Impact of Government Policies on Family Budgets

Lord Stevenson of Balmacara Excerpts

Thursday 27th October 2011 Lords Chamber

[Lord Stevenson of Balmacara]

My Lords, I am delighted to be participating in this debate. I congratulate my noble friend Lord Knight of Weymouth on initiating it and on his speech, with which I agree 100 per cent. I will talk today about debt and its impact on families and on the financial services sector. In so doing, I declare an interest as the chair of the Foundation for Credit Counselling. Operating currently as the Consumer Credit Counselling Service in all parts of the United Kingdom, we are the UK’s leading debt advice charity. We provide confidential, free and independent counselling and money management assistance and, now in partnership with Citizens Advice, we have reached nearly a million financially distressed families in the last two years.

Our typical client—just to give a sense of what we are dealing with—owes over £25,000 to between five and eight lenders, which include the banks, the credit card companies, store cards, utility companies and the Government. The role of the charity is to work with lenders—who do not get nearly enough praise for the highly responsible way they work with us on this issue—to find an appropriate way of dealing with problem debt, including setting up an affordable debt management repayment plan, which is free to the client, welfare benefit checks and other debt solutions.

As I said, we are in contact with over 1,000 clients a day. The issues which they tell us are worrying them at the moment include the rising cost of living—with CPI inflation at 5.2 per cent last month, and RPI inflation at a 20-year high of 5.6 per cent—and energy prices, which, as has been discussed, have increased: electricity by 7.5 per cent and gas by 13 per cent. From our statistics we find that 30 per cent of clients are in fuel poverty, defined as having to spend 10 per cent of their net income to heat their homes adequately. A similar proportion of those seeking our help did not have the means to meet their day-to-day cost of living let alone to repay their debts. Underemployment, mainly part-time employment as opposed to unemployment, is starting to emerge as a major reason for debt problems.

We also work with other think tanks and organisations, including the Bank of England, which uses our data to provide more information. In a recent report, Debt and Household Incomes, the Financial Inclusion Centre reported that, in its calculations, 6.2 million households can be identified as financially vulnerable; that 3.2 million are already in financial difficulty, because they are either three months behind with a payment or in some form of insolvency; and that 3 million are at risk because they find it hard to make ends meet or may be vulnerable to increases in household bills. The Resolution Foundation reported in August, having done a MORI poll, that 48 per cent of people on low to middle incomes have no cash remaining at the end of the month after meeting their expenses. This month, a Lloyds Bank survey of their current account holders reports that one in 10 Britons do not have enough money to meet their monthly outgoings, such is the parlous state of their personal finances. That report’s other main finding was that incomes continued to fall in real terms in September, being on average 1 per cent down on last year, and that spending on essential items such as food and petrol has risen by 3.5 per cent compared to last year.

What are we to make of all this? In the immediate future, we know from our clients that people are borrowing less and, where they can, repaying their debts. That is a good thing, even though it may impact adversely on GDP. Yet as incomes are declining in real terms and saving is still not yet a habit, more and more people who come to us are unable to pay their debts. I will share some of my medium-term worries with your Lordships’ House. First, on the timing of the return to what we might call normal mortgage interest rates, we kid ourselves if we think that this extended period of ultra-low interest rates will last indefinitely. When we get back to real mortgage interest rates, which will be of the order of 5 per cent, it will cause significant damage to the budgets of millions of home owners.

A second concern is the impact that student debt will have on people who go to university after 2012. We had a recent Written Answer in this House which estimated the debt burden for new graduates after 2015 at between £40,000 and £50,000. How will they ever earn enough to repay that, and how will they get other borrowings in place to buy a house or start a family without recourse to the bank of Dad and Mum? This will certainly discriminate against those from deprived backgrounds and do nothing for social inclusion. My third and major worry in this area is that unless the bottom two deciles of income distribution get a real increase in their basic earnings—say of the order of 10 per cent—I do not see how they are ever going to square their family budgets, let alone repay the debts they have accrued. Where is that growth in real incomes going to come from?

The UK economy faces hard times. Debt is increasingly defining the experiences of what I might call the haves and the have-nots. The haves are households with no or low debts, savings and assets to provide a cushion in case of hard times, as well as sufficient income so that they do not have to rely on credit to make ends meet.

The have-nots are the millions of households who are burdened by debt, with little or no savings to protect them, struggling to make ends meet every month and increasingly vulnerable to predatory lending practices. I call on the Government to protect consumers from the aggressive practices of predatory lenders and commercial debt management companies who exacerbate, rather than alleviate, financial problems. This needs to be done through a combination of tough, properly enforced consumer protection and ensuring that financially vulnerable households have access to independent, objective and free debt advice.

In the future the legacy of personal debt will be one of the single biggest influences on the quality of household finances and will have an impact on the financial services industry. UK household finances have become unbalanced. Converting the UK from a debt culture to a savings culture, so as to promote self-reliance, is a major public policy challenge. This may be comparatively easy for the haves; however, if the financially vulnerable have-nots are to be supported on the road to self-reliance and freedom from debt burdens, they will need good, independent, free debt advice and financial work-outs from trusted intermediaries. However, this legacy of debt has wider implications for UK households and the financial services industry. UK households may be entering a new economic paradigm: a sustained period of high public debt, low economic growth, low interest rates and higher inflation with record levels of personal debt. This will affect household disposable incomes, consumer behaviour and attitudes to risk. This in turn will impact on the revenues and sustainability of business models in the financial services industry.