UK households living beyond their means

Written by Oliver Wade

For the first time in almost 30 years, UK households have seen their outgoings surpass their income, spending an average of £900 more than they received in income in 2017, amounting to almost £25bn, according to the latest data from the Office for National Statistics (ONS).

Households’ outgoings last surpassed their income for an entire year in 1988, though the shortfall was a much lower amount at £0.3bn.

The ONS highlighted that “even in the run-up” to the financial crisis of 2008 and 2009, when 100% of mortgages were offered to prospective home buyers without a deposit, the UK did not reach a point where the average household was a net borrower. In order to fund this shortfall, households either have had to borrow, potentially living beyond their means, or dip into their savings.

The report found that households have reverted to borrowing more and saving less, taking out almost £80bn in loans in 2017, the highest figure recorded in a decade, while only depositing £37bn with British banks, the lowest figure since 2011.

The report revealed that, in total, households accumulated more debt than assets in 2017, the first time the ONS has seen this since records began in 1987. The office has warned that, if this were to continue, UK households could risk lacking enough collateral to cover their debts.

As the base rate set by the Bank of England (BoE) is just 0.5%, compared with almost 15% in 1990, financial conditions are currently better suited towards borrowers rather than savers.

However, the BoE has recently warned the country to expect interest rate rises, which could in turn affect saving and borrowing behaviour. Borrowing could potentially increase in the short-term as households seek to take advantage of smaller payments, while saving could be postponed amid the prospect of higher returns in the future.

Commenting on the findings, AJ Bell senior analyst Tom Selby said: “UK households were forced to fill a £25 billion black hole in their collective finances in 2017 as spending outstripped income for the first time in 30 years.

“Economic growth founded on rising debt is clearly not sustainable and if this continues into the long-term it would be profoundly worrying.

“One obvious reason for this is the interest rate environment we have experienced in recent years, encouraging people to borrow more and spend rather than save at the paltry rates offered through bank accounts and Cash ISAs.

“Households took out loans totalling £80 billion last year, while less than half this amount (£37 billion) was deposited in bank accounts – the lowest amount since 2011. Households also accumulated more debt than assets since records began.

“It’s notable, if unsurprising, that the biggest problem lies among those at the lower end of the income spectrum, the poorest 10% spending two and a half times their total income during 2017.

“Put this all together and you see the significant challenge policymakers have in boosting financially resilience in the UK.”

Selby further recommended that, those “lucky enough” to have some spare cash at the end of the month should consider investing in stocks and shares through pensions and ISAs, as markets have “soared” in recent years.

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