Greek-style Austerity Measures

British Austerity Measures Lead to Sharp Cut in Household Spending

October 25, 2010

The Scotsman - Household spending has fallen at its fastest pace for nine months as Britain's families brace themselves for the worst following last week's comprehensive spending review (CSR). October's household finance index, published today by research group Markit, will add to concerns that low consumer confidence will destabilise the UK's already weak economic recovery.

The survey reveals a sharp deterioration in household finances compared with September, with the first increase in debt since February. Households also reported even greater pessimism about the coming year.

Families reliant on public-sector salaries were the least optimistic about the next 12 months, but the survey also unearthed a concerning level of anxiety among private-sector workers.

Chief among most families' concerns is the housing market, with price expectations slumping to a 17-month low in this month's index. However, inflation expectations eased slightly.

The research paints a gloomy picture ahead of third-quarter GDP figures, published by the Office for National Statistics tomorrow. Economists are expecting growth to have slowed to 0.4 per cent, a fall of two thirds from the unexpected 1.2 per cent surge in output in the second quarter of the year. Early forecasts for the fourth quarter point to similarly subdued growth of 0.4 per cent amid low consumer confidence.

Commenting on today's survey, Tim Moore, economist at Markit, said:

"Low levels of household confidence are clearly a concern for short-term economic growth prospects, and the forthcoming 29-30 per cent reductions in some government department budgets will have added to many households' worries about their job security.

"With people adjusting their own spending in response to anxiety about future finances, the wider economy may be set for an extended soft patch before we see the long-term gains from the deficit reduction and benefits to the private sector of a leaner government."

Chancellor George Osborne continued to face accusations over the weekend that his £81 billion of spending cuts threatened to tip Britain back into recession.

One of the winners of this year's Nobel Prize in economics yesterday accused the coalition government of exaggerating the threat of a debt crisis. London School of Economics professor Christopher Pissarides said there was "minimal" risk of Britain experiencing a sovereign debt crisis like the one that brought Greece to the edge of bankruptcy earlier this year. He warned that unemployment was high and job vacancies few, and rapid spending cuts might make the situation worse. He advocated reducing the budget at a slower pace.

However, Prime Minister David Cameron defended his government's position warning that without the austerity package Britain is "looking down the barrel of economic ruin."