(Dec 7): Around a decade ago, the Bank of England (BOE) was infamously described as the UK economy’s “unreliable boyfriend”. Now that role has fallen to the British consumer, just as Rachel Reeves counts on a resurgence in spending to make her numbers stack up.
The Chancellor of the Exchequer’s budget, delivered on Nov 26, depends on higher tax revenues from workers and families in the coming years. Yet if earnings and spending don’t hold up, she risks a £40 billion (US$53 billion, or $68.66 billion) hole in the public finances.
Brits have been notably parsimonious since the pandemic, choosing to save more of their money amid ongoing worries about the state of the economy. Real consumption dropped by around 0.25% in both 2023 and 2024, the Office for Budget Responsibility said on the day of the budget.
However, the OBR — the fiscal watchdog that marks the chancellor’s work — thinks consumption will have jumped 1% this year, with growth accelerating to 1.75% by 2029. It has this element of gross domestic product (GDP) rising more strongly than others, as government stimulus and business investment fade.
Not everyone is convinced. “The way people are spending is changing and I don’t know that that’s going to flip back,” said Raoul Ruparel, director for Boston Consulting Group’s Centre for Growth.
“We have always been quite reliant on consumers, but they’re underperforming — and that is hampering growth.”
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In recent years, inflation-beating wage rises and falling borrowing costs have failed to convince people to open their wallets. Instead, households have set aside more than 10% of their disposable incomes. Retail sales volumes are still below pre-Covid levels, with shops and restaurants struggling to make ends meet.
Furthermore, those positive tailwinds are starting to drop off. Wage growth is cooling and unemployment rising, as employers try to cope with the Labour government’s higher payroll taxes.
Millions of workers will also be dragged into higher tax bands after the government’s decisions to freeze personal tax thresholds for another three years, prompting the OBR to predict that growth in real disposable income per head will grind to a halt.
“A very important assumption from the OBR is that people will maintain their consumption even when, later in the forecast, their real income declines,” Ruth Curtice, chief executive of the Resolution Foundation think tank, told the House of Commons Treasury committee last week.
A rebound in spending therefore depends on households running down their savings — something the OBR has long anticipated, yet consumers have consistently refused to do.
“Previous price shocks and the recent rise in inflation expectations are impacting future household spending decisions,” says Yael Selfin, KPMG UK’s chief economist. The BOE’s latest survey of households showed that a majority plan to spend less and save more over the next year, as they expect inflation to remain elevated.
GfK’s sentiment indicator shows consumers are reluctant to make big purchases as confidence in the economy is deteriorating.
This challenges another OBR prediction that households will go back to spending more of their income on goods paying value-added tax. That underlies forecasts that value-added tax (VAT) receipts will make up a larger share of the economy, reaching £224 billion by 2030, up 30% from 2024.
Overall, the OBR’s numbers are even more ominous, with the tax burden needing to rise to a level not previously seen in the UK. It lists a downside scenario in which earnings, equity values and consumption disappoint — leading to £40 billion less in revenue by the end of the forecast in 2030-2031.
“Consumer spending is a major driver of growth in the UK,” Selfin said. “Even a small decline is impactful.”
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