Lower-income households are using savings and borrowing more during the coronavirus lockdown according to research by the Resolution Foundation. In fact, poorer families are twice as likely as richer ones to have increased their debts during the crisis.
By contrast, richer families are actually saving more because they’re not able to eat out or go on planned trips abroad. Just one-in-eight high-income households have increased their use of consumer credit too.
The growing wealth gap between UK households
According to the research, which was funded by the Standard Life Foundation charity, those most at risk in the crisis have the weakest savings safety net to fall back on, highlighting Britain’s growing wealth gap.
A typical worker in a shut-down sector of the economy – and therefore most at risk of unemployment – had average savings of just £1,900. This is much less than the average savings (£4,700) of someone who has been able to work from home during the crisis.
Among the second poorest fifth of households, 32 per cent are saving less than usual, compared to the 17 per cent who have increased their savings. One in four of these households have increased their use of consumer credit – most commonly credit cards which carry high interest rates – during the crisis.
The report also revealed that the wealth gap between the richest and poorest tenth of households grew by more than £370,000 between 2006-08 and 2016-18, reaching £1.4million. Wealth gaps up and down the country have also grown, with London and the South East accounting for 38 per cent of all wealth in 2016-18, up from 32 per cent in 2006-08.
A lack of savings for so many low-income households could post significant challenges for the Government as it phases out emergency support for family incomes.
Calls for reform to protect people from financial crisis
“Pre-coronavirus Britain was marked by soaring wealth and damaging wealth gaps between households,” said George Bangham, Economist at the Resolution Foundation. “These wealth divides have been exposed by the crisis.”
Bangham believes that because the impact of the coronavirus pandemic could be felt by families for many years to come, the UK government should do more to support households.
“…it’s important for the Government to both strengthen the social security safety net via Universal Credit, and assist more low and middle-income households in building up their private safety nets by boosting their savings,” he added.
Mubin Haq, CEO at the Standard Life Foundation, also said that the report highlights how vital wealth is to comfortable living standards.
“Not only does it help reduce costs, especially housing, but savings and assets provide an important buffer when income drops. Millions are now facing an income drop and in need of that buffer. Savings are not a nice to have, they are a must have.
“People who lose their jobs or have a drop in their income, and have been unable to build up their savings, are being pushed into borrowing. Those on the lowest incomes will have less choice and more likely to be reliant on high-cost credit.”