Poorest British families spent 2.5 times their income last year

By Helen Fisher on August 29, 2019

The average family overspends by £900 every year.

It would seem that a very large percentage of British households are urgently in need of proper financial advice. According to the Office for National Statistics (ONS), the average household last year spent nearly £900 more than its income, creating a total shortfall of nearly £25bn – most of which was financed via running down savings or borrowing money.

The government was warned in 2017 that the UK’s consumer credit bubble of around £200bn could not be sustained. Ever since the Brexit vote, households have come under pressure from higher inflation, slower wage growth and benefits cuts.

AJ Bell’s Research Analyst Tom Selby said that these figures presented British ministers with a strong challenge as they attempted to “build financial resilience in the UK”.

The sharp increase in debt-financed spending over the last two years has also occurred against the background of the Brexit decision, which triggered higher inflation at a time of below-average wage increases.

ONS researchers said that the current situation was worse than in 1988. Compared to other major Western nations, British households are now among the most indebted. The deficit among British households (1.2% of GDP) looks even more ominous compared to the 5.1% surplus in Germany and the 2.7% surplus in France.

The ONS report, titled  Making ends meet: are households living beyond their means?, added that in 2017, British households took out loans amounting to more than £80bn, the most since 2008 – and they deposited only £37bn in banks. Even more significant was that debt accumulation exceeded investments in pensions, shares and bonds.

Charities fighting against poverty, such as StepChange, an organisation that provides financial advice to households that are in debt, cautioned that the poor were most vulnerable and constantly in need of debt to keep their financial ships from sinking.

StepChange’s CEO Phil Andrew lashed out at the ONS for claiming that British households were living above their means, thereby implying that people could reduce their spending if they simply wanted to do so.

He said: “It’s really unfortunate that this very useful data is so heavily sprinkled with the phrase that households are ‘living beyond their means’. The reality is that too many households, here in Britain, in 2018, simply cannot make ends meet, however hard they try.”

His reaction came after the ONS said that an increase in interest rates, which is widely expected to be announced by the Bank of England within a few days, might encourage individuals to save more, which could improve household finances.

Financial advisers might take note that, according to the ONS data, the wealthiest 10% of families spent less than 50% of their available income last year, leaving significant amounts for savings and investment. The other side of this coin is that the poorest 10% spent 2.5 times their disposable income – with worrying implications for their saving potential.

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