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Inequality led to poorest families taking on more debt, study finds Inequality led to poorest families taking on more debt, study finds
(about 9 hours later)
Britain's vulnerability to financial crisis was increased by a surge of borrowing by poor households driven by rising inequality, according to a study published on Tuesday . Britain's vulnerability to financial crisis was increased by a surge of borrowing by poor households driven by rising inequality, according to a study published on Tuesday.
The report, prepared for the Resolution Foundation thinktank by the National Institute of Economic and Social Research (NIESR), found that while the whole of the UK was living beyond its means in the boom years leading up to the crash, the tendency was most pronounced among those with the lowest incomes.The report, prepared for the Resolution Foundation thinktank by the National Institute of Economic and Social Research (NIESR), found that while the whole of the UK was living beyond its means in the boom years leading up to the crash, the tendency was most pronounced among those with the lowest incomes.
It noted that the bottom 10% of households bridged the gap between a 17% rise in incomes in the decade between 1997 and 2007 and a 43% rise in spending by taking on more debt. It added that there was evidence that the "dramatic decline in saving" among Britain's poorest families was "consistent with the view that increasing demand for, and supply of, credit to these households may have reduced the sustainability of their debt burden and hence increased the risk of crisis." It noted that the bottom 10% of households bridged the gap between a 17% rise in incomes in the decade between 1997 and 2007 and a 43% rise in spending by taking on more debt. It added that there was evidence the "dramatic decline in saving" among Britain's poorest families was "consistent with the view that increasing demand for, and supply of, credit to these households may have reduced the sustainability of their debt burden and hence increased the risk of crisis."
Middle-income families also spent more than they earned, with incomes rising by 33% and spending by 46%. But the study found that those on the lowest incomes were particularly exposed because few were owner-occupiers and so did not have an asset rising in value to offset their increased debt. The highest-income households also saw their incomes grow by less than their spending, but retained a positive – although declining – savings ratio. Middle-income families also spent more than they earned, with incomes rising by 33% and spending by 46%. But the study found that those on the lowest incomes were particularly exposed because few were owner-occupiers and so did not have an asset rising in value to offset their increased debt. The highest income households also saw their incomes grow by less than their spending, but retained a positive – although declining – savings ratio.
Gavin Kelly, chief executive of the Resolution Foundation, said: "We all know by now that the debt position of households grew starkly worse in the run-up to the financial crisis. But what this report exposes is the dramatic difference for lower-income households, who were way outspending their incomes by 2007. Looking to the future, we need growth that is sustained by gains spread across the whole income distribution – not ever more debt for those on the lowest incomes." Gavin Kelly, chief executive of the Resolution Foundation, said: "We all know by now that the debt position of households grew starkly worse in the run-up to the financial crisis. But what this report exposes is the dramatic difference for lower income households, who were way outspending their incomes by 2007. Looking to the future, we need growth that is sustained by gains spread across the whole income distribution – not ever-more debt for those on the lowest incomes."
Jonathan Portes, director of NIESR, said: "This research suggests that there may well have been a connection between the rise in income inequality in the years preceding the crisis and the rise in household borrowing, particularly for those on lower incomes. This doesn't explain the last crisis or tell us what to do now. But it does tell us that income inequality and distribution matter for macroeconomic policy and the sustainability of growth."Jonathan Portes, director of NIESR, said: "This research suggests that there may well have been a connection between the rise in income inequality in the years preceding the crisis and the rise in household borrowing, particularly for those on lower incomes. This doesn't explain the last crisis or tell us what to do now. But it does tell us that income inequality and distribution matter for macroeconomic policy and the sustainability of growth."