Inequality, debt and growth

Document type
Lucchino, Paolo; Morelli, Salvatore
Resolution Foundation
Date of publication
1 May 2012
Poverty Alleviation Welfare Benefits and Financial Inclusion, Families
Social welfare
Material type

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 This report shows that low to middle income households were reliant on borrowing to fund much of their spending for more than a decade before the financial crisis. The report reveals the full extent of the increase in borrowing and deterioration in household savings rates in the run up to the 2008/09 crisis, with the poorest 10% outspending their income by 40% by 2007. Given only a minority of the poorest are homeowners paying off their mortgage, it is highly unlikely this was counterbalanced by an increase in housing wealth. 
The report, found that over the 10 years 1997-2007, spending grew faster than incomes across all households, but for the poorest groups this was much more pronounced.  For the bottom 10%, incomes grew by 17% while spending grew by more than twice as much (43%).  Even middle income households found themselves falling behind, with incomes growing by 33% and spending growing by 46%, resulting in a negative savings ratio for a full ten years before the crash. The highest income households also saw their incomes grow by less than their spending over the period but still retained a positive - although declining - savings ratio.