Disposable income can only spread so far

Only last week, Power NI announced price increases for domestic customers of 27.5% from 1 July. This follows a 21.4% increase in January and a 6.9% increase last July.

The hits keep coming. Food prices, which are already experiencing sharp inflation, are expected to continue to rise into next year as the war in Ukraine exacerbates supply chain challenges. Added into the mix, for those who received a payslip over the past few weeks, you will have noticed the new 1.25% health and social care levy has reduced your take home pay. Anyone not on a fixed rate mortgage may well have received their fourth letter since December letting them know about increased monthly payments.

With all these extra calls on our money, how able are we to handle it? To answer that, we need to understand the distribution of income across NI. The Department for Communities (DfC) undertakes an annual analysis which shows income by household across the region. The Department’s analysis found that around three-fifths of individuals in NI earn less than the mean income of £571 per week and that NI generally has higher levels of lower income individuals than in the UK as a whole.

While gross median annual earnings in NI stand at £24,000 (the highest level on record), when adjusting for inflation, real wage levels of £21,505 are no better than in 2005 (£21,723).

In an average household here, around 70% of income is sourced through earnings, with the remainder being a combination of state supports received (18%), occupational pensions (7%), investments (2%) and miscellaneous (2%). This breakdown does vary when examining income bands. Generally, those in the bottom 25% of earners receive less from earnings (44%), while state support accounts for a larger proportion (49%) of income. As such, state support reviews, such as the £20 cut to Universal Credit will likely have a significant impact on those at the lower end of the income distribution.

Disposable income is the key metric to consider how well consumers can navigate their way through current price increases. Analysis shows that the level of discretionary income has been declining with those in the lowest income band seeing the largest fall in discretionary income. Those in the top earner bracket didn’t escape, but saw their discretionary income fall by a more modest amount.  That is a significant squeeze on incomes and, when we consider where incomes are spent, raises concerns for financial resilience.

For those in the lowest income group, 35% of expenditure goes on housing and food costs. By way of comparison, this is 19% for those in the highest income group. It is clear then that the energy cost increases are hitting lower income households more dramatically, without a lot of financial wiggle room to absorb further increases.  This maybe goes some way to explaining why unsecured debt is increasing again, having fallen during the pandemic. According to the Bank of England, the level of consumer credit, which includes personal loans, credit card debt and overdrafts rose by 107.5% between 31 January 2000 and 28 February 2022. Total outstanding consumer credit in February 2022 stood at £199.5bn. While there is no specific data on the level of debt within NI, research by the Financial Conduct Authority (FCA) suggests that people across NI have the highest level of over-indebtedness. They estimate that adults in NI owe around £3,990 in ‘unsecured debt’ compared to £3,320 for the UK as a whole.  The FCA’s research also found that around 10% of people in NI are in ‘difficulty’ – those that have missed domestic bills or credit commitments in 3 or more of the last 6 months. Around 56% of adults in NI have characteristics of being ‘potentially vulnerable’ i.e. those who may have low financial resilience/capability.  

Given the cost of living squeeze and limited scope (for many) to absorb additional costs, it is little wonder that consumer confidence is tumbling. Consumer confidence, a strong leading indicator of a recession, has been declining in the UK since November 2021. Similar sentiment is evident locally via Danske Bank’s Consumer Confidence Index, which reports a sharp decline in confidence this quarter – down from 134 at the end of last year to 117 now. 42% believed their financial position has deteriorated and 43% of consumers felt their finances will deteriorate.

Evidently, consumers are feeling financial strain. Too many more price increases, especially in essential items like energy and food, could see financial strain moved to significant distress.