Debt, rather than earnings, is being used to cover living costs, writes Carl Packman.
Debt, rather than earnings, is being used to cover living costs, writes Carl Packman
The UK at long last has had a spate of good news stories about its finances: inflation has fallen, unemployment is down to a five year low of 22m, and on top of that some recent Resolution Foundation research has found that though an increasing number of the workforce are self-employed, the majority of them are content with this for now (the important words being for now).
However sadly there is a ‘but’. While this is all good news on the whole we do still have to ask ourselves whether we feel better off. As Shabana Mahmood MP said in her eloquent discussion with Jeremy Paxman on Newsnight last night “people don’t live their lives on a graph”.
While the economy is starting to get back on track many people around the country still face what has previously been described as the personal recession: where the price squeeze on the cost of living affects individual households to the point where they have to cut back on what they consume; in extreme circumstances this is called heat or eat.
Furthermore while the coalition government begin celebrating, it is their sleight of hand that has cost the average family £974. As Ed Balls has said changes to the personal tax allowance has not made lower income households better off at all – despite the changes being held by chancellor Osborne as proof that he and his government are on the side of hard working families.
It would be so easy for this government now to forget at what cost this economic recovery has taken place. While a correction in the labour market and on the prices of goods has started to be corrected millions of people are struggling to stay away from the financial cliff edge.
StepChange, the debt advice charity, found recently that while millions are paying utility bills, rent and council tax on credit cards and payday loans, some 12m people in the country have next to no savings to facilitate them through periods of financial shocks – which a great many more people are at risk of with an emergence of the newly self-employed.
Their research also found that this is not simply a problem for the unemployed or even on what most would consider low incomes. Despite today’s news, because of the extent to which the debt-to-income ratio is such a problem there is still such thing as a ‘squeezed middle’ – indeed StepChange have seen some 8m households with incomes nearing £35,000 per year fall into debt spirals that will take them years to escape from.
Is this problem being tamed today? Not likely. In February StepChange also reported that there had been an 82 per cent increase in their advice for people struggling with payday loans between 2012 and 2013. As the economy recovers we are witnessing a personal debt crisis that our elected representatives are choosing to ignore.
There is a reason why looking at debt-to-income ratios is a far better measure of financial prosperity in a country than simply looking at the average wage and how this stacks up against the cost of things. We know for example that indebted households in the poorest 10 per cent of the country have average debts of more than four times their annual income. The average StepChange client had three live payday loans at the time they sought advice. Their average debt to payday lenders was £1,647, while their wages on average were £1,381.
Even getting work is no magic bullet; the plight of the working poor remains. As the Annual Monitoring Poverty and Social Exclusion report by the Joseph Rowntree Foundation pointed out recently, “for the first time there are more people in working families living below the poverty line (6.7 million) than in workless and retired families in poverty combined (6.3 million), having suffered a sustained and ‘unprecedented’ fall in their living standards.”
In-work benefits, in itself, means that the state is subsidising low pay employees – there is no justification for celebration at all.
And this isn’t going away. As David Coats for The Smith Institute recently noted from his research, through labour market restructuring we are developing an “hourglass economy”, where there is relative growth of positions at the top (management roles etc) and relative growth of positions at the bottom, but fewer positions being created in the middle which means fewer chances for employees to progress in employment.
Does the government not realise the extent to which this will bring about a skills shortage? Does it not want to ensure people work towards career development as opposed to perceiving a job merely as something that can pay the bills?
Sure, we can celebrate the news today – it has been a long time coming. But there are still deep problems. Debt, not earnings, is being used to cover living costs within a cost of living crisis, and in-work benefits are subsiding low wages. I’m afraid the celebrations will have to wait.
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