Consumer windfall could yet save the Tories

'If I were John Major, I would be quite eager to hang around for as long as possible, just in case these pots of money should have a dramatic effect on the mood of the electorate'
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The Independent Online
In his interview with David Frost, the Prime Minister again made it clear that he intends to soldier on for an election in 1997. Of course, he has little option but to say that at the present juncture, and he can always change his mind. The obvious difficulties of governing with such a thin parliamentary majority give him a cast-iron excuse to go to the polls whenever he likes. But all the private signs are that the Tories are genuinely preparing for another 15 months in government.

Not everyone thinks this is a good idea. Simon Jenkins argued in the Times last Wednesday that such is the disarray in the back-bench ranks, such is the lameness of the governing duck, that the Prime Minister's best chance is to go to the country this summer. If we think only of the politics of Westminster, and particularly of the difficulty of keeping the children inside the nursery, this may be right.

But what about economics? What about that most over-used concept in the political lexicon, the feel-good factor? Simon Jenkins may have reckoned without the succession of large nest-eggs, most of them nothing to do with the Government, which will be jingling into the pockets of the electorate between now and mid-1997. These give Mr Major every incentive to hang on for as long as the Ulster "squirearchy" will allow.

It is universally received wisdom that the consumer has had a lousy time of late. Every politician who retreats from a doorstep says as much. The estate agents who populate the news bulletins have long faces to accompany repeated prophecies of a pick-up in the housing market "next year". Champagne bartenders report that the vintage years remain in the fridge. Although shopping centres are teeming with people, customers are still said to be "price-resisitant". It is tough all round, apparently.

Despite this all-pervasive gloom from the commentators, the reality is already rather different, and is set to become more so. No nation truly short of cash could be spending around pounds 3bn a year on tearing up Lottery tickets - that is the amount the punter "invests", over and above the prize money recycled to the consumer. According to a new study by David Walton and Martin Brookes of Goldman Sachs, expenditure on the Lottery could have depressed the annual growth in retail sales volume by as much as 2 percentage points by the end of 1995. In other words, while the official data was suggesting that retail sales had grown by only 0.7 per cent in the course of last year, the underlying figure may have been over 2.5 per cent. Furthermore, new car registrations by individual purchasers - not included in retail sales - rose by around 6 per cent during 1995. And new mortgage commitments are on the rise again, as are house prices.

None of this rules out a few depressed quarters for output in the UK, since the problem of excess stockbuilding has still to be overcome, both here and in Continental Europe. Even if final demand remains quite strong, output may stagnate as companies supply the consumer off the shelves, instead of from new production. So the growth of output may drop well below the growth of demand for quite a while. However, provided that the consumer remains reasonably robust, any setback to production, even if quite sharp, will not last very long. And prospects for the consumer are, if anything, improving because of that series of windfalls mentioned earlier.

Tax cuts are not the main factor here. The Budget last November was generally seen by the Tories as a disappointment, since it added only about pounds 3.5bn to purchasing power in the coming fiscal year. But the Chancellor was perfectly well aware when he decided on his package that several extraneous factors would come to the consumer's aid before the election.

According to Messrs Walton and Brookes, personal income will be boosted by around pounds 1bn this spring when households in England and Wales receive a rebate of pounds 54.60 on their electricity bills following the recent flotation of the National Grid. Further boosts to spending power will come from the takeover of the TSB by Lloyds Bank, and from the Abbey National takeover of National and Provincial Building Society, which together will put more than pounds 1.4bn into consumers' pockets before mid-year.

Then there are the maturing Tessas to consider. Principal investments worth about pounds 15bn will be unfrozen in the first quarter of 1996. According to recent surveys of investors, much if not all of this will be immediately ploughed back into new accounts, so there will be little effect on consumer spending. But about pounds 3bn of interest payments will also become available, and a good part of this could easily find its way into spending. Finally, there is the "biggie", the real consumer jackpot, a honey pot large enough to impress Winnie the Pooh himself. This concerns the flotation of Halifax Building Society scheduled for the first half of next year. Rough estimates suggest Halifax could be capitalised in excess of pounds 9bn, all of which would be handed over in shares to individual members.

Since many of these members have never had any intention of owning an equity investment in a financial services company (as opposed to holding an account in one), they will probably sell the shares immediately and spend some of the proceeds. The experience of the much smaller pounds 1.8bn takeover of Cheltenham & Gloucester last year certainly suggests that consumer spending is boosted relative to disposable income when this sort of thing happens.

Even without another penny of tax cuts in the 1996 Budget, and not counting a penny of the principal maturing in the Tessas, the sum total of these windfalls in the next 18 months is an absolutely staggering pounds 18bn - equivalent to more than 2 per cent of total consumption in the economy over the same period. It is hard to imagine that consumers will not feel better off as this money hits their pockets, though up to half of it would come after the election if the Halifax flotation comes after polling day. (How the Chancellor must be racking his brains to think of a way of influencing the timing of that decision!)

The Bank of England argued in its November Inflation Report that the impact of all this extra money on actual consumer spending may not be very large for several reasons. Households may already have anticipated some of the impact; they are unlikely to translate the whole of a one- off windfall into immediate expenditure; and many of the consumers receiving payments have high propensities to save anyway.

Only to the extent that households are strapped for cash ("liquidity- constrained" in the economic jargon) should this monetary injection be expected to flow mainly into spending.

All this may be true. Certainly, economic theory indicates that an increase in wealth, even if unexpected, should not be immediately and fully translated into extra spending. But if I were John Major, I would be quite eager to hang around for as long as possible, just in case these pots of money should have a dramatic effect on the mood of the electorate.