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Britain's debt - how much is too much?

With increasing unease about rising debt levels in the UK, Brunel’s Professor of Accounting Robin Jarvis highlights the scale of the challenge for a population facing intolerable social hardship:

“It has been widely reported that unsecured household borrowing has shot up to levels that are unsustainable in the UK economy. A number of informed commentators predict this will create a bigger financial crisis than in 2007/8. These reports are based on hard evidence.

“Some examples bring home this worrying tale. UK households owe £180 billion in unsecured consumer credit and a huge £64 billion of this sum is credit card debt. In fact credit card debt has been identified by the Financial Conduct Authority (FCA) to be of particular concern. The FCA reports that around two million consumers in the UK were in arrears or defaulting. Of these, 600,000 cardholders have been in default or in arrears for more than six months and it will take 10 years for holders of five million cards to pay back their credit card debts - assuming they don’t borrow more in that time period.

“There is also evidence that the problem is growing. The Bank of England reported that in January there was a 9 per cent increase in consumer borrowing compared to a month before - to a sum of £1.6 billion per month. The Bank’s figures for mortgage borrowing over the last year has seen a 25 per cent increase.

“On the other side of the coin, savings, which have a direct relationship to debt, have declined significantly in recent times. Having no or low savings undermines financial resilience as households are vulnerable to financial shocks, such as having to find money to meet emergency needs. The fact that low levels of savings lead to debt makes it even less likely that money can be put aside into savings and creates a vicious circle.

“Our research underpinning the publication Britain’s debt, how much is too much? examines the evidence of over indebtedness and savings and proposes strategies to address a problem that creates consumer detriment and which has a dreadful consequence on civil society.

“The research specifically examines three vulnerable groups:

· students who are funded by personal borrowing

· self-employed workers, a growing proportion of the UK working population who are subject to earnings that can vary significantly over time

· employees who are on a low income and whose earnings can vary from month to month

“The strategies to address the problems confronted by these three vulnerable groups take the form of nudges, innovations and targeted government intervention. The paper makes nine recommendations employing these strategies. The following briefly describes these strategies.

“There is an acknowledged close relationship between budgeting and savings. Financial Technology (FinTech) has been found to be a useful aid to managing finances and there is a strong expectation that this innovation will lead to immediate online information that may be helpful to savings and budgeting solutions. In particular, the development of a standardised Application Program Interface (API), promoted by the government, will allow the development of third party apps that are compatible with all the UK bank systems and that are considered secure. The information will be designed specifically for consumers to plan and manage their bank accounts. This development should be useful for all three of our vulnerable groups.

“The evidence suggests that someone who makes regular debt repayments is exhibiting savings-type behaviour. The paper proposes strategies to exploit this behaviour pattern. Firstly, advocating the charity StepChange’s recommendation that the government’s recently introduced auto-enrolment system for pension savings be extended to include a savings element. The second proposal is to use the end of a debt repayment period to convert borrowers into savers. These proposals are likely to need some incentives such as those relating to tax allowances.

“Specifically for students, the paper proposes a move to monthly maintenance payments rather than termly payments. This would align England and Wales with the Scottish system, which it is argued promotes better cash management by students. 

“Not surprisingly, because of the level of credit card debt and use of other non-standard credit markets such as payday lending, the paper makes a number of recommendations for interventions by the government and its agencies, explicitly the FCA. Debts incurred by the three vulnerable groups in our study tend to have less choice of products and providers as compared to lower risk consumers and are therefore more reliant on these forms of credit which can be very expensive when in arrears and in a default situation.     

“Finally, the paper recommends that a market for social lending bonds should be developed promoting sustainable capital and providing investors with a reasonable low-risk return. Additionally, the paper advocates that the government should work with existing commercial marketplace lenders, credit unions and community development financial institutions (CDFIs) to develop ethical lending market places though online platforms.”

Prof Jarvis, and his fellow authors Mick McAteer of the Financial Inclusion Centre and independent consultant Sarah Beddows presented their paper Britain’s debt, how much is too much? to a Roundtable discussion before a panel of experts at Portcullis House. See the paper here.