'Painful' Budget warning dents people's confidence

21 September 2024, 10:14 BST

A long-standing measure of consumer confidence regarding finances and the broader economy has experienced a significant decline, sparking concerns that the government's warnings about a "painful" Budget have dented public trust.

GfK’s Consumer Confidence Barometer has plunged deeper into negative figures since the end of August. This index had been gradually recovering following the COVID pandemic, increased living costs, and higher interest rates, which had dampened optimism for many.

GfK noted that the latest reading doesn't offer "positive news" for the UK's new government, while some analysts have attributed the decline to Labour's pessimistic rhetoric surrounding the Budget. Labour leader Sir Keir Starmer has warned that the upcoming Budget on 30 October will be difficult, with potential tax increases and spending reductions.

One specific measure already announced is the means-testing of winter fuel payments, which will leave over nine million pensioners ineligible for up to £300 this winter. The new government has sought to emphasise the financial situation it inherited from the previous Conservative administration, but some business figures, including Iceland’s Labour-supporting boss Richard Walker, have criticised the government's "pessimistic forecasts."

According to the Institute of Directors (IoD), talk of tax hikes and increased workers' rights has also "shaken business confidence" in the UK's economic landscape. GfK's data revealed that consumers’ views on both the general economic outlook and their willingness to make large purchases had fallen sharply.

'Doom and Gloom'

GfK's latest results showed that people’s expectations for their personal finances have once again turned negative, dropping by nine points to -3. Other consumer confidence indicators also fell, with the overall index down by seven points to -20.

Nick Glynne, head of Buy It Direct Group, reported that his business, which sells large home appliances and furniture online, saw a 9% drop in website traffic, which he attributed to the "doom and gloom promoted by Keir Starmer." Glynne suggested that public concern over tax increases linked to the Budget has had an immediate impact, though he acknowledged other factors like rising mortgage costs also played a role.

Despite the drop in consumer confidence, Glynne expressed hope that the government may be "managing expectations" and that relief could come with a continued decline in mortgage rates by November.

The decrease in confidence came as a surprise, following the Bank of England's recent interest rate cut to 5% in August, which was intended to ease financial pressures on households. The Bank has hinted at further interest rate reductions, though "gradually."

Inflation, which tracks the rate of price increases, has also dropped significantly, staying at 2.2% in August, just above the Bank’s 2% target.

"Even with inflation stabilising and the prospect of more interest rate cuts, this doesn’t bode well for the new UK government," said Neil Bellamy, consumer insights director at GfK. He noted that the removal of winter fuel payments and the warning of further tough choices regarding taxes, spending, and welfare have left consumers "anxiously" awaiting the Budget on 30 October.

The Government's Fiscal Outlook

The government has stated it faces a £22bn financial shortfall this year, with £9bn of that attributed to the decision to offer above-inflation pay raises to public sector workers. Justin King, former CEO of Sainsbury's and chair of Ovo Energy, compared the situation to a company in recovery, stressing the importance of aligning public expectations with reality.

"I think there's also an element of managing expectations," King told the BBC’s Today programme. "The government will want the Budget to feel less severe than anticipated, so it's better to set the bar low now and let the final outcome seem more favourable."

With further details of the Budget approaching, it is evident that the government is preparing the public for tax increases, welfare cuts, and potential departmental budget reductions. While the Chancellor and Prime Minister are expected to deliver a more optimistic economic outlook at the Labour Party conference and an upcoming investment summit, the anticipation of these fiscal challenges has already influenced public sentiment.