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Is financial crisis measured by Xmas food handouts? Are we in big trouble?

Christmas food handouts double as millions face ‘financial precipice’

What interest rate has to do with economic recovery? Interest rate is still zero (in the USA) and the economy has not recovered since 2007. Resolution Foundation says: “Debt-ridden households could kill off economic recovery when interest rate rises…” Should we expect a worse case scenario sooner?

The number of people who will turn to food banks for sustenance is expected to double this Christmas, as a new report warns that millions more families face a financial “precipice” due to high personal debts, flat-lining wages and future interest rate rises.

With 3 new food banks opening every week in the UK, the charity the Trussell Trust (that oversees Britain’s 292 emergency outlets), says it expects to feed 15,000 people over the Christmas fortnight alone, almost double the number last Christmas.

Many hungry people visit food banks: they refuse to accept free food because they think it carries a stigma.

Food bank

Volunteers at food banks aim to tackle ‘hidden hunger’ – Photograph: Christopher Thomond for the Guardian

 and y published in The Observer, Dec. 22, 2012  under ”

Christmas food handouts double as millions face ‘financial precipice'”

“A study published by the Resolution Foundation, an independent think-tank  says that millions of households with low to middle incomes will be pushed close to the edge if they are unable to reduce their debts, including mortgages, before the cost of borrowing returns to more normal levels.

Volunteers who are giving up part of their holiday to help run food banks – from students to pensioners and representatives of local businesses – will be out in record numbers across Britain this week, distributing food to those who cannot afford a decent Christmas. Their aim is to tackle “hidden hunger” – that affecting people who refuse to accept free food because they think it carries a stigma.

The Resolution Foundation report exposes how millions of families, unable to pay off debts, are facing a crisis if interest rates are pushed up in coming years to keep inflation down.

Matthew Whittaker, senior economist at the Resolution Foundation and the author of the report, On Borrowed Time?, said: “Debt levels are a major concern for a substantial number of families struggling under a burden of repayments, even as things stand.

“There is a very real prospect that borrowing costs will rise more quickly than incomes and that lenders will become less flexible over repayments. Many households are already in a very exposed position, even with interest rates on the floor, so even small changes in the financial outlook could have a dramatic effect.

“All this threatens to make the burden unbearable for many debt-loaded households, particularly those on lower incomes. This would be dangerous at any time, but it looks especially so in the current era of frozen wages, under-employment and faltering living standards.”

Figures published last week by the Bank of England showed that 3.6 million households – 14% of the total – now spend more than a quarter of their income on debt repayment, including mortgage costs. The Bank also says that up to 1.4 million households (12% of those with mortgages) are in special measures with their bank, having asked for temporary deals from their lenders.

The RF report shows that debt is distributed unevenly across income groups, with those in the poorest 10% of households spending on average 47% of their monthly income on debt repayments, compared with 9% for the richest 10%.

It also highlights how 2.4 million households with a mortgage (one in five) are spending more than 25% of their gross income on mortgage repayments alone – at a time when interest rates are at just 0.5%.

Before the debt boom of the 2000s, only 15% of households were in this position, even when interest rates were as high as 7%.

The debt problem is likely to be all the more serious for struggling families because wages and household incomes are likely to stagnate over the next few years. The RF suggests that the average full-time wage will rise no higher in real terms than its 2000 level of £26,200 until at least 2017 – down from a peak in 2009 of £29,000.

Few economists expect interest rates to rise in the near future – almost certainly not in 2013 – but after that the Bank of England would be under pressure to raise rates to see off the threat of inflation were the economy to show signs of recovery.

The report notes the delicate balance that the Bank – under its newly appointed governor, Canadian Mark Carney – will have to strike between controlling inflation through raising interest rates and creating a risk of mass mortgage default and increased bankruptcy rates, which could combine to derail any nascent recovery in the economy.

The report says: “The prospect of interest rates rising and forbearance [special arrangements people set up with banks to help them through] being removed while incomes continue to stagnate heightens the risk of future defaults.

Such an outcome may yet slow down, or stall, economic recovery: at some tipping point the micro issue becomes a macro one. In this eventuality, we may find that the green shoots of recovery just sprouting in the UK economy prove to be living on borrowed time.”

Increase small and inexpensive celebrations: There are many occasions to celebrate, and it is celebrating the good positive attitudes that extend a chance to survive the gloomy days ahead.

Why salaries not rising with companies’ profits?

 

A trader walks past a display screen
The gap between medium and low-income earners and those at the top of the UK’s pay scale began to widen years before the global economic crisis began.
Pay for ordinary workers has not kept up with economic growth and rising company profits. Duncan Weldon, senior economist at the Trades Union Congress, stated several reasons.

Have you noticed how your boss seems to be doing quite well, but your own pay is stagnating?

The cost of living is going up, but your wages are not keeping pace?

It is easy to blame the recession, but you may be surprised to hear that the trend for weak wage growth predates it.

The British BBC is trying to explain why salary is not increasing.

“Pay for ordinary workers had flatlined before the current global financial crisis began. (Continue reading the main story)

Duncan Weldon, senior economist at the Trades Union Congress, stated several reasons: “Essentially the workforce has been separated from the proceeds of growth… and at an accelerating rate

Stewart Lansley,  author of ” The Cost of Inequality” wrote: “Research by the think tank  and The Resolution Foundation, which focuses on people of modest-to-low incomes, reveals that between 2003 and 2008, there was a pay freeze for people earning the median wage or less.

James Plunkett, of The Resolution Foundation, said: “We saw almost no wage growth for those in the middle-income bracket and below despite the fact that the UK economy grew by 11% in that period

Basically, little of the economic growth of recent years found its way into the pay packets of ordinary people. A large part of it went into company profits and to the very top earners.

Why This growing pay divide?

Since the 1970s there have been major structural changes in the British economy.

The impact of the globalisation of production and technological advances since that time have combined to radically change the nature of the labour market.

The financial sector accounts for much of the UK’s wages growth of the past two decades

Some jobs have simply vanished, either replaced by machines or outsourced to lower cost countries.

Other jobs have been made much more productive – a financial trader armed with a quick internet connection is able to make a lot more money than one reliant on a telephone and fax machine.

In fact, it is estimated that around 80% of the UK’s wage growth in the last 20 years has been in the finance sector.

Matt Oakley of Policy Exchange wrote: “By giving tax credits, this allows firms to actually pay less wages than it would do otherwise. It acts as a kind of firm subsidy, reducing wages”

Some analysts refer to this as the ‘hollowing out’ of the labour market. The idea is that the old middle-income jobs have gone and what is left are either very highly skilled, highly paid jobs at the top or low skilled, low paid ones at the bottom, like in retail and the care sector.

Throughout the 1980s, a larger share of national income started to flow to those at the top of the earnings ladder as they disproportionately benefited from the increases in productivity brought by globalisation and technology.

Earnings for those at the top rose at a much faster pace than for those in the middle and at the bottom.

From the late 1990s, that trend became even more pronounced, with the top 3% of earners starting to detach themselves from everyone else.

Some argue that these trends alone do not tell the whole story. Technology and globalisation are obviously important factors but other forces are at work, too.

They point to the fact that these wage discrepancies are less marked in other advanced western economies, suggesting that governments can do something to influence them, either through the tax system or through a better minimum wage – or indeed that stronger unions can negotiate better deals for the workforce.

How did we get this False sense of wealth?

The notion that median wages, (the cut-off line between 50% of the population wages) were not growing in the five years running up to the fall of Lehman Brothers may seem odd.

Duncan Weldon presents Analysis on BBC Radio 4 on Monday, 20 February and said:  “People did seem to feel better off at the time and, indeed, now look back on it with something approaching nostalgia.

Whilst wages were not going up for many, other factors were mitigating this – house prices were rising, making home owners feel wealthier, credit was easily available and the system of tax credits topped up the income of lower earners.

Yet policy analysts on the centre-right think the generosity of the welfare state encouraged companies to pay less”.

Matt Oakley points to the rise of “in-work benefits” introduced under the last Labour government:

“The tax credit system spanned households with incomes of up to around £55,000 ($87,000), so a large chunk of households were taking tax credits home.

“There’s been some evidence it can have an adverse effect… by giving tax credits, this allows firms to actually pay less wages than it would do otherwise. It acts as a kind of firm subsidy, reducing wages.”

Gavin Kelly of The Resolution Foundation said: “It will take a long time for many households to recover the position that they had previously attained prior to the recession. We’re looking towards 2020… and that’s assuming that the economy does recover”

It is important to remember that wages, although very important, are only one part of household incomes. A two-earner couple with children will have an income made up of two sets of wages, child benefit and possible tax credits and interest from savings.

Through the 1980s and 90s, the entry of more women into the labour market was a major driver of household incomes as second wages topped-up family budgets. In the 2000s, the introduction of tax credits did the same.

So the question is  “is there anything else that is going to drive up household income in the next ten years”?

With the tax credit system being scaled back and with childcare costs preventing many women increasing their working hours to boost household income, it may well be that wages will become a more important factor in increasing incomes.

The problem is that they show little sign of growth at the moment.

If the economy does return to growth, one key question is: “who benefits from it? Will it resemble the growth of the 2000s and flow to those at the top and into company profits or will ordinary people get their fair share?”

Without the alleviations of a generous tax credit system, a high increase in the number of two-earner couples or cheap credit, wage growth will be crucial in driving living standards higher.

Note: Related stories The new world of work; Earnings fail to cover inflation; Explore the Analysis archive


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adonis49

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