Lower income households turn to borrowing

22 June 2020

Lower-income households are twice as likely as high-income households to have increased their use of consumer credit during the crisis, and are 50 per cent more likely to be saving less than usual, leaving them particularly exposed to the ongoing economic crisis, according to a major new Resolution Foundation report published today (Monday).

Rainy Days, published in partnership with the Standard Life Foundation, examines the distribution of wealth across Britain in the run-up to the crisis, and how the crisis is having different impacts on the balance sheets of richer and poorer households.

The report shows that those most at risk in the crisis have the weakest private savings safety net to fall back on, while the crisis itself is exposing Britain’s wealth gaps, and the ability of low-wealth households to weather the economic storm.

A typical worker in a shut-down sector of the economy – and therefore most at risk of unemployment – had average savings of just £1,900, far less than the average savings (£4,700) of someone who has been able to work from home during the crisis. These workers are most worried about making ends meet if they lost their main income source for a month (24 per cent are worried, compared to 17 per cent among those working from home).

Looking at the impact of the crisis on households across the income distribution, the report finds that lower-income households are far more likely to run down their savings and turn to high-interest credit.

Among the second poorest fifth of households, one-in-three (32 per cent) are saving less than usual, compared to one-in-six (17 per cent) who have increased their savings. One in four of these households have increased their use of consumer credit – most commonly credit cards which carry high interest rates – during the crisis.

In contrast, just one-in-eight high-income households have increased their use of consumer credit, while one-in-three (34 per cent) are seeing their savings increase significantly as their spending falls.

These very different experiences of this crisis reflect both how focused its negative effects have been on lower-income families, and the big wealth gaps across Britain before the crisis struck.

The report shows that the wealth gap between the richest and poorest tenth of households grew by more than £370,000 (in real terms) between 2006-08 and 2016-18 to reach £1.4million. Wealth gaps across the country have also grown, with London and the South East accounting for 38 per cent of all wealth in 2016-18, up from 32 per cent in 2006-08.

The Foundation adds that while wealth inequality has not increased in recent years, it remains almost twice as high as income inequality.

Rainy days shows that the lack of a private savings safety net, for so many low-income households in particular, could pose significant challenges as the Government phases out its emergency support for family incomes. It highlights the need for both a stronger social security safety net, and for policy makers to do more to tackle very large wealth gaps once Britain emerges from the crisis.

George Bangham, Economist at the Resolution Foundation, said:

“Pre-coronavirus Britain was marked by soaring wealth and damaging wealth gaps between households. These wealth divides have been exposed by the crisis. While higher-income households have built up their savings, many lower-income households have run theirs down and had to turn to high-interest credit.

“The impact of coronavirus crisis will be with families for many years to come. That’s why it’s important for the Government to both strengthen the social security safety net via Universal Credit, and assist more low and middle-income households in building up their private safety nets by boosting their savings.”

Mubin Haq, CEO at the Standard Life Foundation, said:

“Today’s report highlights how vital wealth is to our living standards. Not only does it help reduce costs, especially housing, but savings and assets provide an important buffer when income drops. Millions are now facing an income drop and in need of that buffer. Savings are not a nice to have, they are a must have.

“The growing jobs crisis and the tapering of furlough and self-employment support brings this to the fore. People who lose their jobs or have a drop in their income, and have been unable to build up their savings, are being pushed into borrowing. Those on the lowest incomes will have less choice and more likely to be reliant on high-cost credit.

“The Government needs to move quickly to make further reforms to boost incomes so people are protected from the financial crisis created by the pandemic. In the longer term the Government needs to think of ways everyone has a greater share of the wealth generated in the UK.”

Download the report