Where does the money go? Understanding household incomes and spending
Household finances are a core topic for Understanding Society, ISER’s huge academic survey capturing information every year about the social and economic circumstances and attitudes of people living in 40,000 UK households. It is the largest survey of its kind in the world.
Economists and policy analysts want to understand whether households are making ends meet, how they are making ends meet, and how earnings, spending and living standards evolve over time. A number of unresolved ‘puzzles’ continue to concern researchers in this area. For example, current policy interventions and monitoring are based on income-based measures of poverty. However, survey data suggest that households with very low income spend more than they earn and more than households with moderately low income.
It could be that the data are flawed: these households may be misreporting their income or expenditure. Alternatively, it could be that this spending beyond income is real. It could be that some households with very low income have considerable wealth, or experience low income only temporarily, and so are sensibly maintaining spending by borrowing or drawing down savings. Or, it could be that poor households are spending more than they can really afford, perhaps in order to “keep up”.
Understanding this puzzle is crucially important for properly identifying the poor, and targeting assistance. In addition, if many households are spending beyond their means, then the recovery from the recent recession will not be sustainable. A major obstacle to understanding this puzzle, and others, is the lack of data with a full financial picture of households. Income minus expenditure must equal changes in assets and debts. If we saw all of income, spending and savings and debt for a given household, we could work out, for example, whether households that are spending more than they earn are accumulating unsustainable debts. Currently different surveys ask about, at most, two of spending, income and wealth. This is because it has been felt that asking about all three would place too much burden on respondents. Against that, there is some reason to think that respondents might be able to give more accurate information if they framed their thinking with the idea that income minus expenditure must equal changes in assets and debts.
A new project titled Understanding Household Finance Through Better Measurement, funded by the ESRC/NCRM and lead by ISER’s Annette Jäckle, seeks to develop new ways of collecting information on the financial experience of households. In particular, this project will ask respondents to report all of income, spending and changes in assets and debts. However, to keep the burden of responding manageable, the project will seek to use new technologies to help households collect and report information.
For example we will experiment with giving households an app for their phone which will help them to record their spending, and we will develop a web-based questionnaire that makes reporting enjoyable. In developing these tools, ISER researchers are working with technology and market-research experts at the Kantar Group of companies. We will bring innovative technologies that are now used by commercial companies into our scientific study. The lessons we learn will improve not only Understanding Society, but also similar studies around the world. The new methods will take time to develop and test, but ultimately, with new and better data, we will be able to provide new and better evidence on how households are faring in difficult economic times.