By Paul Hackett, director of the Smith Institute
Britons seem to be world-class at spending and second-class at saving. The government must address the personal debt crisis through heavier regulation of payday lenders and policies to tackle stagnant wages and income inequality
The cocktail of austerity, falling incomes and easy credit has pushed record numbers of people into debt. More and more of us are now living perilously on the never, never, and the problem is getting worse. Unless government and regulators take preventative action, we are in danger of sleepwalking into a major personal debt crisis.
There are around six million households in the UK that are already in financial difficulty or at risk of facing unmanageable debt – 23% of all households. That’s double what it was a decade ago, and it is not just down to the growth of payday lending. Unless there is a shift in policy and a change in consumer behaviour then all the signs are that the problem of unmanageable personal debt will get worse – perhaps a lot worse – even if the economy recovers to pre-recession levels.
It is not only the sheer scale of personal debt – all £1.4trn of it – and how it impacts on the macro-economy that should worry policy makers. It’s also the lengthening list of who is most at risk. Problem debt in the future will predictably continue to affect the vulnerable and poor, especially those who are already over-reliant on high cost credit. However, on current trends, problem debt will also start to affect a much wider group, including more middle-income households and many more single and older people.
Research from the Smith Institute shows that it will take longer for tomorrow’s borrowers to pay off the debts incurred in their youth. What we could see is large numbers of Generation Y struggling to service their rolling debts (including student loans and debts from periods of unemployment), which in turn will make it harder to buy a home or build a pension.
Meanwhile, those from Generation X (post-war baby boomers) who have no assets and are on low pay may have to continue working longer into very old age to meet their financial commitments.
Using new ONS data and information from the debt charity StepChange, our report identifies two distinct (and fast growing) cohorts of problem debtors: those with around £12,000 of debt and some assets; and those with £2,000 of debt and few assets. Each group represents around one in ten households, and more than half are in unmanageable debt.
The interesting feature of the £12K debtors is that they are on average incomes and are mostly in regular work. They may well see themselves as middle class, are young and often couple households. They are at risk because they have large amounts of unsecured debt, nearly half of it in the form of contracted loan agreements outside hire purchase, overdrafts and credit card debt (which are also high).
In contrast, the £2K debtors are more likely to be unemployed or on low incomes and therefore struggling to clear relatively small (but entrenched) amounts of debt. This group are just getting by and nearly a third of their debts are from payday loans. Like the £12K debtors, they have no safety net against a sudden crisis, like illness or losing their job.
Coming down the road are hugely significant demographic drivers, such as more single-person households and an ageing population. These, combined with widening wealth inequalities, likely interest rate rises (including more expensive mortgages) and continued pressure on welfare provision, will make it harder for policy-makers to mitigate indebtedness. Without intervention, by 2025 we could well have more than one in four households at risk of serious personal debt.
Part of the solution must be to seriously cap the cost of payday loans, and perhaps include stricter limits on the time debts must be paid back, real time credit checks, and controls on the number of times a debt can be rolled over. Limiting the amount of easy credit available to so-called ‘zombie debtors’ is long overdue, but more help is needed for those who have no choice but to take on extra debt.
Government, the financial industry and debt charities must also do more to improve financial literacy. Some progress has been made with financial education in schools, but the report calls for a sustained national debt awareness campaign similar to the ‘five a day’ fruit and veg adverts. Such a campaign could also include more naming and shaming of irresponsible lenders and perhaps government support for a financial MoT for the over-50s.
There’s a big job to be done by the new Financial Conduct Authority to make sure credit products are reasonable and fit for purpose. Government could also do more to support credit unions and stop punishing the poorest in society who are most vulnerable to loans sharks and payday lenders.
However, we can’t ignore the fact that as a nation we seem to have as much of a savings problem as we do a debt problem. The British seem to be world-class at spending and second-class at saving. A concerted approach towards improving personal savings for both the £2K and £12K debtors would make sense, including the reintroduction of Saving Gateway type schemes where the state matches a proportion of an individual’s savings.
But, new pro-saving policies and tougher regulation will only go so far. Even if government heavily restricts payday lenders, we would still have a personal debt crisis. The solution must also include tackling stagnant wages, reducing income inequality and lowering living costs.
This article first appeared on Public Finance