Clarke fails to pass the confidence test

The Budget offered the Government an opportunity to restore consumer confidence and boost spending on the high street. However, as Tom O’Sullivan reports, Kenneth Clarke has failed to deliver on both counts.

Twelve months ago on these pages Etam finance director Keith Miles welcomed the budget and said: “The consumer will now say: ‘Thank you, now let’s get shopping’.” Miles has since left the retailer following managerial restructuring.

But more importantly consumers did not share Miles’ enthusiasm and the consumer boom craved by manufacturers and retailers failed to arrive.

So when Kenneth Clarke stood up in the Commons yesterday the c-word was again on the lips of the nation’s retailers and manufacturers. He was charged with the task of encouraging “Consumer Confidence” – getting the public to spend. Additionally he had to marry a growth in the level of consumer spending with the political hopes of a Government trying to convince a sceptical public that things really are getting better.

A derisory cut in income tax of just 1p; a relaxation of tax on savings held by the lowest rate taxpayers; 2bn of increased private sector funding of public sector projects; price hikes for the tobacco industry; concessions for the alcohol business; and investment in education, health and the police were all delivered by the Chancellor.

But the general consensus is that Clarke failed. He anticipated that there would be no increase in interest rates and that housing prices would pick up, but did nothing to encourage the process. The average family is almost 4 per week better off but with the indirect taxation on cigarettes and petrol the extra amount could be halved.

“The Chancellor’s measures will do little to stimulate consumer confidence and the business environment generally,” says Willott Kingston Smith partner Bob Willott. “There is nothing to encourage people to make long-term investments, whether in cars, houses or anything else. That is hardly good news for businesses wishing for sustained economic growth.

“Everything is short term, nothing is long term. At the moment nobody has any long term confidence and if people spend the extra money it will be on the lottery or a night at the pub.” Mintel Research on the eve of the Budget supports Willott’s argument – many people polled said they would spend any income tax cut on lottery tickets.

It is also a view echoed by Coopers & Lybrand partner Derek Jenkins who was underwhelmed by the whole exercise. The company produced a pre-budget feel-good factor index highlighting the uncertainty in the jobs market and the depressed housing sector which is fuelling consumer fears.

“It is a statement of faith that has given some stability to the economy,” says Jenkins. “Consumer confidence relies on people being sure that they will still have a job in 12 months time. The recession hit middle- income people and they will not be convinced. The Budget will not hinder steady progress but it has also not done anything to accelerate the process.”

The impact on an already fragile marketing services sector will be quickly obvious. Advertising budgets have been cut and agencies have been reporting a fall in new business for the last four months. In that environment it is difficult to see how Clarke’s Budget will have improved matters.

But James Walker, media development director at J Walter Thompson, remains confident. “This is a political Budget and the focus was for a quick fix for consumers. Ad expenditure is dominated by massive fmcg spending, one penny in the pound will have little effect on sales of margarine or cornflakes. Our forecast for 1996 is unchanged with ad expenditure growing by eight per cent next year.”

Among the biggest losers in the collapse of consumer confidence in the past 18 months has been the car industry – often taken as the barometer of the UK economy – where retail sales have fallen by more than ten per cent since June 1994. Only in the last two months have retail car sales started to reverse and many manufacturers were looking to the Budget for a further fillip.

“We were looking for something that would contribute to long-term growth and we got that,” says Vauxhall’s executive director of sales and marketing Ian Coomber. “We should start to see retail growth of about five per cent next year in a market that is still over supplied and where competitiveness is growing all the time.”

A key factor in any optimistic view of the Budget is a belief that interest rates will be cut when Clarke meets with Eddie George, Governor of the Bank of England, on December 13. Many observers believe that is why the Budget has not been as fulsome as some had hoped.

If they are wrong, even the minor fillip provided by tax cuts of more than 3bn will not be enough to get consumers shopping.

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