Andrew Webb: Disposable income only extends so far

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We are all painfully aware of the current inflationary pressures, especially when looking at our energy bills.

Two weeks ago, Power NI announced price increases for domestic customers of 27.5% starting July 1. This follows a 21.4% increase in January and a 6.9% increase last July.

The hits follow one another. Food prices, which are already experiencing high inflation, are expected to continue to rise next year as the war in Ukraine exacerbates supply chain challenges.

Added to this, for those who have been on paychecks in the past few weeks, you will have noticed that the new 1.25% health and social services tax has reduced your take home pay.

Anyone who doesn’t have a fixed-rate mortgage may well have received their fourth letter since December informing them of the increased monthly payments.

With all these extra calls on our money, how well are we able to handle it? To answer this question, we need to understand the distribution of income in Northern Ireland. The Department of Communities (DfC) undertakes an annual analysis which shows income per household in the area.

The department’s analysis found that around three-fifths of people in Northern Ireland earn less than the average income of £571 a week and that Northern Ireland generally has higher levels of low-income people than in the whole of the UK.

While median annual gross earnings in Northern Ireland stand at £24,000 (the highest level on record), taking inflation into account, real wage levels of £21,505 are no better than in 2005 (£21,723).

In an average household here, around 70% of income comes from earnings, with the rest being a combination of government support received (18%), occupational pensions (7%), investments (2%) and miscellaneous (2%) ).

This distribution varies when looking at income brackets. Typically, the bottom 25% of earners receive less income (44%), while state support accounts for a larger proportion (49%) of income. As such, revisions to state support, such as the £20 cut to Universal Credit, are likely to have a significant impact on those at the bottom of the income distribution.

Disposable income is the key metric for assessing how well consumers can navigate current price increases. The analysis shows that the level of discretionary income has declined, with people in the lowest income bracket experiencing the largest drop in discretionary income.

The wealthiest were not immune to this, but saw their discretionary income drop by a more modest amount. This is a significant squeeze on revenue and, when considering where revenue is being spent, it raises concerns about financial resilience.

For those in the lowest income group, 35% of spending is on housing and food. For comparison, it is 19% for people in the highest income group. It is therefore clear that increases in energy costs are hitting low-income households most dramatically, without much financial leeway to absorb further increases. This may partly explain why unsecured debt is rising again, after falling during the pandemic.

According to the Bank of England, the level of consumer credit, which includes personal loans, credit card debt and overdrafts, increased by 107.5% between January 31, 2000 and February 28, 2022. L he total consumer credit outstanding in February 2022 was £199.5 billion. Although there is no specific data on the level of indebtedness in Northern Ireland, research from the Financial Conduct Authority (FCA) suggests that people in Northern Ireland have the highest level of over-indebtedness. raised.

They estimate adults in Northern Ireland owe around £3,990 in ‘unsecured debt’ compared to £3,320 for the UK as a whole. FCA research also found that around 10% of people in Northern Ireland are ‘struggling’ – those who have missed national bills or credit commitments in three or more of the past six months. Around 56% of adults in Northern Ireland show characteristics of “potentially vulnerable”, meaning those who may have low financial resilience/capacity.

With the cost of living squeezed and the limited ability (for many) to absorb the extra costs, it’s no wonder consumer confidence is plummeting. Consumer confidence, a leading indicator of a recession, has been falling in the UK since November 2021.

A similar sentiment is evident locally via the Danske Bank Consumer Confidence Index, which shows a sharp drop in confidence this quarter, from 134 at the end of last year to 117 today. 42% believe that their financial situation has deteriorated and 43% of consumers believe that their financial situation will deteriorate.

Clearly, consumers are feeling financial pressure. Too many additional price increases, especially for essential items like energy and food, could lead to a significant financial crisis.

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