How Osborne’s recovery really looks: graduates with £50,000 debt before they’ve left education

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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