Are Household finances stretched to the limit?

While the markets may have taken the Autumn Statement in their stride and seem to have moved on from several giddy weeks, studying the various papers that came with the Chancellor’s announcements in more detail over the days that followed his statement did reveal a few pain points that could have been missed. 

For example, there is a planned 23% increase in fuel duty coming in March. That’s expected to add 12p per litre to fuel. I listened to the Autumn Statement and it wasn’t mentioned. Trust me, I’m my teenage children’s personal taxi driver – with the miles they have me doing I would have noticed a fuel duty hike announcement.

Another matter that has been rumbling around, is that the government has set itself on a path of paying banks interest payments running to billions of pounds on the money that the government made when it injected £900 billion in to the economy during quantitative easing.

The banks have been receiving base rate interest payments on these accounts, apparently as a custom rather than a legal entitlement and so the argument goes that, with the Bank of England base rate now projected to go to 5%, continuing this custom, where there is no legal obligation to do so, is going to cost the government billions in seemingly unnecessary expenditure.

Tax Research UK deal with this point in much more detail than I can here. To me it seems that the central point is that we all are now dealing with billions in tax and spending changes and there were ways to reduce that burden on us. 

There was much made in the days following the Autumn Statement that our living standards are going to fall dramatically. With inflation at its highest rate in 40 years, incomes are failing to keep pace. This inevitably makes us worse off. Over the next year, the Office for Budget Responsibility forecasts our living standards to fall by 4.3%, which will be the highest fall since records began in the 1950s. The following year, we are expected to take another hit to our living standards of about 2%. Combined, this will wipe out any gains we have made in living standards since 2013-14 – a decade of progress wiped out in two years.

As we know, this decline in our standard of living will impact differently across different income groups. To shine some light on how NI’s lowest earning households are faring, the Consumer Council have produced an income expenditure tracker. It is a sobering read. In Northern Ireland’s lowest earning households, income after tax is averaging £233 per week. 

After spending on basics, which has been calculated at £208.66 per week, there is barely £25 left for what we call ‘discretionary’ items. Over the past year, income after tax has risen by less than 2% while spending on basics has risen by 13.5%. As a result, discretionary income if down by 46%, from £45 to £24. More than half of income in lowest earning households goes on housing, food and transport. In the highest earning households these items absorb less of overall income and the balance is quite different.

For example, 9% of high earners’ income is taken up by housing costs compared to 21% for the lowest earners. Transport accounts for 23% of high earners’ income, as these people typically have access to cars. Transport is 13% of low earners’ income, reflecting lower car ownership and higher economic inactivity levels reducing the need to travel. Discretionary income for the lowest earners in NI is the lowest it has been in four years, and has fallen for five consecutive quarters. 

So, as we head into the Christmas season, where the pressure to spend really ramps up, there is not a lot of cheer around. The prospects for the year ahead look particularly challenging for the economy. With 54% of consumers expecting to be significantly negatively affected by the cost of living increases, spending looks set to be curtailed. 

This is according to Tourism NI’s sentiment tracker, which finds that 44% of people are going to eliminate big purchases such as cars and 70% of people are going to cut back on eating out. Even the gym and Netflix subscription is at risk, with nearly 10% planning to eliminate subscriptions and just shy of 50% planning to reduce spending.

Consumers have entered a ‘wait and see’ period, cutting back now in the hope that things improve soon. When the economy is this weak, you would hope that the traditional levers of reducing interest rates and increased public spending would be pulled. As it stands, interest rates are going up, taxes are rising and public spending is set to tighten. I fear that’s a recipe for pain.