Why economic recovery may be bad news for low income households

Even when the northwest economy gets better, for those on low incomes – life may get worse. This is because of a hidden tide of debt inequality that is set to become the new income (and health) inequality.

This week I picked up a tweet from @Working America, highlighting IMF research in 2010 by Kumhof and Ranciere in Finance and Development. It said:

‘In 1983, the bottom 95% of the population (by income) had 62 cents of debt for every dollar they earned. But by 2007, the ratio had soared to $1.48 of debt for every $1 in earnings. For the top 5%, their debt-to-income level actually fell during the same period, from 76 cents of debt for every dollar earned in 1983, to just 64 cents in 2007. And experts say the picture hasn’t changed much since then.’

The graph below, based on IMF data shows what’s happened between 1983-2007:

While this is US data and only goes up to the financial crash, it does illustrate the issue that low incomes are really only half the income inequality story. Its shadow side is that those on low incomes have much larger debt to income ratios and this ‘debt inequality’ is growing as their capacity to repay is reducing.

It will grow dramatically faster when the international economy comes out of crises and interest rates rise – and they will rise much faster than pay especially the lowest paid.

As the financial crises was developing (in 2008), and while working for the Department of Health in the north west of England, I went to visit one of the region’s largest Citizens Advice Bureaux to discuss debt and mental health.

They told me:

• half of all their CAB citizen consultations were about debt management
• almost everyone they dealt with either had a mental health problem preceding their debt problem or as a result of their debt problem.

For those who are working but on low incomes, debt leads to stress–related lost productivity, workplace absenteeism and frequently it can end in loss of employment. Poverty, relative deprivation and social exclusion have major impacts on health and premature death, and the chances of living in poverty are loaded unfairly towards specific social groups.

The issue of financial inclusion and access to affordable credit, savings and other financial products is a major issue for north west families – especially the ‘working poor’ and those on benefits. These are the very groups who already experience poor mental and physical health.

The most vulnerable families of the northwest are already shouldering the greatest social burden of financial market failure including:

• reduced availability of public services
• reduced employment availability
• lower income
• poor and unequal health and life expectancy
• reductions in welfare benefits

This is already having big impacts on welfare advice services and mental health services. For both state and voluntary sector services, this is happening just as they have had to make cuts.

As the economy improves, debt inequality is likely to place thousands of the lowest income households in the northwest in yet further multiple jeopardy.

For low income families, as interest on their repayments rise but their disposable income does not, and the services that might help are less able to; the wealthier will be increasing the income gap and reducing their own debt to income gap.

Children and older people will suffer most as they have least capacity to change their risk exposure to either their family’s or their own accumulated ‘debt to income ratio’. Both groups are already over-represented in the lowest income households.

It is therefore likely that as the economy improves, hidden debt inequality will increase health inequalities for the most vulnerable – economic recovery may not be universally good news for the poorest families.