Tax measures will hit consumer budgets

22 July 2010

The effects of the emergency Budget will be felt adversely by most households and consumers in the UK, a leading economics group has predicted.

Capital Economics estimated that disposable incomes will decline by 1 per cent next year, the first drop since 1982.

By 2015, the combined £40 billion of tax increases and spending cuts set out in the Chancellor's Budget will have seen 8 per cent whittled from the average household income.

Capital Economics said that 2011 would be the toughest year, arriving as it does on the back the increase in VAT from 17.5 per to 20 per cent.

If the figures turn out to be accurate, it could come as a blow to the government's hopes of a private sector-driven recovery.

Vicky Redwood, a senior economist at Capital Economics, commented: "Consumers clearly stand to be amongst the biggest losers in the fiscal squeeze."

The Treasury own figures forecast the deficit cutting measures would cost the top 10 per cent of households £1,600 in two years' time, with average earners losing between £300 and £600, and the poorest £180.

But Capital Economics has a less optimistic view and has calculated that tax hikes by themselves will shrink average household budgets by £550 next year.

Ms Redwood added: "We expect overall real household disposable incomes, after inflation, to rise by 0.5 per cent or so this year, before falling by 1 per cent or so in 2011 and flatlining in 2012.

"This would be the tightest squeeze on incomes since the mid-1970s, when real incomes fell by almost 3 per cent in 1976 and 1977. And if we are right in thinking more fiscal tightening is yet to come, the squeeze could turn out to be worse.

"Although the Budget contained overall tax rises of £8.2 billion, households' taxes rose by nearly £11 billion to help pay for cuts in corporation tax and the rise in the threshold for employers' national insurance contributions.

"The fiscal squeeze will condemn consumer spending to a period of extraordinary weakness."