Money on my mind

A lot of the time we think about rich and poor in terms of income: indeed, that is how our broader Unsung Britain project, which this paper contributes to, has set out the story so far. But living standards also depend on accrued debts and stocks of wealth. These come in lots of forms, but what matters most for the economic resilience of lower-income families are liquid savings, personal credit and arrears. These are the assets and liabilities that directly expand or restrict the ways that families can immediately adjust to financial shocks, such as job loss or unexpected costs. So in this paper we focus on those categories of debt and wealth.

If savings are the first line of economic defence, an awful lot of working-age Britain doesn’t have enough of them to be more than a few pay-days away from trouble. Half of working-age families (49 per cent) had less than three months’ income stashed away. That proportion is, unsurprisingly, higher for the bottom half (60 per cent) of the income range, but is still large (38 per cent) across the top half. Replacing lost income is a huge stretch across the spectrum. The real differential is seen, however, not in considering the capacity to cope with anything as dramatic as a redundancy, but rather in having access to the sort of fixed cash sums needed to deal with the one-off costs that almost inevitably crop up from time to time, such as a car breakdown or a bust boiler. Across the top half of the income spectrum, one-in-seven (15 per cent) are living in families with less than £1,000 in readily-accessible savings; for the poorest fifth, that exposed proportion surges to one-in-two (49 per cent).

So could Unsung Britain’s sense of security be transformed by devising some ingenious pro-saving policy to entice more families to set a little money aside? It might be tempting to think so, but when we asked hard-pressed families how their lives would change if they had a meaningful savings account, few talked to us about the peace of mind that would come with maintaining a durable buffer. Instead, they spoke about finally being able to make a single life-changing purchase: an overdue home repair, for example, or a car. In other words, even if savings could be achieved, it is often hard to believe they could be maintained. Especially for those on very low incomes, the prudence of keeping some money aside for rainy days cannot be considered in isolation from the urgency of foregone consumption.

Nonetheless, a significant minority of poor families do save regularly, and the trend for that proportion in the 2010s was up. On the eve of the pandemic, more than a third (35 per cent) of poorer adults usually had money to save at the end of the week or month, up from a quarter (24 per cent) before the financial crisis.

Alongside higher savings, there has been a welcome fall in debt. The broad trend in consumer debt since the financial crisis – which had been rising rapidly before the bubble burst – has been downward. Despite the late-2010s car finance boom, the average working-age family on a bottom-half income closed the 2010s owing 17 per cent less in real terms (£2,300 in 2018-20) than their counterparts had on the eve of the financial crisis (£2,700 in 2006-08).

The twin shocks of the pandemic and cost of living crisis went on to test the financial resilience of many households. There was much concern, and some evidence, in the early months of the Covid crisis that families’ balance sheets were diverging, as the poor took an income hit as lockdowns disrupted in-person work and lockdowns pushed up the costs of food shopping and home schooling, while the rich saved on meals out and holidays. But if poorer families’ balance sheets did take an initial hit, this did not persist. The latest evidence suggests poorer families’ overall unsecured debt burdens are lower now in real terms than before the pandemic. And across the economy as a whole, the rate of saving continues to be much higher than in most of recent history (with the exception of the pandemic).

The recent reduction in debt has not arisen because fewer households are using credit cards and other consumer loans – the proportion of all families with outstanding balances of either has scarcely changed since 2016. Rather, it is because the value of those outstanding balances has come down, and indeed come down more for the poorest third than other families. The outstanding credit card balances of this group were, by September 2023, worth 34 per cent less than they had been before the pandemic, while their combined car loans, personal loans and overdrafts sank by over 20 per cent in parallel.

This may sound like a good news story, but in reality, it is more likely a reflection of changing credit conditions which could leave much of poorer Britain more exposed to the vicissitudes of life. The cost of credit has risen considerably, with, for example, average credit card interest rates up by 3.6 percentage points compared with 2021. As household bills went on to rise, one theoretical option for muddling through for a while might have been reaching back towards the credit card in order to settle up. Instead, many families in Unsung Britain seem to have put the credit card away, while leaving those bills to lapse into arrears instead. Since 2012, electricity customers behind on payments have more than tripled, climbing from 0.3 million to over 1 million by the end of last year. Gas bill arrears have followed a similar trend, rising from 0.3 million to 0.9 million over the same period. Alongside this surge in indebted energy customers, typical debt balances for both gas and electricity debts have swelled from under £500 to about £1,500.

Citizens Advice reports big changes in the debt problems observed in their caseload: although the credit card debts of their clients have fallen, the average outstanding balances for rent and council tax are up by about a third since 2019, and arrears for utilities up by roughly half. The big rise in arrears likely reflects some mix of rising household bills and the arrival of tighter credit conditions, in which debt has – like air being squeezed from one part of a balloon into another – merely changed forms. Regardless of the balance of these effects, burgeoning arrears could carry dangers. Payments due on household bills have often been classed as ‘priority debts’ for a reason. Falling behind has traditionally had consequences – including loss of basic services – that don’t immediately arise with consumer credit.

More recently, though, some of these dangers have receded. Regulation now restricts the number of homes being cut off from heating and electricity, and for a while during the cost of living crisis, utilities were prevented from putting those in arrears onto prepayment meters, under which services can be temporarily cut off when credit runs dry. In our focus groups we heard directly from families about the complex juggling of their priorities in managing their debts, including maintaining their credit scores, controlling the flow of repayments and avoiding the spiral of high-interest loans. In some cases, people expressed a perfectly intelligible preference for interest-free arrears over costly consumer debts.

And yet it would be a mistake to retire the old idea of ‘priority debts’. When families fall behind on rent, eviction is a risk. In the case of Council Tax, so even is imprisonment. While some of the sting of utility debts has been drawn for the moment, we don’t yet know how companies and regulators will respond to the way that it has swollen, especially as they adjust to the passing of the ‘cheap money’ era on their own finances. On the other hand, we can’t expect energy companies to serve as interest-free credit for households, not least because this ultimately drives up costs for other billpayers. Ofgem has already shifted towards making pre-payment meters easier to install, but such measures are a harsh remedy and should only ever be a last resort. The regulator’s consideration of a capped debt relief scheme for families on means-tested benefits is a step in the right direction, but further thinking on consumer protection will still be needed.

Even if some energy debt is written off, advice on how to prioritise and juggle liabilities is bound to remain important. So, too, is exerting a grip as early as possible. We spoke to some stretched families who said that their anxiety eased once they had connected with the issuing authority for a bill they were behind on, and settled on a repayment plan. Relatively modest public investments in advice and possibly brokering services, between debtors and creditors, could have the potential to make a big difference.

It is also imperative to reduce the number of families who lapse into arrears in the first place. Families with more liquid savings will be less liable to do so. One way to help more families do so would be to create a so-called ‘sidecar’ scheme which is bolted on to auto-enrolment pension accounts, and allows for easy access to a slice of that retirement saving as a rainy-day fund. Another useful, and more tightly targeted, step would be bolstering the Help to Save matching scheme offered to Universal Credit (UC) recipients: instead of the existing ‘opt-in’ model, it could become something covering all recipients except those who proactively opt out. Boosting access to affordable credit in emergencies is yet another way to make a difference. So, too, could gripping the costs that have put so much strain on family budgets, for example by readying a social tariff system that could curb bills in a targeted way – focused on families who were both high-energy users and low-income – in the way sketched out in our previous work. But, ultimately, when it comes to the liquid rather than the less-liquid part of families’ balance sheet, the most plausible route to sustainable repair job is ultimately via boosting income itself.