The Reluctance of British Consumers Is a Growing Challenge for Keir Starmer's Government

How caution in consumer spending is hindering the UK's economic recovery under Labour's leadership / Broomberg

In the UK, consumers' reluctance to spend is becoming a significant obstacle for Prime Minister Keir Starmer's Labour government. Despite taking office with promises of improving living standards, the economy is facing multiple setbacks, with household spending showing no signs of picking up. According to recent data, British families, still recovering from the impacts of Labour's first budget, are prioritizing saving over spending. The increasing cost of living and job insecurity are contributing to this cautious behavior, leading to a decline in discretionary spending.

A year after Labour's budget, which was meant to address fiscal challenges, inflation remains high, and fears of job losses are exacerbating the situation. The optimism that followed Starmer’s victory in July has now faded, and the economy has contracted on a per-capita basis, with consumer sentiment showing a downward trend in recent polls. The situation has caused concern at the Bank of England, where some policymakers are even calling for a significant interest rate cut to stimulate the economy.

The role of consumer spending in the UK's economic landscape is crucial. With household spending accounting for nearly two-thirds of the nation's GDP, the current cautious outlook makes it difficult to fuel economic growth and generate the necessary tax revenues. Chancellor of the Exchequer Rachel Reeves has proposed an ambitious growth strategy, focusing on substantial investments in housing and infrastructure. However, workers are facing more immediate challenges, such as concerns over job security and wage stagnation as businesses brace for a payroll-tax hike of £26 billion ($32.9 billion) and increases in minimum wage rates.

The cautious approach to spending reflects a broader sense of economic insecurity. Jessica Hinds, Director of Economics Research at Fitch Ratings, emphasized that the cooling labor market and declining demand for workers are adding to consumer unease. Over the past five years, many households have already experienced financial shocks, and the current economic climate has done little to improve their outlook.

Although wages are growing faster than inflation, providing some hope for improving living standards, the financial cushion built during the pandemic is quickly vanishing. Despite reports of more than £2 trillion in savings across households, much of this increase has been eaten up by rising costs. Adjusted for inflation, savings are only marginally higher than they were before the pandemic, and remain far below the long-term trends that might have offered consumers a more secure financial position.

For the lowest-paid workers, wage growth has been strongest, but the additional income is often absorbed by essential bills or used to pay off debt, leaving little room for discretionary spending. Wealthier households, on the other hand, have accumulated the majority of the pandemic-era savings. However, these households are less inclined to spend, viewing their savings as a buffer against future uncertainties rather than as a means to stimulate the economy.

Consumer confidence took a significant hit after Labour warned of necessary but tough decisions to fill the fiscal gap left by the previous Conservative government. The £40 billion tax increase unveiled in October 2024, which primarily targeted businesses, deepened this sense of unease. In response, businesses are now facing the dual pressures of rising taxes and the need to protect their margins, often by cutting jobs or increasing prices.

By the end of 2024, the UK economy grew by just 0.1%, largely due to government spending, while consumer spending remained stagnant. The country also faces geopolitical tensions, rising food and energy costs, and other pressures that are further eroding consumer confidence. As a result, many households have shifted toward saving rather than spending, with a notable increase in the number of people looking to save for future financial shocks, according to research by GfK.

The lack of accessible savings for many families has become a pressing issue. For many, the rise in housing costs—now consuming about a third of new tenants’ gross incomes—has left them with less to spend on goods and services. Additionally, fixed-rate mortgage holders face higher costs when refinancing, further tightening household budgets.

Surprisingly, the Bank of England’s Catherine Mann, previously known for her hawkish stance, has now advocated for a substantial interest rate cut, signaling concerns about consumer behavior and the slow recovery in demand. Mann acknowledged that, even as interest rates decrease, consumer spending may remain subdued for an extended period, as households continue to save and manage their finances cautiously.

As households tighten their belts, spending on previously essential items—such as bread and utilities—has decreased, with many opting for cheaper alternatives. For example, more consumers are choosing personal care items over salon visits, or adjusting to cheaper housing options. The UK’s economy now finds itself in a delicate situation, where the reluctance of consumers to spend is holding back the recovery, and with rising housing and living costs, this issue is unlikely to ease in the near future.