George Osborne’s hopes of riding out the global downturn suffered a twin blow after retail sales tumbled last month and his plan to slash government borrowing appeared to be off track, despite higher tax receipts in December.
Speaking in Davos on Friday, the chancellor said he would stick to ‘plan A’ despite facing calls to relax his austerity measures and fund investment to boost growth. He said he would ignore clamours to loosen the government’s purse strings and pledged to maintain the path of deficit reduction set out in his autumn statement.
“The new year is only three weeks old, and already I’m facing calls to abandon our public spending controls and borrow freely. That would be precisely the wrong response,” he told a group of business leaders.
Osborne is under pressure after a difficult start to the year that has seen a further decline in manufacturing and construction outputand a much hoped-for resurgence on the high street last month sunk after retail spending dropped in December at its fastest pace for more than six years.
Mild weather and deep discounting dented takings for retailers during the Christmas period, according to official figures that showed a 1% fall in the value of goods bought compared with December 2014.
The Office for National Statistics (ONS) said retailers appeared to have offered discounts for longer than during previous Christmas periods, dragging down the value of sales.
A move by department stores from a one-day Black Friday sale in late November to week-long events encompassing Cyber Monday also depressed December’s figures.
“Promotions during the 2015 Christmas period were more spread out compared with 2014, with retailers offering discounts over a longer period of time rather than a one-day event. Clothing and footwear stores struggled in December due to the milder weather,” said Melanie Richard, head of retail sales at the ONS.
Compared with a month earlier, sales volumes were down 1% in December, well below expectations. . The figures follow patchy reports from big retailerson their all-important Christmas season. Clothes retailers said the warmer weather hurt sales anddisappointing sales were reported by Marks & Spencer and Next. But thebeleaguered supermarkets fared better than expected.
The government’s finances were also facing a difficult final quarter of the financial year. Borrowing of £7.5bn last month was lower than the £10.1bn expected, but took the cumulative deficit for the financial year to £72.9bn, only slightly below the £73.5bn total predicted by the Office for Budget Responsibility by April.
It will take a huge influx of tax receipts in January and February from Britain’s wealthiest taxpayers and the country’s 4.6 million self-employed workers to prevent an overshoot by April.
Sam Alderson, an economist at the consultancy CEBR, said the March budget could prove a headache for the chancellor should the OBR be forced to lower its growth forecasts and predict higher borrowing.
“Osborne is likely to have less of a spring in his step compared with recent Budget days, limiting the potential for any considerable giveaways,” he said.
Alan Clarke, a UK economist at Scotia bank, said a larger than expected contribution to the EU’s coffers last December flattered the 2015 figures. “This time a year ago, we had to give billions to the EU as UK GDP was revised up. The bigger size of the UK economy meant that our contribution to the EU budget had to rise. That wasn’t repeated this year, so borrowing is well down on a year ago,” he said.
Britain’s expanding workforce also appeared to play a major role in increasing government receipts in the form of higher-than-expected national insurance contributions, while corporation tax and VAT recovered from a lacklustre start to the year.
The Treasury clampdown on spending since the Conservative party won the election last year was another factor. Benefit payments fell, despite the increasing number of people aged over 65 and eligible for a state pension. Whitehall spending also dipped.
The official retail figures will add to concerns that the UK economy struggled in the second half of 2015, mirroring a slowdown in the global economy that has panicked financial markets.
The first glimpse of how the UK economy fared in the final months of 2015 will come next week with the release of fourth quarter GDP figures. Economists had expected the economy to have expanded 0.5% after growth of 0.4% during the third quarter, according to a Reuters poll carried out before the retail sales figures were released.
But given the reliance of the UK economy on consumer spending, the disappointing retail figures may mean GDP growth is lower than expected, economists said.