Britain’s debt crisis
By Helena Page, Consultant

As the dust settles after last week’s Budget, it is clear that Philip Hammond’s ‘giveaways’ have failed to distract from the dismal predictions for the UK economy. The budget was accompanied by the OBR slashing growth predictions for the next five years, with suggestions that Britain’s pay downturn will continue until 2025.

While moves such as exempting first time buyers from stamp duty on properties up to £300,000 and raising the repayment income threshold for student loans will be welcomed, it is unclear how Government will protect these gains from being cannibalised by inert productivity growth coupled with price rises.

Also, despite the ongoing Treasury Select Committee inquiry into personal savings, the Budget was conspicuously devoid of measures to raise living standards for most middle and low income households. With the grip on living standards set to tighten, Hammond provided little indication of how the Government will encourage Britons to save.

This state of play is of particular concern given recent Bank of England warnings over rising levels of consumer debt, culminating earlier this month in the first interest rate rise since before the financial crisis. Unsecured credit is now estimated to total £200 billion, and ComRes research for R3 reveals the impact of this debt crisis at a personal level: two in five (41%) British adults are worried about their current level of debt, and, of these, credit card debt is most likely to be the cause of their concern (50%).

Debt is also taking its toll on wellbeing: ComRes polling for Citizen’s Advice found that a quarter (23%) of British adults believe their current debt level has a negative impact on their mental health.

To be sure, the cost of servicing debt remains far cheaper than pre-2008 when interest rates ran at more than 5%. However, the rapid increase in borrowing almost certainly belies a widespread lack of financial resilience. The OBR confirmed that pay will lag even further behind inflation which has continued at 3% for a second consecutive month. More worryingly, this month the ONS reported that the price of food is running at 4.1%. This is a marked increase on the 0.6% food price inflation was running at 12 months earlier, shifting the drivers of inflation to goods which hitting middle to low income households the hardest. ComRes research for R3 indicates this pinch is already being felt. Two in five adults (40%) often or sometimes struggle to make it to pay day, rising to three in five (61%) 25-44 year-olds. The cost of food (56%) and household energy costs (40%) are cited most often as the cause of financial difficulty by those struggling to stretch household budgets.

Moreover, recent research for Citizen’s Advice highlights the precariousness of this situation. Only a third (31%) say that their personal income has increased in the last twelve months; two thirds (66%) have at least one credit card, but two in five (40%) with a credit card are only paying back the balance on their debt irregularly or never.

With sluggish economic growth and weak productivity predicted, and creative policies for stoking economic growth in short supply, the strain on household budgets will not subside any time soon. Adding to the gloom, Mark Carney has warned that interest rates are likely to rise twice more over the next two years, hampering the ability of lower income households to access credit and compounding financial instability. With issues like Universal Credit, public spending and the housing crisis high on the political agenda, consumer debt is the dog which has not yet barked. But with no clear strategy for alleviating the downward pull on personal finances, that cannot last forever.

CONTACT US TO FIND OUT MORE ABOUT HOW WE CAN HELP YOU