Fears of a personal debt crisis look more inflated than interest rates.
We are constantly hearing that Britain is on the verge of a consumer debt nightmare. The metaphors vary but the message is the same: the debt bubble is about to burst, we are on the edge of a debt precipice, we are addicted to debt.
These discussions distort the issue, and dwell on the downside of personal debt. Balanced debate about debt is pretty much confined to dry specialist reports.
It cannot be often that a Bank of England statistical press release is turned into a front page lead story in the Daily Mail, yet that is what happened recently with a headline proclaiming a ‘credit card meltdown’. The story claimed: ‘Credit card debt has soared to almost £1billion, fuelling fears that the national spending spree is set for a painful ending.’ (1) Meanwhile, the Daily Express ran a front page warning of ‘credit card madness’, which was hooked on a market research survey (2); and the Mail carried another front page “Credit ‘kills’ a family man”, reporting the tragic suicide of the father-of-two Stephen Lewis, evidently over £70,000 debt he had built up from 19 credit cards (3).
The debt discussion isn’t confined to bastions of Middle England such as the Mail and Express. The BBC has run a day of action on the issue, as well as a Panorama programme called ‘Spend it like Beckham’ (4). The Guardian’s economics editor Larry Elliott has argued that the government should organise campaigns around debt in the same way as it has around smoking and binge drinking (5). The New Statesman carried a piece by Ann Pettifor, director of the Jubilee Research programme at the New Economics Foundation, which referred to debt-laden consumers as ‘compliant’, ‘gullible’ and ‘obedient’ (5).
Even the normally sober Financial Times often gives an unbalanced take on the issue. The news that personal bankruptcies hit an 11-year high in England and Wales in the final quarter of 2003 made a front page lead story (6), while the news that the number of property repossessions had fallen to its lowest level for 20 years in 2003 was buried near the bottom of an inside page (7).
To measure the true dimensions of Britain’s household debt problem it is necessary to step back from the rhetoric and take a careful look at the statistics. In some respects, debt levels are high – but we are far from reaching a ‘debt crisis’. This suggests that perceptions of crisis owe more to other factors than to real levels of consumer debt.
Let’s consider some of the common claims, and try to sort out the fact from the fiction.
- ‘Household debt has reached astonishing levels.’
We often hear the statement that debt is at record levels. But debt is almost always at record levels – debt tends to rise as society becomes richer, just as do GDP, company profits and standards of living.
A more meaningful measure is to look at Britain’s household debt levels historically, or in relation to other countries. From this perspective, debt levels look high. The household debt to income ratio stands at 130 per cent today, compared with 102 per cent in 1993 (8). Internationally Britain’s household debt levels are far higher than most industrialised countries – although Australia and the Netherlands have higher levels (9).
However, debt service levels – the amount of debt repayments relative to income – are fairly stable. Since interest rates are relatively low, the burden of repaying debt, particularly in terms of mortgages, is reasonably light. Although credit-card interest rates are significantly higher than base rates, these are still low in historical terms. Debt service levels have stayed at roughly the same level since 1993 (10).
It is also important that assets have grown alongside debt. Part of the reason for this is that more people own their houses than in the past – so more people have mortgages. According to the International Monetary Fund (IMF), household wealth is equivalent to about 650 per cent of disposable income, while debt is worth 130 per cent of disposable income (11). In other words, the aggregate level of household wealth is five times that of debt.
- ‘Most debt today is on credit cards.’
According to Bank of England statistics, over 80 per cent of debt is secured – most of this is made up of mortgages secured on property (12). The remainder is unsecured, although not all of this is on credit cards.
- ‘Higher interest rates would make things worse.’
It is true by definition that higher interest rates increase the burden of debt. But base rates – against which commercial loan rates are calculated – are still relatively low. Such rates have risen from 3.5 per cent for much of 2003 to 4.25 per cent today. But according to the Bank of England, interest rates would need to rise to about nine per cent (which is seen as extremely unlikely in the foreseeable future) for debt servicing costs to be a similar burden as they were in 1990 (13). It should also be remembered that base rates reached 17 per cent in 1979-80 and 15 per cent in 1989 (14).
- ‘A section of the population is finding it hard to repay its debt.’
Always true. The tricky question is to identify what proportion is really suffering.
Numerous studies have tried to measure the proportion of the population that is finding debt a heavy burden. According to the Financial Services Authority, Britain’s main financial regulator, 31 per cent of households are struggling or falling behind with at least one borrowing commitment; another authoritative study found that 16 per cent of households claimed to be in financial difficulty; and one per cent of respondents to a MORI poll said that they were having real financial problems and falling behind with many credit card or bill commitments (15).
But there have always been some people who have found it difficult to pay their bills and repay their debt. And in any case, these subjective measures of financial difficulties should be treated with care, because individual expectations of a reasonable standard of living change over time.
Other new statistics seem to indicate that more people are in control of their credit card bills than is generally assumed. According to an independent survey commissioned by the Association for Payment Clearing Services (APACS), 77 per cent of credit card spending made in 2003 was repaid by people who paid their bill in full each month. Another eight per cent was incurred by people who usually repaid in full, while only three per cent of spending was incurred by people who made the minimum repayment in any one month (16). This suggests that people who are struggling to repay their credit card loans account for only a small proportion of total spending.
- ’A house price crash would make the debt much worse.’
Yes, but it may not happen.
It is true that the International Monetary Fund (IMF) has estimated that house prices in Britain are between 30 and 35 per cent above their long-term equilibrium level (17). It is also true that the longer that house prices continue to shoot up the more likely it is that there will be a crash. According to the Nationwide, the price of an average house nearly doubled from £75,060 in January 2000 to £145,918 in April 2004 (18).
But it is the same factors that make the debt burden more affordable that have helped to drive up house prices – it is because of low interest rates that house buyers can afford to pay more for their houses.
What should we make of such a mixed picture?
Whether debt becomes a severe burden is likely to depend on broader economic factors. If economic growth slows in the future, it will certainly make it harder for individuals to repay their debts – and higher unemployment or higher interest rates could also make the debt burden far more severe.
Yet concerns about the build-up of household debt aren’t really driven by real debt levels. Instead, many of those who campaign about the issue are driven by a new ethical agenda, which is calling for consumers to be more thrifty and not to buy more than they can afford. The underlying argument is that people should lower their horizons and be content with what they have got, rather than borrowing unsustainably.
It should therefore be no surprise that those who are most concerned about household debt are often those who are most sceptical about the benefits of economic growth. Raising the debt question means attacking the aspirations of people who want to improve their standard of living, telling them to cut back and not be so greedy. Doubts about the value of material development are focused on ‘gullible’ consumers.
Debt is a severe problem for a small minority of people and, if the economy worsens, it could be a serious difficulty for many more. But the debt issue should not be used as a stick with which to beat consumers, attacking the popular aspiration to live a more prosperous life.
Daniel Ben-Ami is the author of Cowardly Capitalism: The Myth of the Global Financial Casino, John Wiley and Sons, 2001 (buy this book from Amazon (UK) or Amazon (USA)). He is also a contributor to Cultural Difference, Media Memories: Anglo-American Images of Japan, Continuum International Publishing Group, 1997 (buy this book from Amazon (UK) or Amazon (USA)).
He is speaking at the spiked-seminar Play now, pay later?, in central London on the evening of Thursday 20 May 2004. For further details, email Sandy.Starr@spiked-online.com
Give us some credit, by Daniel Ben-Ami
‘Debt addiction’: don’t buy it, by Daniel Ben-Ami
(1) Daily Mail, 5 May 2004. Official statistics on this topic can be found on the Back of England website
(2) Daily Express, 17 March 2004
(3) Daily Mail, 11 March 2004
(4) See the Hey Big Spender section of the BBC website
(5) Obesity, binge drinking and smoking are targets – so why not debt?, Larry Elliott, Guardian, 25 August 2003
(6) ‘Coming soon: the new poor’, Ann Pettifor, New Statesman, 1 September 2004. See also an article by her on the Open Democracy website, The coming first world debt crisis
(7) ‘Bankruptcies at 11-year high as debt fears rise’, FT, 7 February 2004
(8) ‘Property repossessions fall to lowest level for 20 years’, FT, 29 January 2004
(9) CML Market Briefing, March 2004
(10) For international comparisons of household debt see Asia Pacific: The Twin Bubbles , Andy Xie, Morgan Stanley Global Economic Forum, 6 April 2004; and available at speech by Andrew Large (.pdf) at the Association of Corporate Treasurers’ annual conference, 23 March 2004
(11) Bank of England Inflation Report, May 2004, chart 1.14
(12) IMF country report 04/56 , March 2004, United Kingdom: 2004 article IV consultation, p9
(13) Bank of England figures on individual lending
(14) Bank of England Inflation Report, May 2004, chart 1.16
(15) See Bank of England historical base rate information
(16) Figures quoted in Are UK households over-indebted?, prepared for Association for Payment Clearing Services (APACS), British Bankers’ Association, Consumer Credit Association, Finance & Leasing Association. April 2004. The report is available from the APACS Card Information Office on 0870 420 3208
(17) Press release, 17 May 2004
(18) IMF country report 04/56 , March 2004, United Kingdom: 2004 article IV consultation, p8
(19) See Nationwide’s historical house price information
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