Household finances: income, saving and debt Contents

2Overall levels of household saving and debt

The flow of income into savings (the household saving ratio)

19.The aggregate flow of household incomes into savings and investments has been lower in the past two decades than it was in preceding decades, and it has fallen to historic lows in the last two years. The household saving ratio (the difference between total disposable income net of taxes and total consumption spending across all households) averaged 8–9 per cent since 2000, compared with 11–12 per cent over the 1980s and 1990s. The ratio rose immediately after the financial crisis, but it fell sharply in the latter part of 2016. In 2017, the household saving ratio was just 4.2 per cent, the lowest on record (since 1963).20

20.The full measure of household disposable income includes income from financial investments and imputed income that has little relation to day-to-day household finances.21 The Office for National Statistics (ONS) also produces a “savings ratio on a cash basis” that excludes these sources of income and which witnesses to this inquiry agreed was a more relevant measure of the proportion of income that households feel they are putting aside.22 This ratio also fell back sharply in late 2016, and in 2017 it was negative for the first time since before the financial crisis.23

Chart 2.1 Household net saving ratio (% of disposable income)

Sources: Office for National Statistics, Quarterly sector accounts UK: January to March 2018, 29 June 2018 and Alternative measures of UK households’ income and saving: January to March 2018, 4 July 2018

21.The long-term decline in the total saving ratio may reflect an ageing population, as retirees drawing down their savings account for an ever-greater share of households.24 John Glen, the Economic Secretary to the Treasury told the Committee that the decline since 2016 may also be a result of improved confidence, since “people tend to save more when the economy is in a worse state, because they feel vulnerable and they cannot access credit”.25 This may be a factor, but the Committee has taken evidence that the interruption to growth in real incomes that occurred over 2016 to 2017, while consumer spending slowed but continued to grow, was a greater influence in pushing down saving rates.26

22.The saving ratio is a macroeconomic residual that can be highly volatile from quarter to quarter, so short-term movements in it must be interpreted cautiously.27 Nonetheless, the prospect of the saving ratio remaining at historically low levels, as it does in the latest Office for Budget Responsibility (OBR) and Bank of England forecasts,28 may be a cause for concern. Professor Sir Charles Bean, a member of the OBR’s Budget Responsibility Committee, told the Committee:

The point that the saving ratio cannot keep on falling is an important one. The only way you can do that is by building up more and more debt and, ultimately, that would be unsustainable for households, so that is the reason for thinking that there is a limit to how far down it can go. Obviously if you have temporary fluctuations in income, you might have shortterm movements in the saving ratio, but you would not expect it to settle at a very low rate.29

23.Household saving can be combined with household investment to give the household sector’s overall rate of net lending (net saving) to the other sectors of the economy. Across the economy as a whole, sectoral borrowing and saving must balance. If households are to be net lenders, then the combination of government, corporations and the rest of the world must be net borrowers. Sir Charles observed that falls in household saving in recent years has been correlated, to some extent, with falls in government borrowing, although he was unsure about causation:

There certainly is a correlation… [whether it is causal] is the much harder thing to tease out. My story for the last few years would be that consumers retrenched at the time of the financial crisis… with the rise in unemployment and the slowdown in income growth… it stayed high for quite a while and then has been coming down gradually. That is the sort of mirror, at least partially, of what has been happening to government borrowing. As the Government have been borrowing less, households have been saving less. That is the flip.

When asked whether public sector net borrowing could fall to zero while household saving rates rose, Sir Charles said it was possible if, for example, corporate investment increased and became a stronger driver of growth:

That depends on what is happening with the corporate sector and, for that matter, the rest of the world… suppose there is an autonomous recovery in investment. Now companies start dissaving. You could have a world where households might be saving quite happily and also government borrowing has come down to relatively low levels to balance or whatever.

Chart 2.2 Sectoral net lending (% of GDP)

Sources: Office for National Statistics, Quarterly sector accounts UK: January to March 2018, 29 June 2018; and Office for Budget Responsibility, Economic and fiscal outlook March 2018, 13 March 2018

24.The aggregate household saving ratio is volatile, and short-term movements should not be over-interpreted. Nonetheless, the recent sharp fall, to record lows on certain definitions, is a cause for concern. It also reflects the UK economy’s reliance on consumer spending to drive growth. If rates of household saving remain low, it could reduce the resilience of households to downturns and undermine any gains to economic stability from cutting public sector borrowing.

Overall levels of household debt

25.Aggregate levels of household debt have fallen relative to household incomes since the financial crisis. Excluding student loans, household debt amounted to 125 per cent of annual disposable income in 2017, up a little from 122 per cent in 2015, but down from 144 per cent in 2008.30 Nonetheless, household debt remains high by historical standards (it was below 100 per cent of income prior to 2002). The clear majority (78 per cent of the total) of household debt is mortgage debt secured on dwellings, and therefore rises in house prices are a driver of the long-term rise in debt levels. Consumer credit is a relatively small part of overall household debt (12 percent), but has grown rapidly in recent years. The pace has eased recently, from a peak of 11 per cent annually in November 2016 to 9 per cent in April 2018.31

26.The Bank of England’s Financial Policy Committee believes that the risk to UK financial stability arising from UK household debt is at a manageable level. The FPC has taken steps to constrain the growth in consumer credit and high income-multiple mortgages in recent years. The Governor told the Committee:

The overall context is that UK households have worked hard. They have paid down a lot of debt. At its trough, they paid down 20 percentage points of debt relative to income, vis-à-vis the peak that came in 2008. There has been some pickup from there, but it is still down 14 percentage points from the peak. The second point is that people have got themselves into work. They have improved their balance sheets. The quality of the borrowers has gone up quite substantially …

The third point is that from a debt service perspective… the burden on the people who are borrowing… is very low. The debt service ratio is about 7.7 per cent. The historic average is about 9 per cent.

With that context, from a Financial Policy Committee perspective, we see [consumer credit] as a pocket of risk. As you note, it has been growing at 10 per cent rates and, as we note in terms of our reviews of the underwriting standards, as I said a moment ago, in our judgment, banks have given too much credit for the improvement in the underlying creditworthiness of those households. We are looking for an adjustment to be made …

Dr Carney also said that the rapid growth in consumer credit in recent years had been inflated by a “statistical anomaly” due to the growth in personal contract purchase (PCP) car finance.32

27.A number of witnesses told the Committee that, in terms of the impact on household finances and harm to households, at present the distribution of debt, and particular types of potentially more damaging debt, were a greater concern than the overall level of debt. Ashwin Kumar, Chief Economist at the Joseph Rowntree Foundation, told the Committee:

… there are higher levels of unsecured debt for people who have higher income. It is not the debt per se; it is the problem debt that is the problem, as it were. It is people who are in arrears, people who are finding their debt a burden. Therefore, the aggregate amount of debt is perhaps not the issue.33

28.Matt Upton, Head of Policy for Consumer and Public Services at Citizens Advice, made the point that “debt with consequences”, such as bills arrears, may not fall under the strict definitions of consumer credit or household debt at all:

… people can get fixated on this £200 billion to £210 billion figure … One thing that is worth focusing on is those debts that, for obvious reasons, have more significant consequences. Those would be priority household debts around rent arrears that can involve you being kicked out of your home, energy debts that can mean you being cut off, or debts to, say, your council that can involve imprisonment.

One of the real dangers is that a lot of those debts, the non-consumer-credit debts, are not captured as part of this £200 billion figure. The Bank of England and other bodies are very clear on the size of this consumer credit bubble, but absolutely no attention is being paid to these much more damaging debts, which we know run into the billions and billions of pounds and have those more severe consequences. There is a sense of someone needing to grip the overall picture, rather than just obsessing about consumer credit.

29.In identifying where debt may cause harm to households and pose risks to the stability of household finances, it is relevant to consider the distribution of household debt, as well as the aggregate level. Additionally, it is important to take a broad view of debt, including not only financial debts, but also non-credit debts, such as rent and bills arrears to both the private and public sectors.

The balance of responsibility between regulators and Government

30.Some submissions to this inquiry have called for the Financial Conduct Authority (FCA) to be given an objective to take account of and/or improve overall levels of household saving, arguing that “there is no coherent, joined up government policy to promote saving and investing.”34 When they appeared before the Committee for this inquiry, FCA directors and the Economic Secretary to the Treasury were asked to clarify the remit of the FCA and other regulators as regards household saving and debt. They were asked in particular about the point at which saving and debt becomes a broader Government and Treasury responsibility. Christopher Woolard, the FCA’s executive director of strategy and competition said:

As a regulator, we act where we see the most harm and we particularly prioritise those who are vulnerable. If we want to translate that into the specifics that relate to households, we have looked at a number of the major markets that most affect households, so credit cards, mortgages, retirement income, asset management, which sits behind pensions that people have, and things like the payday cap and high-cost credit.

When you want to think about the overlap between ourselves and Government … when I think we are approaching questions of what you might describe as social policy, we very much look at Government …

[Regarding the overall health of the UK household balance sheet] When you look across the regulators, there are specific things that the Bank of England does, that the PRA does, that we do, and indeed some of the other utility regulators may do, that can contribute to this. When you look at the balance sheet in the round, and in particular some of the big questions like intergenerational issues, they are clearly matters principally for Government, even though regulators may contribute to some part of that.35

31.When asked whether the Treasury gives weight to the health of the household finances of the nation, as well as the public finances, when forming economic strategy, John Glen responded “absolutely we do”. When further asked to clarify whether the impact of savings on long-term structural economic stability and on future living standards is a Treasury responsibility, he responded “ultimately, of course… the Chancellor makes decisions every fiscal event about making adjustments to how we raise money and how that affects different cohorts in the population.”36

32.Ministers have not always been so clear about the Treasury’s responsibilities in the past. In response to a question in the House regarding the Government’s responsibilities for alleviating the risk of a household debt crisis, the previous Economic Secretary, Stephen Barclay, responded:

The hon. Gentleman misstates the position. It is an independent responsibility of the Bank of England to address that—[Interruption.] It is. It is of course an area where there will always be frequent discussions with the Treasury, but it is a Bank of England matter.37

The Autumn Budget 2017 report does not mention the household saving or household debt forecasts of the OBR, or discuss the implications of historically low household savings rates.38

33.The responsibility for improving overall levels of household net saving sits more appropriately with the Government and HM Treasury than the financial regulators, because they have a broader remit and a wider range of policy objectives and tools.

34.The Committee welcomes the Economic Secretary’s clarification that the Treasury does take into account the health of household finances in setting economic policy, and that Treasury Ministers are ultimately responsible for ensuring that low rates of saving or high rates of indebtedness do not imperil long-term economic stability or living standards.

35.The importance of this responsibility is not reflected in the Autumn Budget report, which contains no discussion of household savings or debt. The Treasury rightly has much to say about the public finances. In the next Budget, the Treasury should report on the state of household finances and the level and rate of household savings, at a regional and national level, including its assessment of the implications for future living standards and wider economic stability. It should identify the most consequential risks to the financial resilience of households and set out its strategy for addressing them.

20 Office for National Statistics, Quarterly sector account, UK: January to March 2018, 29 June 2018

21 For example, employers’ pension contributions and income earned by pension schemes on behalf of households.

22 Oral evidence taken on 14 November 2017, Household finances: income, saving & debt, HC 600, Q2

23 Office for National Statistics, Alternative measures of UK households’ income and saving: October to December 2017, 12 April 2018. The longer-term trends are unknown since the cash measure is not currently available prior to 1997

25 Oral evidence taken on 8 May 2018, Household finances: income, saving & debt, HC 600, Q296

26 Oral evidence taken on 22 May 2018, Bank of England Inflation Reports, HC 596, Q162–163 and Oral evidence taken on 30 November 2017, The Budget Autumn 2017, Household finances: income, saving & debt, HC 600, Q209–210

27 Oral evidence taken on 14 November 2017, Household finances: income, saving & debt, HC 600, Q2

28 Economic and fiscal outlook March 2018, 13 March 2018 and Bank of England, Inflation Report May 2018, 10 May 2018

29 Oral evidence taken on 30 November 2017, The Budget Autumn 2017, Household finances: income, saving & debt, HC 600, Q204

30 Including student loans, debt has only fallen from 147 to 133 per cent of disposable income. However, since student loan repayments are income-contingent and since the loans are written off after a certain threshold, they are unlike other forms of debt. See Treasury Committee, Seventh Report of Session 2017–19, Student loans, 6 February 2018

31 Figures are drawn from staff calculations and Bank of England, Financial Stability Report—June 2018, 27 June 2018

32 Oral evidence taken on 17 October 2017, The Work of the Bank of England, HC 474, Q40–42

33 Oral evidence taken on 14 November 2017, Household finances: income, saving & debt, HC 600, Q21

35 Oral evidence taken on 8 May 2018, Household finances: income, saving & debt, HC 600, Q249–251

36 Ibid Q297

38 HM Treasury, Autumn Budget 2017, 22 November 2017

Published: 26 July 2018