Budget Concerns Dampen Consumer Confidence

A significant decline in consumer confidence has raised alarms about the impact of the government’s warning of a “painful” upcoming Budget. The GfK Consumer Confidence Barometer has plunged further into negative territory since late August, signaling a troubling shift in how people feel about their finances and the economy.

Previously, the index had shown signs of recovery as the effects of the Covid pandemic, rising prices, and increased interest rates began to wane. However, the latest data offers little hope for the new government, with some economists linking the recent decline to Labour leader Sir Keir Starmer’s negative comments regarding the upcoming Budget scheduled for October 30.

Starmer has characterized the forthcoming Budget as “painful,” indicating that tax hikes and spending cuts are on the horizon. Already, the government announced plans to means-test winter fuel payments, which will exclude over nine million pensioners from receiving up to £300 this winter.

The new administration has emphasized the economic challenges inherited from the previous Conservative government. However, some business leaders, including Richard Walker, CEO of Iceland and a Labour supporter, have cautioned against what they view as “doom-laden prophecies.” The Institute of Directors (IoD) noted that discussions surrounding tax increases and enhanced employment rights have negatively affected confidence in the UK’s business environment.

GfK has reported “major corrections,” or double-digit declines, in how consumers perceive the overall economic landscape and their willingness to make significant purchases. This downturn is reflected in consumers’ outlook on their personal finances, which dropped nine points to -3. The overall consumer confidence index fell by seven points to -20, indicating widespread uncertainty.

Nick Glynne, CEO of Buy It Direct Group, observed a 9% decrease in website traffic for his business, which sells large home appliances and furniture online. He attributed this decline to the negative sentiment surrounding the Budget, saying, “It’s almost a perfect map between when the government started announcing the likelihood of bad news in the budget and the drop in demand.” Glynne expressed concern that the Budget could lead to further financial strain on consumers, particularly with rising mortgage costs.

Surprisingly, the fall in consumer confidence occurred after the Bank of England cut interest rates to 5% in August, which was expected to ease some financial pressure. The Bank has signaled the possibility of gradual further reductions in borrowing costs. Inflation has also seen a notable decline, holding steady at 2.2% in August, just above the Bank’s target.

Neil Bellamy, GfK’s consumer insights director, indicated that consumers are “nervously” awaiting the Budget, particularly following the withdrawal of winter fuel payments and warnings of more difficult decisions ahead regarding taxes and welfare. When questioned about whether the “doom and gloom” narratives were exaggerated, Chancellor Rachel Reeves defended the government’s position, stating that recent business surveys reflect a high degree of confidence in the economy, thanks to the stability restored under the current administration.

The government has acknowledged facing a £22 billion “black hole” in public finances this year, partially attributed to Reeves’s decision to grant above-inflation pay increases for public sector employees. Justin King, former CEO of Sainsbury’s, noted that, much like a company undergoing restructuring, it is crucial for the government to manage expectations effectively. He suggested that announcing all potential bad news in advance might help temper the impact of the Budget.

Despite the economic challenges, some positive indicators have emerged. Recent figures showed that the UK economy stagnated in July, and the Bank of England has revised its growth expectations for the third quarter down to 0.3% from 0.4%. However, retail sales increased by 1% in August, driven by warmer weather and seasonal discounts.

The Treasury maintains that it has been transparent about the state of the public finances and is working to rebuild the economy based on its strengths, including its leading renewable energy and service sectors. Both the Chancellor and the Prime Minister are expected to deliver a more optimistic message at the Labour Party conference next week and at an important investment summit in mid-October. Nevertheless, the government remains committed to the notion that the Budget will entail tax increases and spending cuts, underscoring the ongoing economic uncertainty facing consumers.