Tax rises 'dampen' consumer optimism

8 January 2010

Prospective tax rises and the return of VAT to the old rate of 17.5 per cent may have had an adverse effect on consumer confidence.

Building society Nationwide reported that its monthly consumer confidence index, which assesses household outlooks on the state of the economy, and personal employment and financial prospects, dipped to 69 in December, down from the 74 registered in the previous month.

Barely a third of those polled (34 per cent) expected the economy to improve in the next six months compared with the 41 per cent in November who anticipated an upturn.

The reversion to the old 17.5 per cent standard rate of VAT, along with planned tax increases announced in the pre-Budget Report, had, Nationwide said, dented confidence among consumers.

Martin Gahbauer, Nationwide’s chief economist, commented: “The five-point fall in confidence in December suggests that an element of caution may have begun to creep back into the minds of consumers over the Christmas period.

“This comes at the end of a positive year for the index, which gained some upwards momentum in 2009 to help claw its way up from the record low seen in January. The main driver behind this revival is likely to have been a renewed hope for the future economic situation and a belief that the worst of the recession is over.”

But Mr Gahbauer went on to say that the VAT hike and other looming tax changes may have dampened optimism in December, forcing people to review their expectations for the future.

He concluded: “Although it is still early days, these lower expectations may foreshadow a more sluggish consumer outlook in 2010 as stimulus measures are withdrawn.”