Is financial capability the problem?

When people fall on hard times a common response is to say that they are spending money on the wrong things, or in the wrong way. Whether its Sky TV or a packet of cigarettes, focus is often on what people buy and how they buy it.

This has some major repercussions from policy makers. Financial capability is heavily monitored, personal finance education is to be made compulsory in schools, and housing associations are increasingly providing budgeting advice to combat rent arrears.

But is financial capability really the problem?

Whilst there is evidence that budgeting advice can help people to manage with low incomes, in depth ethnographic research from Surrey County Council and Lambeth Council suggests that people are actually much better at managing their money than they are given credit for. Indeed, living on a low income surely necessitates good management of a tight budget?

According to the financial services regulator “the UK population does well when it comes to making ends meet” – but that those who do worst at this are also the ones most excluded from mainstream financial services.

There are as many as 8 million people in the UK who don’t have access to a transactional bank account. On average this costs these individuals a whopping £1,280 per year, a punitive amount by anyones standards.

Given these circumstances, is financial capability really the biggest issue for low income households? Should the government be doing more to improve financial inclusion instead?