Household spending improves but incomes return to 2004 levels

The Momentum UK Team 18 June 2012

In correlation with inflation, UK households are taking home earnings equivalent to those of six years ago as incomes are bitten by their biggest fall since 1981. Consumers have been left around £34 a month worse off than last year, according to a recent report by the Insitute for Fiscal Studies.

However greater affordability of essential items and monetary awareness has meant that household finances are showing signs of improvement as consumers are ‘living more comfortably’ and making ends meet with greater ease.

Incomes hit record low

The year 2010-2011 saw the first decrease in household incomes for five years as people earned an average of 3.1pc less than the previous year, according to the Institute for Fiscal Studies (IFS).

The report suggested that this was because incomes had actually managed to creep up in the height of the recession (2008 to 2010), suffering a ‘crash and burn’ effect more recently. The knock-on effect caused last year’s drop to be the biggest fall in over 30 years with earnings to return to the 2004/5 levels.

On the subject of the fall, John Cribb of the IFS said:

“This was driven largely by a decline in real earnings, as the impact of the late 2000s recession on incomes finally started to become clear.”

The IFS research predicted an even bleaker future for household incomes. Earnings were forecasted to fall further in the year 2012/3 and it was forecasted that by 2015/6, mean incomes would be no higher than they were in 2002/3.

Household spending better managed

In contrast with the rising unemployment and inflation levels, household finances have shown recent signs of improvement according to Lloyds TSB’s Spending Power Report.

For the month of May (2012), their report highlighted that over half (54pc) of respondents live comfortably on their incomes each month, meeting all their outgoings with some left over - a 6pc increase on the month of April. Moreover the number of consumers whose incomes did not cover their outgoings for the month of May dropped to 7pc.

The report suggested that increased affordability of essential items had played a big part in slowing household spending down as the yearly growth on essential spending had decreased in almost all areas. The steadied cost of fuel mean that spending in this area dropped to its lowest in two years taking up just 5.1pc of household incomes. Gas and electricity remain the biggest consumer of monthly incomes at 11.4pc.

More consumers are also starting to realise the importance of making financial provisions as 59pc of respondents said that they would be saving any money left from their incomes after meeting outgoings in order to help enhance their ‘financial security’.

Jatin Patel, director of current accounts at Lloyds said:

“Consumers are still under real pressure financially, but we are beginning to see some initial signs that the squeeze on household finances may be easing as affordability of essential items improves.”

“Our research suggests that a growing number of people have money left over at the end of the month following outgoings.  Nonetheless, people continue to spend a large portion of their monthly income on household bills and essentials, and it is unlikely that we will see any significant further improvement until income growth returns to more positive levels.”