Household finances: income, saving and debt Contents


5.In evidence to the Committee, Andrew Bailey, the Chief Executive of the Financial Conduct Authority (FCA), set out some of the challenges to UK household finances that form the motivation and background for this inquiry:2

If we put Brexit to one side, heroically, this is the big issue [we face]: what I broadly call the lifecycle model of borrowing, saving and pension drawdown. It is a very serious issue. What you have in the mix here is a combination of lower retirement saving rates, higher indebtedness at a younger age… people going into the housing market at a later age and therefore having mortgages to a later age, and a prolonged period of low real interest rates.

6.These challenges are linked to long-term structural changes in the UK’s economy and demography. For the most part, these changes lie outside the scope of this report’s terms of reference, but they form an important backdrop to understanding current and future pressures on household finances. Some of the changes that have a particular bearing are outlined below.

A slowdown in household income growth

7.The decade since the 2007–08 financial crisis has been an exceptionally tough one for household incomes. The Institute for Fiscal Studies (IFS) has calculated that the median equivalised real household income3 increased by 0.6 per cent per annum on average over 2007/08 to 2016/17, having fallen over the earlier part of that period and recovering at a subdued pace in the latter. That compares to an average growth rate of 2.0 per cent during the forty years prior to 2007.4

Chart 1.1 Median equivalised net household income(£ weekly, 2016/17 prices, GB only)

Source(s): Institute for Fiscal Studies, Living standards, poverty and inequality in the UK: 2018, 20 June 2018; Treasury Committee staff caluclations

8.The different components of household income have evolved in different ways since the crisis. Wage growth–the most important element for working households–has been slower in the last decade than at any point since the mid-19th Century (although there has been a robust recovery in numbers employed).5 Growth in working age benefits has been roughly zero since 2007/08 (they rose in the immediate aftermath of the crisis but fell later, reflecting employment growth and policies of successive governments to control welfare expenditure), while pensioner benefits and income from private pensions have both increased. As a result, the pressures on household finances have tended to differ across demographics. For example, according to the IFS, the gap in incomes between working-age and pensioner households has shrunk since 2007 from around 20 to 10 per cent (and has disappeared entirely if adjusted for housing costs).6

9.Relatively weak growth in earnings has been one of the most important influences on household finances in recent years. Torsten Bell, the Director of the Resolution Foundation, told the Committee that “[the effect on incomes of] the earnings squeeze that start to some degree in the mid-2000s and then became very severe from 2009 to 2014… is very big, and it dominates almost everything else.” He went on to say that, although earnings growth may pick up in the coming years, particularly for those benefiting from minimum wage rises, the incomes of some households would face pressure from the ongoing working-age benefit freeze: “No one is doing well, so the macro picture is not an inequality picture… But the difference for the next four years versus the previous five is that we are moving into more of a skewed thing… because of the benefit freeze.”7

The “new normal”: productivity and interest rates

10.The ultimate determinant of the prospects for household incomes is productivity growth. The latter has performed poorly since the financial crisis, persistently enough that the UK’s official forecasters have concluded that labour productivity growth will most likely not return to pre-crisis norms for the foreseeable future. Since the Autumn 2017 Budget, the Office for Budget Responsibility (OBR) has forecast that the future rate of productivity growth lies “roughly halfway between the pre-crisis [around 2 per cent] and post-crisis [around 0.5 per cent] averages”.8 In the Bank of England’s forecast, labour productivity does not grow by more than 1¼ per cent in any year.9

11.If the forecasters are correct about labour productivity, there will be long-term negative implications for household incomes, and most directly for wages and salaries. Robert Chote, the Chairman of the OBR, told the Committee: “weaker productivity growth over the medium term implies weaker earnings growth than you would otherwise have had. That obviously matters to most people, primarily because of what it tells you about living standards.”10

Chart 1.2 UK productivity (output per hour, 2007=100)

Sources: Office for National Statistics, Labour productivity time series, 6 July 2018; Office for Budget Responsibility, Economic and fiscal outlook March 2018, 13 March 2018; and Treasury Committee staff calculations

12.Another aspect of the changed economic outlook that has direct implications for household finances is lower real and nominal interest rates. Bank rate, the nominal interest rate set by the Bank of England’s Monetary Policy Committee (MPC), has yet to move above the record low of 0.5 per cent it reached in March 2009, and the MPC has repeatedly issued unanimously-agreed guidance “that any increases in Bank Rate would be expected to be at a gradual pace and to a limited extent”.11 Michael Saunders, a current MPC member, has indicated recently that he expects Bank rate to rise to just 2 per cent over the next few years.12 The average Bank rate in the ten years leading up to the financial crisis was close to 5 per cent.

13.Lower interest rates make mortgages and credit cheaper for households. However, for long-term saving, they imply that more income needs to be put aside, or a greater share needs to be allocated, to higher-reward, higher-risk investments, in order to obtain a given level of return. In the words of the Financial Services Consumer Panel in written evidence to the Committee, “Saving [needs] to be seen in the context of a seemingly permanent low interest rate environment… It is difficult and unrewarding to save.”13

Trends in inter-generational wealth and home ownership

14.The rate of home ownership in the UK has fallen, and the decline is concentrated among younger households. In mid-2017, 51 per cent of households were owner-occupiers (with or without mortages), from a peak of 58 per cent during 2002. Home-ownership rates have fallen among all age groups, except those over the age of 65, but most steeply for those aged 24–35 (from around half in 1990 to a quarter in 2017).14

15.This shift in the rate of home ownership reflects a broader inter-generational shift in overall household wealth. A Resolution Foundation report has found that each generation born since 1956–60 currently has lower median net wealth than the preceding five-year cohort had at the same age. The shortfall is greater for those born more recently, with those born in 1986–90 having 84 per cent less wealth than those born in 1981–85 had at the same age.15 Torsten Bell told the Committee that the “dominant problem” behind the shortfall in savings for the youngest cohort was “that their wages are no higher today… than people born 15 years before them.”16

16.The impact of these trends in wealth and home ownership on lifetime household finances will unfold over decades and could be profound. If today’s younger households continue to experience a reduced rate of home ownership through their lives, more of them will need to finance rent payments out of their retirement savings. Ashwin Kumar, Chief Economist at the Joseph Rowntree Foundation, told the Committee that “there is probably 100 pounds a week difference in your housing cost if you are a renter or an owner-occupier in retirement” and Torsten Bell said “we should start worrying about how we provide that security to people who are going to be renting… think of the housing benefit bill”. In this context, the role of inheritances and parental gifts could have an amplified impact on the intra-generational distribution of wealth. An aging population is further complicating the role of inheritance by delaying the point in their lives at which people typically receive bequests. Mr Kumar said “I am particularly concerned about the idea of reinforcing inequalities through inheritances… I do not think we are even at the start of understanding how those interactions are going to play out.”17

17.Housing and incomes are only some of the pressures on inter-generational household finances. Michael Johnson, a research fellow at the Centre for Policy Studies, expanded on some of the other pressures facing younger generations:

… Generation Y18 have burdens the previous generations have not had. Currently there is around £101 billion or £102 billion of student debt, for example. Although it is income-contingent, it is not an experience that many of us in this room have had, along with all the other challenges that Generation Y has: no [defined benefit] pensions, fragmented careers etc.19


18.Household incomes were hit hard by the financial crisis and its aftermath. But structural changes to the economy—including permanently weaker productivity growth, lower rates of home ownership, lower real interest rates and an ageing population—mean that, for many households, the pressure on their finances will persist. Left unchecked, these pressures are also likely to exacerbate inter- and intra-generational differences between households.

2 Oral evidence taken on 13 June 2018, The Work of the Financial Conduct Authority, HC 475, Q340

3 The equivalised household income is adjusted for the number and age of household members, so that it gives a broadly comparable measure of the standard of living across households of different compositions. The IFS adjusts incomes so that they are equivalent to that of a household with two adults and no children, using the OECD equivalence scale.

4 Institute for Fiscal Studies, Living standards, poverty and inequality in the UK: 2018, 20 June 2018

5 Mark Carney, The Spectre of Monetarism, Speech at Liverpool John Moores University, 6 December 2016

6 Institute for Fiscal Studies, Living standards, poverty and inequality in the UK: 2018, 20 June 2018

8 Treasury Committee, Fifth Report of Session 2017–19, Autumn Budget 2017, 22 January 2018

9 Bank of England, Inflation Report May 2018, 10 May 2018

10 Oral evidence taken on 14 November 2017, Household finances: income, saving & debt, HC 600, Q187

12 Michael Saunders, ‘Why raise rates? Why “Limited and Gradual”?’, Speech at the Fraser of Allander Institute, 20 April 2018

14 Resolution Foundation, Home ownership in the UK, 22 September 2017. The share of all households that own their home outright (currently 27 per cent) has continued to increase and surpassed the share of those with mortgages (currently 24 per cent) in 2013. Adults living in their parents’ homes are counted as separate households in these figures.

16 Oral evidence taken on 14 November 2017, Household finances: income, saving & debt, HC 600, Q8

17 Ibid, Q14, Q17, Q19, Q20, Q54

18 Born in the 1980s and 1990s—Generation Y is broadly synonymous with Millennials

19 Ibid, Q54

Published: 26 July 2018