How Hunt’s tax raid has depressed consumer spending

Consumer Spending
Consumer Spending

With rail strikes, cold weather and a cost of living crisis to contend with, retailers and hospitality businesses were already facing up to a lean Christmas this year even before Jeremy Hunt stood up to the Despatch Box to deliver his Autumn Statement.

The Chancellor only added to the misery with a package of corporate tax hikes and stealth raids on households and investors. Experts believe the package means already rock bottom consumer confidence will keep falling, prompting shoppers to spend less and worsening the recession.

“There's almost a return to that almost a lockdown mentality and people have spoken about a financial lockdown,” Rich Shepherd from market research firm Mintel says. “A couple of years ago we were all locked down because of Covid. Now, we're going to be effectively locked down because we can't afford to go out potentially.”

Everyone is worried about money. British consumers have halted their spending more than in most comparable countries, retail sales are set for their worst quarter in 14 years apart from during the height of the pandemic, and business confidence continues to deteriorate.

Hunt last month froze income tax thresholds at current levels until 2028, a move that will see more people dragged into higher tax brackets in the coming years as inflation pushes up pay packets.

Shepherd says the Chancellor’s stealth income tax raid is “another piece of bad news” and “another concern” for households, acting as a drag anchor on spending over time.

“It's something that we're going to have to think about going forward and it's going to be something that keeps the brake on the recovery,” he says.

Consumer spending was already weak the Autumn Statement. In real terms it was still 3pc below pre-pandemic levels in the three months to September, OECD figures show. This makes the UK an outlier among rich advanced economies. Only Spain and the Czech Republic have seen deeper drops, while the UK is doing considerably worse than countries such as France and Germany.

Britons expect to spend 16pc less on their Christmas shopping this year, according to research from RSM, an audit and tax consultancy.

Capital Economics predicts that retail sales will fall by 0.5pc in the final three months of the year. That would be the worst performance in nearly a decade and a half, except for the final months of 2020 when millions of people were locked down and told they couldn't travel home for Christmas.

“We do think that the retail recession will drag on next year,” says Ruth Gregory of Capital Economics. “Households continue to face this nasty combination of high inflation, high mortgage rates and falling house prices.”

This slump in consumer spending is hitting businesses hard, according to David Bharier, head of research at the British Chamber for Commerce.

Business confidence has been falling for months but it is “now clear” that the Autumn Statement and the fallout from the mini-Budget have had “a further chilling effect,” he says.

The impact has been twofold, with businesses seeing their costs go up and sales go down, according to Bharier. Tax rises in the Autumn Statement are making matters worse.

“We're seeing that the types of businesses that are most likely to report diminishing confidence are actually on the retail side,” Bharier says. “So that indicates to us that there's a slowing of consumer spending.

“We got reports of retailers and hospitality firms talking about decreased bookings compared to what they would normally expect for this time of year.”

The worst may be yet to come. Many households may not yet be aware that they are set to pay more tax, as income tax bands have been frozen rather than rates going up. As inflation continues to run rampant, many will start to feel it.

“We've been seeing this big drop off in the percentage of firms expecting turnover and profitability to go up,” says Bharier. “Everyone's panicking because there's a limit to how much they can push on their costs.“

Households felt slightly more confident in November than October but sentiment is still near record lows, according to GFK. OECD figures show UK consumers were more pessimistic than average across the eurozone and among G7 countries in October, the most recent month data is available for.

“The reality hasn't really come through for a lot of people,” says Joe Staton of GfK.

GfK’s figures this week show that sales of consumer electronics over Black Friday were their lowest since 2017 as shoppers become more discerning with their money or simply avoid big purchases.

Staton said: “I think people are just running scared and running cautious in anticipation of what's going to happen next year. If people do have money they're hanging on to it.”

With Hunt’s tax grab set to be felt more keenly in the months ahead, many of us will be hanging on to our money even harder than ever. With good news in short supply, the Chancellor’s budget was an unwelcome early gift for families and businesses this Christmas.