Expenditure and Disposable Income Trends of UK Households: Evidence from Micro-Data

By van de Ven, Justin | National Institute Economic Review, October 2011 | Go to article overview

Expenditure and Disposable Income Trends of UK Households: Evidence from Micro-Data


van de Ven, Justin, National Institute Economic Review


The view that there is an 'under-savings' problem in the UK domestic sector has had an important bearing on the contemporary agenda for policy reform. This paper considers the temporal variation of household expenditure and disposable income described by micro-data observed during the past four decades (1971 to 2009). I find a very close correspondence between the growth of expenditure and disposable income over the sample period, with the implication that households have not offset the well-documented decline in occupational pension provisions during the period through increased private saving out of disposable income.

Keywords: Under-saving; retirement; expenditure; disposable income

JEL Classifications: D12, D14, D31, D91

I. Introduction

The general perception that there is an 'under-savings' problem in the UK has motivated much discussion in the contemporary literature and provided an important impetus to the agenda for policy reform. Any judgement about the sufficiency of savings behaviour is, however, complicated by the diversity of incentives that bear upon intertemporal planning in practice. In this study I take a fresh look at the statistical evidence, by considering how age profiles of household expenditure and disposable income have varied between birth cohorts over a 39-year period. The results obtained suggest that households have not increased their savings out of disposable income to offset the decline in occupational pension provisions that has occurred during the past thirty years.

The perception that the national savings rate is too low is worrisome from a macroeconomic perspective because it suggests that investment may be insufficient to sustain prospective growth, or that--if adequate rates of investment are maintained--then domestic borrowing may pose a risk to creditworthiness. From a microeconomic perspective, under-saving is likely to result in insufficient finance to meet aspirations for prospective consumption, exposing the public sector to political economy risk. Disgruntled retirees, for example, may pressure the government to increase state sponsored benefits, putting the public finances in doubt.

It is, however, exceedingly difficult to determine whether there is an under-savings problem, both because of the complexity that is usually attached to identifying 'optimal' saving rates for any specific objective, and because of the diversity of competing objectives that characterise our economic environment. Increased saving may be required to sustain a particular level of growth on the one hand, while lower saving may be required to support a desired consumption stream on the other. And even if attention is limited to the household savings problem, then basic economic theory suggests that savings will respond to a range of issues that include expectations over future employment and investment prospects, the evolving policy environment, credit market conditions, individual demographic and financial circumstances, and the nature of preferences. We have little data to draw upon in relation to many of these factors (particularly where expectations are concerned), and some we can identify only indirectly (e.g. preferences).

Analyses that are concerned with the adequacy of savings have consequently tended to focus upon particular issues of concern, each on the basis of a discrete set of assumptions. One subject of concern in the literature has been the sustainability of national aggregates. Weale and coauthors, for example, focus upon the savings rate required to ensure that consumption grows at the same rate as income in steady-state equilibrium. (1) Comparisons between national saving and the implications drawn from a highly stylised macro-model that are reported by these authors suggest that the UK is under-saving by between 1 and 10 per cent of GDP. In a similar vein, a very large literature has explored the sustainability of public finances, following the seminal contribution of Auerbach and Kotlikoff (1987). …

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