INCOME tax cuts and falling inflation will at last end the long squeeze on households and start to stimulate an economic recovery, top economists predicted this morning.
After five gloomy years, consumers will see disposable incomes stabilise through 2012 and accelerate next year, Ernst and Young’s Item club believes, creating a “slow and steady recovery on the high street”.
Inflation is gradually falling and prices should be brought in line with wages by the end of the year, the group forecasts.
Combined with increases in the tax-free income allowance, the average consumer will be £482 better off this year and £624 in 2013, which is expected to start feeding through to the high street.
“After the tightest squeeze on consumer incomes in a generation, the worst is now behind us and most people should start to feel a bit better off by the end of the year,” said economist Andrew Goodwin from the Item Club, explaining that the vast majority of earners will benefit from the tax changes.
“Only the top 10 per cent of the income distribution, earning above £36,000, and the bottom 10 per cent, who aren’t liable for income tax, won’t benefit from the increase in the personal allowance.”
However, the recovery will still be slow as consumers continue to battle the after-effects of the debt binge leading up to the financial crisis.
Consumer debts will act as a drag on spending as households are expected to use some of the extra cash to pay those down, particularly once interest rates start to rise towards more normal levels.
Debt levels have already improved sharply – the debt to income ratio has fallen from 173 per cent at its 2008 peak to 151 per cent at the end of 2011, but remain well above the 117 per cent seen in the US.
Furthermore, any new spike in the oil price could see inflation jump again, hitting incomes and stamping out the slow recovery.
“We still need to keep our fingers tightly crossed,” said Goodwin.
“The Eurozone crisis continues to cast a long shadow and consumer confidence could easily take another hit if the situation worsens, particularly if unemployment nudges up.”