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Budget: The misplaced confidence of the British consumer Budget 2017: The misplaced confidence of the British consumer
(about 5 hours later)
A funny thing about confidence is that some people have it but shouldn't, while others should but don't.A funny thing about confidence is that some people have it but shouldn't, while others should but don't.
It's true more than ever when it comes to the confidence to spend money. And it sums up one of the challenges facing the Chancellor, Philip Hammond, as he prepares for Wednesday's Budget.It's true more than ever when it comes to the confidence to spend money. And it sums up one of the challenges facing the Chancellor, Philip Hammond, as he prepares for Wednesday's Budget.
Consumer confidence appears to be rock-solid, defying gloomy pre-EU referendum predictions that people would rein in spending. In contrast, big corporations are sitting on cash piles rather than investing it.Consumer confidence appears to be rock-solid, defying gloomy pre-EU referendum predictions that people would rein in spending. In contrast, big corporations are sitting on cash piles rather than investing it.
But is the consumer confidence well-founded? Or is the consumer a braggart, so given to outward shows of confidence that it betrays an underlying insecurity? Mostly, the consumer is stepping up spending using someone else's money.But is the consumer confidence well-founded? Or is the consumer a braggart, so given to outward shows of confidence that it betrays an underlying insecurity? Mostly, the consumer is stepping up spending using someone else's money.
The amount of goods and services being consumed is growing faster than people's incomes.The amount of goods and services being consumed is growing faster than people's incomes.
Credit card debt is at a record. Overall, unsecured debt - which excludes mortgages but includes credit cards, car loans and, notably, personal loans - is rising faster than it has in a decade and amounts to 40% of the average income.Credit card debt is at a record. Overall, unsecured debt - which excludes mortgages but includes credit cards, car loans and, notably, personal loans - is rising faster than it has in a decade and amounts to 40% of the average income.
Trouble aheadTrouble ahead
That's not surprising, perhaps, when the reliance on ultra-low interest rates to avoid anticipated economic trouble has led to the cheapest personal loans in living memory.That's not surprising, perhaps, when the reliance on ultra-low interest rates to avoid anticipated economic trouble has led to the cheapest personal loans in living memory.
If you are in trouble, consolidate your debts into a cheap personal loan - and, hey presto, manageable payments and a little left over to spend. And if you want a new car - hey, there's no-deposit finance.If you are in trouble, consolidate your debts into a cheap personal loan - and, hey presto, manageable payments and a little left over to spend. And if you want a new car - hey, there's no-deposit finance.
But can we rely on that consumer confidence to last? Inflation is edging up. With CPI at 1.8%, prices are rising more slowly than average earnings. There is trouble ahead.But can we rely on that consumer confidence to last? Inflation is edging up. With CPI at 1.8%, prices are rising more slowly than average earnings. There is trouble ahead.
If the companies from which we buy goods and services import raw materials from abroad, they are paying about a fifth more than they did a year ago. They are not passing that on - so far.If the companies from which we buy goods and services import raw materials from abroad, they are paying about a fifth more than they did a year ago. They are not passing that on - so far.
They also no longer have such a ready supply of cheap labour. Being a migrant worker is not what it used to be. The weaker pound no longer buys as many Polish zlotys or Romanian leus.They also no longer have such a ready supply of cheap labour. Being a migrant worker is not what it used to be. The weaker pound no longer buys as many Polish zlotys or Romanian leus.
Firms are under mounting pressure to raise prices. Again, the fear of losing customers is holding them back - so far.Firms are under mounting pressure to raise prices. Again, the fear of losing customers is holding them back - so far.
PrioritiesPriorities
So, what about the government's confidence to spend?So, what about the government's confidence to spend?
Every chancellor frets about the amount by which he outspends his income - the deficit. And the national debt - the accumulation of years of overspends - is nudging £1.7 trillion, or 90% of the value of the UK economy.Every chancellor frets about the amount by which he outspends his income - the deficit. And the national debt - the accumulation of years of overspends - is nudging £1.7 trillion, or 90% of the value of the UK economy.
That's why chancellors in recent years have been a bag of nerves when it comes to spending.That's why chancellors in recent years have been a bag of nerves when it comes to spending.
By contrast to gung-ho consumers, Mr Hammond doesn't think cheap interest rates should lead him to borrow more.By contrast to gung-ho consumers, Mr Hammond doesn't think cheap interest rates should lead him to borrow more.
His priority has been to cut spending even if it harms other priorities, such as supporting low-income working families. Budget measures have helped such families pay less income tax.His priority has been to cut spending even if it harms other priorities, such as supporting low-income working families. Budget measures have helped such families pay less income tax.
But for many families who are just about managing, that chink of light is eclipsed by the withdrawal of state support for those who choose to work. This is one of the biggest austerity measures that Mr Hammond has chosen to keep.But for many families who are just about managing, that chink of light is eclipsed by the withdrawal of state support for those who choose to work. This is one of the biggest austerity measures that Mr Hammond has chosen to keep.
Perhaps it is only right that the chancellor should be less confident to spend than us consumers. But if you're bored of hearing about his deficit, liven things up by thinking of your own.Perhaps it is only right that the chancellor should be less confident to spend than us consumers. But if you're bored of hearing about his deficit, liven things up by thinking of your own.
Households have deficits too; they outspend their incomes. And unlike the chancellor's deficit, ours are going the wrong way.Households have deficits too; they outspend their incomes. And unlike the chancellor's deficit, ours are going the wrong way.
Your personal deficitYour personal deficit
The Office for Budget Responsibility estimates that households will outspend their incomes by £34bn this year.The Office for Budget Responsibility estimates that households will outspend their incomes by £34bn this year.
That is set to rise to almost £50bn in the next five years. The total household debt? £1.6 trillion - a mere £100bn shy of the government's accumulated debt.That is set to rise to almost £50bn in the next five years. The total household debt? £1.6 trillion - a mere £100bn shy of the government's accumulated debt.
Ask yourself this: which deficit matters more for the future of you and your family? The chancellor's or your own?Ask yourself this: which deficit matters more for the future of you and your family? The chancellor's or your own?
So, why does so much need to be sacrificed to address the government's debt, and so little to address those of households?So, why does so much need to be sacrificed to address the government's debt, and so little to address those of households?
The government borrows money and appears to have little confidence to spend. The consumer spends borrowed money and is as confident as ever.The government borrows money and appears to have little confidence to spend. The consumer spends borrowed money and is as confident as ever.
But there is a third category: those who do have the money (pots and pots of it) but have less and less confidence to spend it. This is the corporate sector.But there is a third category: those who do have the money (pots and pots of it) but have less and less confidence to spend it. This is the corporate sector.
When prices rose faster than earnings, the consumer found their spending power shrinking; wages were not keeping up.When prices rose faster than earnings, the consumer found their spending power shrinking; wages were not keeping up.
For many large businesses it was the other way around. The prices they were charging were rising faster than labour costs.For many large businesses it was the other way around. The prices they were charging were rising faster than labour costs.
The ironyThe irony
Many businesses, especially the successful, established ones, accumulated vast sums and have been sitting on large piles of cash. In the UK, that cash pile is somewhere between half a trillion and a trillion pounds.Many businesses, especially the successful, established ones, accumulated vast sums and have been sitting on large piles of cash. In the UK, that cash pile is somewhere between half a trillion and a trillion pounds.
And here is the irony. While consumers borrow and spend, corporations sit on large pots of money too nervous to spend. In the fourth quarter of last year, business investment dropped.And here is the irony. While consumers borrow and spend, corporations sit on large pots of money too nervous to spend. In the fourth quarter of last year, business investment dropped.
If that continues, it matters greatly. The underlying problem that has stopped wages keeping up with prices and undermined living standards is a lack of growth in productivity.If that continues, it matters greatly. The underlying problem that has stopped wages keeping up with prices and undermined living standards is a lack of growth in productivity.
To improve the amount of goods or services produced by each worker - and, therefore, the amount a company can afford to pay them - there has to be investment in technology, training and infrastructure.To improve the amount of goods or services produced by each worker - and, therefore, the amount a company can afford to pay them - there has to be investment in technology, training and infrastructure.
Corporate nerves have been frayed, not least because established companies are more likely than consumers to fear the effects of Brexit.Corporate nerves have been frayed, not least because established companies are more likely than consumers to fear the effects of Brexit.
Regardless of whether that fear is justified, it may be having a harmful effect. Without increased private investment, productivity growth is a hard trick to pull off.Regardless of whether that fear is justified, it may be having a harmful effect. Without increased private investment, productivity growth is a hard trick to pull off.
The chancellor's challenge? Unlock some of that cash and get corporations to invest more.The chancellor's challenge? Unlock some of that cash and get corporations to invest more.
By threat or inducement (that is, through taxing or tax relief), Mr Hammond must shift the economy away from a dependence on the unduly confident consumer. That way, he may get the unduly nervous finance director to take a leap of faith.By threat or inducement (that is, through taxing or tax relief), Mr Hammond must shift the economy away from a dependence on the unduly confident consumer. That way, he may get the unduly nervous finance director to take a leap of faith.