IFS - Many better-off households may increase savings as spending on 'banned' activities falls. Poorer households spend much more of their income on necessities and will be less resilient to any falls in income

8 Apr 2020 03:54 PM

The current crisis will have a big effect on the incomes of a lot of people, but it will also affect their spending.

New analysis from IFS researchers shows how dramatic these changes in spending might be, and how they differ according to household income.

• Around a quarter of household spending goes on things that are currently not possible or strongly discouraged – things like eating out, commuting, going on holiday and transport. Almost half of spending (47%) goes on essentials like groceries, housing costs and utilities, where spending is harder to cut back.
• For richer households this sort of consumption represented a much bigger fraction of their spending than for poorer households who were more likely to focus their spending on necessities such as rent and groceries. The richest fifth spent far more as a proportion of their total spending on eating out and taking holidays (20%) than the poorest fifth (12%).
• As a result, richer households may effectively be forced into additional savings over this period. They will also be more resilient to falls in income. 
• Because lower-income households focus a higher share of their spending on necessities (55%) than higher-income households (39%), they will be less resilient to any fall in income.

Alex Davenport, a Research Economist at IFS, said:

“Social distancing measures aimed at containing the spread of coronavirus are likely to have a significant impact on households' spending. Before the lockdown, on average one quarter of household budgets was spent on transport and leisure - areas of spending that will fall substantially during the lockdown. Spending on these sorts of goods and services was more important for richer households than poorer ones. Poorer households by contrast tend to spend more of their budgets on bills which are harder to avoid, such as rent, food and utilities. This makes it harder for these households to cope with temporary reductions in their incomes."

Household spending and coronavirus