Strength against shocks Low income families and debt

Dalia Ben-Galim Institute for Public Policy Research

28th June 2010d.ben-galim@ippr.org

“We went through a couple of the worst months we’ve ever had. There is no extra, and sometimes you’re having to rob Peter to pay Paul and hoping you make the extra up in between to get Peter paid back again. The kids have noticed, even down to pocket money, treats, days out, it’s just non-existent. It’s very, very, demoralising going to work all day and earning nothing. It’s horrendous – it affects my moods, it affects home life, everything. This has taught us a very valuable lesson in how quick your life can be taken – your income can be taken from you [through] no fault of your own.”

When times are tough

• Methodology

• Context

• Key findings – The poverty premium– Most families want to save money– The impact of ‘trigger’ events

• Key recommendations and policy implications– Build financial strength and resilience – Greater support to mitigate impact of external shocks

Overview

• 58 low-income families – Glasgow, London, Nottingham and Newcastle

• Day-to-day understanding of spending, saving and

debt patterns

• Over 4 month period – Initial face-to-face interview – Spending diaries – Catch up regular phone calls – Final interview

• Nov 2008 – April 2009 – included Christmas

Methodology

Context: debt

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Unsecured debt to income ratio Secured debt to income ratio

• Expansion of household credit – 43% of low-income families were homeowners – 59% credit cards– 47% mail order catalogues UK households saving

less

• Families from all income groups entered recession in debt

Context: credit

“I wish I’d never got that one [credit card]. We all make mistakes, well some people do. I won’t be doing it again; the APR is just so high on it… it’s my own fault for getting myself into debt in the first place, I could kick myself really, but sometimes when times are hard, like when I had my part-time job, before I went full-time… I ran up a few debts then.”

(London, female 33, single parent 3 kids)

Credit: too easy or my fault?

• Low-income families often pay a ‘poverty premium’ on essential and non-essential items

• Over two-thirds of participants said that their biggest problem was the high price of food and energy

• Door-step lenders – trust and convenience more important than cost

If I have a crisis I would then go to [the doorstep lenders]. I know you pay three times as much to pay it back but if you’ve got a problem they normally help you out. They come to the door each week and if you haven’t got [the] £10 they want, it’s quite easy to give £5 or whatever. They’re my backbone.”

(46-year-old female, two-parent household, three children, Nottingham)

Findings: The poverty premium

• Typology of saving– Coping with uneven spending patterns throughout the year – Saving for short-term precautionary reasons – Long-term asset building

• Government position on savings not yet clear – Labour Government supported Savings Gateway, Child Trust

Funds, ISAs and Personal Pensions Account.

• Families able to juggle, few able to save– “I’ve not been one for saving long-term. I can save for a purpose.”

(Female,33, Newcastle, single-parent family, two children)

• Positive attitudes to saving, but difficult to find the money

Findings: wanting to save

• The impact of ‘trigger’ events in the current economic crisis means that many families are accumulating debt at a faster rate

• Over a quarter of ippr’s research participants experienced a fall in household income during the research period

“I lost my job and my husband did as well. That just killed my finances completely because we had nearly £40,000 a year coming in and we went from that to nothing. I was getting £60 a week on incapacity [benefit]. He was getting about £80.” (46-year-old female, two-parent household, two children, Newcastle)

Findings: trigger events

• Build financial strength and resilience – A savings account to build resilience– Funding for affordable credit initiatives for low-

income families – Online credit comparison– Free and impartial financial advice

• Greater support to mitigate impact of external shocks

– Integrated advice and support at crisis point – Flexibility on financial commitments

Recommendations

• Cannot under-estimate ‘trigger events’ – local labour market conditions matter

• Suitability and appropriateness of financial products – by what criteria?

– Will sub-prime mortgages be appropriate again?

• Budget implications– The ratio of spending cuts to tax increases –

disproportionate impact on low-income families– VAT increase, Savings Gateway cut and changes

to benefits – not progressive

Policy implications