Today has seen some research published into the UK’s experience over the credit crunch era by the Social Market Foundation. Regular readers will recall that it was only last Wednesday that I analysed this claim from the Institute of Fiscal Studies.
Average income back to around pre-recession level
It turned out that the conclusion was in fact driven by the inflation measure used and that changing this assumption gave very different answers.
In total, this means that projected 2014–15 real median income is further below its 2007–08 level if CPI is used (3.0%) than if RPIJ is used (0.4%).
That is a fair bit lower! If we used the headline RPI then you can add around another 3% so it would be 6% lower. I guess that living-standards are 0.4% lower or 3% lower or 6% lower does not make such a great headline does it?! I wonder how much of the media will spot that?
Accordingly we were left with the conclusion that UK living-standards had in fact fallen with the amount determined by the inflation measure you feel is the most accurate. Sadly for the IFS this is the opposite of what they broadcast through the media. Perhaps we now know why politicians recommend the IFS!
What does the Social Market Foundation say?
It opens with something we have discussed many times on here.
Following the financial crisis, UK households experienced the longest period of falling real wages since records began. They were poorly prepared for this, having run down savings and taken on increasing amounts of debt during the 2000s.
This is a somewhat different emphasis to that provided by the IFS and I would think that the majority of readers would think that it is much more in line with their personal experience. Also tucked away is something that deserves more exposure.
saving dramatically increased and indebtedness fell.
This highlights one of the policy errors of the Bank of England as the hapless Mr Bean (Deputy Governor Charlie Bean) urged savers to spend their cash.
At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.
Savers will of course still be wondering when “they will be doing very well” as deposit rates have fallen even further since then. By contrast Sir Charles Bean retired on an index-linked (none of the CPI rubbish for Charlie as he receives the full RPI!) of £119,600 per annum at age 60 I am sure our pension experts can value this for us. For some reason the Bank of England has stopped doing so! Anyway we can conclude that Charlie will not need to dip into his savings in retirement.
The SMF conclude that there are very different experiences
Just like Charlie those at the top of the spectrum – mostly defined by themselves – seem to have done very well.
The top 20%: The top income group are far more financially secure today than those in the top incomes going into the downturn. Median financial wealth in this group increased by 64% between 2005 and 2012-13. They are now less likely to be in debt compared to the middle-income group – a reversal of the pre-crisis trend…The top 40% have also seen an improvement, although the increase in financial security is not as substantial.
Also the next group of winners is perhaps even less of a surprise.
Homeowners have been able to add more to their savings than other individuals, as they have benefited from lower housing costs. ……This is above and beyond the
any gains made from increases in property values.
We can add to this as we know that since the surveys above were taken then house prices have risen substantially. From the UK ONS.
UK average house prices increased by 9.8% over the year to December 2014
Indeed we can also factor in that the top 20% are of course more likely to live in London where in spite of a recent cooling the rises have been more substantial.
Annual house price increases in England were driven by an annual increase in London of 13.3%
The house price boom will mostly have taken place after the period of these surveys as UK house prices turned in April 2012.
If there are winners then sadly there also have to be losers in this arrangement and we see some familiar concepts at play starting with our poorest citizens.
The bottom 20%: The lowest income group are less financially secure today than those on the lowest incomes going into the downturn. By 2012-13, median financial wealth among the lowest income group was 57% lower than in 2005. Over the same period, the proportion of those on the lowest incomes with non-mortgage debt increased; and the value of that debt rose faster than incomes – by 67%.
Have they borrowed to keep going? There are all sorts of troubling consequences here.
Also the generational war which I have discussed previously pops up in the SMF analysis. The emphasis used is mine
26-35 year olds: The intergenerational gap in incomes and wealth has widened. Wages for younger workers fell substantially during the downturn – at a greater rate than the average. 26-35 year-olds today are less likely to own a home. In 2005, 74% of 26-35 year olds owned a home; by 2012-13, this had dropped to 54%.
Are these the individuals that “Help To Buy” is “helping” to buy what I consider to be overpriced houses? What could go wrong here?
I guess younger readers will be singing along to Paul Simon right now.
We work our jobs
Collect our pay
Believe we’re gliding down the highway
When in fact we’re slip slidin’ away
Slip slidin’ away
Slip slidin’ away
Indeed the gaps have widened
Most of the deleveraging that took place in the aftermath of the crisis happened among the top income group. Those on the lowest incomes have not built up their financial resilience. On average, they have less than six days’ worth of income in savings.
Two of my themes are at play here. Firstly the disastrous policy error made by the Bank of England when it “looked through” higher inflation and let it rip apart the earnings of our youngest and weakest. Secondly the interrelated theme that there is a high standard deviation of experiences or more simply we are splitting apart as a nation.
There is much to consider here and in so far as it goes we see a conclusion which is broadly in line with what we might have expected. However it does have weaknesses as highlighted below.
Pension wealth, the purpose of which is to provide an income in later life, rather than to help cope with hardship
during working lives, is excluded from our analysis.12 Similarly, housing, whilst an important component of overall wealth, is not examined in detail in this report due to the fact that, as an asset, it is relatively illiquid.
Slightly bizarre don’t you think to exclude the largest -especially these days!- and one of the largest sources of wealth! I have helped out already with a view on the ever growing household wealth or at least what it is perceived as. So let me now look at pensions. One rough and ready indicator is the value of the FTSE 100 equity index which passed 6000 to wards the end of 2012 and has recently nudged towards 7000. Those who have invested abroad such as in Germany or Japan have done a lot better as we mull the way that the QE era has increased wealth for the better-off one more time.
In a separate release we have been told this by the UK Office for National Statistics.
Our new analysis shows that between 2007 and 2012, of those aged 18 to 59 who were in income poverty1, but then entered employment, 70% moved out of poverty. The other 30% remained in poverty, despite entering employment.
This is heartening for the 70% who benefit but for the other 30% well the same song strikes up again.
Slip slidin’ away
Slip slidin’ away
You know the nearer your destination
The more you’re slip slidin’ away
Or as Seasick Steve puts it.
Cause I started out with nothing
and I’ve still got most of it left