Consumer spending expected to drop
Consumer spending is expected to drop by 0.5% or £354 million in the first quarter of next year compared with the same time last year following the VAT increase, according to a report.
Fewer than one in five retailers (18%) plan to pass on the full increase to customers by the end of January, but 95% expect to within three months, the study from price comparison website Kelkoo and the Centre for Retail Research (CRR) found.
The rise from 17.5% to 20% will cost the average household almost £520 or £212 for every man, woman and child in the UK and raise £13 billion for the Treasury, the report forecasts.
Consumers will reduce their annual spending by £324 per person following the increase, with 50% claiming they will spend less throughout the year, a survey for the study found.
More than a third of consumers (36%) have been buying early to beat the increase and more than half (53%) claim they will reduce their spending by a quarter in January alone, the poll revealed.
Kelkoo marketing director Chris Simpson said: "Retailers are facing a difficult start to 2011 and while it is widely recognised that urgent action is required to plug the hole in the UK's finances, it is imperative to avoid a sharp drop in consumer spending as it could derail the retail industry's fragile recovery from the recession.
"In the new year consumers will be left facing an increase in the price of everyday goods at a time when salaries are generally being frozen and unemployment is rising.
"Retailers have spent the last few months encouraging consumers to 'shop now to avoid the VAT increase'. However, the combination of lower disposable incomes, higher prices and a reluctance to increase borrowing is likely to result in lower levels of spending, meaning retailers may have to endure a £2.2 billion fall in retail sales in the first quarter of 2011."