Private indebtedness is widely accepted as a major underlying cause of the 2008 economic crisis and the ensuing recession, with high-risk loans and sub-prime mortgages disastrously destabilising major financial institutions. Total unsecured debt for UK households (which includes credit cards, overdrafts, payday loans and student loans but not mortgages) rose by £48 billion between 2012 and 2015 to reach £353 billion, almost matching the levels of unsecured debt prior to the recession. The same was true of consumer credit (which does not include student loans), which fell during the economic crisis but had risen to near pre-recession levels by the end of 2015. While there has been a lot of emphasis since 2008 on the household elements of private debt, this has tended to mostly focus on mortgage debt, rather than consumer credit.
This 2020 ‘Britain in Red’ report from the Centre for Responsible Credit for The Trades Union Congress uses secondary data to investigate in more detail what has happened to households’ use of consumer credit since the 2008 recession.
While specific methodological details are included in the preliminary report (2015), this report uses two types of data:
- Aggregate level data from the Office for Budget Responsibility (OBR) which is taken from the National Accounts. The authors argue that the OBR measures of debt to income fail to fully reflect the financial pressures on financial budgets, and suggest alternative measures of household debt burden.
- Household-level data from the Bank of England’s NMG survey is also used to identify which households have the greatest financial difficulties, with a view to informing the design and implementation of policies.
The findings from the report are based on two measures:
- Financial vulnerability: financially vulnerable households are defined as those that have debts that are worth 60% or more of their income.
- Over indebtedness: Households in problem debt spend more than 25% of their monthly income paying the interest on their debts (credit cards, loans, overdrafts, arrears).
- While there was a general improvement in the number of households classed as financially vulnerable compared to the earlier 2015 report (which was attributed to wage growth), those in the lowest income decile were considerably more vulnerable.
- In 2015 the unsecured debt to income ratio of the lowest income households was 22%, seven times as high as those in the highest income group.
- There were also some improvements in debt servicing measures (therefore over indebtedness) since the 2015 report, though measures were still much higher than in 2012.
- Overall, 11% of households holding any form of unsecured debt were estimated as overindebted in 2015, more than double compared to the 5% in 2012.
- Of the households that were classed as overindebted, half were paying out more than 40% of their income to their unsecured creditors (classed as ‘extremely overindebted’).
- In total over three million households (or over 7.5 million people) were overindebted, an increase of 28% since 2012. This equates to one in eight UK households being overindebted, with 1.6 million of these households in extreme debt.
- Of those households who earned £30,000 or less, 16% were overindebted in 2016, which was the same as in 2015 and an increase of 9% from 2012.
- The share of extremely overindebted low-income households rose to 9% in 2016; three times as many as in 2012.
- In 2015 9% of low-income households in employment were classed as extremely overindebted, almost doubling in a year from 2014 (5%).
The report includes three recommendations for the future monitoring of household debt burden and actions to facilitate reducing this burden:
Improve the monitoring of household debt burden, adopting the measures of total interest payments introduced in the report.
Establish an official target to reduce the household debt burden from the 2016 level of 25%.
Implement effective measures to achieve the target, including ways to ensure overall annual interest charged on consumer credit is reduced.
The debt advice and insolvency systems should be reviewed, with the aim of a system that is cheap to access and provides sufficient protections ‘to enable a fresh start’.
Points to consider
Methodological strengths/weaknesses: While little information on the methodology is included, the analysis appears to be based on comprehensive research, using mainly descriptive statistics.
Generalisability/ transferability: This report is of significant interest to politicians, policymakers and other stakeholders who are interested in understanding the burden of household debt, and in particular the economic impact of consumer borrowing.
Relevance: o The findings are situated in a UK context, though some of the learnings may be transferrable to countries with similar financial regulatory environments.
o Due to the fat-moving nature of financial regulation, some of the findings and recommendations in this summary may now be outdated.