UK households £2,500 worse off this year than 2007

A new report by uSwitch.com into the nation's disposable income shows the extent of Britons' rapidly declining spending power in the last 12 months since the start of the credit crunch and the Northern Rock crisis.

For the first time since 1997, British households actually have less money left in their pockets after tax, national insurance and essential bills have been accounted for. Despite average pay packets seeing a slight increase, this year we're set to have £2,500 (15%) less household disposable income than in 2007. This is a rise of just 21% since 1997 against a gross household income rise of 54%.

The 15% shock fall in disposable income over the last 12 months is unprecedented. Disposable income now represents just 28% of gross household income, compared to 35% in 2007. The rapid decline is attributed to essential living costs soaring at their fastest rate since records began, while rises in tax and social contributions have eaten into net income, which, as a proportion of gross income, has fallen 0.5% in the last year alone.

Cost of Living Up 8%

Steep hikes in the cost of household essentials such as gas, electricity, fuel and food have contributed to essential household bills climbing by an inflation-busting 8% over the last 12 months - almost double the Consumer Price Index (4.4%) and 3% higher than the Retail Price Index (5%).

While official food inflation figures show prices rocketing 13.7%, a 28 year high, supermarket figures reveal food and drink costs have together experienced a rise of almost 25% on last year's figures. Specific increases include a 16.3% rise in the price of meat and a sharp hike in the price of breads and cereals of 15.9% over the past year. Milk, cheese and eggs are all up by 19% and vegetables are up 11%.

Fuel has seen a dramatic increase with average annual bills for unleaded petrol now totalling £1,655 - a 28% increase on 2007. UK drivers are currently paying an average of 12% more than their European neighbours to fill up their cars, and, if the price of petrol hits a predicted £2.30 a litre by 2009, it will cost more than £3,800 a year just to keep a car on the road.

Energy bills alone could potentially account for a crippling £1,467 of a household's annual budget by the end of 2008 - an unprecedented 61% or £555 increase in just a year. Annual household energy bills have risen from £912 on average in January to £1,048 in June, to a painful £1,127 today. Consumers are now experiencing the second round of energy price rises this year while experts estimate that bills could be pushed up by a further 40% by the end of the year.

Tax Up 6%

Soaring living costs are the undisputed culprit for the drop in household disposable income, but families have also witnessed a drop in net income. While gross household income has climbed by 2.89% since 2007, rises in income tax (6%) and National Insurance (4.6%) have led to net income as a proportion of gross income falling 0.5%.

In 1997, tax accounted for 9.6% of average gross household income. The figure has steadily increased, and today now stands at 12.1% of gross income - up 0.4% since last year. National Insurance is also hitting our take home pay with a 4.6% rise on last year's average household contribution, 6.9% of our gross income compared to 6.8% in 1997. In fact, Tax & National Insurance now account for the highest proportion (21%) of gross household income since 1991.

Hardest Hit

This July has seen unemployment surging at its fastest rate in 16 years and wage growth the weakest in five years. uSwitch.com figures reveal that a shocking 9 million (35%) of us are not getting a pay rise this year6. Of those who are, 77% expect 4.5% or below and 74% expect 4% or below6. With rises of just 2.8%, 2.45% and 2.2% respectively, manufacturing workers, teachers and prison officers will have even less in their pockets to cope with soaring bills.

That the cost of living is spiralling upwards is particularly bad news for the UK's poorest households. The number of people earning below the 40% national average household income threshold is at its highest since records began in 1979. There are now 5.6 million living below the 40% threshold, compared to 1.3 million at the end of the '70s.

uSwitch.com's study also reveals huge disparities in disposable income between UK towns and cities. While some parts of the country spend just 30% of their net income on household bills, others see over twice as much disappearing on their essentials. Some consumers are seeing up to 80% of net income being eaten up by household bills.

Households in Newcastle fare worst, spending 76.8% of their net income on bills such as gas and electricity and food and drink - more than anywhere else in the country

Hull, Nottingham and Blackpool aren't far behind, seeing between 63% and 65% of their take home pay going on bills

Meanwhile counties like Surrey and Buckinghamshire are spending 35% of their income on essential living costs.

Houses

The study also shows that this year the average UK house price has dropped for the first time since 1992 to £174,514 compared to £181,810 in 2007.9 However, the time it takes to sell a house - 10 weeks - is the longest since 2001. What's more, house sale prices as a percentage of the asking price is now 91.6% - an all-time low since housing market studies began in 2001.9

Yet despite tumbling house prices, average monthly mortgage repayments have risen from £965 in 2007 to £1,025 in 2008 - a 6.2% increase - and the interest rate shows no sign of coming down.2

Ann Robinson, Director of Consumer Policy at uSwitch.com, says: "While British athletes have been going for Gold, British consumers are going for broke. It's been a year since the start of the credit crunch and these figures reveal the exact price being paid by British consumers.

"Consumers are in a lose / lose situation where everything is shooting up except their income. The shock increase in the consumer price index - which has more than doubled in the last six months to over twice its official target - will impact everyone this year. It's a catch 22 situation - struggling consumers need pay rises to help them meet the mounting cost of living, but the Bank of England and the Government wants to keep pay rises to a minimum to dampen inflation.

"People now have less money in their pockets than at any point since 1997 and British consumers are facing an autumn of discontent. With UK emigration on the rise, they could be forgiven for selling up and moving abroad - except they will then be stung by falling house prices and a log jam in the housing market."