Disposable income is seen as an accurate measure of prosperity. It reflects the level of resources households have left to spend following the deduction of tax and ‘necessities’ from Gross Income. Disposable (or discretionary) income drives the markets for non-essential goods and therefore has a large bearing on economic performance. If an economy is able to fully capitalise on this spending, and make sure that a good proportion of it is spent in the local economy, then it can help to stimulate growth.

Over the past decade there has been a 30% rise in the total level of disposable income. This has been accompanied by steady growth in household consumption, particularly of luxury and experience goods. Despite this strong growth, other figures for individual households suggest that the picture may not be so good for the average consumer. A study by Ernst & Young suggested that household costs now account for 71% of income, compared to 64% in 2002-03. There are two suggested reasons for these figures. The first is that recent tax (particularly council tax) and national insurance increases have reduced the level of take-home pay. The second suggestion is that households are now spending an increasing amount on servicing debt. The report from Ernst & Young shows that the average UK household now spends £1,000 per month on finance, including mortgages, pensions and debt repayments. Since the survey was published the cost of borrowing has risen several times, making the problems even more pronounced.

Another worrying aspect of the previous rise in disposable income is that it has been accompanied by a drop in the total amount saved, i.e. 14% from 1996-2006. Whilst the short term impact of such a trend will be increased spending in the economy, long term it is likely to seriously affect the size of people’s incomes later in life, this is of particular concern given the UK and North East’s aging populations.

Fact File

• Household consumption has increased by a steady rate of around 5% per annum since 1997.

• A recent report from Ernst & Young suggested that the UK average disposable income per household in 2006 was £768 per month, compared with £845 per month in 2002.

• The average mortgage repayment in 2002 was just £364, this rose to £604 in 2006.