Hard-up families are splashing out on credit cards and eating into their savings as inflation rises, according to Britain’s top spending watchdog.
Consumers continued shopping after the Brexit vote, keeping the economy afloat and confounding doom-mongers who predicted an immediate recession.
But the Office for Budget Responsibility (OBR) – the Government’s independent watchdog – warned yesterday that this spending spree had been sustained in part by a debt binge and a raid on nest eggs.
Sir Charlie Bean, a former deputy governor of the Bank of England who now works at the OBR, said that the splurge was ‘not sustainable’.
Debt binge: Consumers continued shopping after the Brexit vote, keeping the economy afloat and confounding doom mongers
His comments drew the ire of critics who pointed out that Bean had supported slashing interest rates when he was working at the Bank, hammering savers’ returns.
And in infamous comments in 2010, he even said Britons should be ‘not saving more, but spending more’.
Former pensions minister Baroness Altmann, who criticised Bean at the time, said: ‘It’s just so strange.
‘The Bank of England’s policy is so misguided. I would hope Sir Charlie has changed his mind after looking at it from the point of view of the economy and consumers, rather than a narrow monetary policy perspective.
‘I would like to see more of the Bank of England’s current members recognising this problem.’
Yesterday, Bean said: ‘Some households will have been running down savings. The important thing is, that’s not sustainable.’
The Government announced it would hike tax rates on payouts from companies by 7.5 per cent in the July 2015 budget.
But the change did not come into effect until the following April, triggering a scramble to pocket cash before then, Budget documents revealed.
The rush cost the Exchequer £800million in lost taxes, says the Office for Budget Responsibility. It cited estimates that a seventh of this benefited just 100 people, who pocketed £30million each.
There may be a fresh rush to extract profits after Chancellor Philip Hammond announced a £5,000 tax-free allowance on dividends would be cut to £2,000 by April next year.
Consumer spending rose by 3.2 per cent in 2016 according to the OBR, its fastest increase since late 2007 before the financial crisis hit.
But incomes are believed to have been flat, implying a sharp drop in household saving rates.
Consumers are believed to have saved 0.6 per cent of their disposable incomes in the third quarter of last year, which is down from 2.8 per cent a year earlier.
The OBR said that this had dropped even further for the final three months of 2016, down to minus 0.3 per cent.
It is the first fall into negative territory since 2008 and suggests that consumers are now actually dipping into their savings pots rather than putting cash away.
Credit card lending has also picked up, although the OBR commented that this had played a smaller role.
Figures released last week showed that credit card spending had soared to a record high, with shoppers putting another £339million on plastic in January – the equivalent of nearly £11million a day or £455,000 an hour.
It took the total owed on credit cards to an all-time high of £66.7billion, which is an increase of more than £10bnillion in just five years.
The debt splurge and savings squeeze come as rising inflation pushes up prices, making the behaviour of consumers even less likely to last.
Inflation as measured by the consumer prices index hit 1.8 per cent in January and the OBR is expecting it to peak at 2.7 per cent at the end of this year.
Most savings rates are now languishing far below inflation thanks to the Bank of England’s record-low interest rates.
Even building society Nationwide admitted last month that many rates across the industry would struggle to keep pace with rising prices.
Anna Bowes of Savings Champion, which provides independent savings advice, said: ‘It’s really important that the authorities recognise the fact people are no longer saving.
‘If you don’t save then you have to rely on the State, and that’s not something people want to do.’
She added: ‘It’s good to hear people recognising that saving is so important, and they need to make it more attractive.’