Households borrowed to spend in decade running up to financial crisis

The Momentum UK Team 15 May 2012

Low to middle income households were borrowing to spend in the run up to the financial crisis according to a new report from the National Institute for Economic and Social Research (NIESR).

The report conducted on behalf of the Resolution Foundation think-tank found that between 1997 and 2007 spending grew faster than income across all households, with the shortfall more pronounced for the poorest households.

The poorest 10% of households outspent their incomes by 40% by 2007. Between 1997 and 2007 income grew by 17% while spending grew by 17% for the same group, while middle income household income grew by 33% with spending up by 43% in a single decade.

The highest income households also saw savings levels decline, outstripped by rates of spending, though to a lesser extent.

The report suggested evidence of a link between the unsustainable rise in household debt burden and the risk and impact of the financial crisis.

According to the latest figures supplied by the money education charity Credit Action average household debt stood at £8,333 excluding mortgages, and £54,542 including mortgages in 2007. In 2012 the average household debt stood at £7,903 excluding mortgages and  amd £55,436 including mortgages.

NIESR reported earlier this month that household wealth was £6.8 trillion and the end of last year, down 7.87bn compared to the end of 2007 and that wealth is unlikely to return to pre credit-crunch levels until 2019.

Gavin Kelly, chief executive of the Resolution Foundation said:

“We all know by now that the debt position of households grew starkly worse in the run up to the financial crisis. But what this report exposes is the dramatic difference for lower income households who were way outspending their incomes by 2007. Looking to the future, we need growth that is sustained by gains spread across the whole income distribution - not ever more debt for those on the lowest incomes.”

Jonathan Portes, director of NIESR said

“This research suggests that there may well have been a connection between the rise in income inequality in the years preceding the crisis and the rise in household borrowing, particularly for those on lower incomes. This doesn't explain the last crisis or tell us what to do now. But it does I believe tell us that income inequality and income distribution matter for macroeconomic policy and the sustainability of growth.”