Household finances in Scotland – now and in the future

New summary statistics have been released today on household income for the UK, including Scotland, covering the period up to the 2018/19 financial year. These figures belong to the pre-COVID-19 world but should not be dismissed as irrelevant. They provide a picture of the underlying health of household finances going into this current crisis.

On average, household incomes have been stagnating in recent years, a trend that continued in the most recent data. Median household income was £517 a week in Scotland in the three-year period 2016/17 – 2018/19[1], or £464 after housing costs have been taken into account.

The largest source of income came from earnings with social security income proving most of the residual. Pension, investment and ‘other’ income are important for some, but on the whole is only a small portion of average income.

Does the pattern of income from earnings and social security change depending on how well-off you are? Quite considerably. The two lowest income deciles have as much, or more, income coming from social security than from earnings on average. This contrasts to the overall picture where nearly three quarters of income comes from earnings.

Chart 1: Income by Source

chart 1

Source: HBAI dataset

What impact will the Coronavirus outbreak and government response have on average income and on different parts of the income distribution?

Earnings will reduce for many households. This will differ by sector, and indeed some people will not see their earnings change at all. On the other hand, income from the means tested part of the social security system will increase. This is due to both new applications from those who have recently lost their earnings and from the increase in the standard allowance in Universal Credit/Working Tax Credit announced last week. Even with this additional support, it’s highly unlikely to offset the reduction in earnings in full for those affected.

At the moment, we do not have the full picture of where hits on earnings will occur but we know that industries such as tourism, hospitality and (non-food) retail are on the front line of business closures. These sectors do not tend to be well paid, which suggests that those who see a reduction in income from these sectors will be concentrated in (but not limited to) the lower end of the income distribution.

The self-employed are another key at risk group. Families with a self-employed worker tend to be distributed throughout the income distribution. In most years we see a cluster right at the bottom and right at the top. Again, not all self-employed people will be affected, and some will be able to weather the storm better than others due to cash reserves and/or an ability to cut costs quickly.

Given the scale of the disruption to the economy, we are likely to see some reduction in income at the median. Whilst concerning that average living standards will dip (albeit hopefully only temporarily), those who may be least able to cope with a fall in income are those who are already on low incomes.

In 2016/17 – 2018/9, average weekly income for a two adult household on the poverty line was £310 before housing cost are taken into account. Clearly, a further fall in income will be extremely difficult to deal with.

Half of all people in poverty are in working households and two thirds of children in poverty live in a working household. Depending on their job, these households could therefore see falls in their income. Social security will cushion some falls in income, but is unlikely to entirely offset the full decrease.

Tackling poverty is a key objective of the Scottish Government, and there are statutory targets that all parties in Holyrood have signed up to with regards to child poverty, and interim targets for 2023/24. Even pre COVID-19, the statistics released today show that we remain far away from these targets.

Chart 2&3: Child Poverty Target Measures

charts 2&3

Source: HBAI and Understanding Society Dataset

Is the current crisis going to mean we are even less likely to meet these targets? This is a question that is harder to answer than it would first appear. A fall in income for households at the bottom of the income distribution will reduce living standards, and this will be captured in at least one of the four targets that the Scottish Government has to meet: absolute poverty, which measures how incomes are changing over time. Material deprivation, the ability to afford basic goods and services, will also probably worsen.

However, progress towards the relative poverty target (which often is the referred to as the ‘headline’ poverty statistic) may not worsen as much, and could even improve. This is partly due to the fact that if average (median) income falls then the relative poverty line, calculated as 60% of the median, falls. It’s also due to means tested benefits, which as previously mentioned, will cushion some of the falls in earnings, and increase income for some people already in the system. This may keep more people out of poverty that would otherwise be the case. This shouldn’t mask the fact that many will be worse off and those just above the poverty line will be in barely a better financial situation.

Many families will face a difficult financial situation in the months ahead. However, it’s important that we do not lose sight of the need to try and do all we can to reach the child poverty targets. We know that lower income families are less likely to have adequate savings to see them through periods of financial distress. Whilst there are likely to be more families temporarily joining them in hardship, those who were already dealing with this are likely to be less able to cope. Coupled with reported food bank shortages and vital services shutting down, getting by could become near impossible. These statistics out today underline that many families are already in crisis, even before COVID-19 came on the scene.

[1] Due to the size of the survey sample in Scotland, most reported statistics on household income use a three-year average of data.

Authors

The Fraser of Allander Institute (FAI) is a leading economy research institute based in the Department of Economics at the University of Strathclyde, Glasgow.

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