Household Debt

Lord McKenzie of Luton Excerpts

Monday 13th November 2017 Lords Chamber

[Lord McKenzie of Luton (Lab)]

My Lords, it is a pleasure to follow my noble friend Lady Lister. I, too, welcome the focus of the right reverend Prelate the Bishop of St Albans’s Question, which chimes with some of the discussion we have had in recent weeks on legislation. The right reverend Prelate asks for the Government’s assessment of the risk associated with current levels of household debt. As a recent Guardian article sets out, at a time when the Government are planning to cut the annual deficit year on year, the debt of Britain’s households is going in the opposite direction. We have heard some of the statistics already.

The House of Commons briefing paper tells us that household debt as a percentage of disposable income started rising in 2016 and stood at 140% of disposable income in Q2 of 2017. At the end of 2016, it amounted in total to £1,825 billion with mortgage debt making up 87% of that amount. We are also reminded that individual insolvencies in England and Wales in the first three-quarters of this year were the highest since 2014. It is the rise of non-mortgage forms of credit that is fuelling the rise in borrowing, especially arrears of household bills and utility bills. This is across the piece, including council tax and water company bills. Rent arrears, as we know, are rising dramatically. At a time of low wage growth and freezing of benefits, consumers are turning to credit to buy essentials. So we have an economy being built on debt when this was supposed to be an era of business investment, higher productivity and export growth.

What are the risks? We should first recognise that borrowing can be good for the economy—for example, if it is enabling consumer spending to be smooth—but high levels of household debt can also create problems for the economy and for individuals. There are obvious risks of increased default on loans, especially if interest rates are to rise with wages stagnating. There will be risks to the economy as a whole where individuals divert resources to dealing with secured debt and cut back on other consumer spending.

The Money Advice Service defines overindebtedness as including keeping up with domestic bills and credit arrangements being a heavy burden, and missing credit commitments or domestic bills in any three or more of the last six months. The FCA has a concept of potential vulnerability, which is a wider concept, covering those with low financial resilience, low financial capability, an experience such as divorce or bereavement, or health issues. Its 2017 survey identified that 8% of the UK adult population, or 4.1 million people, have not paid domestic bills or met credit obligations in three of the last six months. This has implications for the revenues of local and central government. Just under 8 million people are overindebted, while 4.5 million people say that they have been declined a financial services product in the last two years.

Whatever measure is used, there are millions of people in this country living hand to mouth, struggling or unable to pay their way, with many having to resort to food banks to survive. Of course we know that the misery caused by unmanageable debt is not just the financial strain it puts on households, consigning them to a future of accessing high-cost finance. It puts strains, sometimes unbearable strains, on household relationships. It affects people’s self-esteem and health, particularly their mental health.

Does it have to be like this? Of course it does not. For a start, the Government could make speedier progress on introducing their manifesto commitment, referred to by others, to provide a breathing space for those struggling with debt. I leave it to my noble friend Lord Stevenson, who has been at the forefront of pushing this issue and to whom I pay tribute, to say more on this. The Government can also ensure that the new single finance guidance body is robustly introduced as soon as possible to secure a smooth transition from the existing money advice services. There is also work to do around financial education and financial capability.

But there are more profound matters. We know that the build-up of council tax arrears has arisen as a result of passing the buck to local authorities and the continuing squeeze on their finances. We know that the payment architecture for universal credit, as my noble friend Lady Lister has just said, is fuelling rent and other arrears. We also know that a decade of draconian cuts to the social security system has thrown millions into poverty. The Government have the power to change all this. They do not have to accept, for example, the grotesque juxtaposition of growing domestic debt levels when they see billions washing around in offshore centres. The risk to our economy and the well-being of those mired in debt are in the Government’s hands to address.