The spike in personal debt is a reminder the economy is built on the indebtedness of large swathes of the population
The words ‘back to pre-crisis levels’ will feature quite heavily in the run-up to the next election, thanks to analysis by the Institute for Fiscal Studies that says median household income levels for 2014/15 will match levels not seen since 2007. But George Osborne probably won’t want to tell us that household debt levels have also returned to pre-crisis levels.
Of course Osborne can rightly be accused of obscuring the facts anyway. According to the IFS, the recovery in living standards has been slower than the period following previous recession. The amount of lost time and lost money in the delayed recovery should matter every bit as much when we come to decide who we want in charge come the next election.
Delayed recoveries and their real impact on households might explain the return to pre-crisis household debt levels. In a new report out today, PricewaterhouseCoopers (PwC) show that unsecured debt (such as credit cards and personal loans) is making an intense return, rising by nine per cent in 2014 to £239bn, or close to £9,000 per household – an all-time high.
While personal debt and borrowing have stayed at consistent highs over the recession and recovery periods, only now is it spiking back up to 2008 levels, to the extent where PwC anticipates that by 2016 unsecured debt levels will reach nearly £10,000 per household in the UK.
This reinforces a point I’ve made many times: that to a large extent the economy is built on the indebtedness of large swathes of the population. But even in the so-called ‘recovery’ phase many households, particularly those on low incomes, will be experiencing a bad recession hangover – where the only option to get back on track is to take on more debts. And we are only seeing the beginnings of this.
What’s interesting is that student debts are driving up the figures in large part. Of the £19.7bn increase in unsecured borrowing in 2014, £9.1bn (which accounts for around 46 per cent of the increase) came from student borrowing.
While we can expect the same tired response to these figures by the usual crowd who support high fees for students and justify saddling people with more forms of debt before they’ve even left education, we might remember how risky it is to oblige graduates who started university after 2012 to take on average debts of £40,000-£50,000.
Other debts are more typical. £4.2bn (around 22 per cent of the increase) came from credit cards, and £6.4bn (around 32 per cent of the increase) came from other sources such as personal loans and overdrafts.
The real scare story is what is yet to come. Knowing that UK households are extremely vulnerable to interest rates rises, PwC have worked out using their own analysis that a two per cent rise in interest rates would leave households needing to find an extra £1,000 a year just to cover the additional interest costs.
Economist Ann Pettifor, who spoke at the From Recovery to Discovery event last week, pointed out the risk that interest rate rises would have on the vast majority of mortgage holders in the UK.
Some 70 per cent of UK mortgages are variable rate mortgages, compared to 20 per cent in the US, meaning that when a rise in interest rates occurs a great deal of people will begin to feel a very large pinch. Again, not something that George Osborne would talk about when discussing the UK recovery.
Back in February the Trades Union Congress (TUC) analysed data from the Office for Budget Responsibility to find unsecured household debt forecast to grow 4.5 times as fast as wages.
By this reckoning unsecured debt will reach an average of around £29,000 per household by 2019. That is to say, if the stewardship of the economy carries on after the election in the same way George Osborne has so far managed it, then the debts of UK households will grow to unprecedented levels. PwC analysis today shows we are well on the way to this point.
Thank goodness then, I suppose, that we have an option in 45 days’ time to get rid of the current chancellor of the exchequer.
Carl Packman is a contributing editor to Left Foot Forward and the author of Loansharks: The rise and rise of payday lending
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25 Responses to “How Osborne’s recovery really looks: graduates with £50,000 debt before they’ve left education”
Leon Wolfeson
Again, what would Labour do differently? And don’t mention the proposed 6k fees, which most students still won’t pay off, but will pay for 30 years (ending up paying far more than their origional debt…) – and of course, Universities would have to slash their teaching provision drastically there, so…
ed
But if Labour get in, on all reckoning this will get worse! They will borrow more, spend more, invest less . . .
Millsy
£29k debt per household by 2019? Assuming that everyone borrows more and more with no regard for what they can afford; that the banks and other lenders ignore affordability rules & charge offs. Ridiculous! Anyone can draw a straight line up a graph if they ignore the real world. Honestly, I expected better from you.
Jake
Student Loans aren’t debt. Debts have to be paid back. They are in effect a change to your tax allowance once you are working. First job on 18k a year? You will pay a few quid a month extra tax – and that’s it. Most people will never pay them back in full and those that do will be earning good salaries.
Guest
“Good”. Nope. There’s a very low graduate premium in the UK. In fact, the system means unless you’re working in the city, you’ll lose money over your working lifespan compared to if you had not gone.
Moreover, it is debt, there is no tax allow change and you don’t even know where the threshold for repayment is! You’re also right that most people won’t pay them back – they’ll pay massively more than the original loan AND the government will end up with a massive debt to pay!