Total debt

While the government plans to cut its annual deficit year on year until 2025, Britain’s households are going in the opposite direction.

Figures for household debt show that since 2012 households have added to their debt mountain and the trajectory puts the ratio of household debt to GDP heading back towards the peak seen in the boom years before the financial crash.

In March 2012, total household debt stood at £1,518.5bn in today’s prices compared with £1,630.1bn in March 2017. So in the past five years household debt has increased by an inflation-adjusted rate of 7.3%.

It is not a surprise to many analysts that with wages growth adjusted for inflation (and excluding bonuses) crawling ahead by just 0.7% over the same five-year period, consumers are turning to credit to buy essential items.

Ultra-low interest rates may have kept the cost of mortgage loans lower than expected by the government’s official forecaster, the Office for Budget Responsibility.

But there are concerns that borrowing on loans, credit cards, overdrafts and second mortgages has rocketed. Making matters worse, many households have doubled up on their debts by getting into arrears on their monthly bills, especially council tax.

Unsecured credit

In 2007 unsecured consumer debt – mainly on credit cards, store cards, loans and overdrafts – peaked at 45% of household income. In the years immediately following the financial crash, households were more inclined to kick their credit habit. Saving increased and borrowing declined, as the level of unsecured debt fell to 35% of income by 2012. But since 2012 households have increasingly failed to clear their credit and store card bills at the end of the month. High interest rates on those cards had sent their debts rocketing and the OBR now predicts unsecured household debt will reach 47% of income by 2021.

Bank of England figures show unsecured consumer credit jumped 4.9% in the past year when adjusted for inflation. The total increased from £192bn (in today’s money) in July 2016 to £201.5bn in July 2017.

This marks a slowdown on the previous two years when growth hit 12% and inflation was almost non-existent, but maintains the trend for UK GDP growth to come almost entirely from an increasing population and consumer spending with borrowed money.

It wasn’t supposed to be this way. The government’s official forecaster, the Office for Budget Responsibility, once predicted that the UK’s economic revival would be built on the foundations of business investment, higher exports and an improvement in productivity that would lead to higher wages. It didn’t materialise. Instead a mix of low wages growth, government cutbacks on welfare and public services, and more recently the uncertainty created by the Brexit vote have forced millions of households to borrow to buy essentials.

Car finance

Loans linked to car purchases have rocketed in recent years driven by loans in the form of personal contract plans (PCPs). These plans cover the depreciation on a car over three to five years, making them cheap to finance on a monthly basis. Deposits can also be as low as a few hundred pounds.

As a result PCPs have grabbed 86% of the new car market, which means more than 1m cars a year are bought with this new style of finance.

Another measure of its success is the rise of auto-finance from dealerships - when the funds are provided by car makers - which has more than doubled in the past five years from £14.6bn in 2011, in today’s money, to £31.7bn in new credit issued in 2016.

But the industry does not produce figures for the level of total debt on PCP loans. It also fails to publish the level of sub-prime lending to the poorest households.

The lack of transparency about the scale of lending in recent years and how much was directed at people who might not be able to keep up their payments in a downturn, has fuelled fears that the rapid growth in specialist car loans is a repeat of the payment protection insurance (PPI) scandal. PPI was a previously niche product that was widely adopted by the finance industry before leading to a wave of compensation claims from customers. The industry says lending to people with poor credit histories is low and the credit is offered against an asset - the car - which can be repossessed in the event the owner cannot pay, protecting the lender from defaults.

Mortgages

The government helped to revive the mortgage market after the banking crash with its Help to Buy scheme, which subsidised the deposits of first time buyers. It also backed a Bank of England project to support lenders offering cut-price mortgage rates to buyers and re-mortgagers.

Critics of the schemes believe they have encouraged thousands of people who could not afford a mortgage under more normal conditions to take on huge debts.

More than 40% of mortgage borrowers have never experienced an increase in interest rates and the fear is that many in this group would be unable to cope. Some might only be able to make repayments with dramatic cutbacks in other spending, but this has knock-on effects for the economy. Others might face repossession or need forebearance by their lender, increasing the lender’s liabilities.

A rise in the Bank of England’s 0.25% base rate is now possible before the end of the year after one of Threadneedle Street’s policymakers who is renowned for wanting to keep rates low, Gertjan Vlieghe, said he felt the time was nearing for a hike. Many economists believe the first rate hike could come in November.

Students

Student debt has soared in recent years following sweeping changes to the way universities are funded. Until 2013, the majority of university funds came from central government. A hike in fees to £9,000 and then £9,250 this year, has shifted the burden to students, who borrow from the Student Loan Company (SLC). The most recent figures to the end of March show outstanding debt on loans jumped by 16.6% to £100.5bn, up from £86.2bn a year earlier. The government expects to write off around 40% of the total, though critics of the scheme expect that figure to rise to 60%. Low wages growth over the next couple of decades, rising taxes to cope with an ageing population and the shift to insecure working practices and the gig economy are likely to make it more difficult for graduates to repay their loans in full.

Arrears

Council tax arrears have increased 12% in the past five years. Data from the water industry shows that the total level of unpaid bills increased from £1.9bn to £2.2bn in the four years between 2010-11 and 2014-15 (in 2014-15 prices). This is an increase of about 17% over four years. Outstanding debt on electricity and gas bills added another £1.24bn to the arrears total in 2016-17.

But there is little clear data to show the extent of rent arrears and arrears on other household essentials, such as broadband services and mobile phone contracts.

Citizens Advice said its greatest concern was the rapid rise in arrears as households struggle to maintain payments for basic services.

The debt advice charity said many families are unable to make ends meet and arrears were a reflection of this dire situation as much as consumer finance debts.

Councils and other government agencies have gained a reputation for taking a harder line with arrears than high street banks, which are more likely to agree a debt management plan to repay debts. they will often write-off at least some of the debt.

Councils, though, will employ debt collectors at an earlier stage, racking up bailiff bills and legal costs, which are then added to the arrears.

UK: the international perspective

A country’s debts have four elements - household debt, corporate debt, government debt and the trade balance, if it is in deficit.

The US and the UK are the two G7 countries that have fuelled GDP growth with increasing amounts of consumer debt in recent years. The UK also runs a large trade deficit and operates with a shortfall in government spending. Corporations, on the other hand, have hoarded cash and as a group have the healthiest balance sheets in modern times.

Continental European countries have been more circumspect in allowing household debt to increase. Banks in Germany and France have been more reluctant to lend, though partly in response to their own failure to deal with bad debts left overhanging from the 2008 crash. Just to give the full comparison with the UK, Germany has a large trade surplus, a government budget surplus and a bouyant corporate sector with relatively few borrowings

Canada has a particular problem with household debts relative to disposable incomes after a property boom that has pushed house prices to record levels.

The UK’s trade deficit, which is the largest in the G7, shows that not only are consumers spending more than they earn each year, they are spending it on imports and borrowing from foreigners.

In Japan the high level of household debt illustrates a more general reluctance among the population to put up with meagre wage growth. The growth in Japanese consumer spending is higher than wages growth and tax receipts are lower than government spending, leaving household and government debt to rise. This year Japan’s public sector debt to GDP ratio is expected to breach the 250% mark, compared to the UK’s 89% and Germany’s 68%. Japan survives by virtue of its huge trade surplus, which its declining population must work increasingly hard to maintain.