The feeling of not being able to cope financially has a more negative effect on our mental and physical health then the size of our debts or how much we earn, according to research by Declan French, to be presented at the Royal Economic Society''s annual conference at the University of Bristol in April 2017.
Data from Understanding Society, a nationally representative survey, indicate that 7.6% of households in the UK live under financial strain. Having low income, being liquidity constrained or having no savings are sources of this strain, but the study also finds that these raise the probability of suffering financial strain by less than 2 percentage points. Unexpected events – such as being laid off, going through a divorce or having benefits withdrawn – make it more likely that a household is under financial strain, raising the probability by 9.3 percentage points.
The author uses this insight to analyse the impact of disability benefits reform: ''I find that the uncertainty generated by an opaque process of reassessment caused financial strain to increase for households not made materially worse off. On average, the reassessment process increased the probability of feeling financially strained by 7.9 percentage points.''
He adds: ''If, as a result, members of these households experienced mental and physical health problems requiring public healthcare resources, the introduction of the reassessment process for these individuals will have increased costs for the taxpayer.''
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UK households have been exposed to economic recession followed by a government programme of austerity, putting many under severe financial strain. Data from Understanding Society, a nationally representative survey, indicate that 7.6% of households in the UK are living under financial strain.
Why does this matter? Because in my study, I find that the feeling of not being able to cope financially has a more negative effect on individual mental health and general health status than other economic variables such as the size or nature of debts or the level of income.
But standard economic theory would indicate that households can avoid feeling financially strained by planning over the life course. They borrow against future wealth or save to ease any potential financial difficulties.
But some households are liquidity constrained and only have their savings to rely on. Other households will never have much future wealth to borrow against and are always living on the edge of adversity.
Also, unexpected things happen that are difficult to plan for, like being laid off, divorce or withdrawal of benefits. Adjusting to these new circumstances, changing patterns of expenditure and looking for new ways of earning money puts households under pressure.
So what do the Understanding Society data tell us about why UK households report difficulties in managing financially? The effects of uncontrollable shocks on financial strain are greater than persistent financial hardship. Experiencing a financial shock raises the probability of being under financial strain by 9.3 percentage points and the magnitude of this effect dominates having low income (1.8 percentage points) or being liquidity constrained with no savings (1.9 percentage points).
This insight helps to explain the case of disability benefits reform where I find that the uncertainty generated by an opaque process of reassessment caused financial strain to increase for households not made materially worse off. I find that, on average, the reassessment process increased the probability of feeling financially strained by 7.9 percentage points.
If, as a result, members of these households experienced mental and physical health problems requiring public healthcare resources, the introduction of the reassessment process for these individuals will have increased costs for the taxpayer.
More generally, the UK government has reformed other aspects of the welfare system and the pension system. Any cost savings generated by these reforms should be considered in relation to their impact on financial strain.
