Skyrocketing household debt

The TUC is right to highlight the problem of skyrocketing levels of personal debt. Driven by a decade of wage stagnation, austerity and profiteering by banks and finance companies, more than eight million people now spend more than one-quarter of their income servicing their debts.

Analysis published before Christmas by the End the Debt Trap coalition, of which NEF is a member, supports the TUC’s findings. We do not include student debt in our data, but still find that households in Britain collectively owe more than £200 billion on top of their mortgages and are repaying at least £20 billion per year. This is means the amount households in the UK owe is higher than it was before the 2008 crash; this is deeply concerning for the individuals and families affected, but also bad for the UK economy as a whole.

As the Christmas lights are turned off and people return to work after their holidays, this figure is likely to be even higher, with many people having to resort to expensive overdrafts, credit cards or personal loans to pay for presents, on top of what they may already owe.

Contrary to the image of people in debt that is often portrayed in the media, most borrow to make ends meet. This is not surprising as wages have remained stagnant over the past decade while the cost of living has risen sharply. Analysis from the Institute for Fiscal Studies shows that ​‘median real earnings for employees are still 3% below where they were in 2008 and 13% below where we might reasonably have expected based on rates of growth seen in the years prior to the crisis.’

Contrary to the image of people in debt that is often portrayed in the media, most borrow to make ends meet.

While this is a nightmare for household finances and bad news for the economy, the human cost is also significant, with high levels of debt linked to stress and even mental health problems. A new book containing detailed stories of families in debt — particularly looking at the impact on children — also published shortly before Christmas, highlights this problem in acute and painful detail.

Given that very high levels of private debt presaged the 2008 Financial Crisis, we should of course all be concerned about an economic model that requires households to borrow at an unsustainable level in order to fuel growth. But even if the next crisis isn’t immediately around the corner, the government should act now to stave off the prospect of future instability and to relieve households of at least some of their burden. There are three things that can be done.

First, to provide immediate and urgent relief to those eight million people at the sharp end of the debt crisis, the government should extend the cap on interest rates it applied in 2015 to payday lenders such as Wonga. There’s a temptation to see so-called ​‘high cost credit’ as the practice of a few bad apples in the barrel; pernicious lenders that exploit people on low incomes in the hour of need.

In fact, it’s a systemic problem across the whole finance sector, with mainstream banks and finance providers charging very high rates of interest on unarranged overdrafts and credit cards, which many are forced to rely on either to help pay off existing loans or to cover the cost of distress purchases — at this time of year typically a broken boiler or an essential repair to the car.

After Parliament took action, the Financial Conduct Authority was directed to cap payday loan charges at 100 percent — which means that people who take out loans would never have to pay back more than twice the amount they originally borrowed, when interest rates and other charges were taken into account.

The FCA is now in the process of applying something similar to so-called ​‘rent-to-own’ companies such as Bright House, which is welcome. But as long as vast swathes of the finance sector are still able in effect to charge what they like, especially to the poorest and already highly indebted, then capping costs in one part of sector will only move the problem around. Overdrafts, credit cards, store cards, personal loans and catalogue credit should all be capped.

While capping the charges people pay to borrow is an important step to relieve some of the misery now — and to release some of the money households spend servicing their debts back into the real economy — it is not a long term solution. So, second, wages must rise. NEF supports the TUC’s call for a higher minimum wage, but we also think boosting the power of unions and ensuring workers have places on company boards or even have a right to own part of the company so they can secure more of the profits companies make for pay rises is key.

Third, growth should be led by business and government consumption — primarily in the form of investment in people, services, machinery and systems — and not households. Even with caps on credit costs and higher wages, if households are essentially seen as the engine of growth, then high and rising levels of personal debt — and a plethora of other problems — will always be a risk. The rhetoric of an end to austerity is urgently needed in reality, including an ambitious programme of government-led investment in vital services, affordable housing and new, green infrastructure. This should help take the economic weight of people’s shoulders.

It’s easy to blame people for the debt trap into which they end up falling, but in the current economic climate — rich pickings for a greedy finance sector — rising levels of household debt are almost inevitable. But, as we know from 2008, that can end very badly for all of us and not just for the households caught in the trap.