Household spending in Britain plunges

Household spending in Britain has fallen at an unprecedented rate over the past three years, an economic study claimed today.

In an analysis of the last recession, the Institute of Fiscal Studies (IFS) also said there were marked changes in the areas people cut back on compared with previous economic downturns.

Household expenditure fell by 5% in real terms between 2008 and the first quarter of 2009, when Britain was last officially in recession, but unlike the previous two downturns, in 1980-81 and 1990-91, spending has still not recovered to its pre-recession levels.

Food purchases were significantly lower in the last recession due to higher food prices, along with lower spending on holidays, alcohol and eating out.

Consumer durables expenditure, though, was little changed during 2008-09, something the IFS attributes to the temporary cut in VAT and the vehicle scrappage scheme introduced by the last government. In the previous recessions, consumer items saw the largest reductions in spending, according to the IFS.

The think-tank also said it was young households, where the oldest person was under 35, which reduced spending fastest while households with people over 64 carried on with little change.

Cormac O'Dea, a research economist at the IFS, said the pattern of household expenditure is crucial to the understanding of the path of the economy as it accounts for about 65% of GDP.

He said: "Continued economic weakness has gone hand in hand with continued low levels of household spending and the drop in spending since 2008 has been unprecedented in recent history both in its scale and its persistence."

Last month, the IFS warned the impact of public spending cuts and tax rises on UK household income would be felt for up to 10 years.

Government forecasts made in March implied twice as long a period of spending below the pre-recessionary period than in the previous two downturns, the IFS said, but even these forecasts are now regarded as too optimistic.

PA