"We've become so used to living beyond our means we're now in a debt
The debt pandemic New Statesman Liam Halligan Monday 24th October 2005
Between us we owe £1 trillion and we can't afford the repayments. British consumers have a serious dose of borrowing sickness and, as Liam Halligan warns, it may be fatal to the economy
Gordon Brown used to say Britain's economy was in its best shape for 200 years. The Chancellor no longer makes that claim. The reason is that the UK is growing at its slowest rate for 12 years. And that is largely because consumers - until very recently the driving forces of the economy - are buried under mountains of debt.
Britain's personal debt burden recently topped £1trn (that's 1 followed by 12 zeros), and, while the bulk of that is mortgages, more than a fifth is unsecured debt - on credit cards and personal loans. That means the average household has unsecured loans of £7,650. This country is now shouldering no less than two-thirds of all credit card debt outstanding across the entire European Union.
Brown's celebrated record of presiding over economic growth - "52 consecutive quarters of expansion" - owes a lot to the consumer boom funded by this frenzy of borrowing. Our decade-long shop-a-thon has enabled us to grow faster than much of western Europe. But with the Confederation of British Industry reporting the weakest high-street sales for 22 years, the party is over. Across the country desperate retailers have launched their earliest-ever autumn sales, but still the meltdown continues. Just too many shoppers are spooked by their growing debts.
"More and more people - particularly from middle-income households - have serious debt problems," says Sue Edwards of Citizens' Advice Bureaux. "They've borrowed to maintain lifestyles, and the 'have-it-all' culture means attitudes to credit have changed. But in recent months we've received huge numbers of debt-related calls."
Consumer bankruptcies have hit record levels. New official figures show individual insolvencies up 37 per cent on 2004, and twice as common as when Labour took office.
Earlier this month, in his most pessimistic speech to date, the Bank of England governor, Mervyn King, said: "Some of the influences that have in the past boosted consumer spending may be going into reverse." He also admitted to "concerns about the increase in personal debt, particularly unsecured debt . . . which may cause difficulties in the months and years ahead".
A recent Bank of England working paper, which King will have overseen, is also worth noting. "Household indebtedness has grown sharply in the UK in recent years," its authors said. "The rapid debt accumulation raises questions about the ability of people to repay what they owe."
And there may be worse to come for debt-soaked consumers. With inflation at an eight-year high of 2.5 per cent, many economists believe interest rates will soon rise from 4.5 per cent. Certainly, with high oil prices driving inflation, the chances of any more cuts are receding rapidly. And if rates do go up, so will personal debt, with inevitable consequences for consumer spending. The Chancellor, who has already revised his 2005 growth forecast downward once, could have to do so again.
Until recently Sam Drew was among the middle-income consumers keeping the economy on song. But, although he lives in Surrey's commuter belt and holds down a respectable £30,000-a-year job, he is "in a state of financial despair".
Despite appearances, this 39-year-old professional is servicing £24,000 in unsecured debt, on two credit cards and a personal loan. "I'm literally counting pennies before buying a pint of milk," he says. "My situation is so dire I'm deeply depressed and find it hard to see a way out." A "huge chunk" of his income goes on debt repayments. "I've already had to sell my house. But, with my finances still a mess, I can barely afford the basics."
Drew is among millions in difficulty. Since the start of 2005 the number of county court judgments served on those with unsecured loans has risen by a quarter. That's one reason why August saw an extremely rare credit card net repayment. For only the second time in 11 years, the public's monthly card repayments exceeded new borrowing. In other words, maxed-out households called a halt. And with high-street spending flat and retailers bracing themselves for the slowest Christmas in a generation, this retrenchment is seriously affecting the wider economy.
For his part, Drew accepts his responsibilities. "My situation is largely my fault," he says. But he insists that "the lenders made it far, far too easy" to run up debts. "I was plodding along nicely until invited to take those credit cards," he says. "That was the slippery slope. The company kept raising the credit limit. Pretty soon, the monthly payments exceeded my salary."
Now trying to salvage his finances, Drew uses the Consumer Credit Counselling Service. The UK's biggest debt charity, the CCCS advises tens of thousands of people, working out payment schedules and helping with creditors. Malcolm Hurlston, who founded the service ten years ago, lifts the lid on the truly alarming world of "extreme" debt. "Among those seeking our help, the average unsecured debt is almost £29,000," he says. "So Sam's debt is below average. And calls to our helpline are up more than 50 per cent this year."
Hundreds of CCCS clients have unsecured loans - above and beyond mortgages - exceeding £100,000. Hurlston cites "dozens and dozens" with ten credit cards or more. Several clients have more than 40. "The number of desperate cases is growing fast," he says. "People get in much greater difficulty than they used to, and roughly half of those in severe debt become clinically depressed."
Earlier this year Richard Cullen, a self-employed mechanic from Wiltshire, committed suicide. He had debts of £130,000 on 22 different cards. Cullen used one card to pay off another, so he appeared solvent when in fact he was bust. "Suicides are mercifully rare," says Hurlston. "But, whatever the lenders say, customers can't always look after themselves."
The CCCS points also to "a huge increase" in callers below the age of 25, particularly women. "With student loans and easy access to credit, many youngsters are desensitised to borrowing," Hurlston says. "They seem resigned to servicing massive loans for the rest of their lives."
The Department of Trade and Industry says the new Consumer Credit Bill - the first in 30 years - will help reverse the rising debt tide, particularly among the vulnerable. Ministers argue that the legislation, currently going through parliament, will improve transparency on credit charges and, crucially, data-sharing between lenders. But Mick McAteer of the Consumers' Association has "grave concerns". Like many debt campaigners, he says ministers don't want to rein in credit because it sustains the politically important feel-good factor. "This bill means the industry can continue with predatory and aggressive sales of deliberately confusing products. Measures on credit limits and data-sharing remain very weak - this is a government that puts the needs of the financial services industry before those of consumers."
However the legislation turns out, a more immediate question is whether the wider economic effect of over-borrowing - now only too apparent - is likely to last. After all, even this summer's self-imposed credit cutback may not be what it seems. While there was a net reduction in card debt, August also saw a surge in new personal loans and mortgage approvals. The number of home loans rose 8 per cent, the first increase in almost a year.
In essence, consumers used the August rate cut to refinance their borrowing. In a bid to reduce interest charges, loans were shifted from credit cards to houses.
This is the nub of our problem. Middle-income Britain is locked into a cycle in which periods of excessive spending are followed by remortgaging and other debt consolidation. Then, as people are egged on by lenders, retailers and endless born-to-shop celebrity starlets, their borrowing binge begins anew.
"Unsecured" loans are endlessly rolled over into housing, so adding to "secured" mortgage debt. That's one reason rampant unsecured borrowing, which was once limited to the twilight world of door-to-door loan sharks, is now part of polite society.
Millions of households have sunk into debt on the expectation that property prices will keep rising. But prices have fallen for 14 months in a row. The danger is that, as our economy slows and unemployment rises, mortgage defaults will go up. House prices could then fall more rapidly, possibly sparking an early-1990s style crash. Even if that doesn't happen we have serious problems. Thanks to our habit of adding unsecured loans to mortgages, the latest figures show that total household debt servicing, including secured debt, is now above 20 per cent of our incomes. In other words, on average we're spending more than a fifth of our incomes on loan payments. That is as big a burden as in the crisis years at the start of the 1990s, even though interest rates today are much lower.
In many ways our debt burden today is more worrying. If interest rates rose sharply - and high oil prices mean they could - debt repayments would soon reach dangerous new highs. Even if that doesn't happen, today's debts will last far longer: in the early 1990s high inflation eroded outstanding loans, but that doesn't happen in today's relatively low-inflation world.
That's the main reason Middle England's debt burden is likely to drain household incomes, acting as a drag-anchor on our economy for many years to come. As that realisation sinks in, British consumers - up to their necks in debt - are opting to consume much less. By doing so, they are seriously undermining the single most important factor driving the growth of the British economy. And that affects us all, indebted or not.
"I look at people on the high street," says Sam Drew, "and wonder how many others are in too deep. There are millions out there like me. We've become so used to living beyond our means we're now in a debt pandemic."
Liam Halligan is economics correspondent at Channel 4 News