A fresh round of UK economic indicators are bolstering arguments that the Labour government’s efforts to prepare the public for a tough budget next month have backfired on sentiment.
Two surveys released on Thursday underscored the concerns being felt by consumers and businesses about the prospect of tax hikes and spending cuts to close what Chancellor of the Exchequer Rachel Reeves has said is a “black hole” in the public finances. Part of that effort was a headline-grabbing decision to cut winter fuel subsidies for about 10 million pensioners.
The fiscal warnings coincided with a sharp drop in confidence among employers about hiring in August, according to data released on Thursday by the Recruitment and Employment Confederation. Figures from the British Retail Consortium separately showed the net balance of households expecting the economy to deteriorate over the next three months almost tripled in September.
The surveys capture the weeks after Reeves announced in late July that she had discovered GBP22 billion ($37.77 billion) of undisclosed spending commitments left by the previous Conservative government and signaled tough decisions ahead. A similar downturn in sentiment has been recorded in surveys by the Institute of Directors, GfK and S&P Global.
Prime Minister Keir Starmer, who led Labour to victory on July 4 on a pledge to boost economic growth, tried to brighten the message in his speech to the Labour Party’s annual conference in Liverpool on Tuesday, promising “light at the end of the tunnel”. Reeves, meanwhile, pledged “no return to austerity” and real-terms spending increases over the Parliament term.
“Negative publicity surrounding the state of the UK’s finances appears to have damaged confidence in the economic outlook, particularly among older generations,” said Helen Dickinson, CEO of the British Retail Consortium.
See also: St. James’s Place to shutter GBP1.8 bil UK property funds
The REC said businesses were focusing their efforts on temporary hires, a tactic normally used in period of uncertainty. “Some of the challenges ahead that were widely discussed in August will also be weighing on employers’ minds,” said REC CEO Neil Carberry.
UK consumers are showing restraint despite falling inflation and the Bank of England easing borrowing costs. GfK’s monthly gauge of consumer confidence fell the most since Russia’s invasion of Ukraine in 2022, with consumers less willing to splash out of big-ticket items.
An S&P Global survey showed private-sector companies postponed investments this month amid worries about tax rises and spending cuts. The IoD had set the tone at the start of September with a survey showing optimism among company bosses plummeting in August.
See also: UK’s Starmer to open key summit with vow to rip up red tape
Most of the drop was due to changes in sentiment as opposed to factors like unemployment, real-wage growth and financial conditions. In fact, the Organisation for Economic Co-operation and Development on Wednesday upgraded UK growth forecasts for the next two years by more than any other Group of Seven nation.
That suggests the government’s warnings overshadowed otherwise brighter economic conditions, according to Bloomberg Economics.
“The newsflow plays an important role in determining households’ perception of the economic situation and the government has an important role in managing it,” Bloomberg economists Ana Andrade and Dan Hanson wrote in a note. “The last thing the economy needs now is a surge in consumer caution that prematurely takes the wind out of its sails.”
