The Economic Position of Households, Q3 2012

Abstract

‘The economic position of households’ is part of the ‘Measuring National Well-being Programme’. This quarterly publication focuses on household actual income and expenditure, which are measures that take account of services in kind provided by the state, such as healthcare and education. It is important to consider household actual income and expenditure as these services in kind have implications for well-being and they vary from one country to another and over time.

Key points

• Real household actual income per head increased by £21 (0.5 per cent) in the third quarter of 2012, compared with the second quarter of 2012, to its highest level since the fourth quarter of 2010.

• Real household actual expenditure per head was virtually unchanged rising by £9 (0.2 per cent) in the third quarter of 2012, compared with the second quarter of 2012.

• The household saving ratio increased by 0.3 percentage points to 7.7 per cent in the third quarter of 2012. Gross household saving was £21.2 billion in the same quarter, up from £20.3 billion in the second quarter of 2012.

Real household actual income and expenditure

Real actual household income consists of wages and salaries, income received by households from pensions, benefits, share dividends, net interest and self employment income after taxation and social contributions (which is known as real household disposable income), plus the implied value to the household of Government services such as education and healthcare.

Real actual household expenditure consists of spending by households, excluding buying or extending a house, purchasing valuables (paintings, antiques) or second-hand goods (household final consumption expenditure) but including the implied spending by households on Government services such as education and healthcare.

In both measures, the term ‘real’ means it has been adjusted to exclude the effect of price rises as £1 today would buy less goods than £1 historically.

Real household actual income per head stood at £4,535 in the third quarter of 2012, which was an increase of £21 (0.5 per cent) compared to the second quarter of 2012. The increase in real household disposable income per head (differing from ‘actual’ income because it does not include in kind services provided by the state) was slightly smaller in cash terms - £8 (0.2 per cent) from £3,761 in Q2 2012 to £3,769 in Q3 2012. Therefore, the services in kind provided by the state, such as education and healthcare, contributed £13 of the increase in income per person between the second and third quarter of 2012.

The gap between the two series in figure 1 represents services in kind provided by the government, such as health and education. This steadily increased to a high in the third quarter of 2009 of £850 and declined to £753 in 2012 Q2 with a small increase to £766 in 2012 Q3.

Figure 1: Real households’ disposable income and actual income per head (constant prices)

United Kingdom

Source: Office for National Statistics

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In the third quarter of 2012, real household actual expenditure per head increased by £9 (0.2 per cent) from £4,447 in Q2 2012 to £4,456. Real household expenditure per head increased by £4 (0.1 per cent) from £3,588 in quarter 2 2012 to £3,592 in quarter 3 2012.

Figure 2: Household expenditure and actual expenditure per head (chained volume measures)

United Kingdom

Source: Office for National Statistics

Notes:

1. Reference year 2009

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Real household actual income and expenditure per head are the headline measures in this release as they are good statistics to track economic well-being over time, and between countries. In the UK, healthcare and education services are generally provided free at point of use, whereas in some countries these goods and services have to be paid for. All else being equal, if households in two different countries have the same level of income, but one gets free provision of goods and services then the households in this country are relatively better off.

Household actual income

Without taking account of inflation, growth in household actual income was 1.2 per cent in Q3 2012 when compared with the previous quarter. The main contribution came from growth in sole trader income and housing services.  Social benefits also made a positive contribution of 0.4, nearly all of which can be contributed to the increases in benefits in kind. At the same time, household payments of taxes and social contributions reduced household actual income by 0.2 per cent.

Wages and salaries and social benefits also made a substantial positive contribution, which is indicative of an improving picture in the labour market. This is supported by an increase of 87,000 in the number of employees in the third quarter of 2012.

A positive contribution to household actual income was also made by capital income (0.1 per cent); capital income includes net interest, dividends and implied incomes from certain types of insurance policies.

Table 1: Contributions to growth in household actual income (current prices)

Table source: Office for National Statistics

Household actual expenditure

Without taking account of inflation, household actual expenditure increased by 1.1 per cent, compared with the previous quarter. The main contributor to growth was in other goods and services.  This component experienced 0.5 per cent growth between the second and third quarters of 2012, with one contributing factor being the sale of Olympic tickets.

The other main components making a positive contribution were social benefits in kind and durable goods. Housing including energy, which includes gas usage, has made a slightly negative contribution in the most recent quarter.

Table 2: Contributions to growth in household actual expenditure (current prices)

Table source: Office for National Statistics

The household saving ratio

Figure 3: The household saving ratio

United Kingdom

Source: Office for National Statistics

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The household saving ratio is a key indicator of the economic situation of households. The household saving ratio is the amount of saving that households make in relation to available resources.  As the saving ratio is constructed by dividing savings (a relatively small number) by households’ available resources (a relatively large number), the series has volatility and so care should be taken to look at longer term trends alongside the latest change. The saving ratio’s turning points are seen as a key indicator of the direction of the economy.

In the third quarter of 2012, the saving ratio was 7.7 per cent, which equated to households making savings of £21.2 billion. The saving ratio increased by 0.3 percentage points from 7.4 per cent in Q2 2012. This increase was driven by a faster rate of increase in total resources (1.1 per cent), compared to final consumption expenditure (0.8 per cent).

Before the financial crisis in 2008, the saving ratio had been on a downwards trend, driven by high levels of household spending. However, between the first quarter of 2008 and the second quarter of 2009, the saving ratio increased from -0.2 per cent in the first quarter of 2008 to a peak of 8.2 per cent in the second quarter of 2009.  It fell during the following year to just below 6 per cent, but has since drifted upwards as households have not spent in full the increases in real disposable income generated by rising employment and falling inflation.

Household financial balance sheets

The levels of household financial liabilities as a proportion of household disposable income continued to decline to 1.50 in the third quarter of 2012. Household liabilities in the third quarter of 2012 were £1.5 trillion. Since the end of 2007, household liabilities have been broadly flat. This reflects a flattening in the value of mortgages held by households.

The ratio of liabilities to household income was broadly flat between 1988 and 2001, ranging between 1.03 and 1.17, increasing to a peak of 1.75 in the first quarter of 2008 before a steady decline in more recent periods.

Figure 4a: Household financial liabilities relative to income

United Kingdom

Source: Office for National Statistics

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Household financial assets as a proportion of household income increase in the third quarter of 2012 to 4.26 from 4.22 in the second quarter. This has been broadly flat following a decline in the period to the first quarter of 2009. The fall in the most recent period was driven, in part, by a fall in the assets held by households and partly by an increase in income; household assets fell by £102 billion over the quarter.

Figure 4b: Household financial assets relative to income

United Kingdom

Source: Office for National Statistics

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The ratio of net assets/liabilities (i.e. assets less liabilities) to household income increased to 2.78 in the third quarter of 2012 from 2.73 in the previous quarter; this reflected an increase in household income and a greater increase in household assets than in household liabilities between the second and third quarters of 2012.

Figure 4c: Households’ net financial assets/liabilities relative to income

United Kingdom

Source: Office for National Statistics

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Focus on the distribution of household income and wealth

When considering the economic position of households it is important to look at the distribution of income and wealth. Average measures do not show the differences between the richest and poorest households and therefore their relative economic position. For example, a country could have high levels of average income and wealth, but if this is held by a few individuals a considerable part of the population could be experiencing a relatively low standard of living and this would not be picked up by the overall measure. Inequality of distribution is therefore an important measure when finding the well-being of households.

• All four of the components of wealth are more unequally distributed than income alone.

• Once taxes and benefits are taken into account, the richest 20 per cent of households have an income of almost four times that of the poorest 20 per cent.

• The wealthiest 20 per cent of households have 96.6 times more wealth than the least wealthy 20 per cent.

• Inequality in the distribution of wealth is driven by the distribution of net financial wealth and savings in private pension schemes.

Income inequality

When comparing societies it is important to consider how evenly the income is shared out as well as the average level of income.  This is particularly the case for households as, in general, people tend to assess their well-being in terms of their income relative to others around them, rather than just the absolute level of their income.

The distribution of income has remained relatively stable over the last 20 years. Figures in The Effects of Taxes and Benefits on Household Income, 2009/10 ¹ show that the richest members of society, those in the top 20 per cent of households, have a pre-tax income 16 times greater than the poorest 20 per cent. In contrast, final household income, which is net of tax, cash benefits and benefits in kind, gives the richest 20 per cent almost four times more income than the poorest. The difference between the two figures highlights the equalising nature of the welfare system in the UK.

Notes for Income inequality

1. Although 2009/2010 income is not the most recent year that income data is available, it was chosen for this analysis so that it is comparable with the wealth data (which is only available for 2008/2010).

Distribution of wealth

Although income and earnings are usually the primary way households fund spending, they can also draw on their other assets (for example, savings or inheritance).  Some households might have a very low income but may have a lot of savings (or other assets) that allow them to continue spending. This means that they may enjoy a standard of living comparable to those who have much higher earnings.  It is also important to know the extent to which spending today is being funded by running down assets, and therefore how sustainable the level of spending is. Wealth, and its distribution, is therefore important when it comes to monitoring the standards of living.

Median household wealth for Great Britain is one of the measures of well-being, and also included on the Well-being Wheel of Measures. Median wealth in 2008/10 was £235,000. Even though median wealth gives a clearer picture of what has happened to the ‘typical’ household, it still masks a lot of the inequality present within wealth. A recent release from the Wealth and Assets Survey  showed that in 2008/10 the value of total wealth for the wealthiest 20 per cent of households was 96.6 times greater than the least wealthy 20 per cent. This difference is substantial compared to the inequality present in the income distribution.

The difference in inequality is illustrated in Figure 5, which shows the Lorenz curves¹ for income and wealth for 2009/10 and 2008/10 respectively. Lorenz curves are a graphical representation of the inequality of distribution; where the diagonal 45 degree line illustrates a scenario where income or wealth is equally shared. The closer the Lorenz curve is to the diagonal line, the more equal the distribution becomes. Figure 5 shows diagrammatically how big the difference is in the distribution of the two measures. The curves in Figure 5 show that the poorest 50% of households account for around 30 per cent of total incomes, but only 10 per cent of total wealth.

Figure 5: Lorenz curve for wealth (2008/10) and income (2009/10)

United Kingdom

Source: Wealth and Assets Survey, Living Costs and Food Survey - Office for National Statistics

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Looking into the components of wealth may provide a clearer picture of where this inequality lies. Figure 6 shows the Lorenz curves of the individual components of net total wealth² – net financial (savings and stocks and shares minus debts such as credit cards balances, loans, informal borrowing and overdrafts), net property (houses and other property minus mortgages), physical (the value held in household content, collectables and cars) and private pension wealth (the value of savings in private pension schemes). Again the lines closer to the diagonal line are the more equally distributed.

Figure 6: Lorenz curve of income (2009/10) and components of wealth (2008/2010)

United Kingdom

Source: Wealth and Assets Survey, Living Costs and Food Survey - Office for National Statistics

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Net financial wealth and private pension wealth are the least equally distributed components.  Physical wealth and net property wealth are relatively more equally distributed.  This implies that, as they become better off, households invest in houses and cars before they buy pensions or stocks and shares. This makes sense, as households are more likely to buy assets with practical and current uses – necessary things such as cars or washing machines - before investing in financial assets or pensions. Figure 6 shows that all four components of wealth are more unequally distributed than income.

Notes for Distribution of wealth

1. A Lorenz curve is created by ranking households from poorest to richest and graphing the cumulative share of household income and households as a proportion of total income and households respectively.
2. Property, financial and total wealth are net measures as they each deduct the value of liabilities from the value of assets.

Background notes

1. Components of Household Actual Income and Expenditure

   Household Actual Income

   Component	National Accounts Definition
   Wages and salaries	D11. wages and salaries
   Sole trader income and housing services	B2G and B3G. gross operating surplus of households including gross mixed income
   Capital income	D4 Net. property income
   Social benefits	D62 net. social benefits and D63 net. social benefits in kind
   Taxes and social contributions	D612. Received imputed social contributions, D5 paid. taxes on income and other current taxes, D6112 paid. employee social contributions and D6113 paid.  social contributions by self- and non-employed.
   Other	D7 Net other current transfers.

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   Household Actual Expenditure

   Component	National Accounts Definition
   Durable goods	Total durable goods
   Housing including energy	COICOP 04 (energy includes water, electricity, gas and other fuel)
   Food and non-alcoholic  beverages	COICOP 01
   Other goods and services	All goods and services excluding durable goods, COICOP 01 and COICOP 04.
   Social benefits in kind	D63. net social benefits in kind
   Expenditure of non-profit institutions serving households	P31. Expenditure of NPISH

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2. Non profit institutions serving households (NPISH)

   All estimates presented are for the combined Household and NPISH sectors. NPISH sector institutions comprise any non-profit organisation where the majority of its funds come from households, of which the largest industries include charities, universities, religious organisations and trades union.

3. Chained volume measures (CVM)

   Chained volume measures allow users to identify changes in expenditure on a good (or service) resulting from a change in the quantity purchased, rather than a change in the price of that good (or service). More information on annual chain-linking can be found in the article Methodology Note: annual chain-linking 18 (58 Kb Pdf) .

4. National Accounts Revisions Policy

   The data in this release are consistent with the United Kingdom Economic Accounts – Q2 2012, and are subject to revisions following the ONS National Accounts Revision policy. The policy may be found on the National Statistics website.
   Estimates for the most recent quarter are provisional and, as usual, are subject to revision in light of updated source information.

5. Next publication – 16 April 2013 (provisional date)

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