Are we living beyond our means in the UK?

This morning has seen the UK Office for National Statistics enter the fray around whilst is something of a hardy perennial amongst economic questions.

UK households have seen their outgoings surpass their income for the first time in nearly 30 years, our data have shown.

I have to confess my first thought was are you sure about the 30 years? But let us suspend that particular critical facility for a moment and continue.

On average, each UK household spent or invested around £900 more than they received in income in 2017; amounting to almost £25 billion (or about one-fifth of the annual NHS budget in England).

Households’ outgoings last outstripped their income for a whole year in 1988, although the shortfall was much smaller at just £0.3 billion.

Even in the run-up to the financial crisis of 2008 and 2009 – when 100% (and more) mortgages were offered to home buyers without a deposit – the country did not reach a point where the average household was a net borrower1.

Significant factors here will be regular topics such as the higher inflation of 2017 raising expenditure and the continuing struggles of wages growth. Although the next point raised may result in a strongly worded letter from an angry Canadian in the heart of the City of London.

To fund this shortfall, households either have to borrow – at which point they could be living beyond their means – or dip into their savings.

And our data show they are borrowing more and saving less.

Households took out nearly £80 billion in loans last year, the most in a decade; but they deposited just £37 billion with UK banks, the least since 2011.

Why might borrowing be attractive? Oh yes.

We’re borrowing more and saving less partly because the interest rate – which dictates returns on money saved and the size of loan repayments – has been at or near a record low for the past decade.

The base rate set by the Bank of England is just 0.5%, compared with almost 15% in 1990, making financial conditions better for borrowers rather than savers.

That of course does not give the Bank of England enough credit as until November the Bank Rate was 0.25% and nearly for the whole year it was supplying liquidity to the banks via the £127 billion Term Funding Scheme. It had also back in August 2016 started other Sledgehammer measures such as £10 bililion of Corporate Bond purchases and £60 billion of UK Gilt ( QE) purchases. These moves led to a succession of record low mortgage rates which perhaps the ONS is not aware of but it has spotted a likely consequence.

Households’ investment reached a record high of £74 billion in 2017, most of which was spending on new homes and major home improvements.

This provokes two lines of thought. Let us start with my subject of Monday where we noted a case of someone buying a new kitchen presumably expecting his house would rise in value by more only to discover that it was not that simple. Next is the issue that something ordinarily regarded as a “good thing” investment seems not to be quite so clearly so here.

The nib on the fountain pen of our angry Canadian may fracture under the pressure as he notes that even being unreliable has contributed.

Recently, the Bank of England has been warning the country to expect interest rate rises. Expectations of an interest rate rise can affect saving and borrowing behaviour. Borrowing could rise in the short-term as households seek to take advantage of smaller repayments, while saving could be put off amid the prospect of higher returns in future.

At this point our angry Canadian will be torn between pointing out he saved 250,000 jobs and venting his spleen by calling in Chief Economist Andy Haldane and asking for a report on developments with his adviser Billy Bragg. Oh and when did over 4 years become “recently” please? As to the pen’s nib I would not be too worried as after all there is no shortage of gold to repair it with at the Bank of England.

There was something rather familiar to readers of my work although of course something confusing for those who believed the past Bank of England claims that there was no unsecured credit boom.

The stock of consumer credit – including credit cards, car finance plans and payday loans – has risen by nearly one-third in the last five years. Car finance is comfortably the fastest growing type of credit, with nearly 90% of new car purchases now funded this way.

I think actually car finance was the fastest growing type of credit is better as the slow down in sales will put a brake on things.

The amount of money owed in short-term loans has surpassed its pre-crisis level. These loans do not require any collateral (such as a house deposit) to be approved, but they’re expensive to pay back because they demand higher interest repayments.

Oh and here is an example from the BBC of an official body getting ready for an interest-rate move.

National Savings and Investments (NS&I) is cutting the interest rate it pays on its Direct Individual Savings Account (ISA), affecting nearly 400,000 savers.

From 24 September, NS&I will reduce the rate on its Direct ISA from 1.00% to 0.75%.

Ch-ch-changes

Can anybody think how our financial behaviour might have been influenced so that we have become more like Canada?

Meanwhile, the average household in Germany and France has always been able to cover their outgoings without turning to debt, partly because they’re historically bigger savers than the UK, Canada and the US.

For a long time, the average UK household was in a similar position to those in France and Germany. However, we’re now much closer to Canada and the US than our European neighbours.

Comment

As I noted this work appearing on social media I started to wonder if it would turn out to be like that Swiss cheese with the holes in it? There are elements of that because if you are looking at borrowing in this way I think you also need an idea of asset backing ( if any) and also a realisation that some of the numbers will not be known. For example I can see how we should know the amount of bank deposits in the UK but share investments especially abroad are far from clear.

If we look at the numbers there is an unsettling tone as I note that the report talks about a financial year and the numbers are for calendar years. But I know people like them so here we go. UK financial assets at the end of 2017 were £6.6 trillion and our angry Canadian might be mollified as he notes that it has grown from £5.2 trillion in the year he took up his post especially as he can then add to it the rise in house prices. By far the largest player is pension schemes at £3.8 billion with bank deposits next at £1.57 billion.Against that total debt is £1.8 trillion so looked at like that we are (trillions of) quids in.

Except of course the £3.8 billion is against a future liability which is missed out and we are often somewhere between poor and hopeless in measuring them. From Josephine Cumbo of the Financial Times.

The adoption of a higher discount rate by USS is in keeping with other private sector schemes. This year, Tesco sliced its DB deficit largely by increasing its discount rate from 2.5% to 2.9%.

In addition there is the issue of maybe people have borrowed because they think ( perhaps are) wealthier. Or at least some are as we are reminded that in the era of the 0.01% there is a clear case of what Pink Floyd described as “Us and Them”

Meanwhile as a cricket fan let me note that there seams to have been a late swing to Imran Khan in Pakistan.