Why George Osborne is wrong about household debt
Photo credit: Jonathan Roland
January 7, 2016 // By: Madeleine Ellis-Petersen
This morning George Osborne, amidst warnings about the ‘dangerous cocktail’ of threats faced by the British economy, claimed this is ‘not a debt fuelled recovery’ and ‘overall levels of household debt have fallen in our country over the last five years’.
This is not true. A number of reports point to increases in the UK household debt burden over recent years, from the Centre for Social Justice’s report which outlines the ‘growing issues of problem debt’ to the Money Charity’s December 2015 Debt Statistics, which claimed that ‘people in the UK owed £1.456 trillion at the end of October 2015… up from £1.42 trillion at the end of October 2014 – an extra £706.71 per UK adult’.
The Office for Budget Responsibility (OBR) predicts that these increases will continue over the current parliament, and by 2020 household debt is set to have risen to 167% of household income.
The problem is not only that levels of household debt are rising, but that the highest debt to income ratios are found amongst lower income households. Moreover, amongst indebted households there has been an increase in ‘extreme over-indebtedness’, that is, their debt repayments are greater than 40% of their household income. In 2014, 1.6million households spent more than 40% of their income servicing non-housing debts, with 1.1million of those households having annual incomes of less than £30,000.
So, why is this a problem?
Effects on wellbeing
The charity StepChange has documented the impacts of rising household debt on wellbeing, with worries about debt affecting sleep, mood, concentration and attendance at work.
Effects on families
Research by the Children’s Society has also highlighted the stress that problem debt puts on family relationships and the extent to which problem debt affects children’s lives. Children growing up in families with problem debt are more than twice as likely to be unhappy at school, and nine out of ten families with problem debt report having to cut back on essentials such as food, clothing or heating in order to keep up with repayments.
Effects on the economy
The negative effects of rising household debt are not simply felt at a personal level. High household debt is bad for the economy as a whole. The Bank of England reports that high household indebtedness is likely to have a ‘large adverse effect on aggregate demand’, which essentially means that indebted households are less likely to buy things.
As a consequence, high levels of household debt have ‘been associated with deeper downturns and more protracted recoveries’ and the credit boom was identified by the Bank of England as a contributing cause of the 2007/08 financial crisis.
The burden of household debt in the UK is increasing. According to OBR predictions, debt levels in 2020 will exceed the levels of household debt before the 2007/08 crisis. This suggests that rising household debt poses a real threat to the UK’s economic stability.
What can be done about this?
Rises in high cost credit and rising arrears on household bills are driven by a number of factors. In particular, the following have all contributed to the financial difficulties of households: a lengthy fall in real wages between 2010 and 2014; a rise in underemployment (the number of people who would like to work more hours but cannot obtain them) since 2008; a rise in self-employment (one in seven workers in the UK are now registered as self-employed; and the typical self-employed worker earns 40% less than the typical employee) and increased ‘casualisation’ of employment (evident in trends such as the rise of zero-hours contracts).
All of this has occurred against a background of austerity, which has disproportionately affected the poorest families, and placed further pressure on the finances of low income groups.
George Osborne is right to warn of a dangerous cocktail of threats facing the British economy. He should have owned up to the fact that rising household debt is a poisonous ingredient in the mix.
Household debt: the missing ingredient in Osborne's 'dangerous cocktail' of economics risks