British consumers are spending beyond their means, warns OBR

10th December 2014

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British consumers are spending beyond their means, the boss of the Government’s economic watchdog has warned.

Robert Chote, the chairman of the Office for Budget Responsibility told MPs on the Treasury select committee that consumer spending had accelerated ahead of wage growth at the fastest rate in two decades.

He said: “If you look at the relatively robust pace of growth over recent quarters, that has been reflected particularly in terms of the contribution from the consumer, in terms of people running down saving rather than having stronger income growth.”

He suggested that this rate of spending relative to income growth was unsustainable.

Chote added: “If you look at the last year, real consumption growth has been running further ahead of real wage growth than in almost any other year over the last 15 or 20 or so. Therefore, in our forecast the main reason we expect the quarterly pace of growth to slow is that you see consumer spending moving more into line with income growth, and being less driven by a decline in saving.”

The comments come as new research casts doubt on borrowers’ ability to absorb the cost of a rise in interest rates.

Legal & General’s Mortgage Mood survey found that a third of UK borrowers would not be able to afford their repayments if they increased by £100 – £199 a month.

In a speech today, Bank of England policy maker  Ian McCafferty argued that interest rate rises should start soon and be gradual in order to sustain the recovery.

He said that slow and early interest rate rises would help to prevent the economy from overheating.

The British Chambers of Commerce took an opposing view, claiming that early interest rate rises pose a “huge risk” to the recovery.

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