Modelling UK household expenditure: economic versus noneconomic drivers

This article attempts to quantify the contributions of economic and noneconomic factors that drive UK consumer expenditure for 12 COICOP categories of goods and services using the structural time series model (STSM) over the period 1964Q1 to 2006Q1. This approach allows for the relative quantification of the impact of noneconomic factors on UK household expenditure demand (via a stochastic trend and stochastic seasonal) in addition to the economic factors (income and price). The results suggest that the contribution of the noneconomic factors is generally higher for ‘housing, water, electricity, gas and other fuels’, ‘health’, ‘communication’ and ‘education’; hence, they have an important role to play in these sectors. The message for policymakers is therefore that, in addition to economic incentives such as taxes which might be needed if they wish to restrain future expenditure, other policies that attempt to influence lifestyles might also need to be considered.