Tag: real income

The ONS has just published two of its major annual publications on income and expenditure in the UK. The first is the Annual Survey of Hours and Earnings (ASHE) and looks at earnings from 1998 to 2013. The second is Family Spending and looks at the level and pattern of household spending each year from 2001 to 2012.

Figures from the two publications show that average real incomes have fallen each year since 2008. This is illustrated in the first chart (click here for a PowerPoint of the chart). They also show that household expenditure in real terms is falling and is at the lowest level since 2006.

Overall picture
In 2012, households’ average weekly disposable income was £597. In 2012 prices, this was down from £621 in 2010 (after the recession) and £659 in 2008 (before the recession).

Household expenditure is at its lowest level in real terms for over a decade. In 2012 households spent on average £489.00 per week. In 2012 prices, this compares with £521.90 in 2001/2 and £533.80 in 2006 (the peak year).

Picture for particular income groups and products
Although average real incomes have fallen, not everyone has been affected the same. For example, not all occupations have seen a fall in incomes (see the table at the end of the BBC article, Earnings rise slower than inflation for fifth year running). Also, as income distribution has become less equal, so those in lower income groups have seen their real incomes fall the fastest. This is partly the result of nominal wages rising less fast for low-paid workers and partly the result of price increases for various essentials, such as food and power being greater than the rate of inflation, and these products constituting a higher proportion of expenditure for poor people than rich people (see Squeezed Britain 2013).

Likewise expenditure hasn’t fallen on all categories of product. Since 2006, real expenditure on clothing and footwear and on housing, fuel and power has risen. The second chart illustrates expenditure on some of the different categories and how the balance has changed (click here for a PowerPoint). This partly reflects the changes in prices of products, with some items, such as electricity, gas and rent having risen faster than the average, and with the demand for such items being relatively price inelastic.

The changing pattern is also partly the result of different income elasticities of demand for different items. Thus, with falling real incomes, the proportion of income spent on products with a low income elasticity of demand is likely to rise.

Expenditure also varies by income group. People on higher incomes tend to spend a greater proportion of their income on things such as leisure activities (e.g. eating out and holidays), motoring, and clothing and footwear. Poorer people tend to spend proportionately more on food and drink, and on electricity, gas and rent (even net of housing benefit). These differences are illustrated in the third chart which looks at certain categories of expenditure of three different disposable income groups: the poorest 10% (decile), the richest 10% and the 6th decile (i.e. the 6th group up from the bottom – the group with average or just above average income) (click here for a PowerPoint for the chart). Detailed figures can be found here, which is Table 3.2 from Family Spending.

Just as the time-series data looking at changing income and expenditure over time can illustrate the different income elasticities of demand for different products, so can the cross-sectional data in Tables 3.1 and 3.2 of Family Spending.

Articles

Earnings rise slower than inflation for fifth year running BBC News (12/12/13)
Energy and rent are now the biggest family bills The Telegraph, Steve Hawkes (11/12/13)
Families spend £489 each week – on what? The Guardian, Mona Chalabi (11/12/13)
Cost of energy hits family budgets, says ONS BBC News (11/12/13)
Family spending interactive: how has it changed? The Guardian Datastore, Mona Chalabi (11/12/13)

Data

Annual Survey of Hours and Earnings, 2013 Provisional Results ONS (12/12/13)
Annual Survey of Hours and Earnings, 2013 Provisional Results: Statistical Bulletin ONS (12/12/13)
Family Spending, 2013 Edition ONS (11/12/13)
Family spending in 2012: Infographic ONS (11/12/13)
Video Summary: Are you an average spender? ONS (11/12/13)
Household expenditure based on COICOP classification, 2001-02 to 2012 at 2012 prices: Table 4.1 of Family Spending ONS (11/12/13)
Detailed household expenditure as a percentage of total expenditure by disposable income decile group, 2012: Table 3.2 of Family Spending ONS (11/12/13)

Questions

  1. What are the determinants of the price elasticity of demand for a product?
  2. What are the limitations of using time-series data of prices and expenditure to estimate the price elasticity of demand for particular products?
  3. What are the determinants of the income elasticity of demand for a product?
  4. What are the limitations of using time-series data of incomes and expenditure to estimate the income elasticity of demand for particular products?
  5. What are the limitations of using cross-sectional data of expenditure of different income groups to estimate the income elasticity of demand for particular products?
  6. How do your answers to the above questions demonstrate the significance of the ceteris paribus (other things being equal) assumption?
  7. If real earnings are falling, why are people able to spend more in real terms?
  8. What are the macroeconomic implications of increased consumer spending at a time of falling real incomes?
  9. How could increased consumer spending help to reverse the fall in real incomes (a) in the short run (b) over a period of a few years? Distinguish between the effects on aggregate demand and aggregate supply.

According to a report just published by accountancy firm Deloitte, UK household real disposable incomes are set to fall for the fourth year in a row. What is to blame for this? According to Deloitte’s chief economic adviser, Roger Bootle, there are three main factors.

The first is the combination of tax rises and government expenditure cuts, which are now beginning to have a large impact. Part of this is the direct effect on consumer disposable incomes of higher taxes and reduced benefits. Part is the indirect effect on employment and wages of reduced public expenditure – both for public-sector employees and for those working for companies that supply the public sector.

The second is the rise in food, fuel and raw material prices, which have driven up the rate of inflation, thereby eroding real incomes. For most people, “pay growth is unlikely to catch up with inflation any time soon. Inflation is heading towards – and possibly above – 5%. Real earnings are therefore all but certain to fall for the fourth successive year in a row – the first time that this has occurred since the 1870s.”

The third is that demand in the private sector is unlikely to compensate for the fall in demand in the public sector. “I still doubt that the private sector can compensate for the cuts in public sector employment – which is already falling by 100,000 a year.

The upshot is that I expect households’ disposable incomes to fall by about 2% this year in real terms – equivalent to about £780 per household. And it will take until 2015 or so for incomes to get back to their 2009 peak.

… In terms of the year-on-year change in circumstances, although not the absolute level, that would make 2011 the worst year for households since 1977 (the depths of the recent recession aside). Were interest rates to rise too, conditions would arguably be the worst for households since 1952.”

Well, that’s a pretty gloomy forecast! The following articles examine the arguments and consider the likelihood of the forecasts coming true. They also look at the implications for monetary and fiscal policy.

Since I wrote the above, two more gloomy forecasts have been published: the first by the Institute for Fiscal Studies and the second by Ernst & Young’s Item Club. Both reports are linked to below.

Articles
Squeeze on incomes expected to rule out rate rise Guardian, Phillip Inman (3/5/11)
No rate rise until 2013, says Bootle MoneyMarketing, Steve Tolley (3/5/11)
UK households ‘face £780 drop in disposable incomes’ BBC News (3/5/11)
Why our purchasing power is set to suffer the biggest squeeze since 1870 The Telegraph, Ian Cowie (3/5/11)
2012 ‘worst year’ for household finances says Deloitte BBC News, Ian Stuart, Chief Economist with Deloitte (3/5/11)
Retailers expect sales gloom to continue Guardian, Graeme Wearden (3/5/11)
What makes consumers confident? BBC News, Shanaz Musafer (4/5/11)
Household incomes in UK ‘may return to 2004 levels’ BBC News (13/5/11)
Biggest squeeze on incomes since 1980s TotallyMoney, Michael Lloyd (13/5/11)
High street to endure decade of gloom, says Ernst & Young Item Club Guardian, Julia Kollewe (16/5/11)
Outlook for spending ‘bleak’ and road to recovery is long, Ernst & Young ITEM Club warns The Telegraph, James Hall (16/5/11)

Reports
Feeling the pinch: Overview Deloitte (3/5/11)
Feeling the pinch: Full Report Deloitte (3/5/11)
Long-term effects of recession on living standards yet to be felt IFS Press Release (13/5/11)
ITEM Club Spring 2011 forecast Ernst & Young
UK high street faces difficult decade as consumer squeeze intensifies and households focus on paying down debt, says ITEM Club Ernst & Young (16/5/11)

Data
Forecasts for Output, Prices and Jobs The Economist
Forecasts for the UK economy: a comparison of independent forecasts HM Treasury
Commodity Prices Index Mundi
Consumer Confidence Index Nationwide Building Society (Feb 2011)
Confidence indicators for EU countries Economic and Financial Affairs DG

Questions

  1. For what reasons may real household incomes fall by (a) more than and (b) less than the 2% forecast by Deloitte?
  2. What is likely to happen to commodity prices over the coming 24 months and why?
  3. With CPI inflation currently running at an annual rate of 4% (double the Bank of England’s target rate of 2%), consider whether it is now time for the Monetary Policy Committee to raise interest rates.
  4. For what reasons might households respond to falling real incomes by (a) running down savings; (b) building up savings?
  5. What are the implications of the report for tax revenues in the current financial year?
  6. What makes consumers confident?