July 4, 2008 | posted by Michael Baxter in Distribution of income | comments (0) |

Underlying fundamentals are strong.  That’s the reason given for why the current economic crisis will be short-lived.   That’s why the Halifax and Nationwide insist there will be no property crash.    That’s why Gordon Brown and Co think the economy is basically in good shape.  It is just the credit crunch.  Once credit is restored, everything will be fine.

But for people working hard on an average sort of income, things have been getting tougher for some time.   Unemployment might be low, but we didn’t seem to be feeling any better off.

A year ago, Ernst and Young shone a lot of light on the picture.   Back then, it found that the average family had just over 22 per cent of its gross income left over, as opposed to over 28 per cent in 2003.   The report was published before the credit crunch, and did not get the attention it deserved.

But that was then.  It’s a year on, and now our discretionary disposable income, that’s after things such as petrol, council tax, utility bills, rent/mortgage, is at its lowest level in five years.  The average household now has just £772.79 left over, as opposed to £909.84 in 2003/04.

We all know why, council tax, utility bills, and of course food and petrol, have all been soaring.

“All consumers are painfully aware of the huge hikes in petrol and utility bills but we’ve also seen some fairly hefty price increases in pension contributions and debt repayments,” said Jason Gordon, the director of retail at Ernst & Young

He added: “If we go one step further and factor in food price inflation, which official figures have placed at 8.7 per cent in the last year, it’s clear that household budgets are under enormous strain. Add in the impact of falling house prices on the consumer’s propensity to spend, and the consumer economy is undoubtedly on a knife-edge.”

Earlier this week, Bank of England MPC member Charles Bean warned that living standards are expected to fall for another year.

So that’s pretty bad.  The economy may have been booming for five years, but we have not been getting any better off.  Presumably then, the boom was funded by borrowing.

But, if we have less money left over to spend on living, as opposed to surviving, how can there be inflationary pressures?

That is why, in the longer-term, deflation is a danger.  Once oil and food price hikes have worked through the system, we could be left with a nasty shortfall in demand, leading to price falls. 

And that, in the longer-term, is surely the bigger danger.

July 2, 2008 | posted by Michael Baxter in Distribution of income | comments (0) |

So how much do you need to live on?

If you are a part of a married couple with two chidlers, then it’s £370 a week, after rent, or so says research from the Rowntree Foundation. 

To afford this budget on top of rent, living in a modest council home, the two parents–two children household needs to earn £26,800 a year before tax, according to Rowntree Foundation research, produced after interviewing a cross selection of the public.  

If you are on your own, then you need £158 a week, before rent, meaning you need a salary of £13,400 a year to cover your living expenses and rent.

So what does survival require these days?  Well, for your stereotypical, two parents–two kids, you need, among other things, £97.47 a week for food, £29.26 for clothing, but a whopping £186.98 for child care.  But what about having fun?  The report allocated £90 for what it rather grandly calls social cultural participation, and £6.06 for alcohol.

Rent was put down at £69.40, which assumes the family lives in this modest council home.

For families with no adult working, state benefits provide for less than half the minimum budget for single people and around two-thirds for those with children. The basic state pension provides a retired couple with about three-quarters of the minimum, but if they claim the means-tested Pension Credit their income is topped up to just above the minimum income standard.

The minimum income is above the official “poverty line” of 60 per cent median income, for nearly all household groups. This shows that almost everybody classified as being in poverty has income too low to pay for a standard of living regarded as “adequate.”

Mind you, if you have to drive to work, even if work is no more than a 20-minutes drive, it seems likely petrol alone will be £50 a week.  Car payments, so that’s tax, repairs, and actually paying for the vehicle, must come in at £250 a month.  So that would mean the total cost of travelling to work would add up to another £450 a month.  If you both drive to work and have a similar distance, but don’t work near each other, then total motoring costs would be £900 a month. 

Rent of just £69.40 a week seems very low.  If you were to rent a reasonable house big enough for the four of you, then surely £750 a month is the minimum rent.  So after paying tax, two people with two children who both drive to work may need to earn the £26,800 a year estimated by Rowntree, plus £10,000 a year for paying for cars and petrol, an extra £500 a month for rent, then tax, say £3,000, that is another £19,000.  All of a sudden, it appears that actually, some families, living a pretty frugal life style, will need a joint income of  £45,000.  And that seems quite a lot.  

June 12, 2008 | posted by Michael Baxter in Distribution of income | comments (0) |

Poverty and inequality both increased for a second successive year during 2006-07 said the Institute for Fiscal Studies (IFS) earlier this week.

Actually, poverty and inequality is a bit of a tautology.  Poverty is defined by the number of people living in households with income below 60 per cent of the median income.  So by definition then, a rise in poverty means a rise in inequality.

But that is nit-picking.    However you define it, it is not good.

The IFS was commenting after the release of the latest annual Households Below Average Income report from the Department for Work and Pensions. “The biggest surprise in the data,” said the IFS, “was the increase in pensioner poverty, which rose by 200,000 after housing costs (AHC) and 300,000 before housing costs (BHC).”

In the Budget of 2008, the government announced additional one-off payments to pensioners in winter 2008 at a cost of £575m. These will reduce pensioner poverty in 2008-09. “However, if the money is not found to repeat them, pensioner poverty may then increase again in the following year as it did in 2006-07,” said the IFS

The number of people in poverty rose by 400,000 to 13.2 million after housing costs, which when added to rises seen the year before makes an increase of 1.2 million over the latest two years. But before we all march up to Number 10 demanding Gordon Brown does something about it all, bear this in mind: “Poverty remains significantly lower than when Labour came to office,” or so said the IFS.

The number of children living in poverty in the UK in 2006-07 rose by 100,000 to 3.9 million after housing costs.  Child poverty is now 300,000 higher than it was in 2004-05. The fall in child poverty under Labour came to an end in 2004–05, and it now seems to be on the increase again.

The government has a target to halve child poverty from its 1998-99 level by 2010-11. It cut child poverty by about 70,000 per year over the last eight years, but now needs to cut it by 300,000 a year over the next four to meet the target.  On existing policies, IFS researchers predict that the number of children in poverty will fall by 700,000 to 2.2 million in 2010-11, but this would still mean missing the target by 500,000. Additional spending on child tax credits of around £2.8 billion a year by 2010–11 would be needed for the government to have a 50-50 chance of meeting its target.

The IFS said that the: “increase in poverty in 2006-07 comes as little surprise, when we consider that benefits and tax credits grew less quickly than prices (let alone earnings) for people of working age. Benefits are increased in April in line with the inflation rates recorded in the previous September, so they automatically lag price increases when inflation is rising.”

And David Phillips, IFS Research Economist said: “Further increases in poverty and inequality will not be welcome news to the Government, even though they should come as no surprise. We estimate that it would need to spend a further £2.8 billion a year by 2010-11 to give itself a 50-50 chance of meeting its next child poverty target. But the Chancellor will be under pressure to spend the same amount renewing last month’s ‘one off’ income tax cut, most of which benefits families on middle incomes rather than the poor.”