Why firms need to be freed to spend

Allister Heath
DESPITE repeated promises from the coalition that it would tackle the burden of red tape, a raft of new employment rules are set to come into force over the next few years. As we report on page 1, these will cost UK firms billions of pounds in extra recurring costs, even on the government’s own figures; seven major changes are planned for 2011 alone.

This is an idiotic situation. Public spending is rightly being reined in over the next four years to prevent national bankruptcy. Unfortunately, this will impact on consumer spending – which is why we need a corporate sector-led spending recovery to compensate. That means encouraging private firms (existing and new) to spend and recruit. Instead, the coalition – with some exceptions on tribunals – is continuing to heap costs on UK Plc, or acquiesce to EU rules which will only discourage such spending and hiring. It’s ridiculous.

So far, consumer spending has been stronger than many expected. But this won’t last – so more corporate spending will be desperately needed in 2011 and beyond. Ian Stewart, Deloitte’s excellent chief economist, has crunched the numbers in a research note. Over the last year UK consumer spending rose two per cent in volume terms, despite lower wages after tax and inflation. Three forces have kept consumer spending rising – only some will keep helping out.

The first is the Bank of England’s ridiculously low interest rates, still at 0.5 per cent: these (and some deleveraging) are the main reasons why debt servicing costs have tumbled 25 per cent over the last two years. Between 2007 and 2010, real wages fell three per cent in the UK. But an average consumer had more income in real terms left after taxes and interest payments to spend in 2010 than in 2007.

The second force boosting consumer spending is that welfare payments (including the state pension) now make up 35 per cent of total consumer incomes in the UK and have risen by 12 per cent over the last two years, Deloitte’s figures reveal. Some of this has been clawed back by higher tax but most hasn’t yet.

The third force has been the stock market recovery, which has indirectly and directly boosted millions: since the first quarter of 2009, households’ net financial wealth, after stripping out mortgage and other debts, is up 33 per cent. UK households’ financial assets are worth more than twice as much as their debts, a rare reassuring statistic in an otherwise bleak balance sheet. So despite sluggish house prices and high debt, the net worth of households – the sum of assets and liabilities – has risen 13 per cent from the lows of two years ago.

So what of the future? Equities will continue to help. Nevertheless, a rise of one per cent or so in consumer spending is likely this year, so new sources of growth are needed. Necessary interest rate hikes will be the biggest drag on consumers. Cuts will hit some benefits – but spending is driven by higher income households, which will be less affected. The top 60 per cent of earners account for approximately 80 per cent of consumer spending. The best hope is for inflation to ease – allowing real wages to start rising – and corporates to start hiring. Profit-fuelled firms are beginning to splash out – but the last thing the coalition should be doing is hitting them again and again. Cameron needs to start delivering on his promises – and unleash the private sector.
Follow me on Twitter: @allisterheath