The poor have seen their incomes squeezed more than the rich over the past year and households are reining in spending as they grapple with uncomfortably large debt burdens, a new survey commissioned by the Bank of England reveals today.
The survey, published in the Bank's latest Quarterly Bulletin, found that 62 per cent of households in the lowest quartile of the income distribution said that their after-tax income declined over the past year. That contrasted with 48 per cent of those in the top quartile of earners who reported a drop in after-tax incomes.
The survey, conducted for the Bank by NMG Consulting, said average monthly pre-tax incomes fell by £43 in 2012, to £2,627. Modest wage increases over the year were eroded by increases in VAT, higher energy prices and more expensive imports. And CPI inflation of 2.2 per cent implied an even steeper drop in real incomes.
The survey also showed that 12 per cent of households were "very concerned" about the borrowing levels, while a further third said they are "somewhat concerned". Those with high loan-to-value mortgages were the most nervous about borrowing levels.
Thirty-five per cent of households have cut back on their spending in response to worries about debt. Spending by households accounts for 75 per cent of GDP, meaning retrenchment or falls in disposable income are bad news for the economy.
Services data from the Office for National Statistics for October will be released on Friday. A fall in output will increase the chances of the economy contracting in the final quarter of 2013 and entering a "triple dip recession".
The survey found that 5 per cent of households have fallen behind on bill repayments and a further 17 per cent described keeping up as a struggle.
The survey reported that households are saving an average of £185 per month, or 7 per cent of their pre-tax income. It also indicated further household deleveraging to come, with households that voiced concern about their debt levels paying down their borrowings at a quicker rate than others.
Respondents expected further saving too. Twenty-eight per cent of households said they plan to increase savings over the next year. Prospective homebuyers were particularly pessimistic, with the average saying they expect to be forced to save for a further six years to achieve this goal.
Around half of respondents said they have been impacted by the Government's fiscal consolidation, blaming higher taxes, cuts to spending, and lower welfare benefits. Households containing a public sector worker were more nervous about losing their jobs than households with earners in the private sector. Uncertainty about future incomes was higher among younger households, reflecting the Coalition's efforts to safeguard the interests of pensioners. Almost half of working age respondents were concerned about income falls, compared with just 28 per cent of households aged over 65.
Relatively few respondents – just 6 per cent – cited the eurozone crisis as a reason for increasing saving over the next year. By contrast, 36 per cent cited saving for a large item, 34 per cent to reduce debts and 27 per cent to save for a house deposit.
The Bank concluded from the survey that "the household saving ratio is likely to remain broadly flat over the next year".
NMG questioned 4,000 households in an online questionnaire between 12 September and 2 October.