/ Money

Concerns over living standards are here to stay

Cartoon financial advisor climbing mountain, by Peskimo

The recovery seems to have well and truly set in. Today’s ONS release of UK growth data suggests that the UK economy grew by 0.7% in the fourth quarter of 2013. And growth also looks to continue next year.

If wages keep pace with prices in the future, immediate pressures on household budgets will be eased. However, more concerning is the composition of price rises and the impact on household expenditure.

As a result of rising prices, consumer budgets are more and more being taken up by essential expenditures and this is denting household spending power. Just looking at the last ten years, analysis using the Which? Spending Power Index shows that if food, housing and energy prices had risen at the same rate as general inflation, disposable incomes would be 5.2% higher in real terms than they are today; that’s the equivalent of £1,320 at today’s prices.

Dents in household spending

Consumers are also being asked to contribute to investment in essential markets such as telecoms, energy and water. The recent National Infrastructure Plan outlined investments currently pencilled into the infrastructure pipeline. A conservative calculation shows that this could amount to increased costs of £740 per household per year up to 2020. And the demise of defined benefit schemes and increased life expectancy mean that we are all going to have to sacrifice more of our pay today to secure our future living standards.

Similar arguments can be made with increasing needs to fund pensions, social care, children’s (higher) education and childcare. All in all, increased needs to provide for the future and for new essentials means that there is less to be spent on what we need and what we want now.

Of course, larger rises in real terms pay will ease some of these issues. But with shifting consumption needs, heavier requirements to save for the future and an increasing burden of non-discretionary spending, it is unlikely that pay rises will be enough.

The big cost of living sum

So what else can be done? First it needs to be accepted that there is not a clear enough articulation of the combined impact of these price rises and future demands on household budgets. Getting a handle on this “Big Sum” will empower consumers to take the necessary steps and politicians to put in place the right policy responses to raise livings standards.

In the short-term consumers can attempt to shift their consumption patterns as we have recently seen for energy. They can also be helped to more actively pursue the best value options. A clear example is in annuity markets where, despite rates varying by up to 38%, only 30% of people switch provider when they come to retire.

What’s needed to set living standards on an upwards and sustainable trajectory is a more fundamental shift in how consumers spend their money and engage in a huge range of essential and non-essential markets. Policy makers and regulators also need to make sure that markets work better for consumers and that public services respond to consumer needs.

This is an excerpt from Matthew Oakley’s blog on Huffington Post.


We must remember the dire days of the recession when the future looked very uncertain. Part of personal wealth problems were because we lived too much on credit, and forced up the housing market through excessive mortage loan-to-value (and self declaration of income). Irresponsible banking and government’s lack of awareness or control also contributed. At least now we seem to be getting the country back on its feet. As more people get into work, and as companies become more profitable, so the tax take will increase to fund the expenses listed above. We need a wealthier country before we will see our standard of living recover. One positive outcome might be that we are much more aware of essential expenditure and how to minimise it, and perhaps less prone to live now, pay later. I just hope the recovery doesn’t get spoiled by political populist policies – time for responsible government (where do we get that from?).

Too true indeed, Malcolm.

Of course, so long as savings interest rates continue to rub along the bottom, the standard of living for a very significant proportion of the population will continue to decline. The concept of “non-discretionary” expenditure is unknown to many people and as the costs of essentials continue to outpace incomes so many are forced to endure reduced circumstances for longer and longer. The “triple-lock” for state pension increases hardly recognises that the highest-rising components of the cost of living indices make up a disproprotionate percentage of pensioners’ expenditures. I am not advocating an immediate uplift in savings interest rates, however. Malcolm’s recipe is the right one and the recovery must be led by the wealth created through work and economic output. It just seems unfortunate to me that many people who will never benefit from them are being compelled to contribute to long-term national infrastructure investments through compulsory levies on their utiity bills [and if they should need to make a railway journey]. I would hope that some rebalancing of that factor could be considered as soon as the country can afford it.

“politicians to put in place the right policy responses to raise livings standards”.

What politicians will these be, then? The current coalition are not interested in raising living standards, other than for those who already don’t have to worry about them. They want to keep wages low in order to have a compliant workforce who are scared of losing their jobs, however low the pay.

I largely agree with both of the above comments but it’s important to bear in mind the generation differences and the many changes which have taken place since people of pensionable age were raised during, or post second world war austerity. More importantly, we need to reflect on the considerable changes and advances in modern technology enabling quick and easy access to money. We of a certain age have contributed to some extent to the evolutionary ‘buy now pay later’ mindset by plying our offsprings with the things our parents were unable to afford to give us, thereby culminating in the materialistic society we have today. The advent of the contraceptive pill and the general acceptance of homosexuality has contributed to a more freer society with smaller families and more women working to supplement household incomes and a more comfortable lifestyle. Cheap flights to holiday destinations and warmer climates have added to the general enjoyment which in turn has brought about much variation and selection in our food consumption.
Young people to-day have grown up with these high ideals and expectations but at what cost?
With continuing rising prices for basic essentials like food, fuel and transport now and in the future, also worries about climate change, I predict it will take a long time for a generalised acceptance among the younger populace in particular, for any radical reforms in peoples’ lifestyle. The ever widening gap between rich and poor is one of the main issues which needs to be addressed to-day in order to bring about a fairer society.
We can learn lessons from the past but we must continue with future plans regardless. If we are to keep up our high expectations we must improve and invest in our manufacturing output, exports scientific research and infrastructure in order to keep abreast with global competition.
The challenges are many and varied but the emphasis must be on the future and less on harking back to the past.

Beryl, I think the only thing I would take issue with is the gap between rich and poor. There has always been a gap, and I see the poorer in the UK today as being better than the poor were years ago. I think we need to overcome the envy of the rich – in our kind of society (in all kinds it seems – look at the Far East and Asia) there will always be a big gap in wealth. We just have to live with it.

To Thumbsdown – how do you think it will be changed? Can you point to a time in history anywhere that has been any different?

Malcolm, some of the most successful egalitarian countries in the developed world i.e Japan (representing the Far East) and all of the Scandinavian countries rate highly on the Gini Scale.
According to a report by The Equality Trust at http://www.equalitytrust.org.uk (I’m sure you will find of interest as it contains lots of statistics), the UK is now one of the most unequal countries in the world. This has not always been so however. On the Gini Inequality Scale, in 1977 the UK was rated 0.24 whereas in 2012 it had risen to 0.34. I accept your views there will always be a gap between the rich and the poor and I don’t have a problem with that – my point being the ever increasing gap which is taking place in the UK here and now in the present.

There are various statistics. The ratio of the richest 10% to the poorest 10% is 10:1 in the UK – slightly higher than the OECD average. USA in 2013 produced by far the greatest number of millionaires – 6x France, 8x Germany, 13x Italy and 14x UK. I find our attitude towards wealth a little odd; we seem quite happy to spend a fortune on football and concert tickets, helping to make a number of people very rich indeed, but quibble when business people become rich. What matters more to me is lifting people out of poverty.

Barry says:
6 February 2014

The only comment I’d like to make is that the phrase “living standards” in the title is misleading, though politicians and the news media make the same mistake. By all means discuss income and expenditure, but surely living standards include the services available to you. If you’ve been a user of a local library, youth club, day centre, greengrocer, post office, hospital department, bus service or whatever, and it closes down, that to me represents a worsening in living standards. There’s more to life than money.

I retired due to ill-health some years ago. I am below pensionable age but do have a modest public service pension on which I do not pay National Insurance contributions.The change to an ‘earnings tax’ would greatly affect me as I am disabled and unable to secure work unless my disability is catered for. I wonder how many people in my situation will be affected by this raid upon our meager incomes. Does anyone else feel we are returning to the age of Dickens?