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The Economic Position of Households, Q4 2012 Article

Released: 16 April 2013 Download PDF

Abstract

The Economic Position of Households is a quarterly publication. The aim is to give data users the opportunity to consider the interaction of household income and expenditure and the main drivers of the observed trends. All analysis is adjusted for seasonal effects.

Key points

Inflation adjusted household income per head, including services in kind provided by Government:

  • fell by £13 (or -0.3%) in Q4 2012,

  • increased by £84 (or 0.5%) in 2012 compared with 2011,

  • but the last nine years have been flat compared with growth between 1997 and 2004.

Inflation adjusted household expenditure per head, including spending by Government on behalf of households:

  • increased by £4 (0.1%) in Q4 2012,

  • increased £71 (0.4%) between 2011 and 2012,

  • grew between 1997 and 2007, fell in 2008, then remained relatively flat.

The household saving ratio in current prices (price effects included):

  • was 6.7% in Q4 2012 (down from 7.9% in Q3 2012),

  • gross household saving was £18.5bn in Q4 2012 (down from £21.7bn in Q3 2012). 

Household financial liabilities in current prices (price effects included):

  • were 1.46 times greater than household disposable income in Q4 2012,

  • in 2012 were 1.74 times greater than household disposable income in 2007, a peak in the ratio of liabilities to income; this peak was followed by a steady fall in this ratio to the current level.

Household Disposable Income per head adjusted for inflation

Disposable income per head adjusted for inflation stood at £3,767 in Q4 2012, a fall of £13 (-0.3%). Income per head including services in kind provided by Government (such as education and healthcare) was £4,521, a fall of £13 (-0.3%), a similar decrease to the disposable income per head. This suggests the services in kind provided by the state did not contribute to the fall in income per head, or the income from those services was stable. Despite the quarterly fall in income per head including services in kind, there was a 0.5% increase between 2011 and 2012 of £84.

Figure 1 shows income per head with and without the added received income from services in kind provided by Government. The gap between the two series represents the value of those services in kind provided by Government. It shows how household income per head has been relatively flat compared with the growth between 1997 and 2004, when adjusted for inflation. Similarly the path of household income per head including the services in kind provided by Government showed positive growth between 1997 and 2007, but has been relatively flat since, with a very slight increase in Q4 2012 (influenced by a small decrease in inflation in comparison with recent years).

Figure 1: Households disposable income per head and household income per head including services in kind (adjusted for inflation)

Figure 1: Households disposable income per head and household income per head including services in kind (adjusted for inflation)
Source: Office for National Statistics

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Household Expenditure per head adjusted for inflation

In Q4 2012, household expenditure per head grew by £4 (0.1%) to £3,608. There was an annual increase of £38, a growth of 0.3% between 2011 and 2012.

There was an identical increase in household expenditure per head including spending on services in kind by Government on households’ behalf (such as education and healthcare). This also increased by £4 (0.1%) to £4,459 in Q4 2012. Annually, there was an increase of £71 from 2011 levels, a growth of 0.4%.

This suggests the expenditure by Government on services in kind such as education and healthcare did not contribute to the increase in expenditure per head; the spending on behalf of households by Government stayed the same between Q3 2012 and Q4 2012.

Figure 2 shows expenditure per head with and without the added expenditure on services in kind on households’ behalf by Government. The gap between the two series represents the value of those services in kind.

It can be seen from Figure 2 that between 1997 and 2007, both measures of household expenditure increased, peaking in Q4 2007. After 2007, both measures of household expenditure fell. Since 2009 Q2, expenditure has remained relatively flat. Household expenditure (including spending on households’ behalf by Government) has stayed between £4,418 and £4,502 while expenditure by households has stayed between £3,574 and £3,656.

Figure 2: Households expenditure per head and household expenditure per head including spending by Government (adjusted for inflation)

Figure 2: Households expenditure per head and household expenditure per head including spending by Government (adjusted for inflation)
Source: Office for National Statistics

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Household income including services in kind

The statistics presented in this section do not control for inflation, they are current price estimates (price effects included).

There was a quarterly increase in household income including services in kind of 0.7% in Q4 2012. The main contributions came from growth in net social benefits income (0.6%) and a decline in net other income (-0.4%), which includes non life insurance premiums, miscellaneous transfers such as lotteries and gambling and compensation payments.

The increase in household income with price effects included is in contrast to the fall in household income when adjustments are made for inflation. This shows the impact of inflation.

Figure 3: Q4 2012 Contributions to growth in household income including services in kind

Figure 3: Q4 2012 Contributions to growth in household income including services in kind
Source: Office for National Statistics

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The increase in social benefits seen between Q3 and Q4 2012 is part of the overall 5.4% annual increase in social benefits between 2011 and 2012. This increase is relatively standard for the series and was spread quite evenly between the four subcomponents: social benefits in cash, private funded social benefits, unfunded employees social contributions and social assistance benefits. Taken together these drivers account for around half the overall increase in social benefits.

Figure 4: Annual contributions to growth in household income including services in kind in 2012

Figure 4: Annual contributions to growth in household income including services in kind in 2012
Source: Office for National Statistics

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Figure 4 illustrates the main drivers for the 4.1% growth seen in annual household income including services in kind between 2011 and 2012. Wages and salaries contributed the most to this increase (1.6%), followed by social benefits (1.5%). Wages and salaries did not have particularly strong growth in Q4 2012 but contributed to the growth in Q2 and Q3 giving a boost to the year as a whole.

Contributions to growth in a particular quarter are not always representative of annual contributions to growth, so sometimes it can be more informative to look at the annual estimates. Analysis of the contributions to household income per head including services in kind for each quarter in 2012 show different drivers across the year. In Q1, the positive growth was largely attributed to taxes and social contributions, in Q2 growth was driven by wages and salaries increase, no main driver in Q3 and in Q4 social benefits was the category of greatest influence on growth.

Household expenditure including Government spending on households’ behalf

The statistics presented in this section do not take account of price effects (inflation); they are presented at current prices.

In Q4 2012 household expenditure including Government spending on households’ behalf increased by 1.2%, compared with the previous quarter. The main contributor to growth was in housing including energy, which experienced 0.4% growth. The growth in this category was due to demand outstripping supply in the rental market added to high energy costs through the winter months.

Figure 5: Contributions to growth in household expenditure including Government and NPISH spending on households’ behalf in Q4 2012

Figure 5: Contributions to growth in household expenditure including Government and NPISH spending on households’ behalf in Q4 2012
Source: Office for National Statistics

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Household expenditure including Government spending on households’ behalf experienced annual growth of 3.3% between 2011 and 2012. The main annual driver was the same driver as in Q4; housing including energy which contributed 1.3% to the annual growth rate. Over the year, no single component provided negative growth to household expenditure (including Government spending on households’ behalf).

The household saving ratio

Figure 6: The household saving ratio

Figure 6: The household saving ratio
Source: Office for National Statistics

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As the saving ratio is constructed by dividing savings (a relatively small number) by households’ available resources (a relatively large number), the series is volatile. Therefore care should be taken when looking at short term movements. Note that a positive growth on this graph shows an increase in the amount that households aren’t spending (this implies that households are ‘saving’).

In Q4 2012, the saving ratio was 6.7%, which equated to households making potential savings of £18.5 bn. This was 1.2 percentage points lower than the previous quarter (7.9%). This decrease was driven by a fall in total resources of 0.1% and growth in final consumption expenditure of 1.2%; in effect leaving less available to ‘save’.

Before the financial crisis in 2008, the saving ratio had been on a downwards trend, driven by high levels of household spending. However, between Q1 2008 and Q2 2009, the saving ratio increased from -0.2% in Q1 2008 to a peak of 8.2% in Q2 2009. After Q2 2009 the saving ratio declined to a low in Q1 2011 before rising back up to levels seen in 1997 and 2009 towards the end of the time series. Whilst it has fluctuated since 2009, the trend has been relatively static in the context of the time series, with the saving ratio staying within a range of 5.2% and 8.2%.

Household financial liabilities

The following analysis on the balance sheet of households and their financial liabilities has not been adjusted for inflation and therefore includes price effects (also known as current prices).

Household liabilities in Q4 2012 were £1.5 trillion. Liabilities increased between 1988 and 2007; since 2007, growth in household liabilities has not been as robust and has remained flat through to the current quarter. This reflects a flattening in the value of mortgages held by households.

The ratio of household financial liabilities as a proportion of household disposable income indicates the levels of liabilities (mortgages and other credit) that households hold relative to their total income. A ratio of over 1 indicates households are holding more liabilities than income in a given period; a ratio of less than 1 signifies that their income is greater than their liabilities.

Figure 7 shows the level of household financial liabilities as a proportion of household disposable income fell in Q4 2012 to 1.46 following the recent downward trend. The fall in the latest period is a result of growth in income (1.2%) being faster than the growth in liabilities (0.2%). The annual figures show the same downward trend between 2011 and 2012 as was seen between 2010 and 2011 (a decline of 0.6 in the ratio of financial liabilities relative to income).

Figure 7: Household financial liabilities relative to income

Figure 7: Household financial liabilities relative to income
Source: Office for National Statistics

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The ratio of liabilities to household income was reasonably flat between 1988 and 2001, staying within a range of 1.03 and 1.17. In 2007 it increased to a peak of 1.74 before a steady decline in more recent periods. This peak in 2007 was prompted by strong growth in liabilities, growth not falling below 6% between 1998 and 2007, while growth in income gradually fell from 6.1% in 2001 to 3.2% in 2007. Since then the growth of liabilities has dropped from 11.1% in 2006 to -0.8% in 2011 driving the shift in the ratio of liabilities to household income after 2007.

In contrast growth in income has remained fairly static between 2002 and 2012 (ranging between 3.1% and 4.6%). This switch in the trends of growth in liabilities and income has caused the ratio to fall. However, the ratio has not fallen to the low of 1988, where liabilities were almost equal to income.

Household financial assets

The following analysis on financial assets has not been adjusted for inflation and therefore includes price effects (also known as current prices).

In Q4 2012, household assets totalled £4.5 trillion. Household’s assets have grown steadily since 1987, with two dips in Q3 2002 and Q1 2009. After each dip, the value of assets lost have subsequently been recovered by households.

The ratio of household financial assets as a proportion of household income indicates the levels of assets that households own in relation to their total income. A ratio of over 1 indicates households are holding assets worth more than their income, a ratio of less than 1 indicates households hold assets below their income.

Household financial assets as a proportion of household income increased in Q4 2012 to 4.32 (from 4.25 in Q3 2012). The growth in the latest period is a result of growth in assets (3.0%) being faster than the growth in income (1.2%).

Figure 8: Household financial assets relative to income

Figure 8: Household financial assets relative to income

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The ratio of household financial assets to household income is a relatively volatile series. Between 1988 and 2012 there has been an increase in the ratio of household financial assets to income, increasing from 3.26 in 1988 to 4.32 in 2012. The series peaked in 1999 with a ratio of 5.03, followed by a fall to a trough in 2002 (3.74). Since that time, the series has continued to show volatility and households have not built up their financial assets as a proportion of their income to the level seen in 1999. The shifts in movement of this ratio have been driven by movements in the value of assets held by households. In recent periods, the annual data shows a decrease from 2010 to 2011 (0.14) and a slight increase from 2011 to 2012 (0.04).

Focus on median income, household income and GDP per head

This section looks at how income is shared between households (a key indicator of well-being). Middle Income Households, 1977-2010/11 released by the ONS in March 2013 looks at median household income which represents the income of a “typical” household better than other measures of income. The three measures discussed in this section are median household income, household disposable income and gross domestic product (GDP) per head. All three measures discussed in this section have been adjusted for inflation.

The main findings are:

  • All three measures of income showed positive growth between 1987 and 2007 (which is likely to have had a positive impact on well-being and living standards). Post 2007 income growth was flat or negative.

  • Median income growth was 63% between 1987 and 2010/11, while growth in household disposable income per head was 79%.

The median household income is the income of the middle household, if all households in the UK were sorted in a list from poorest to richest. Median household income is equivalised to take into account the number of people within a household (see key definitions).

Figure 9 shows the growth in median income, household disposable income per head and GDP per head between 1987 and 2012. They are presented as indices.

Figure 9: Growth in Median Income, Household Disposable Income per head and GDP per head (all adjusted for inflation), 1987-2012

Figure 9: Growth in Median Income, Household Disposable Income per head and GDP per head (all adjusted for inflation), 1987-2012
Source: Office for National Statistics

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All three measures follow a similar upward trend over time; although income is only one element of well-being, this growth suggests a positive impact on well-being and an overall higher standard of living today than in 1987.  However, between 1987 and 2010/11 median income growth was 63%, while growth in household disposable income per head was 79%. The different growths for median income and household disposable income per head are consistent with the findings in Middle Income Households, 1977-2010/11 which showed that household income at the top of the distribution increased faster than that in the middle.

Figure 9 shows that between 1987 and 1991 both the median household income and disposable household income per head increased at a similar rate. For the two years 1992 and 1993 however, median income fell by -1.1% and -1.2%, while disposable household income grew by 3.4% and 4.0%. The two series then followed similar positive growth for the remainder of the time series. The divergence in 1992 and 1993 contributes to stronger income growth in higher income households relative to middle income households between 1987 and 2010/11.

Middle Income Households, 1977-2010/11, released by the ONS in March 2013, shows a similar story. The relative difference between average1 and median income roughly doubled between 1977 and 1990 as the income of households at the top of the income distribution grew at a faster rate (an average of 5.3% per year) than income in the middle of the distribution (which grew at an average rate of 3.1%). Since then, the percentage difference between average and median has remained relatively constant.

In 2009 the two measures of income acted differently to GDP per head which fell by 4.6%. Household disposable incomes fell slightly in 2008 but increased in 2009, despite this period being the start of the recession. However, the falls in 2010 and 2011 meant that growth in the four years between 2008 and 2011 was still subdued when compared to pre-2006 growths.

In 2010/11 median income fell from the 2009/10 peak of £23,173 to £22,590, the lowest it had been in five years. Household income per head also fell between 2009 and 2010.  An important factor in the fall in household incomes was prices growth (inflation), which grew at a higher rate over most of the period.

The 2010/11 data for median income is the most recent available. However, the more recent data for GDP per head and household income per head shows a contrasting picture. GDP per head fell by 0.6% in 2012 while household disposable income per head saw an increase of 1.2%.  This return to growth in household income per head in 2012 partially reflects the impact of lower inflation.

Notes for Focus on median income, household income and GDP per head

  1. In this case average refers to mean equivalised disposable income.

Background notes

  1. Components of Household Actual Income and Expenditure

    Table 1: Real Household Income (Household disposable income adjusted for inflation)

    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
    Taxes and social contributions D612 - Received imputed social contributions, 
    D5 paid - taxes on income and other current taxes
    D6112 paid - employee social contributions 
    D6113 paid - social contributions by self- and non-employed.
    Other D7 Net other current transfers.

    Table source: Office for National Statistics

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    Table 2: Real Household Actual Income (Household disposable income adjusted for inflation including services in kind provided by Government)

    Component National Accounts Definition
    Real Household Income As above
    Plus  
    Social Benefits D62 net – social benefits and D63 net social benefits in kind

    Table source: Office for National Statistics

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    Table 3: Real Household Expenditure (Household expenditure adjusted for inflation)

    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.
    Expenditure of non-profit institutions serving households P31 - Expenditure of NPISH

    Table source: Office for National Statistics

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    Table 4: Real Household Actual Expenditure (Household expenditure adjusted for inflation including expenditure by Government)

    Component National Accounts Definition
    Real Household Expenditure As above
    Plus  
    Social benefits in kind D63. net social benefits in kind

    Table source: Office for National Statistics

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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) - Inflation adjusted estimates
    The inflation adjusted estimates used in this article are chained volume measures with a base year of 2009.
    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 (27.8 Kb Pdf) .
    Estimates for the most recent quarter are provisional and, as usual, are subject to revision in light of updated source information.

  5. Next publication – July 2013 (provisional date)
    Issued by: Office for National Statistics, Government Buildings, Cardiff Road, Newport NP10 8XG

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Supporting information

Further information

Middle Income Households - This article studies the median income of UK households from 1977 to 2010/11.

Glossary

Current prices
The value of income or expenditure at prices of the current reporting period.

Household actual income and expenditure
These are measures that take account of services in kind provided by the state, such as pensions and other social benefits for income and expenditure on services such as healthcare and education.

Household Final Consumption Expenditure
Household Final Consumption Expenditure (HHFCE) includes spending on goods and services except buying or extending a house, investment in valuables (paintings, antiques) or purchasing second-hand goods.

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.

Household Saving Ratio
The household saving ratio is the proportion of gross disposable income which is not spent on goods and services and is therefore ‘saved’.

Median Household income
The median household income is the income of what would be the middle household, if all households in the UK were sorted in a list from poorest to richest (see key definitions). As it represents the middle of the income distribution, the median household income provides a good indication of the standard of living of the “typical” household in terms of income.

Real household income and expenditure
This is the constant price/chained volume measure which takes into account inflation and presents prices relative to the base year. The term ‘real’ means it has been adjusted to exclude the effect of price rises as £1 today would buy fewer goods than £1 historically.

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