To find out who’s to blame for economic uncertainty, reeves should look in the mirror
Household spending is down £50bn since last year. It’s hardly surprising there’s so much uncertainty in the economy given the relentless negativity of the Chancellor herself, says Paul Ormerod
Households in Britain are still saving large chunks of their incomes. The Office for National Statistics (ONS) confirmed this week that the percentage of income saved in 2024 was as high as it was in the financial crisis in the late 2000s.
At 10.4 per cent, this was a sharp rise on the 2023 figure of 7.5 per cent, itself slightly up on the 2022 rate of 6.0 per cent.
Translated into cash amounts, these numbers represent big chunks of money which are being taken out of action. Consumer spending is just over £1,700bn a year in the UK. So compared to 2023, households were spending £50bn less.
Most of the increase in savings in 2024 took place after the general election. The latest ONS data shows that in the first quarter of this year there was no let up. Households saved 10.9 per cent of their income.
This is yet another headache for Rachel Reeves and her desire to see the economy grow.
There is a large literature in economics on why people save. A key reason in practice is the level of uncertainty.
An important study, with both European and American authors, published by the European Central Bank in 2022 concluded that “higher macroeconomic uncertainty induces households to significantly and persistently reduce their total monthly spending… and can have large negative effects on economic outcomes”.
This might well seem obvious. But the empirical analysis of macroeconomic data, such as that produced by the ONS, is fraught with many problems and it is not often that conclusions which are as firm as this can be drawn.
Unnecessary and unhelpful
The question then becomes: why has uncertainty increased so much under Labour?
The obvious culprit is the Chancellor herself and the unremittingly negative story which she has been telling about the British economy.
Last September, for example, just weeks after Labour’s election victory, the former Chief Economist to the Bank of England, Andy Haldane, noted that “just after the election, there was a sense of refresh, a sense of renewal, a confidence about the UK both domestically and internationally”.
But he went on to say that the Chancellor’s claim of a £22bn black hole in the public sector finances was “both unnecessary and unhelpful”.
Haldane attacked Reeves for creating a sense of “fear and foreboding” which could undermine the economic recovery which was underway under Rishi Sunak.
Reeves has gone on to create even more uncertainty.
She claimed to have fixed the black hole, at the same time handing out large pay increases to public sector workers whose productivity has been stagnant since 1997.
Taxes were not going to go up, and they did. They were not going to go up any more, but now all the talk is that there will be further rises in the autumn.
The plain fact is that both she and the Prime Minister no longer carry any credibility in their pronouncements. Whatever they might say now, in a few weeks’ time they may have changed their minds.
John Maynard Keynes is best known for his advocacy of public spending during recessions. His work was stimulated by the Great Depression of the early 1930s.
But in his writings, he constantly stressed that psychological factors were a key determinant of the state of the economy. He coined the splendid phrase “animal spirits” to describe this phenomenon.
The negativity of the Chancellor has depressed the animal spirits of both companies and households. This is reinforced by the uncertainty she has created about the future course of policy.
As a result, firms will invest less. And households will continue to save more and spend less. In short, Reeves has talked us into what will be at best a low growth economy.
Paul Ormerod is an Honorary Professor at the Alliance Business School at the University of Manchester, an economist at Volterra Partners LLP, and author of Against the Grain: Insights of an Economic Contrarian, published by the IEA in conjunction with City PM