Rising inflation and tax squeeze British spending

The typical British household will see its disposable income fall by 2 per cent this year, the equivalent of £780 ($1612), one of Britain's best-known economists warned yesterday, and will wait until 2015 to see its finances recover to the peak seen at the end of 2009.

Roger Bootle, a former government adviser who now works with Deloitte, the accountancy firm, predicted 2011 would be the worst year for household finances since 1977 and added that if interest rates were to rise, British families would not have seen conditions deteriorate so badly since 1952.

Bootle's warning, published in Deloitte's latest economic review, reflects the impact of higher inflation and taxes on income, as well as increased joblessness.

"Real incomes do not provide the definitive picture as to the health of households' finances, but taking a broader look at households' finances arguably leaves the position looking even worse," said Bootle. "I think this year will see falling real earnings, falling real house prices and rising unemployment."

In addition to higher income taxes for most, Deloitte pointed to the fact that inflation is running at 4 per cent, much faster than the rate at which pay rises are being awarded. While inflation is expected to fall before the end of this year, it may not be until next year that wage increases catch up.

The warning will worry already cash-strapped households, but also represents a headache for the economy, which continues to be highly reliant on consumer spending.

The impact of the squeeze is already being felt on the high street, with retail sales having fallen back in recent months, prompting a string of retailers to issue profit warnings.

In total, Bootle said he expected consumer spending to fall by 1 per cent this year and he warned the decline could continue into 2012, with a further 0.5 per cent decline.

The picture is clouded by the uncertain outlook for interest rates, the low level of which has until now been providing comfort for many households with variable-rate mortgages.

The Bank of England's Monetary Policy Committee is due to begin its May deliberations on interest rates today. Until recently, this was the month in which the MPC had been expected to finally begin raising rates from their historic low of 0.5 per cent.

However, a run of poor economic data, including last week's disappointing GDP figures for the first quarter, has left most economists predicting that borrowing costs will not, after all, be raised when the MPC announces its decision on Friday.

"We now expect the Bank of England to delay raising interest rates from 0.5 per cent to 0.75 per cent until November, reflecting our belief that growth will be muted during much of 2011 and that a soft labour market will prevent higher inflation expectations feeding through to lift wage growth significantly," said Howard Archer, UK strategist at IHS Global Insight.

- Independent