Written by Damon Gibbons & Lovedeep Vaid of the Centre for Responsible Credit for the TUC and UNISON.
It is seven years since the onset of the global financial crisis and the ‘Great Recession’. Although the credit boom prior to 2007/08 has been identified by the Bank of England as a contributory factor in causing the crisis, and the Bank have recently reported that the legacy of high household indebtedness has held back the recovery, very little has been done in that time to directly assist British households to either pay down or restructure their debts.
This is now a major concern because a number of factors have combined to increase the household debt burden in recent years. These include a lengthy fall in real wages; a rise in ‘underemployment’ (i.e. people who would like more hours of work but cannot obtain them; record numbers of people in low paying self employment, and a continuing programme of severe cuts to state support for working age households. For many low paid workers, the increased ‘casualisation’ of employment, typified by the rise in zero hours contracts, also causes cash flow problems which in turn drives increased, often high cost, credit use or arrears on household bills.
It is therefore of little surprise that the Office for Budget Responsibility (‘OBR’) is forecasting that household indebtedness will increase further over the lifetime of the current Parliament. The household debt to gross household disposable income ratio is expected to rise by 26 percentage points to 170 percent by 2020. This is slightly higher than the debt to income ratio witnessed just ahead of the crisis in 2007/08. We are concerned about this prospect both because of the damaging effects of debt problems on those who are directly affected and also because an increase in the household debt burden is likely to limit domestic demand, act as a drag on Britain’s economic growth, and increase the vulnerability of the economy to external shocks.
It is important to look at the different components of household indebtedness that are included within the OBR’s forecast. Approximately 80 percent of total household liabilities is secured on property in the form of mortgages. The OBR expects rising house prices to feed through into an overall increase in household indebtedness, and that this will account for around 12 percentage points of the forecast increase in the debt to gross income ratio through to 2020. There has already been a great deal written concerning the possible implications of our high level of mortgage debt, especially if interest rates are raised by the Bank of England. For example:
In May 2014, the Resolution Foundation modelled the impact of likely interest rate increases and reported that if rates were to rise to just 2.9 percent by the end of 2018 then around 2.3 million households could find their mortgages unaffordable; and
Writing in the Bank of England’s Quarterly Bulletin, Bunn & Rostom (2014) reported that the potential for household indebtedness to have ‘a large adverse impact on aggregate demand and on the banking system’ lay behind the Bank’s Financial Policy Committee decision in July 2014 to introduce tighter restrictions on mortgage lending. These included the introduction of ‘interest rate stress testing’ as part of affordability assessment processes for new loans and limits on the proportion of mortgages being offered at loan to income multiples of 4.5 or above.
In contrast, the economic impact of the remaining 20 percent of household indebtedness, which comprises their unsecured liabilities (both consumer credit debts and student loans), has been largely overlooked. For example, Bunn and Rostom’s research, which looked at the negative impact of household indebtedness on domestic demand, focused exclusively on the role played by mortgage debt.
Yet the stock of outstanding unsecured debt is large and the OBR is expecting this to grow further. In its July 2015 forecast the OBR indicated that it expected increased unsecured debt to account for 14 percentage points (i.e. more than half) of the expected rise in the overall debt to gross income ratio through to 2020.
The ‘Britain in the Red’ project is therefore focused on the growing unsecured debt burden of British households. It is examining the evidence from recent household surveys and aggregate datasets to determine the extent to which unsecured debts make households financially vulnerable; how the debt burden is distributed between different types of households, and the wider economic consequences of the long-term accumulation of unsecured debt that has taken place.
This preliminary report sets out the findings from the our analysis of household survey data concerning recent trends in financial vulnerability and over-indebtedness and a future final report will consider how these relate to aggregate datasets and the wider economic impacts of the household debt burden. It will also make recommendations for change. It should be noted that throughout this report we use the term ‘unsecured liabilities’ to refer to the combined total of consumer credit and student loan debt, and ‘consumer debt’ to refer to the unsecured liabilities of households excluding student loans.
The remainder of this report is structured as follows:
Chapter two presents an analysis of household debt survey evidence and comments on observed changes in the distribution of unsecured debt in recent years. In this respect we particularly focus on findings from an analysis of the Bank of England’s annual household debt survey commissioned from NMG Consulting (‘the NMG survey’);
Chapter three then provides further detail from the NMG survey to present findings about the demographic of characteristics of households with the highest unsecured debt burdens; and
Chapter four provides our preliminary conclusions.
Want to hear about our latest news and blogs?
Sign up now to get it straight to your inbox