The immediate future for consumer expenditure

The stockmarket was broadly pleased with the budget and consumer shares should do well following the modest reflationary implications of income tax cuts. Obviously the full benefits, in the form of a reduction in the standard rate of tax from 35% to 33%awaits the successful outcome of negotiations over future wage restraint. But the rest of the income tax package, designed to help the middle income earner, must be faintly bullish for retail shares. Immediately before the budget announcements, official figures showed a relatively large drop in living standards for the past few months. Real personal disposable income fell by between 1% and 1½% between the third and fourth quarters of 1976, a particularly sharp drop. The system of taxation, where thresholds have not been linked to inflationary factors, was cited as one of the major causes of this squeeze. The budget will have partially amended this situation, giving hope of a real, if small growth in disposable income this summer. Store shares, in any case, had been expecting some minor boost to consumer spending. During March store shares had been one of the best performance charts. The benefits of tax cuts should be felt from the spring onwards while in the summer there should be an additional boost from tax rebates. But profitability in the retail sector must be partially dependent on any future wage agreement. A flat rate adjustment will be relatively bad news, since retail wages are among the lowest in industry. There has, mercifully, been no tinkering with value added tax in this budget. The fact that the budget favours the middling income groups must be a mildly optimistic signal for department stores and other types of outlet in the upmarket retail sector. The gains further down the scale are likely to be felt in the supermarkets such as Tesco, where there has been substantial trading down amongst customers as incomes were squeezed.