29th July 2013: UK Consumer Spending Review

Our baseline forecast for GDP has been revised up slightly to 0.9% in 2013. The firmer tone of retail spending, has also raised the upside risks to our consumer spendingforecast. Two challenges remain. Firstly, consumer fundamentals are under renewed pressure. The modest increase in employment in the three months to April, comes after a decline earlier in the year – clearly labour market conditions have lost the buoyancy seen last year. Wage growth continues to languish at rates well below inflation. Secondly, renewed turbulence in global financial markets – this time related to the US central bank’s monetary policy – have begun to push up bond yields in UK. While gilt yields are still at very low levels, there is a risk that that they may rise too quickly, and choke off the modest recovery underway in the UK. Government efforts to reduce the budget deficit and curb the rise in its debt are falling behind the targets set in 2010. When the new coalition’s strategy was launched, it aimed to bring the budget into balance by 2014/15. Spending cuts so far have failed to achieve the required reduction. Meanwhile, a sluggish economy has depressed tax receipts. The target for balancing the budget has been extended to 2018, but to achieve this further cuts are needed. The Spending Review contains new proposals for 2015/16.

Consumers have so far been hit directly by public sector pay constraints including a two-year wage freeze followed by a 1% rise in the current financial year; a 1% cap on benefits from April 2013; removal of child benefits for high income families and large-scale job shedding in the public sector. Indirect effects stem from weaker wage growth and higher unemployment than if austerity had been avoided. What now lies in store? Trimming of pensioners’ benefits and a curb on automatic pay increases based on tenure are possibilities. Also suggested but less likely are restricting housing benefit for the under-25s and limiting state payments to families with more than two children. Consumers in general will suffer given that, with health and most of education ringfenced, other departments will face disproportionate cuts. This could well result in a reduction of frontline delivery in local services. Tax increases in 2015/16 have been ruled out, though consumers will continue to benefit from the increase in tax allowances that came into effect in April.

Written by Sunita Bali