Problem debt could be holding back the recovery, says new report

There has been a sharp rise in household debt among young people and low-income families

 

One in eight households in the UK now have ‘problem debt’. That’s according to new research commissioned by TUC and UNISON, which shows that 3.2 million British households were over-indebted in 2014. This is a significant increase on 2012, when the figure was 2.5 million, or one in ten households.

‘Problem debt’ is defined as having to spend a quarter or more of monthly income on unsecured debt repayments, such as credit cards, loans and overdrafts. But the report, entitled Britain in the Red, finds that 1.6 million households are spending as much as 40 per cent of their gross monthly income on debt repayments (not including housing debts like mortgage or rent payments). The ‘great majority’ of this number, 1.1 million, are lower-income households.

The situation has got much worse for young people over the past two years. In 2012,  just 2 per cent of 18-34 year-olds with any form of unsecured borrowing were over-indebted, but by 2014 this had risen to 10 per cent. The average total unsecured debt for working households aged between 18 and 24 has nearly doubled in the past three years, from just under £7,000 to £13,190.

Although the report says that credit card, personal and payday loans, overdrafts and store cards were the main factor behind this rise in debt rather than student loans, the new research adds to an already worrying picture of  a generation of young people saddled with insurmountable debts. ‘Generation rent”s chances of ever owning a home are diminished even further if much of their monthly income goes on repayments.

Low income families have also suffered from the rise in problem debt. In 2012, 9 per cent of low-income families were over-indebted, compared to 16 per cent in 2012.

The TUC and UNISON say the report reveals how economic growth has failed to reduce the burden of debt repayments for many families, and this combined with wage stagnation is forcing families to borrow far more than they can afford to make it to the end of the month.

As general secretary Frances O’Grady put it, ‘rising household debt is not the sign of a healthy economy’. In fact, it was personal borrowing that helped to drive the last financial crash.

The Bank of England identified the pre-2007 consumer debt boom as one of the causes of the financial crisis and subsequent recession, and has also suggested that household debt has hampered the recovery since.

A 2014 report provided strong evidence that consumers with high debts panicked after the crash and cut their spending. If this group cut their spending by more than the average, the report said, it could account for as much as two-fifths of the 5 per cent collapse in private consumption after 2007.

Britain in the Red concludes that policy makers are not paying enough attention to the ongoing problem of household debt and its effect on the recovery. Both the TUC and UNISON have warned that the problem could get worse if interest rates go up, which they are currently predicted to do around September 2016.

Ruby Stockham is a staff writer at Left Foot Forward.

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