Carl Packman reviews Solving Britain's Personal Debt Crisis, by Damon Gibbons.
There is absolutely no doubt that signs of economic recovery are a good thing. In just one quarter the economy has grown in the UK by 0.8 per cent. However it is the type of recovery we are witnessing that should sit heavy on our minds now. As Vince Cable once asked: is this not a short term recovery based on another housing bubble? Are we too reliant on consumer spending, and thus consumer indebtedness, to fund the smiles of the government front bench?
Damon Gibbons, the director of the think tank Centre for Responsible Credit, has seen this coming for a long time. Not only did he see what was happening to the economy back in 2006 when he told the BBC that British households were on the edge of a debt ‘tipping point’, the result of which could be recession, but he was also well ahead on the effects of dangerous personal debt.
Back in 1999 Gibbons decided, along with colleague Niall Cooper of Church Action on Poverty, to formalise a campaign that the two had been working on and take it to a wider public: the campaign was called Debt on our Doorstep and its two primary aims were to secure an interest rate cap and force banks to provide affordable credit to people on low incomes.
Since then the issue of debt has become far more profound, and Gibbons, whose new book Britain’s Personal Debt Crisis is out now, has made a very decent effort historicising it and highlighting the solutions that need to be discussed more widely by policy makers today.
It is not as if the notion of households struggling to make ends meet on their wage packets alone has crept up on us unnoticed. In 1979 the amount of outstanding consumer credit advanced by banks was little under £5bn, but by 1986 that figure was up to £24.2bn.
At that same time, after 1979, Britons living in poverty rose from 22 to 28 per cent, while between 1980 and 1989, during complete credit market liberalisation and Thatcher’s Big Bang policies, the proportion of low income households using credit to maintain a decent standard of living rose from 22 per cent to 69 per cent.
In 1990 outstanding consumer credit reached £67bn which occurred, according to Gibbons, as a consequence of heavy advertising by banks for credit cards, until the amount of unsecured lending circulating in the UK in 2000 reached an extremely worrying £127.4bn.
By 2010, the European Commission said, about the UK, that households and businesses owed over twice the entire economic output. This had increased by over 80 per cent between 1995 and 2012, and for households alone debts rose by nearly one third between 2000 and 2009, where they peaked at 104 per cent of GDP.
Today, according to a recent survey by thinkmoney.co.uk, one in 20 Britons have said they could not live without borrowing.
The toxic mix of stagnating wages, credit market liberalisation, rising cost of living and the realisation that a debt economy cannot be challenged without raising serious questions on the way we carry out finance in a neoliberal society meant that the ever increasing indebtedness of Britons was inevitable.
So why has the governmental response been so lacking if this problem has been so obvious? Possibly because, in spite of how obviously detrimental rising problem debt has on the rest of society, neoliberal governance has shifted the burden of guilt on the individual and policy making has been built around this odious morality.
Back in 1927 the Moneylenders Act in the UK said that any loan above 48 per cent was unconscionable. The problem, here, however was not the principle but the enforcement of the law. Because the formula to calculate the interest rate was so complex regulators were rarely happy challenging extortionate lenders.
Furthermore, the law required borrowers to take unscrupulous lenders to court themselves – which consumers, particularly from low income households, were less inclined to do.
The Consumer Credit Act of 1974, which came after the Labour-established Crowther Committee, abolished seven previous laws on consumer credit in their entirety and replaced them with a single overarching framework. The Crowther Committee noted that low income people were often charged excessively for their credit, and called for price cap to be levelled at lenders. But this was ignored. The UK since has had nothing of the sort.
Last year however the Financial Conduct Authority, the newly set up regulator, committed to a cap on the cost of credit which it will firm up and enact come January 2015. Gibbons was one of the key figures in the UK to make sure such a cap was realised. But in the concluding points of his book he does note how far further there is to go.
For example a cap, at the moment only relevant for payday lenders, should be applicable to all credit sellers to ensure against extortionate pricing that sees the poorest paying more for their finance. If all of the financial sector is not given the same level of scrutiny as payday then we risk taking our eye off irresponsible lending practices across the whole sector.
Gibbons’ book has spelt out very clearly that this economic recovery, which the coalition government are out there smiling about at the moment, counts for nothing if households themselves don’t feel better for it. Clearly what is most worrying about the recovery is not only that it won’t benefit many households, but it will be off the back of their indebtedness. Gibbons warns against this in the strongest terms – his book should not be ignored.
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