More than half of Brits plan to cut their spending this year, according to a survey.
Although retail sales held up surprisingly well during the downturn, the expiration of the 13-month VAT cut at the start of January is likely to see consumers spend more cautiously, even as the economy officially emerges from recession.
Of those polled by accountancy software company Accountz, 52% said they expected to spend less in 2010 than last year, while only 4% planned to increase spending.
The survey makes sober reading for the government. Although the VAT reduction, along with targeted public spending, helped pull the country out of recession, VAT has now returned to its previous level of 17.5%, and the UK’s ballooning public deficit guarantees brutal cuts to government spending regardless of which party wins the next election.
Whilst the VAT rise was inevitable, it is quite likely that it will impact heavily on consumer spending at a time when the high street is already in disarray and customers are staying away
Quentin Pain, founder of Accountz
Double dip
Many observers are wondering where the momentum will come from to sustain the fragile economic recovery, so the news that consumers are planning to retrench is bad news for the retail sector and raises the spectre of a double-dip recession.
Sixty-one per cent of consumers feel that the VAT hike is fair, but most of those will nevertheless cut their spending in the face of inflation.
Forty-one percent of respondents believe it’s fair that retailers absorb the 2.5% VAT increase, while 29% think that retailers are suffering enough and shouldn’t have to shoulder the burden.
Consumers expect grocery prices to rise most steeply (61% of respondents believed this), followed by holidays and hotels (50%) and restaurants and bars (39%). Fewer customers expected to see big ticket items rise, such as technology products (30%) and furniture (25%).
“This survey highlights the financial insecurity that is rife amongst Brits at this current moment in time,” says Quentin Pain, founder of Accountz. “As much as we would like to support our retail industry and purchase items as frivolously as we once did, we are clearly evolving and becoming more savvy with our finances.
“The VAT increase is a major bone of contention for both retailers and consumers. Whilst it was inevitable, it is quite likely that it will impact heavily on consumer spending at a time when the high street is already in disarray and customers are staying away.
“It looks like 2010 could be quite a challenging year all round.”
Things could get tougher for the retail sector as speculation mounts that the Tories will increase VAT further if they get into power. The Shadow Business Secretary, Ken Clarke, warned that the Shadow Chancellor would have to consider all options at getting the runaway deficit down: “You can’t rule out any options. If you are looking at tax – which George hopes to avoid – he is bound to look at VAT along with other possible sources of revenue.”
