“Behind a nation of non-savers”

The key chart

The key message

Hidden behind the headlines of yesterday’s (15 March 2023) UK budget are three important trends:

1. The shift from large UK household (HH) surpluses (the main counterpart to government deficits) to…
2. …little or no net HH savings or borrowings…
3. …and rising financial inequality

Official OBR forecasts suggest that UK living standards will experience the largest two-year fall in real living standards since records began, bringing real HH disposable income (RHDI) per capita back to 2014-15 levels. Drawdowns on HH savings will not fully compensate for falling RHDIs, hitting consumption and growth in the process.

Expect these trends and rising financial inequality to be centre stage in the build up to the next UK general election – even if they were missing from yesterday’s budget coverage.

Behind a nation of non-savers

UK HHs built up large financial surpluses during the COVID-pandemic and the energy crisis. These surpluses were the main counterpart to the UK government’s large fiscal deficit (see chart below).

According to latest OBR forecasts, the HH sector will move from a net lending position in 2022 to balance in 2023, however, as savings are drawn down to support consumption (see key chart above).

What factors are behind a nation of non-savers, and what do they mean for the UK’s economic and political outlook?

The OBR expects RHDI to fall by 2.6% in 2023, as inflation (4.9%) continues to outstrip nominal earnings growth (3.6%). This follows a fall of 2.5% in 2022 (see chart above).

The OBR also forecasts that RHDI per person (a measure of living standards) will fall by 6% between FY22 and FY 24 – the largest two-year fall in real living standards since records began in the 1950s. If correct, RHDI per person would fall to its lowest level since FY2015 (see chart above).

In response, HHs can either save less, borrow more and/or consume less. The OBR’s forecasts focus on the first factor. HH’s saving is expected to fall to zero in 2023 and 2024 to “support consumption in the face of weak real income growth.” As the “cost-of-living crisis” eases, the savings ratio is forecast to recover to around 1%, still well below the post-financial crisis average (see chart below).

Lower savings will only partially offset the drop in real incomes, however. This means that private consumption will fall in 2023 by 0.8%. Note that the OBR estimates that this fall would be 1.5ppt higher if the savings ratio remained at 2022 levels. Looking further ahead, the forecasts suggest that consumption growth recovers to an average 1.7% a year out to 1Q28 – better than forecast in November, but still unexciting.

What is missing here is the outlook for financial inequality. Lower-income HHs have much less flexibility to adjust their spending in response to rising prices and are less likely to have a cushion of savings to protect them. Recall that HHs in the bottom three income deciles save less than 6% of their gross income. This contrasts with HHs in the top two income deciles who save more than 30% of their gross income (see chart above).

Conclusion

Official forecasts suggest that UK living standards will experience the largest two-year fall in real living standards since records began, bringing real HH disposable income (RHDI) per capita back to 2014-15 levels. Drawdowns on HH savings will not fully compensate for falling RHDIs, hitting consumption and growth in the process.

Expect these trends and rising financial inequality to be centre stage in the build up to the next UK general election – even if they were missing from yesterday’s budget coverage.

Please note that the summary comments and charts above are abstracts from more detailed analysis that is available separately.