Consumer confidence at one year high despite record-breaking debt

The monthly consumer confidence index from market research firm Gfk rose by 9 points in March to -16 from -23 in February, the survey showed an improvement in all five measures. Economists polled by Reuters had expected a smaller increase to -20.

Despite this increase, the UK government has borrowed £19.1bn last month, the highest February borrowing since monthly records began in 1993. The increase in borrowing is likely attributed to a spending splurge, according to the Office for National Statistics. Central government bodies spent £72.6bn on day-to-day activities, £14.2bn more than in February 2020, including £3.9bn on coronavirus job support schemes.

Tax receipts are also £1.5bn lower than a year ago, at £46.2bn, especially VAT, business rates and fuel duty. However, receipts from self-assessed income tax amounted to £4.2bn, £900m more than a year earlier. At the same time, public sector net debt has risen £2.1 trillion, or 97.5% of GDP, in the first 11 months of the tax year – levels not seen since the early 1960s.

So why the increased consumer confidence? Well, the announcement of the budget, as well as the roadmap provided by the government, are two likely contributing factors towards the increased confidence.

The government releasing the budget as well as the roadmap gives economic agents a plan as well as a heads up to what will happen in the future. Even if the information was bad news, by giving the news in advance, economic agents can prepare to reduce the chance of an economic shock.

Due to consumer confidence being a key component of why consumers spend, an increase in consumer confidence is essential for an increase in consumer spending. Consequently, because consumer spending is a key component of aggregate demand, making up 66% of it, aggregate demand may likely increase.

With a rising aggregate demand, Real GDP will also increase, resulting in short-term economic growth. This will lead to higher output levels, resulting in more goods and services being produced in the economy leading to an increase in VAT revenue for the UK government.

This will increase the governments budget, making it easier for them to pay back for COVID, or increase spending on public goods such as; HS2, a high-speed railway link from London to Manchester costing £106 bn designed to improve the geographical mobility of labour.

This will lead to an increase in the productive capacity of the economy as fewer resources, labour, are being wasted.

Hence, despite high borrowing levels, through the use of forward guidance, consumers have been informed that the economy should return to full normality in June. Therefore, because consumers know what will happen, they can make rational decisions and prepare, showing why, despite record-breaking borrowing levels, consumer confidence levels have still increased.


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