UK household debt rockets, setting off alarm bells
As UK Chancellor George Osborne focuses on reducing the national debt, household debt has jumped 8.2% YoY, the biggest increase since 2006, according to Bank of England data. Borrowing has been buoyed by low interest rates offered by fiercely competitive lenders and high consumer confidence, however, national charities have voiced concerns that increasing numbers of people will service these unsecured debts by taking on more credit, hence they are calling on the government to intervene.  

Black Friday, the day of discounted deals and shopper madness imported from the US, passed last week without the scuffles, fights and mini-riots that came to mark last year’s event. But the relatively quiet aisles and slowly revolving doors of Britain’s high-street stores masked an unseen online spending frenzy that analysts believe happened on Friday and will continue this weekend into Cyber Monday today, another discount day, and will add to a predicted bumper Christmas for retailers.

Shoppers are expected to blow a total of £16.5bn between now and the big day, on everything from Star Wars droids to sprouts – up 2.5% on 2014.

But while retailers, online and off, are gearing up to celebrate what could be the best seasonal till receipts in years, many shoppers will be resorting to another festive tradition that is starting to cause concern: the buy-now-pay-later Christmas.

Last week Andy Haldane, the Bank of England’s chief economist, told the cross-party treasury select committee that he was keeping a close eye on the rapid growth of personal loans, which he said were “picking up at a rate of knots”.

With borrowing rising sharply, a growing chorus of voices, from charities to policymakers at the Bank of England, are beginning to raise concerns about whether high levels of household debt are sustainable. Some economists fret that, while the chancellor is focused on attacking the government’s debt pile, families are drifting ever further into the red. “The chancellor has been focused on getting the public debt down, and that’s great, but we believe that is coming at the expense of households,” said Oliver Jones, of City consultancy Fathom.

Fathom’s concerns are backed up by evidence from debt charities which are finding themselves in the familiar territory of pre-financial crisis days when people’s personal debt piles were climbing.

“Our advisers are hearing a lot of people raising the impact of Christmas spending during calls, as we help them to resolve problems with unmanageable debt,” said Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline. “There are lots of pressures at this time of year and many people are deferring decisions about money until Christmas is out of the way, potentially exacerbating their financial situations.” She says calls to the National Debtline increased by 61% after last year’s Christmas holidays, and “all the signs suggest we will see the same again this year”.

Mike O’Connor, chief executive of StepChange Debt Charity, said: “Debt on credit cards, personal loans and other forms of unsecured debt is rising at its fastest rate for a decade. It is vital that this does not get out of control. Responsible lending is now of the utmost importance.”

Across the economy as a whole, borrowing had already begun to pick up long before families started fretting about how to pay for Christmas, with the fastest growth being seen in unsecured debt, such as personal loans and credit cards.

The frenzied scenes of Black Friday 2014 were not repeated this year as shoppers went online.

Photograph: Ray Tang/REX

“What we’ve started to see in the past six to 12 months is a pick-up in unsecured lending: there’s definitely something bubbling up,” says Matt Whittaker, chief economist at the Resolution Foundation thinktank.

So why are we back to what looks like the bad old days of borrowing big? In the aftermath of the financial crisis of 2008 and the ensuing recession, many households took action to repair their balance sheets, paying down debts and reining in spending.

But with average living standards finally starting to rise after the long post-recession squeeze, and Bank of England interest rates still at their record low of 0.5%, the idea of taking out a cheap loan to pay for a car or a holiday – or stock up the fridge for Christmas – has become more appealing.

Fierce competition between lenders has helped to bring down interest rates while the rebound in the housing market has shored up consumer confidence.

“The upturn in the economy has meant consumers are now more confident about their jobs and feel more comfortable about taking on new financial commitments,” says Andrew Hagger, a personal finance expert from Moneycomms. “At the same time banks are hungry to lend and offering all-time low rates on personal loans. The combination of these factors has fuelled the huge increase in unsecured borrowing.”

Like mortgage rates, personal loan interest rates have tumbled. Two years ago someone taking out a £5,000 loan would pay 6% at best; now the lowest rate is closer to 4%.

The latest forecasts from the independent Office for Budget Responsibility, published alongside last week’s autumn statement, suggested that borrowing is likely to continue climbing in the years ahead, with the average household owing more than 170% of a year’s income – including on mortgages – by 2021: higher than the peak before the financial crisis.

But high levels of household debt are not just a worry for families struggling to make ends meet. Some economists fear that rising levels of personal debt could leave Britain vulnerable to the next downturn, when it inevitably comes, whether from a crash in China, rising US interest rates or some other unexpected cause. Official data published on Friday, which showed that economic growth has been heavily dependent on consumer spending, rather than exports or investment, underlined concerns about the sustainability of the recovery.

“The chancellor’s obsession with public debt means that he has turned a blind eye to private debt,” says Ann Pettifor, one of shadow chancellor John McDonnell’s panel of economic advisers. She would like to see the government helping consumers pay off loans. Instead, she says Osborne is encouraging the public to take on yet more debt – by offering subsidised mortgages through the Help to Buy scheme, for example, and forcing students and trainee nurses to borrow more to fund their studies. “George Osborne is acting irresponsibly and not preparing British households – and the wider economy – for rises in the cost of servicing debts,” she said.

Jones, of consultancy Fathom, points out that on some measures household indebtedness now stands above the levels that prevailed in the US before the subprime crash.

If a new downturn does come, and many of those loans turn sour, he argues that a consumer debt crisis would rapidly become a banking crisis – which could threaten economic stability just as much as the high levels of government debt the chancellor is focused on tackling.

So what, if anything, can be done to stop another credit boom and bust?

The Bank of England has new powers to prevent credit bubbles getting out of control. Its 10-member financial policy committee can slap lending rules on banks, for example, to make loans scarcer, or more expensive. It has already stepped in to slow mortgage lending. The Bank can also force lenders to raise more capital if it fears their balance sheets are vulnerable to a downturn.

This is meant to be a more sophisticated approach than just jacking up interest rates and clobbering growth. The committee, chaired by the Bank’s governor, Mark Carney, will present its latest assessment of the economy this week and Haldane has suggested that it could look at consumer loans.

But these so-called “macro-prudential” tools are a relatively recent innovation in the world of central banking and Jones says he cannot think of an example of policymakers successfully deflating a borrowing bubble without triggering a crash. “They’ve got lots of tools they can use,” he says. “Some of them are new and some of them are not; but no one has ever successfully averted a hard landing.” But for now, as the technocrats are locked in the Bank’s Threadneedle Street headquarters weighing up the growing risks of a credit boom, Britain’s carrier bag-bedecked bargain hunters will be out there doing battle among the Christmas crowds, credit card in hand.

Additional reporting by Hilary Osborne