Inequality, debt and growth
Lowest income households reliant on borrowing in run up to crisis Find out more
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Debt and inequality conundrums
15 May 2012 | James Plunkett
This post originally appeared on the OECD blog
How did inequality and household debt interact in the run up to the 2008/09 financial crisis? Today, a new report by NIESR for the Resolution Foundation provides new evidence on that question for the UK. The new analysis confirms the severity of the borrowing situation of low income households in Britain before the crash and raises difficult questions about patterns of consumption in an era of high inequality.
The report’s key contribution is to dig beneath headline figures for household debt to describe the borrowing picture for households at different points in the income distribution. It’s well established that UK household debt, in common with many other countries, ballooned in the late 1990s and 2000s, with the aggregate savings ratio—the percentage of household disposable income that is saved—turning negative in 2008 for the first time since records began. Yet so far these headline figures have been something of a black box.
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Inequality, debt and growth shows that low to middle income households were reliant on borrowing to fund much of their spending for more than a decade before the financial crisis. The report reveals the full extent of the increase in borrowing and deterioration in household savings rates in the run up to the 2008/09 crisis, with the poorest 10% outspending their income by 40% by 2007. Given only a minority of the poorest are homeowners paying off their mortgage, it is highly unlikely this was counterbalanced by an increase in housing wealth.
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