Demand, Capacity and Need for Debt Advice in the United Kingdom 2012

Transcription

1 Demand, Capacity and Need for Debt Advice in the United Kingdom 2012 John Gathergood March 2012

2 The Money Advice Trust Money Advice Trust is a charity formed in 1991 to increase the quality and availability of money advice in the UK. We work with government, the private sector and the UK s leading money advice agencies to: increase the availability of money advice; improve its quality; and improve the efficiency and effectiveness of its delivery. MAT's key activities are:- Support to the debt advice sector through:- Training Second tier support Quality assurance developments, e.g. accreditation Policy, research and evaluation Fundraising, facilitation and strategy development Direct service provision (National Debtline and Business Debtline) The University of Nottingham The University of Nottingham, described by The Times as the nearest Britain has to a truly global university, has award-winning campuses in the United Kingdom, China and Malaysia. It is ranked in the UK's Top 10 and the World's Top 75 universities by the Shanghai Jiao Tong (SJTU) and the QS World University Rankings. The University is committed to providing a truly international education for its 39,000 students, producing world-leading research and benefiting the communities around its campuses in the UK and Asia. More than 90 per cent of research at The University of Nottingham is of international quality, according to the most recent Research Assessment Exercise, with almost 60 per cent of all research defined as world-leading or internationally excellent. Research Fortnight analysis of RAE 2008 ranked the University 7th in the UK by research power. About the Author Dr John Gathergood is Lecturer in Economics in the School of Economics at the University of Nottingham. His research focuses on quantitative data analysis in the fields of consumer finance, credit and personal insolvency. He publishes in leading international academic journals in economics and consumer finance and has undertaken research projects for a variety of organisations including the Department for Business, Bank of England and The Economic and Social Research Council. 1

3 Table of contents Foreword 3 Summary of findings 4 Introduction and project brief 5 1. Advice demand in 2011 and forecast update Recent Trends in advice demand Developments in the UK economy Headline estimates for advice demand in Forecast update for 2012 onwards based on Office for 11 Budget Responsibility Projections 1.5 Comparison with 2010 forecast Alternative forecast under consensus unemployment projection Conclusion Analysis of regional advice volumes Money advice volumes by region Regional household economic characteristics Regional advice seeking and personal insolvency Projections for regional unemployment Regional level advice volume forecasts Conclusion Survey evidence on advice demand Survey purpose and design Advice seeking behaviour question module Measures of financial distress Financial distress and advice seeking behaviour Reasons for not seeking advice Conclusion 34 2

4 Demand, Capacity and Need for Debt Advice 2012 Foreword This is the second annual report commissioned by the Money Advice Trust into demand, capacity and need for debt advice in the UK following the launch of thee initial forecasting model in This new research evaluates the success of the t model, examines regional drivers of demand and looks at the reasons why people who need advicee do not seek it. We first commissioned Dr John Gathergood and the University of Nottingham to create the forecasting model in the aftermath of a recession which highlighted the association between macro-economic factors and problem debt. Given large-scale changess to commissioning and funding for advice services it is now more important than ever that we structure this provision effectively to support people out of problem debt and a into financial health. The research predicts that 1.7 million peoplee will look to the free-to-client debt advice sector for help this year, epresenting a 16 per cent increase on 2011, mostlyy down to growing unemployment and stagnatingg wage growth. At a regional level, high proportions of public sector employment are correlated with large rises in debt problems overr the forthcoming years. Unemployment is a major driver of financial difficulty, and areas such as Northern Ireland, the North N East and Wales, where public sector job cuts are likely to beenn most keenly felt, will see sharpp increasess in debt problems. Importantly, areas of the UK where people are more likely too seek and receive money advice experience a lower rate off insolvency. This corresponds with intelligence from our own service, National Debtline, where we find that assisted self-help enables more than half of our callers to negotiatee a repayment plan with their creditors. Often, the more formal solutions, for example some forms of insolvency, can be more easily avoidedd by seeking advice early. The gap between the 1.7 million m people who will actually seek advice in 2012 and the one in five UK households who w appear to need itt due to problems meeting their credit commitments continues to be worrying. It iss therefore vital that we continue to work in partnership with the free advice sector, government, with banks and with lenders, to raise public awareness about the early-indicators of problem debts and how to seek help and support. The Money Advice Trust would like to thankk our advice sector partners for their support throughout this project, particularlyy in providing access to their client data for the purpose of this research. We will continuee to evaluate this forecasting model and intelligence regarding regional variation, demand, capacity and need forr money advice in the months and years ahead. Joannaa Elson OBE C Chief Executive Money Advice Trust CDIR 3

5 Summary of findings In 2011 approximately 2.6 million individuals in the United Kingdom sought money advice relating to their debts and credit commitments, an increase of 9.8% on a year earlier. Free advice agencies continue to be the most popular source of money advice, with approximately 1.46 million individuals contacting a free advice provider for money advice in The level of money advice demand in the UK in 2011 was very close to that forecast in the first Demand, Capacity and Need report published in However, the trajectory for the UK economy established in the final quarter of 2011 suggests a worsening outlook for growth, unemployment and earnings and it is likely that the UK s macroeconomic performance in 2012 will be weaker than expected. In November 2011 the Office for Budget Responsibility (OBR) released its updated Economic and Fiscal Outlook for the UK Economy. The OBR revised upwards projections for unemployment, revised down projections for average earnings growth and also revised down projections for house price growth and interest rates. An updated forecast for money advice demand based on the OBR projections sees advice demand growing strongly through the first half of 2012 and remaining elevated in line with expected increases and persistence in unemployment. The revised forecast now sees money advice demand levels remaining persistently higher over coming quarters. There is considerable regional variation in levels of demand for money advice. While the largest numbers of individuals seeking money advice relating to their debts reside in London and the South East, relative to population sizes and the coverage of indebtedness and problem debt advice seeking is most prevalent in Northern Ireland, the East Midlands and the South West. The proportion of individuals in arrears seeking money advice in these regions is between twice and three times larger than the proportion of individuals seeking money advice in Scotland, the North East and the South East. Analysis suggests regions in which a larger proportion of the population of indebted households seek advice typically have lower rates of personal insolvency. The regional outlook for developments in money advice demand is also mixed, partly due to the mixed regional outlook for movements in unemployment arising, in large part, from the reductions in public sector employment forecast over coming years. The central forecast scenario sees strongest growth in money advice demand in those regions most likely to be negatively impacted by reductions in public sector employment, notably Northern Ireland, the North East, Wales and Yorkshire and Humber. However, money advice demand is forecast to increase in all regions. Household survey evidence shows that approximately 20% of households exhibit moderate difficulties meeting their credit commitments and 5% of households exhibit severe difficulties and serious problems with consumer credit arrears. Households with more severe debt problems are more likely to seek advice, though even among the group with most severe debt problems only half of households have sought professional advice about their problem debts. Such households are typically aware that professional advice is available, but evidence suggests they may be not aware of the types of advice and assistance which could be of benefit to them. 4

6 Introduction and project brief This report presents new and updated analysis of the demand for debt advice in the United Kingdom. Beginning in autumn 2010, the Money Advice Trust (MAT) launched a new project focused on statistical analysis of advice demand data to inform the sector about developments in advice demand and the likely future direction of demand for money advice. The key findings from that project were presented in the first Demand, Capacity and Need report published by MAT in January An update on developments in advice demand was published in June This report presents further updates on developments in advice demand plus new forecasts for advice demand volumes from the first quarter of 2012 onwards. Developments in the UK macroeconomic context in recent months have led to a revised outlook for advice demand in the near term. Demand for debt advice among individuals in the UK is sensitive to developments in the macro-economy, most notably movements in unemployment, average earnings and interest rates. Since the June update the broad prospects for the UK economy have worsened, reflected in downwards revisions to forecast growth and upward revisions to forecast unemployment in the recent Office for Budget Responsibility (OBR) Outlook for the UK Economy and the Bank of England Inflation Report. This report presents an analysis of how the worsening outlook for the UK economy in official forecasts is likely to impact upon the level of demand for money advice. It also sets out alternative forecasts for money advice based on consensus forecasts for the UK economy among non-government economists. This report presents an analysis of how the worsening outlook for the UK economy in official forecasts is likely to impact upon the level of demand for money advice. In addition to revised UK-level forecasts of future demand for money advice, this report presents new analysis of advice demand and prospects for future trends in advice demand at the regional level. There is much variation in levels of demand for money advice across UK regions, partly reflecting regional variation in the extent and composition of household indebtedness. The uneven regional composition of reductions in General Government Employment (GGE) expected over the period of the next six years and related implications for private sector employment growth are also likely to result in a differential outlook for demand for money advice across the regions. This report presents new evidence on regional variation in advice demand plus region-level forecasts for money advice over coming years. It is well known across the money advice sector that demand for money advice is low relative to the numbers of individuals with payment problems relating to their debts or credit commitments. The 2011 Demand, Capacity and Need report quantified the extent of household debt problems in the UK and the extent of the potential need for money advice. This report builds on that analysis by presenting new evidence on why individuals choose not to seek advice about their debts despite facing financial difficulty, drawing upon survey evidence from bespoke questions on advice seeking behaviour incorporated into the 5

7 YouGov Debt Track survey. The analysis explains the role of perceived usefulness of advice, procrastination on the part of advice seekers and understanding of money advice services in the decision to seek advice. The report is structured in three chapters. Chapter 1 presents an update on recent trends in advice demand at the UK level. Forecasts for money advice volumes through 2011 presented in last year s report are compared against actual outturns of money advice demand seen by the advice sector. The overall level of advice demand throughout 2011 has been at a very similar level to that forecast. The difference between actual and forecast demand is then explained in terms of the difference between actual and forecast levels of unemployment and average earnings growth based on an analysis of OBR data. New forecasts are presented for quarter one 2012 onwards based firstly on OBR forecasts for the UK economy and secondly on alternative scenarios for unemployment based on the median forecast among a sample of non-government forecasts from banks, financial sector firms and economic consultancies. Chapter 2 presents the regional level analysis. The analysis first documents regional variation in trends in advice volumes and relates regional volumes to regional variation in population characteristics and trends in personal insolvencies and problem debt. The chapter then sets out the construction of a regional panel of economic data from which a regional level forecasting model is constructed. A key input to the regional level forecast over the forecast horizon is the extent of public sector employment reductions in each region. The likely pattern of future advice demand across the regions is presented based on a projection for the scale and regional composition of job reductions in the public sector and the implied effects on the private sector labour market. The chapter concludes with a discussion of the implications for those regions most at risk of rapid increases in unemployment and the likely effects on advice demand. The concluding third chapter documents the individual level survey data used to model the decision to seek debt advice, incorporating responses from survey questions which ask individuals with problem debts why they chose not to seek advice. The primary objective of the analysis is to better understand why individuals have not chosen to seek money advice, even though their description of their financial position suggests they have problem debts. Statistical estimates are presented alongside summary statistics. Some policy recommendations are suggested drawing upon insights from the analysis. 6

8 1. Advice demand 2011 and forecast update 1.1 Recent trends in advice demand The 2011 Demand, Capacity and Need report set out statistical forecasts for money advice demand in 2011 based on projections for the UK economy published by the OBR in their November 2010 update. This section documents actual outturns for advice demand based on data provided from free-to-client advice partners and compares those outturns with the demand forecast and explains the variance between the two. The forecasts for advice demand presented in the 2011 report were conditioned upon an expected path for the UK economy presented in the OBR s forecast. Figure 1 below illustrates the central forecast for advice demand from the 2011 report. The bold unbroken line illustrates historical advice demand levels since 2005, showing the sharp increase in demand in late 2008 accompanying the onset of the financial crises in the UK. The broken line illustrates the model forecast. The thin unbroken lines above and below the model forecast illustrates bounds on the forecast range. The central forecast saw advice demand levels moderating through 2011 and 2012, with seasonal variation due to the increase in demand typically seen in the first quarter. From 2013 onwards advice demand was seen to increase steadily. The main drivers of the forecast were the expected decline in headline unemployment through 2011/12 and the subsequent increases in interest rates accompanying economic recovery in the UK economy thereafter. Figure 1: 2010 Forecast demand for debt advice from FTC Sector Q Q Thousands Demand - Actual Demand - Model Estimate 7

9 Actual outturns of advice demand volumes in the first three quarters of 2011 have been very close to that forecast. Figure 2 below illustrates forecast demand compared with actual demand over the period. Advice demand was slightly below the level forecast in the first quarter of 2011, then somewhat above forecast demand in the second and third quarters of The actual outturns compared to forecast in each quarter were: quarter one forecast 393,000 actual 380,000; quarter two forecast 382,000 actual 391,000; quarter three forecast 365,000 actual 384,000. The difference between forecast and actual demand was +13,000 in quarter one, -9,000 in quarter two and -19,000 in quarter three. Hence over the three quarters the total difference between forecast and actual demand was -15,000, or 0.01% of the total advice demand volume over that period. Thousands Figure 2: Demand for Debt Advice from FTC Sector Compared with Forecast, Q Q Demand - Actual Demand - Model Estimate 1.2 Developments in the UK economy Insight into why actual outturns for advice demand differed from those forecast (albeit by a very small margin), and as to why the pattern in advice demand over the three quarters differed from that forecast, can be gained by comparing the November 2010 OBR forecast levels of unemployment, average earnings growth and interest rates with subsequent outturns. Table 1 below details the OBR forecast values for the headline unemployment rate (International Labour Organisation measure calculated from the Labour Force Survey), whole economy average earnings growth (excluding bonuses, calculated from the Labour Force Survey) and the London Overnight Interbank Rate together with the implied personal loan interest rate under constant margin (average advertised rate on a 10,000 personal loan, collated by the Bank of England). The OBR s forecast for unemployment saw the headline rate increasing by 0.2 percentage points to 8.1% in the first quarter of 2011 and then remaining at that level for the second and 8

10 third quarters of the year. First quarter unemployment unexpectedly fell below this level, falling to 7.7% before increasing to 7.9%, below expectation for the second quarter, then sharply rising to 8.3% in the third quarter. In contrast, whole economy earnings growth was weaker than forecast in each quarter. The OBR forecast saw earnings growth falling from 2.4% in the first quarter to 2.1% by the third quarter. The actual outturns were 2.3% in the first quarter falling to 1.9% by the third quarter. LIBOR has also remained below expected values through the three quarters, in line with the weak labour market performance. By quarter 3 the OBR had forecast LIBOR to increase to 1.1% and the advertised rate on a 10k personal loan to rise to 11% from 10.6% in quarter Outturns show the actual rate has fallen to 9.2%. This general picture of unexpectedly good employment statistics in the first quarter of 2011 followed by a marked deterioration in the labour market goes some way to explaining the pattern of observed deviations between forecast and actual advice demand levels, which were lower than expected in the first quarter but have subsequently risen above expectation. The context of the deterioration of the UK labour market is that of weak recovery in business investment and lack of export growth below forecast, in part attributable to the poor growth performance of the Eurozone nations and on-going uncertainty over the future of the Eurozone as a currency union. Table 1: OBR forecast and Actual Unemployment Rate, Whole Economy Earnings Growth and Personal Loan Interest Rates, 2011 Q1 to 2011 Q3 OBR Forecast and Actual Unemployment Rate Q4 Q1 Q2 Q3 OBR November 2010 forecast Actual OBR forecast and Actual Year-on-Year Whole Economy Earnings Growth Q4 Q1 Q2 Q3 OBR November 2010 forecast Actual OBR forecast and Actual Personal Loan Interest Rates Q4 Q1 Q2 Q3 OBR November 2010 forecast (LIBOR) Actual Implied Forecast Rate 10k Loan Actual

11 1.3 Headline estimates for advice demand in 2011 Table 2 summarises headline advice demand volumes across the full range of advice providers for 2011 alongside estimates for previous years from the 2011 report. These estimates are based on data provided by advice partners in the free-to-client money advice sector, together with individual level survey data on advice seeking behaviour drawn from the Office for National Statistics Wealth and Assets Survey. The 2011 report explains in more detail the methodology for estimating advice demand levels across the range of various provider types and the assumptions underlying the statistical methodology which was used to construct the estimates. In 2011 approximately 2.6 million individuals sought advice relating to their problem debts. This is an increase of 1.8% on the level of advice demand seen in 2010, below the peak of 3 million in Free advice agencies remain the leading source of money advice, with 1.46 million individuals seeking advice from a free advice agency in In 2011 approximately 2.6 million individuals sought advice relating to their problem debts. This is an increase of 1.8% on the level of advice demand seen in Table 2: Headline money advice demand estimates thousands Individuals receiving advice - all types 2,453 2,181 2,303 2,972 2,554 2,600 A free advice agency 1,258 1,235 1,253 1,617 1,390 1,460 Accountant, bank manager Friends or relatives Fee-charging debt advice company An insolvency practitioner Citizen s Advice A., CCCS, PayPlan, NDL Total 1, ,122 1,455 1,251 1,260 In summary, recent trends in advice demand have reflected changes in the state of the UK economy. Demand for money advice remains strong in keeping with the subdued and recently worsening performance of the UK labour market. The forecasts presented in the 2011 report have proven to be remarkably accurate predictions of advice demand levels in The deteriorating outlook for the UK economy has results in significant downwards 10

12 revisions to forecast growth and upwards revisions to forecast unemployment in the most recent OBR forecasts. On the basis of these, in the next section we revise our forecast for advice demand for 2012 onwards. 1.4 Forecast update for 2012 onwards based on OBR projections This section presents revised forecasts for advice demand for the free-to-client money advice sector based on the OBR November 2011 Outlook for the UK Economy. The OBR forecasts for the UK economy are the main input into the forecast model for predicting money advice demand levels; hence updated OBR projections inform our revised forecast for money advice demand. The November 2011 OBR projections were substantially more downbeat compared with those one year earlier. Table 3 summarises point estimates for the main macroeconomic aggregates which enter into the forecast model for money advice volumes from the November 2010 OBR projections compared alongside the November 2011 OBR projections (the November 2010 projections extended only until 2015). Table 3: OBR Forecasts for Key Macroeconomic Aggregates Nov- 10 Nov- 11 Nov- 10 Nov- 11 Nov- 10 Nov- 11 Nov- 10 Nov- 11 Nov- 10 Nov- 11 Nov- 11 Total free-to-client (millions) Unemp. Rate (%) Average Earnings Growth (%) G.D.P. Growth (%) House Price Growth (%) Personal Loan Rate, 10k (pp) Mortgage Quoted S.V.R. (pp) Turning first to projections for the unemployment rate, the November 2011 projection sees the unemployment rate increasing by 0.6 percentage points in 2012 to a headline rate of 8.7%, before falling back slightly in 2013 ahead of faster reductions through 2014 and

13 Compared with the November 2010 projection, which saw the unemployment rate falling consistently throughout the forecast period, the updated projection is considerably more downbeat. The major driver of rising unemployment in the revised forecast is the reduction in General Government Employment (GGE) arising due to budget cuts across government departments. The ONS GGE measure incorporates direct and indirect public sector employment, including government departments and agencies, public sector workers and local authority employment. At the beginning of 2011 approximately 6.1 million individuals in the UK were employed in the GGE category, compared to approximately 23 million individuals employed in the private sector. The OBR expects GGE to fall by approximately 710,000 between the first quarter of 2011 and the first quarter of Hence approximately one in eight workforce GGE jobs will be cut over the period. This averages at approximately 30,000 GGE jobs per quarter. However, as the OBR notes, most of these cuts in GGE jobs are front-loaded and throughout 2011 GGE fell at approximately 80,000 per quarter. This reduction in GGE throughout the forecast period is expected to be offset by private sector employment growth. The central OBR forecast sees unemployment falling from 2013 onwards despite the reductions in GGE, hence private sector employment is assumed to compensate for public sector job cuts and contribute to a net increase in employment and reduction in unemployment. It is assumed that over the forecast period the private sector will create approximately 1.2 million jobs. However, under the OBR s projections, private sector employment growth will only begin to offset reductions in GGE in 2013; hence in the near term unemployment is expected to increase by between 170,000 to 220,000 in under the OBR s projections, private sector employment growth will only begin to offset reductions in public sector job cuts in 2013; hence in the near term unemployment is expected to increase by between 170,000 to 220,000 individuals in The increase in forecast unemployment in the OBR projections is accompanied by decreases in forecast average earnings growth. The November 2010 projections saw average earnings growth increasing steadily throughout the forecast period, reaching an annual rate of 4.5% by Under the November 2011 projections average earnings growth is seen to increase more slowly over the period. Weaker labour market performance over the period is reflected in lower forecast GDP growth, which the OBR expects to be particularly weak in 2012 (0.7% growth in the November 2011 projections compared with 2.8% growth in the November 2010 projections), though the growth rate recovers to an annual rate of 3.0% by the end of the forecast period. Weak earnings growth is also seen to impact upon the housing market in the November 2011 projections, which see house prices as close as flat in 2012 before picking up later in the forecast period, compared with a November 2010 forecast which saw a housing market recovering beginning in From the perspective of the forecast model for money advice demand, the weakness of the labour market, output growth and house prices would indicate stronger expected growth in advice demand volumes. However, the weak forecast for output and employment implies a more benign outlook for interest rates. Whereas the November 2010 projections saw personal loan and mortgage interest rates beginning to increase from 2012 onwards, the 12

14 November 2011 projections see little movement in either until Under the more recent projections, the 10k personal loan rate remains at 10.8% through 2012 and 2013 before increasing to 12.2% by The average quoted price on a standard variable rate mortgage remains at 3.6% until 2013, rising to 4.9% by These projections are based on the projected rate for LIBOR, which in the OBR s view is most likely to remain at its current level in line with no tightening of monetary policy by the Bank of England until late in These revised forecasts for key macroeconomic aggregates, together with updated data on money advice demand volumes through the first three quarters of 2011, are used to update the model forecast values for money advice demand. The updated data show that money advice demand at the national level continues to be most strongly correlated with the unemployment rate and average earnings growth which, together with the interest rate on personal loans, remain the key inputs into the forecast model. It is likely that these key variables will continue to be the strongest drivers of advice demand, though there is scope for the magnitude of these relationships to change over time. There is evidence that following the onset of the recession lenders tightened lending criteria and, in particular, increased the sensitivity of loan allocation models to local labour market conditions. We would expect, therefore, that anticipated unemployment is likely to reduce credit supply generally and thus correlated less strongly with future debt problems. The updated central forecast for money advice demand from the free-to-client sector is shown in Figure 3 below. In keeping with last year s forecast, the forecast output illustrated as a central projection (the broken line) together with bounds on the distribution of likely outcomes (one standard deviation above and below the central projection) which are shown as the thin unbroken lines. The forecast horizon extends to the final quarter of 2016 and the forecast frequency remains quarterly as in last year s forecast. Historical actual outturns of advice demand volumes are illustrated in the bold unbroken line, updated to incorporate recent data outturns from As illustrated in the figure, the central projection sees a sharp increase in advice demand levels in the first quarter of 2012, with advice demand remaining high throughout 2012 into 2013, before moderating slightly in the second and third quarters of The sharp increase in demand is driven by the rapid increase in unemployment in the first two quarters of 2012, as indicated in the OBR s projections. Broadly speaking, advice demand remains high in keeping with the elevated unemployment rate, until the unemployment rate begins to fall back later in the period. However, towards the end of the forecast period increases in loan interest rates act to offset the dampening effect of falling unemployment, hence advice demand levels remain elevated through 2014 and

15 Thousands Figure 3: 2012 Forecast demand for debt advice from FTC Sector, Q Q Demand - Actual Central Forecast Forecast Upper Bound Forecast Lower Bound 1.5 Comparison with 2010 Forecast Figure 4 illustrates this updated forecast alongside last year s forecast. The 2010 forecast is illustrated as the broken grey line, the new 2011 forecast is illustrated as the unbroken black line. To avoid confusion, the additional lines illustrating the bounds of the central forecast have been removed from the figure. A direct comparison of the two shows the near-term divergence between the 2010 and 2011 forecasts. The most notable divergence is in the near-term, particularly during 2012, with the new forecast implying a level of advice demand considerably above that seen in last year s forecast. Further out, the 2011 forecast line falls below the 2010 forecast line. This is principally due to the differences in projected interest rates between the two forecast data sets. Whereas the 2010 OBR projections saw a strong recovery in the latter part of the forecast period leading to significant monetary policy tightening and increases in market interest rates, the 2011 OBR forecast for market interest rates yields lower expected values. Whereas the 2010 OBR forecast saw the 10k personal loan rate increasing to 14.1% by 2015 and average quote mortgage standard variable rates rising to 6.9%, the 2011 forecast gives values for these of 11.9% and 4.7% respectively. This is the main reason why the 2011 forecast does not see continuing growth in advice demand volumes past the final quarter of

16 Thousands Figure 4: 2011 Forecast Demand for Debt Advice from FTC Sector Compared with 2010 Forecast Demand - Actual Demand Estimate Demand Estimate 1.6 Alternative forecast under consensus unemployment projections In keeping with last year s report, this forecast element concludes by presenting an alternative forecast scenario based on consensus expectations of movements in the unemployment rate among independent economists, forecasts issued by banks and financial intermediaries, and projections provided by non-government economic research consultancies. These forecasts are summarised by the regular publication Forecasts for the UK Economy released on a monthly basis by Her Majesty s Treasury. Table 4 below details the consensus forecast against the OBR forecast for the forecast period. Table 4: OBR and consensus forecasts for UK unemployment (ILO measure) OBR Forecast Consensus Forecast As can be seen from the figures detailed in Table 4, the consensus forecast for the headline unemployment rate is above the OBR forecast throughout the forecast period. The consensus forecast sees the headline unemployment rate rising to 9.1% in 2012, then falling back by 1.3 percentage points by 2016, whereas the OBR forecast sees a smaller increase in the rate to 8.7% in 2012 and a stronger decline in the rate by 1.5 percentage points to 6.2% by

17 the consensus forecast for the headline unemployment rate is above the OBR forecast throughout the forecast period. Thousands Figure 5: 2011 Forecast demand for debt advice from FTC sector compared with consensus unemployment forecast Demand - Actual Demand Estimate Demand - Consensus Unemployment Rate The implied alternative forecast for money advice demand volumes based on the consensus estimates for unemployment over the forecast period is show in Figure 5. The other variables and data which enter the forecast model are as before. The alternative forecast is illustrated by the broken light grey line, the forecast based on OBR data is illustrated by the broken dark line. As expected, the forecast based on consensus unemployment estimates sees money advice demand volumes higher throughout the forecast period. Under this forecast, money advice demand rises sharply in the first two quarters of The seasonal variation in money advice demand is broadly similar to that seen in the forecast based on OBR data. 1.7 Conclusion Money advice demand in 2011 has been slightly stronger than that forecast in the 2010 report, by a small margin of approximately 0.01%. However, the pattern of money advice demand over the course of 2011 suggests that demand is likely to grow through the early period of 2012 considerably above the 2010 forecast expectation. Early 2011 saw a marked improvement in the performance of the UK labour market, with unemployment falling much faster than the OBR expected in its November 2010 projection. However, the labour market deteriorated significantly through the third quarter of 2011 and this deterioration is seen to continue into 2012 in the OBR s November 2011 projection. These developments in the macro-economy and downward revisions to the OBR s projection for output, employment, wages and house prices result in an updated 2011 forecast for 16

18 money advice demand which see strong near-term growth in advice demand volumes and elevated levels of advice demand throughout the forecast period. The central projection sees money advice demand at approximately 1.7 million individuals in 2012, an increase of approximately 10% on 2011 volumes. This contrasts sharply with the 2010 forecast, which saw advice demand volumes consistently moderating throughout 2012 and The medium term outlook for advice demand remains elevated, due to the prospect of monetary policy tightening towards the end of the forecast period. Consensus forecasts for the unemployment rate among independent economists continue to be notably more pessimistic compared with the OBR s central projection. An alternative forecast for money advice demand volumes therefore sees stronger advice demand growth in the near term and higher levels of demand throughout the forecast period. Both forecasts see unemployment rising sharply in the first two quarters of 2012 and it is likely that over coming months developments in the UK labour market will provide a strong indication of the near term outlook for the UK economy and set a path for money advice demand over the coming year. 17

19 2. Analysis of regional advice volumes 2.1 Money advice volumes by region This section analyses money advice volumes at the regional level. This analysis is motivated by the need to better understand the drivers of money advice client volumes at the regional level to inform resource allocation decisions within the money advice sector. The analysis is conducted at a regional level covering the twelve regions of the UK and Northern Ireland. This level of geographic disaggregation allows for meaningful analysis of regional variation while limiting the data requirements to feasible levels. Advice partners have been particularly helpful and forthcoming in providing regional level data on client volumes and client characteristics to facilitate this analysis. The analysis in this chapter is based on client volumes (measures of the number of clients receiving advice) and not overall demand levels (which include potential clients whose advice demand could not be served). Data on overall demand levels is not available from advice partners at the regional level, and this data distinction is important when interpreting these data on advice volumes. A breakdown of gross free-to-client money advice volumes by region for 2011, compiled from data provided by advice providers is provided in Table 5 below. Unsurprisingly, the simple volume figures identify London, the South East and the South West as the regions with the largest volumes of advice seekers. Approximately 35% of all individuals who sought advice from a free-to-client provider in 2011 were drawn from these three regions. Table 5: Regional composition free-to-client clients 2011 Total FTC Clients % Total UK FTC Clients London 139, % South East 135, % South West 121, % East Midlands 107, % North West 107, % West Midlands 100, % Yorkshire and the Humber 99, % Scotland 78, % East of England 73, % Wales 66, % North East 59, % Northern Ireland 52, % 18

20 2.2 Regional household economic characteristics Alongside this regional variation in money advice volumes there is also marked regional variation in average characteristics for household incomes, finances and related economic variables. Table 6 provides a breakdown of median household income, the proportion of the population receiving key social security benefits, the unemployment rate, the proportion of the population holding credit, the average value of outstanding credit among those individuals holding consumer credit debts and the proportion of individuals holding consumer credit debts in arrears, by region. These data are drawn from a variety of sources. Household income data is derived from the ONS Family Resource Survey, benefit claimant data is drawn from administrative records, the unemployment rate is estimated from the ONS Labour Force Survey, statistics on individual credit holdings, value and arrears are estimated from the ONS Wealth and Assets Survey. Alongside this regional variation in money advice volumes there is also marked regional variation in average characteristics for household incomes, finances and related economic variables. The most marked regional variation among these variables can be seen in median household income (the regions are listed in the table by median household income is descending order). Median household income in London and the South East exceeds 65,000, compared with average household income of less than one quarter this value in the North East and Northern Ireland. There is also much regional variation in the unemployment rate and proportion on the population in each region claiming core social security benefits. Generally, lower income regions tend to have higher proportions of individuals unemployed and claiming benefits, with the North East, Wales, Yorkshire and Humber and the West Midlands exhibiting high rates of unemployment and social security benefit claimants. Given this regional disparity income and unemployment, it is perhaps surprising to find less regional disparity in the proportion of individuals holding credit and the average value of credit holdings across those with credit. The proportion of individuals in each region holding an outstanding balance on at least one consume credit item ranges from 37% in Northern Ireland to 46% in Scotland. Relative to income, there are notable exceptions including the East of England where only 36% of the population hold credit and the North East where 44% of the population hold credit. A better gauge of exposure to credit is the average balance among credit holders, which varies from 6,200 in Northern Ireland to 9,000 in London. The final column of Table 6 details the proportion of credit holders in arrears in each region. This figure is calculated using data from the Wealth and Asset Survey. Arrears here are defined as being at least three months late on a contractual payment on a consumer credit product. The proportion of credit holders in arrears varies from 11% in the East Midlands to 24% in the North East. There is no clear pattern in the proportion of credit holders in arrears relative to average balances among credit holders or to average household income in the region. Taken together, these statistics suggest a varied picture of household financial characteristics across regions. 19

21 Table 6: Regional variation in average household economic characteristics Median household % Claiming key Unemployment % Individuals Average debt % Credit holders in income SS benefit rate holding credit credit holders arrears London 78, % 9.3% 38% 9,000 20% South East 67, % 6.1% 42% 8,200 19% North West 52, % 8.1% 44% 8,400 15% East of England 46, % 6.8% 33% 8,000 16% South West 46, % 6.1% 40% 7,500 18% Scotland 45, % 8.4% 46% 6,300 19% West Midlands 43, % 8.3% 41% 7,400 16% Yorkshire and the Humber 43, % 9.1% 47% 6,900 16% East Midlands 42, % 7.4% 39% 6,900 11% Wales 36, % 9.0% 36% 8,600 21% North East 31, % 9.4% 44% 7,200 24% NI 22, % 6.6% 37% 6,200 12% 20

22 2.3 Regional advice seeking and personal insolvency Next, we combine the statistics on client volumes by region from Table 5 with the statistics on the economic and financial characteristics by region from Table 6 to provide an indication of the relationship between advice seeking behaviour and regional characteristics. These are presented in Table 7 below. The first two columns show the volume of free-to-client advice seekers by region and the proportion of the total UK volume by region. The third and fourth columns combine this data with the statistics from Table 6 on the proportion of individuals with credit and proportion of individuals in arrears to express the volume of free-to-client advice seekers by region as a proportion of individuals in credit and as a proportion of individuals in arrears. These statistics reveal considerable variation in advice seeking behaviour relative to the prevalence of credit and arrears across the region. From the fourth column, in Northern Ireland the total volume of advice seekers is equates to approximately 65% of those with arrears, whereas in Scotland the total volume of advice seekers equates to only 17% of those in arrears. Hence there is very large regional variation in the propensity of individuals in arrears to seek advice about their debts. Northern Ireland and the East Midlands stand out as regions in which advice seeking is most prevalent among individuals in arrears, with volume over 50%, whereas for most regions the average volume is in the region of 20-30%. there is very substantial regional variation in the propensity of individuals in arrears to seek advice about their debts. Table 7 : Regional composition FTC clients 2011 % Total UK FTC As % individuals As % individuals in Total FTC clients sector clients with credit arrears NI 52, % 7.85% 65.42% East Midlands 107, % 6.20% 56.34% South West 121, % 5.83% 32.38% Wales 66, % 5.93% 28.23% West Midlands 99, % 4.49% 28.05% Yorkshire and the Humber 98, % 4.04% 25.22% East of England 73, % 3.88% 24.25% London 139, % 4.79% 23.93% North West 106, % 3.53% 23.54% North East 59, % 5.26% 21.94% South East 135, % 3.86% 20.33% Scotland 77, % 3.23% 16.98% 21

23 Advice/ Arrears Ratio 0.30 Figure 6: Regional variation in ratio of advice seeking to arrears and arrears to personal insolvency R² = Insolvency/Arrears Ratio It might be expected that the regional variation in the proportion of individuals with debt problems seeking advice about their debts from a money advice provider would be reflected in regional variation in the proportion of individuals with debt problems who enter personal insolvency. The majority of personal insolvencies across the jurisdictions and different personal insolvency regimes in the regions of the UK and Northern Ireland are debtorpetitioned. Hence the decision of debtors to file for bankruptcy (or other forms or personal insolvency and their Scottish and Northern Irish equivalents) is the major element which determines the prevalence of personal insolvency. Figure 6 above illustrates this is indeed the case. In regions where there is a higher ratio of advice seekers to individuals in arrears, the ratio of personal insolvency to individuals in arrears is lower i.e. there is a negative relationship between the two. In simpler terms, in regions where more individuals seek advice about their debts, relative to the number of individuals with debt problems (as measured by individuals at least three months in arrears on at least one consumer credit product) there is less occurrence of personal insolvency. The above Figure plots each region as a data point on the scatter diagram and illustrates a line of best fit between the data points, with the R-squared value indicating the degree of statistical association. The statistical association above is not a proof of causality; however it strongly indicates that greater use of money advice services is associated with lower likelihood of seeking personal insolvency as a means of debt resolution. Anecdotal evidence would suggest it is the common experience of individuals seeking money advice to find that money advisers are able to suggest means of debt resolution outside of personal insolvency and, in some cases, 22

24 offer debt management plans in place of personal insolvency measures. This evidence further underlines the value of money advice as a means of avoiding personal insolvency. 2.4 Projections for regional unemployment Forecasting future money advice volumes at the regional level involves undertaking a similar statistical forecasting exercise to that described in the previous chapter of the report but at a disaggregated regional level rather than the national level. This section of the report describes the methodology used for forecasting money advice volumes at the regional level and provides forecasts over a shorter period of up The regional forecasting problem involves more complexities and required judgements compared with forecasting money advice volumes at the national level and this in part motivates the shorter forecast horizon chosen for these forecasts. As with the national level forecast, the dynamics of the regional level forecast are driven by future projections for the key determinants of money advice volumes at the regional level, which are again the regional unemployment rate and regional average earnings growth. The regional money advice model includes some inputs which are region specific (such as the regional unemployment rate) but also inputs which are UK-wide, such as the LIBOR rate which undergirds personal loan rates and mortgage standard variable rates. In general, region-specific variables lead to variation across the regional forecasts whereas national level variables lead to level shifts in money advice volumes across all regions. The major element of uncertainty in regional unemployment forecasting at the current time is regional distribution of reductions in GGE and the implications of these for private sector employment at the regional level. The proportion of public employment in regional employment differs considerably across the regions, as illustrated in Figure 7 below, ranging from 17% in the South East to 28% in Northern Ireland. Furthermore, in some areas and sector public employment directly or indirectly induces private employment. 23