National Minimum Wage

Chapter 5: Setting the Rate
leisure. Indirectly, cleaning and security will be affected by consumer and government
spending. Investment will help determine the long-run outlook for the UK economy and thus
the health of many low-paying sectors. We now turn our attention to the prospects for
consumer spending, investment, trade and government spending.
5.7 Consumer spending depends on current income and wealth, as well as that expected in
future. Over the coming year, the forecasts suggest that nominal wage growth and pay
settlements will remain subdued, increasing by around 2.0-2.5 per cent. Although inflation is
expected to fall throughout 2012, Consumer Prices Index (CPI) inflation is forecast to remain
above the Bank of England target (2.0 per cent) by the end of 2012 with Retail Prices Index
(RPI) inflation still close to 3.0 per cent. This still implies that real earnings are likely to fall
throughout 2012. We discuss the detailed prospects for pay settlements and real earnings
growth later in this section. The measures already in place to tackle the public sector deficit
are likely to increase taxes, reduce tax credits and reduce benefits, thereby reducing post-tax
disposable incomes. Indeed, OBR forecasts suggest that real disposable household income
will have fallen by 4.7 per cent between 2009 and 2012, the largest fall in any comparable
period since records began in 1955. The previous largest fall was 1.9 per cent between 1974
and 1977. Further, per capita real household disposable income is expected to be no higher in
2015 than it was in 2005. The previous worst ten-year period was 1973-1983 when it grew
by 14.4 per cent.
5.8 During the 1990s and the pre-recessionary 2000s, wealth and expectations of future wealth
were important drivers of consumer spending. Increases in house prices led to substantial
equity withdrawal that helped fund housing renovations and extensions, new cars and
holidays. House prices fell during the recession and equity withdrawal has fallen sharply.
The housing market remains subdued and is not expected to pick up to any great extent in
2012. Indeed, property transactions, mortgage approvals and new builds are all well below
their pre-recessionary levels. Personal loans and credit card lending are also relatively
subdued, and likely to remain so, as many consumers attempt to reduce their debts.
Although equity prices picked up towards the end of 2011 and into 2012, there had been
sharp falls in the summer of 2011 as concerns about the euro and the indebtedness of banks
across Europe heightened. Equity prices were still much below their levels in 2007. All of
these influences on consumer spending suggest that it will be unlikely to boost growth
appreciably. Further, Figure 5.2 shows that consumer expectations about prospects for the
coming year have fallen back since the middle of 2011. However, despite the expected fall
in real disposable income, OBR and the median of independent forecasts expect a small
increase in private consumption in 2012 (0.2-0.3 per cent).
131