Over 5,000,000 UK residents are currently said to be struggling with debt issues. Being in debt can lead to all sorts of issues that are not necessarily obviously related to personal finances. It can lead to extreme stress and anxiety, a person may withdraw from society completely. In some cases a person may spiral out of control and amass even more debt in response to the stress. Most people in severe debt will feel isolated and alone at some point. However, there are hundreds of thousands of other people out there who feel exactly the same.
Step Change – a debt advice charity
Last year, more Britons than ever sought financial help. About 600,000 people contacted Step Change, the country’s leading debt advice charity with a host of City luminaries on the board. On its estimates, 2.9 million are struggling with severe financial problems and over nine million more are showing signs of distress.
According to official data, British households owe £200 billion in consumer credit, but that understates the problem, as four in ten people are also behind on household bills by £2,000 each. Alarmingly, the problem is getting worse, even with unemployment at a 42-year low. The average problem debt of people seeking help from Step Change rose last year for the first time since the crisis and the number of those behind on their bills climbed by 5 per cent. Again, this is happening when interest rates have never been lower.
Most of those in trouble are under 40 and living in private rented homes. They are Britain’s hidden working underclass, living hand-to-mouth with no capital to fall back on. Nearly nine million resorted to credit to pay for household expenses last year and six million, with no savings, borrow to cope with income shocks. It’s no coincidence that debt problems have mushroomed as consumer credit grew at 10 per cent a year, the fastest in more than a decade.
Don’t suffer in silence
One little-noticed pledge in both the Labour and Tory manifestos was to adopt Step Change’s “Breathing Space” policy, under which payments for distressed borrowers can be frozen and replaced by a “statutory payment plan”. It’s effectively a form of debt forgiveness enforced on the creditor. The Tories buttressed it with a promise to cut household energy, rail and telecoms bills and to improve rent protections for tenants.
That followed a tentative first step by the Financial Conduct Authority this year after an investigation into credit cards. It ordered firms to help struggling customers “by reducing, waiving or cancelling any interest or charges”. The regulator is now undertaking a similar review into all high-cost credit.
It feels like the precursor to a round of debt write-offs, as happened in the recession. The main reason debt levels briefly fell after 2008 was not because borrowers paid off loans but because lenders realised they would never collect the money. There is an incentive effect here, too. If lenders are made to take losses, they will think twice about extending credit to those who can’t afford it.
If anything, debt is about to get less affordable. Households will be poorer in real terms this year as prices rise faster than pay. Financial repression is not working, because the denominator that matters — income after inflation — is falling. The only way to keep a lid on the problem is to shrink the numerator as well.
An economical issue too
High debt is not just a social issue but an economic one. Fathom Consulting has looked at the total stock of household, corporate and public borrowing across countries and found that it does “buy” growth to begin with, but, once debt reaches around twice GDP, the correlation breaks down, as it has in Britain.
At that point, debt is just economic dead weight. Worse, it obstructs growth as overstretched households can’t spend, deterring companies from investment. Plus, the Bank cannot operate monetary policy. As Sushil Wadhwani, a former rate-setter said, the country ends up in a “debt trap” where raising rates squeezes households so severely it causes a slowdown that results in rate cuts.
What Britain needs is either massive wage inflation or a debt clearout. Labour and the Tories appear to be targeting both fronts, by raising minimum wages and attacking predatory creditors. It’s fiddling round the edges, but at least it’s something. Until then, the Bank will be paralysed, leaving us with rock-bottom rates and more of Mr Carney’s infuriating obfuscations.
If you are concerned about the amount of debt you are in, or know someone who appear to be struggling, there are many things you can do to help. As with many situations, it is always helpful to know you are not alone and to speak to others in a similar situation. Why not reach out to friends, family or even a debt related charity to seek advice on your personal situation.