a quarter. Clearing the credit card debts over the rest of this parliament would reduce consumer spending by 1.75% a quarter and GDP by 1% a quarter.

Nick Pearce, the director of the IPPR who did the above number-crunching, said:

Estimates of trend growth in the UK are around 2.25% a year (ie no more than 0.6% a quarter), so even paying off just credit card debt over the life of this parliament would guarantee that the economy shrank quite significantly between now and 2015 (and that’s before taking into account the government’s cuts in its spending and the knock-on effects on investment, employment, etc).

Sounds bad, right?

Disastrously, consumers are doing just that. Personal borrowing is seeing a record fall as consumers pay off millions of pounds of debt on credit cards, and attempt to increase their savings. Neither of these actions actually result in money entering the wider economy, meaning there is no growth.

Regardless of sector, there will be contractions. This takes us right back to the beginning of this prediction, and pops us firmly in the thrift paradox. I may have been a little out with my timing, but I fear the actual prediction will be spot on. Half a point for me?

Score: 2.7/4

5. The UK Will Enter It’s Own Great Depression

I predicted that the mass cull of public sector workers would be felt immediately, and an associated drop in benefits and economic growth would create a somewhat Perfect Storm.

As yet, I am glad to say that I was wrong on this one. While there are signs the UK will re-enter a recession, I’m pleased to say our own Great Depression is looking unlikely on the immediate front unless the wider issues in Europe go totally wrong.

Score: 2.7/5

6. Reduced Public Sector Workforce Creates Debt Spiral

This one was deliberately Armageddon in nature but held a degree of validity should everything else have happened exactly as predicted. My idea was the public sector cuts severely, resulting in say an additional 1 million people unemployed. The private sector would not be able to come anywhere close to taking up such a slack, and the vast majority would end up on benefits.

Personal finance would take a tumble as the majority of the newly unemployed defaulted on credit cards, loans, mortgages, store cards, car financing and more. Next to no money would be spent on anything other than bear essentials such as cheap food and accommodation. The private sector would contract as a result, causing yet more unemployment. Eventually, as the scenario went, everyone would be unemployed, the government would be bankrupt, and we’d find ourselves back in the 1750′s.

Thankfully again, this one has yet to happen.

Score: 2.7/6

7. Increased Taxation Will Reduce Desire to Spend or Earn

My prediction here was based on taxes going up for normal folk.

Indeed we saw just that with VAT rising from 17.5% to 20%, reducing the desire to spend.

Income tax is and always has been a minefield of contradictions, but in short despite the tax-free allowance going up, the basic rate cap came down. A new 50% tax bracket was introduced for really high earners. National Insurance contributions rose 0.5% as well, making it more expensive to earn money, and spend what was left after it’d be taxed.

A definite win for me here, in a philosophical sense at least.

Score: 3.7/7.

8. The Welfare State Will Be Severely Curtailed or Abolished

Another armageddon-style prediction, but based on a modicum of fact. 1/5th of our GDP (possibly more now) was spent on the welfare system in 2009.

It is too early to tell what the true result of Welfare Reform will be, but suffice to say it will not be an increase in cost for the government. The new “Universal Credit” that is proposed sees families, on average, £322 a year worse off (so far).

I award myself three-quarters of a point for this one, as the writing is on the wall for severe curtailment, albeit not abolishment as yet or within the identified timeframe.

Score: 4.45/8

9. High Inflation

I predicted that whoever won the general election, would enjoy creating an environment that encouraged and stoked high inflation. Inflation helps reduce the real value of debt, and with the amount of debt around the neck of government, the higher the inflation, the better.

As we can see from the graph, the CPI increased significantly from a hair over 1%, to almost 5%. The RPI was even worse hitting almost 6% recently.

While this is not as dire as I had imagined (10%+ wasn’t too far fetched for my brain to foresee), it is still pretty wild and given the target is 2%, counts as high in my mind.

Score: 5.45/9

 

 

 

10. House Prices Will Fall Considerably

I had hoped for a giant market correction in the order of about 50%. A touch morbid any homeowners amongst you will say, I’m sure.

My graph at the time showed (assuming a level increase in cost without too much scientific backing), how overpriced housing was at the time:

What actually happened was this:

I predicted a bigger drop than actually happened, but house prices still dropped by over 10% during 2009/2010, before rising sharply and then dropping back to 0% for 2011. The real-world effect of this was house prices stayed fairly stagnant or dropped by a few percentage points over 2007 asking values.

Again I think half a point is in order in terms of scoring because there was a significant drop in asking prices during the defined period, but not the massive correction I had hoped for.

Score: 5.95/10

 Overall, 59.5% of my predictions held true in some meaningful sense.

This isn’t much fun for me as let’s be honest, it would have been fantastic for the country if all my predictions fell flat on their faces, and everything was rosy.

Sadly that is not the case, and it is far from over yet. To get almost 60% of my predictions right (some of which were pretty wild), is a token win for me, but a terrible blow for our overall economic well-being.

Have a prediction of your own or comments on my analysis? I’d love to see you in the comments.

My regular readers (or those who have delved into the archives) may recall an earlier post about my recent employment insecurity. The concern was imminent redundancies were afoot, and although we are an organisation of over 5,000, my “doom and gloom” tendencies took over and I assumed the worst.

I began preparing for redundancy as if it were going to happen the very next month. This is not a bad idea even if you are not at risk; Fully identifying your financial position, and preparing a plan in advance of such a disaster can mitigate its affects. Identify all your actual and potential sources of income. What are your obligations in terms of mortgages and other debt payments? Do you have savings? How quickly could you obtain government assistance, and what kind would it be?

I am in the fortunate position of living at home with my parents again, following my marriage breakup. The government, if I were made involuntarily redundant, would pay me £64.30 a week as Job Seeker’s Allowance, or £257.20 a month. As it stands, this would be of no material use whatsoever. My loan repayment alone is £413 a month, and that doesn’t even begin to take into account essentials such as food. The loan is insured against such an event, so it wouldn’t be a total disaster for me – but what about you?

My goal was to be debt free by New Years Day 2010. The employment panic set in around August, which gave 4 months until my target – and I was not convinced, in the slightest (courtesy of my “doom and gloom” attitude!) that I would make it. So, I began a frenzied attack on my already pared down budget, and began working myself into the ground grabbing all overtime possible.

How am I doing? … tired.

I have taken a step back now, and calculated my legal position. By virtue of UK employment law I am entitled to a weeks pay (a statutory minimum of £380 a week, if no higher is paid at the discretion of the employer), for every full year of employment. I am also entitled to a minimum of a weeks notice for every full year employed, or pay in lieu.

The interesting point from this little mental arithmetic is that I would be due either 4 weeks full pay and 4 weeks statutory minimum pay (if not more), or 8 weeks notice and 8 weeks statutory minimum pay (again, if not more) depending on my choice to work the notice period or not.

Bottom line, if I had bothered to look back in August, is my target would have been met no matter what. What my little journey to exhaustion lane has done though, is bring forward my debt freedom date somewhat, and I know that I can go into next year without any major concerns of sudden instability.

I have also read the Head Cheese’s budget report for the next financial year, and my department appears unaffected. So it appears things are good until April 2011 if nothing else!

Good times!

A few days ago I wrote that for every two steps I take forward, I appear to suffer being pushed back three. I could not see any way out of the situation I was facing, and it started to eat me up from the inside.

I am a naturally pessimistic person and automatically assume the worst of any given situation or list of potential outcomes. When the second “we don’t have any money” email came out from the Big Boss at work, I concluded that redundancy was only a paycheck or two away. It may well be, but I don’t know that. It could conceivably be a year or two away. Equally I may escape redundancy altogether. It’s entirely an unknown quantity right now.

I saw my goal of debt freedom within my grasp. After freeing myself from consumer debt, I had planned to speed-save my way to paying for my divorce when the bill finally comes in and then starting to save for my future. Everything was going to plan until those darn emails. Debt-freedom suddenly vanished.

If I paid my debt off in November when the spreadsheet said I could – but then get made redundant – I won’t be able to pay my solicitor. Net result: Still in debt.

If I carry my consumer debt but set aside a proportion of my savings  I have to pay my solicitor when the time comes – but then get made redundant – I won’t have enough to pay the settlement fee on my loan. Net result: Still in debt.

Whichever way I regurgitated those scenarios, I came out with the same result. This virtually demolished all the emotional building up I’d given myself over the past year in short order. I felt (and still do to a degree) like I was back in December 2008 again: Out of time, out of options, and despite all my hard work, still out of money.

Then I read an article over at The Simple Dollar while randomly surfing. I don’t remember which and didn’t have the presence of mind at the time to bookmark it, so I am sorry I cannot share the origin of my epiphany with you. But it provided an amazing idea to me.

If I carry my consumer debt but set aside a proportion of my savings to pay my solicitor – and then get made redundant – I can claim on my Payment Protection Insurance! I am uncertain if the cover lasts for 12 months of payments or “until employed again” (I need to read the small print), but either way, it’s a winner. If they will cover 12 months of payments then my end-insurance settlement will be somewhere around the £4,000 mark. I will have that in savings even after paying off the solicitor, with any luck.

My perception shifted.

My goal is now to become notionally debt free, even if I don’t make it happen the moment it becomes theoretically  possible. When (if?) I get comfortably beyond a positive net worth, then I will consider actually making the settlement payment. Until then, I will keep my final piece of consumer debt. The insurance on it may perversely provide a lifeline allowing the payment of another, future debt.

So thank you Trent for indirectly providing me with the idea of how to dig myself out of a hole that has not been dug yet except in my head. But having the rope and tie-off point prepared should it happen is very comforting.

The take-away lesson from this is, I guess, however bad things seem – with enough effort and help from your friends, there is always a way out to be found.