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Income inequalities spanning a decade between 1997 and 2007 had caused financial crisis in Britain largely due to lower income groups who lived beyond their means (15 May 2012)

Date: 15/05/2012
Duncan Lewis, Legal News Solicitors, Income inequalities spanning a decade between 1997 and 2007 had caused financial crisis in Britain largely due to lower income groups who lived beyond their means

The financial crisis ailing Britain has catapulted due to a surge in borrowing by poor households driven by rising inequality according to a published study.
The report, prepared for the Resolution Foundation think-tank by the National Institute of Economic and Social Research (NIESR), found that the whole of UK had been living beyond its means during the boom years which had let to the crash. The tendency was most defined among those with the lowest incomes.
The report found that the bottom 10% of households who had a 17% rise in incomes in the decade between 1997 and 2007 had shown 43% rise in spending by taking on more debt. The study added that there was evidence that the dramatic decline in savings among Britain's poorest families was consistent with the increasing demand for, and supply of, credit to these households which may have contributed to unsustainable debt burden increasing the risk of crisis.
Families in Middle-income group too have spent more than they earned, with incomes rising by 33% and spending by 46%. But those with lowest incomes were particularly exposed because only few were living in their own homes which did not contribute to their asset values to balance their increased debt. The highest income households also saw their incomes grow by less than their spending, but retained a positive, but declining, savings ratio.
Gavin Kelly, chief executive of the Resolution Foundation, said that the debt position of households grew simply worse along with the accumulating financial crisis.
But the report was mainly focusing on the dramatic difference for lower income households, who were way outspending their incomes by 2007. It said that in the future, the growth had to be sustained by gains spread across the whole income distribution. And lowest income group should not be burdened with ever-more debts.
Jonathan Portes, director of NIESR, said the research suggests that there may well have been a connection between the rise in income inequality in the years preceding the crisis and the rise in household borrowing, particularly for those on lower incomes.

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