A new report warns that the declining financial position of younger workers and those on low incomes puts a limit on the UK economy’s ability to depend on consumer spending for growth.
Exclusive new research from the Social Market Foundation (SMF) and the Understanding Society Policy Unit at the Institute for Social and Economic Research (ISER) reveals that today’s younger people and those on low incomes have substantially less in savings and hold higher levels of debt than before the downturn. This is in stark contrast to the top income group, where financial wealth grew by almost two-thirds and debt levels declined sharply.
Wealth in the downturn: Winners and losers argues that while forecasts of UK GDP growth in the next parliament rely on growth in consumer spending remaining strong, SMF and Understanding Society analysis suggests that only those in older age groups and on higher incomes are in a position to start spending more. The report finds that for a large number of people, the imperative is not to increase spending, but rebuild their personal finances after the downturn.
Wealth in the downturn compares the levels of financial wealth (savings and investments) and debt (including loans, overdrafts and hire-purchase agreements but excluding mortgages) of individuals in 2012-13 (the latest available data) against individuals in 2005. The report also tracked a sample of individuals over time to see if they were better or worse off before or after the crash.
WHO WERE THE WINNERS OF THE DOWNTURN?
- The top 20% – those on the highest incomes are far more financially secure today than those on the highest incomes going into the downturn:
- Average financial wealth in this group increased by 64% between 2005 and 2012-13.
- The proportion of individuals with debt in this group fell from 43% in 2005 to 31% in 2012-13.
WHO WERE THE LOSERS OF THE DOWNTURN?
- The bottom 20% – the lowest income group are substantially less financially secure today than those on the lowest incomes going into the downturn:
- On average, those on the lowest incomes have less than six days’ worth of income in savings.
- By 2012-13, average financial wealth among the lowest income group was 57% lower than in 2005.
- Over the same period, the proportion of those on the lowest incomes with debt increased; and the value of that debt rose faster than incomes – by 67%, equivalent to around 28% of their income. The use of overdrafts has risen, most likely as a consequence of general pressure on finances.
- 26-35 year olds – the intergenerational gap in incomes and wealth has widened.
- 26-35 year-olds today are less likely to own a home. In 2005, 74% of 26-35 year olds owned a home; by 2012-13, this had dropped to 54%.
- The amount 26-35 year olds have in savings has fallen by 36%. On average, they have less than one week’s worth of income in savings.
- The proportion of 26-35 year olds in debt has fallen slightly, however the amount debt-holders in this age group owe has increased by 45%. As with the low income group, the use of overdrafts has increased.
Wealth in the downturn shows that the perception of the whole population lowering debt, cutting back on spending, and saving more doesn’t hold up to detailed analysis and that most of this took place among the top income group in the aftermath of the crisis. Those aged 26-35 and those on the lowest incomes have made little progress in building up their savings and paying down debts and are ill-prepared for future financial shocks or rises in interest rates.
SMF Chief Economist and report co-author, Nida Broughton commented:
“Our findings show that the wealth gap between rich and poor and young and old increased further during the downturn.
The economic uncertainty following the crisis prompted many to pay down their debts and build up their savings. But the young and those on low incomes missed out. Greater support is needed to help these individuals prepare for the future; yet this will be a challenging feat. It is likely that the process of repairing their personal finances will only begin once sustained wage growth materialises.”
NOTES TO EDITORS:
- Wealth in the downturn: Winners and losers will be launched at an event on Tuesday 10 March 2015. Details are available here: http://smf.jynk.net/events/wealth-in-the-downturn-winners-and-losers/
- Wealth in the downturn: Winners and losers is the result of a collaboration between the Social Market Foundation and the Understanding Society Policy Unit at the Institute for Social and Economic Research (University of Essex).
- Wealth in the downturn uses data from the British Household Panel Survey (BHPS) and its successor the Understanding Society to examine individuals ranging from the bottom incomes to the top incomes over the period 2005-2012/13, as well as split by other characteristics, including by age group and by homeownership.
- The British Household Panel Survey and Understanding Society (successor to the British Household Panel Survey) are conducted by the ISER at the University of Essex (funded by the ESRC) and is the largest survey of households in the UK.
- The Social Market Foundation (SMF) is a leading independent UK think tank which develops innovative ideas across a broad range of economic and social policy, champions policy ideas which marry markets with social justice, and takes a pro-market rather than free-market approach – smf.jynk.net.