Mervyn King, the Governor of the Bank of England, yesterday blamed the rising tax burden on households for the sharp slowdown in consumer spending. In an unusually critical assessment, Mr King said a combination of higher taxes and rising utility, fuel and insurance bills had left households with less spare cash than they had a year earlier.
Mr King told journalists at a briefing that was broadcast online to the City there had been a "quite sharp rise" of 2 percentage points in the ratio of taxes to household disposable income in the past couple of years. "In the second half of 2004, disposable incomes were lower in nominal terms than a year earlier, so it was hardly surprising that households had less to spend," he said.
He said after accounting for taxes and what he called "boring" spending - petrol, insurance, rent and utility bills - there was less money left for "fun" spending. He said the estimate of a 2 per cent rise was driven by national insurance and income tax and did not include other levies such as VAT and petrol tax.
The Treasury insisted Mr King's view was not new and said growth in households' disposable income - money left over after income taxes and national insurance - had grown faster under Labour than the Conservatives. "Consumer confidence remains around its long-term average," a spokesman said. "Real household disposable incomes have grown by 2.6 per cent a year on average since 1997, compared with 2 per cent between 1992 and 1997."
Mr King has showed himself unafraid to offer veiled criticism of government policy. Last year he warned the "scales" of the public finances were "tilting" towards spending and admonished Ed Balls, the Chancellor's chief economic adviser, for issuing public statements on forthcoming rate decisions.
Yesterday the Bank trimmed its growth and inflation forecasts but insisted the risks were evenly balanced. "We don't enter [the MPC] meetings with any bias in either direction," Mr King said.
The forecasts acknowledged the economy had slowed faster than expected, but now forecast a sharper recovery to GDP growth rates over 3 per cent.
"We have a modest recovery in consumer spending, a small move in trade back to a positive contribution, a small recovery in business investment and a continuing contribution from public spending," he said.
The report revealed "some members" believed the risks were for lower growth towards the end of the two-year horizon, fuelling speculation next week's minutes of the November MPC meeting would show a split vote.
The Bank lowered its inflation forecast to show it hitting the 2 per cent target two years, rather than about 2.2 per cent in the August outlook.
Sterling immediately fell to a two-year low against the dollar on expectations the next move in rate would be a cut, probably in February. That was compounded by official figures showing the number of people out of work and claiming benefit had risen by 12,100 in October - the ninth monthly rise in a row and at twice the pace the City expected. Average earnings growth showed an unexpected fall to 4.1 per cent in the three months to September. But Mr King said the Bank was still worried the doubling in oil prices could trigger a spike in wage claims and high street prices although he admitted there was little sign of that so far. "We have got to go through another pay round. So far, so good but it is early to be definite."
Nick Stamenkovic, senior economist at RIA Capital Markets, said: "Mr King is clearly reluctant to do anything at the moment. The Bank is keeping its options open but if the wage round is benign and growth is weak they will cut rates at the start of next year."
Banks' lending on commercial property deals has hit an all-time high, according to official figures published yesterday that fuelled fears of an unsustainable boom.
The stock of outstanding bank debt on commercial property rose by more than 4 per cent in the third quarter to a record £133bn, the Bank of England said.
The increase was at twice the pace of overall bank debt and meant that commercial property now made up 10.2 per cent of total exposure, pipping a previous peak in 1991.
Although the flow of new lending dropped by 2 per cent to £5.5bn on the quarter, that was dwarfed by the 14 per cent dip for bank lending overall.Reuse content