Inspire CEO Rob Perks writes exclusively for The Business Exchange Swindon & Wiltshire reflecting on the recent Budget change.
For five or six years, we’ve all got used to running our businesses in an environment of low inflation and extremely low interest rates. But is it all about to change and should we be taking action now to protect ourselves and our businesses? The economy has been in the longest recession in most people’s living memory and we’ve adjusted to these new conditions. Even as the recovery has become established over more recent months, the collapse in commodity prices – oil and other natural resources – has meant that inflation has remained low. Combined with very low wage inflation, this has resulted unusually, in continuing record low interest rates despite an improving economic picture.
This scenario has resulted in cheap finance, as long as you could get it, and no need really to protect the value of your assets from the ravages of inflation. Whilst this has been helpful to Governments because they could finance the national debt cheaply, it has been very unfortunate in one other very significant way. The real value of debt decreases in an inflationary environment. For those of us who took mortgages or loans out 20 or 30 years ago, we have seen the real value of those debts decrease over the intervening period because of the effects of inflation. A £50K mortgage with repayments of £300pm seemed a lot of money against a house value of £60K and a net monthly income of £1000 25 years ago. But as the house value has increased to £150K and our salary to £2500 per month, the mortgage almost seems like small change. Government debt behaves in exactly the same way so a good dose of a bit more inflation works wonders for the national debt or “deficit” as we’ve got used to hearing every day.
Consequently, I don’t think it is entirely accidental on the part of the Chancellor that this budget could inject quite a bit more inflation into the economy. Wage inflation will start to rise significantly as the new minimum wage begins to take effect. Landlords seeing their returns diminished as the new tax rules on rental income tax relief begin to bite will put up rents, higher transportation and travel costs rising with the new vehicle excise duty rates will result in costs being pushed up for the goods and services we buy, insurance costs will rise with a near 50% rise in insurance premium tax and you can see where we’re heading.
We need to plan ahead to protect our assets from higher inflation and higher interest rates. It’s all a matter of judgment as there are no crystal balls but I’ll be looking closely at switching loans to fixed rates and any investment assets to ones which will protect me from inflation. It’s a good time to get in early before markets anticipate the changes – the early bird catches the worm. Seek advice before acting. If you have that expert advice on hand, go talk to your advisors, if not, we have a list of partners who will be happy to help.
Rob Perks- CEO of Inspire
To find out more about Inspire and the business support and advice they offer visit: www.inspire.biz.co.uk or call: 01225 355553