Deficit hawks should listen to low earners for real financial hardship
Today the Resolution Foundation launches two reports exploring the financial health of low earners. The Low Earners Audit takes an overview of how the UK’s 7.2 million households living on below median income but independently of state support are faring in the recession. Behind the Balance Sheet complements this overview by going beyond the front door and exploring how low income households juggle their money on a daily basis.
Month after month the Labour Market Statistics drive home the point that it is the UK’s 9.4 million working age low earners, not the middle class bankers, who have been worst hit by this recession. As a report we published last year showed, unemployment increases have been steepest in industries and occupations where low-skilled, low paid work is concentrated. People in typical low earner occupations are more likely than others to remain out of work for more than six months.
That said, it is true that rises in unemployment have been less steep than in either of the last two recessions, and the government can rightly take some of the credit for this. Many commentators also attribute the slower growth in unemployment this time round to businesses doing all they can to hold on to workers through short-time working schemes and more flexible contracts.
For those households with the safety net of savings and insurance, the option to reduce working hours may be a welcome change in gear. However today’s Audit shows that such underemployment can be as threatening as unemployment for low earners who are already living at the very edge of their means. We found that on average, low earning households are currently spending all of their monthly income, with no money left over for savings or dealing with unexpected costs such as a dentist’s bill.
As Behind the Balance Sheet shows, this is not thanks to poor money management – in fact, the FSA shows that those living on low incomes are slightly better budgeters than people who are better off. Instead, 41% of their monthly income is going on essentials thanks to recent rises in the cost of food and fuel. For one in five low earning households, more than a quarter of their income is being spent on debt repayment – double the number in this situation in 2005. Over half of low earning households have less than £1,500 in the bank.
In this context, we should be worried about the well being of the 4 million low earning households who have reported a drop in income in the last year. We should focus on the 2 million low earning households who are reporting difficulties in keeping up with bills and repayments. The Audit shows that 17% of those reporting difficulties say it is because of their reduced hours, and a further 27% say it is because of a lack of cash flow. In an earlier era of easy credit, such gaps could be bridged; but over a third of low earners report that accessing credit has been harder in the last year.
Our reports make a number of practical recommendations for what action government, lenders and others can take to support low earners during the downturn. But we also echo the warning sounded by the recent National Equality Panel, who argued that the way in which anticipated spending cuts are made will probably be the most important influence on how existing inequalities evolve.
Those advocating such spending cuts must ensure they have a full understanding of what financial hardship is really like for the millions of people on low incomes, whose already precarious position has been heightened by the recession. We hope that our reports provide this vital knowledge.