In austerity-hit Britain, holiday shoppers shorten their lists

One year after Britain imposed sharp austerity measures, the holiday shopping season is feeling pinched, with Christmas lights missing and shopkeepers working hard to lure customers. 

Sitting beneath a vast, glittering star in an out-of-town shopping mall only days before Christmas, Pauline Hedges grimaces as she talks about a task she normally enjoys: choosing presents for her family.

Last month, her son lost his job as a software salesman and her two other children are feeling the pinch as well.

"We're all a bit anxious at the moment so we've agreed to cut back and keep presents really small this year," she says.

This is not what retailers – or many government economists – want to hear.

Christmas, traditionally a time of some profligacy in Britain, is a crucial trading period for retailers. And retail is pivotal to the economy at large, with consumer spending constituting two-thirds of all spending.

But one year after Britain introduced a sharp austerity program to reduce a gulf between government income and spending by 2015, Britons have shortened their shopping lists. Wage increases that have lagged behind galloping inflation, rising unemployment, and the effects of a eurozone crisis that is lowering demand from continental Europe have all contributed to fewer customers in the shops.

Last October, David Cameron's Conservative government announced measures including a cut of 19 percent on average across departments, with welfare aid to Britain's poorest people hit particularly hard. Coupled with $45 billion in tax hikes over five years, $125 billion in cuts were expected to eliminate, for the most part, Britain's $245 billion deficit.

But the remedy isn't working as quickly as had been hoped. Last month, the government announced that it will extend its punishing austerity drive. Chancellor of the Exchequer George Osborne said that the foundering economy had thwarted his goal of nearly eliminating the deficit by 2015, and that the austerity drive would continue until 2017.

He added that pay raises for public-sector workers would be capped and that job losses in the sector would rise to 710,000 from an original estimate of around 400,000.

A day later, a mass strike, the first in Britain in 30 years, closed schools and forced hospitals to postpone nonemergency operations.

The Grinch is in town

Indeed, the run-up to Christmas this year has been marked by a slew of grim news. The Office for Budget Responsibility, which Mr. Osborne set up to provide independent economic projections, said growth this year will be 0.9 percent instead of the 2.3 hoped for earlier. Unemployment has hit a 15-year high, and inflation reached 5 percent in the fall.

Though prices have since eased, thanks in part to supermarket price wars and lower gas prices, economists warn that with inflation still more than twice the rate of average salary increases, households will remain comparatively hard-up.

"Everything's got more expensive, especially bills," says Ms. Hedges. "But I think we're also just uncertain about things – even my small grandchildren worry about the economy."

Free church caroling services

As a result, there are indications that Britons are looking for alternatives to shopping to celebrate this year. Although only 20 percent of Britons describe themselves as members of the Church of England – down from 40 percent in 1983, according to the British Social Attitudes Survey – carol concerts appear to be growing more popular, according to anecdotal evidence from churchgoers.

Commercial concerts are also booming – the Royal Albert Hall in central London is holding more than 20 carol concerts this year.

But that is of little comfort to retailers struggling with falling sales. Figures for Christmas retail sales are not published until January, but in November, shopkeepers suffered their biggest annual fall in like-for-like sales since May, according to the British Retail Consortium (BRC). The value of retail sales on a like-for-like basis was 1.6 percent lower than a year ago.

"It's mostly about people's personal finances – with bills rising and wage increases not keeping up," says Sarah Cordey, a spokeswoman for the BRC. "But it's also about consumer confidence. It's made retailers very nervous in the run-up to Christmas."

That cannot have been helped by a string of recent profit warnings from companies including French Connection, a high street fashion brand. Barratts, a familiar shoe seller, went bust while outdoor goods retailer Blacks put itself up for sale.

In December, Britain's biggest retailer, Tesco, reported a drop in underlying British sales for the fourth quarter in a row while Whitbread, which runs hotels and pubs and had been resilient through the economic downturn, reported a sharp fall in sales growth, saying the grim economic outlook was to blame.

Though the government wants to shift the British economy away from consumption to exports and business investment, this is not quite what it had in mind.

Where are the Christmas lights?

Everywhere in Britain there are signs of cost-cutting. In December, the government imposed a pay freeze on Queen Elizabeth II until 2015. In villages and towns, penny-pinching local authorities are cutting back on Christmas lights: A survey found more than one-third of England's villages would be without their usual Christmas decorations this year because of the expense.

Retailers, meanwhile, have responded to the economic malaise with brighter lights and bigger Christmas displays. From price slashes of the magnitude rarely seen this side of the new year to attention-grabbing stunts, such as closing Oxford Street and Regent Street to traffic all weekend, shops are doing whatever they can to get people through their doors.

"Hamleys normally opens its doors at Christmas and people just flood in," says Laura Olver, head of buying and planning at the world-famous toy store in central London. "But this year we are having to work incredibly hard. Things are really tough."

At Cribbs Causeway, the mall in Bristol where Hedges is shopping, vast, scarlet "50 percent off" signs are plastered across most shop windows.

"I'd be in trouble this year if there weren't sales everywhere," said one salesman of sports equipment, as he stood uncertainly outside a jewelry store preparing to choose something for his wife.

Who is hit the hardest?

Conservative and Labour politicians frequently argue in the House of Commons about which Britons are hit hardest by the austerity measures. Labour argues the cuts will harm the poorest people; the government says it is the richest 10 percent that will see the biggest falls in their income.

Conservatives argue that, regardless, reform is needed as people live longer and public service pensions are unaffordable.

The strikes sparked by such measures mirror protests in continental European countries, where governments are trying to balance budget deficits with the needs of aging populations.

Economists and investors, meanwhile, are torn over austerity. They want the government to address Britain's big deficit to slow its accumulation of debt. But many worry that the cuts will contribute to a recession, which could once again push up social spending while reducing tax income from business earnings. That would drive Britain deeper into debt.

But it is personal debt that is on the minds of many Christmas shoppers in Bristol. Up to 3.5 million Britons who are short of cash and unable to access reasonable rates of credit might borrow money from loan companies demanding rates of interest of up to 4,000 percent or more this Christmas, according to a recent survey by R3, an insolvency professionals trade body.

"I'm spending as much as ever," says one father of three children who does not want to be named. "The sales just make it easier, but I'll still end up in debt."