Empirical research in the field of subjective wellbeing has seen substantial growth over the last two decades and policymakers are increasingly realising the importance of capturing wellbeing impacts holistically in appraisal and evaluation. Much of the existing wellbeing literature seeks to estimate the impact that specific personal characteristics or circumstances – such as ill health – have on wellbeing, while other work has sought to define the link between wellbeing and financial resources. Of the latter studies, much of the attention has been devoted to understanding the role of income in a person’s wellbeing. Prior to this study, evidence on the impacts of debt (and arrears) on individuals’ wellbeing has been emerging but is still insufficient for consensus to be reached. This study aims to find clear evidence on this topic.
This report estimates and monetises the impact of debt on subjective wellbeing for potential use in cost-benefit analysis for Financial Conduct Authority (FCA) market interventions. The study comprises a review of existing literature (mostly from non-UK developed countries) as well as an analysis of data. The data comes from the Wealth and Assets Survey (WAS), a large-sample longitudinal dataset representative of Great Britain. The data used is from the four most recent waves of the survey, covering the period from 2010 to 2018. The sample size for analysis is 96,296.
The research questions are as follows:
- Does total debt influence wellbeing? If so, to what extent?
- Are wellbeing impacts dependent upon the cost of the credit product held?
- What is the effect on wellbeing of being in arrears with debt payments?
- Is the effect of arrear-debt different to the effect of non-arrear-debt?
- Do past levels of indebtedness continue to affect present wellbeing?
- Is the burden of indebtedness felt more strongly among vulnerable groups?
Arrears are defined as the amount owed on 2 or more consecutive missed and overdue repayments at the time of responding to the survey and the dependent variable for analysis is ‘life satisfaction’, one of the ONS4 standard measures, from the Office of National Statistics, widely used in wellbeing research. The study uses the Three Stage Wellbeing Valuation method to monetise econometric estimates for use in cost-benefit analysis. This method is consistent with HM Treasury guidelines and comprises the following stages:
- Derivation of a causal estimate of the impact of income on life satisfaction.
- Estimation of a multivariate regression, controlling for the key determinants of subjective wellbeing to derive the impact of debt and debt-related factors on life satisfaction.
- Calculation of the compensating surplus - the amount of money that leaves an individual at their initial level of wellbeing following a change in debt.
The study was conducted by Simetrica-Jacobs, a commercial research consultancy specialising in social impact measurement, policy evaluation and wellbeing analysis. It appears that the study was commissioned by the FCA, although that isn’t explicitly stated.
Arrear debt: The study shows that there is clear evidence of a negative relationship between arrear debt and subjective wellbeing, of such a magnitude that it positions it among some of the most destabilising events, in terms of wellbeing impacts, that individuals may experience.
High-cost products: The study also finds that high-cost debt products are also significantly and negatively associated with wellbeing. This relationship is mostly driven by the negative impact of current account overdrafts on wellbeing.
Vulnerable individuals: There is compelling evidence that indebtedness affects vulnerable individuals most severely. Unemployment exacerbates the impact of being in arrears on wellbeing, and the impact of high-cost debt is larger for inactive individuals.
Poorer households: Across most types of debt, the experience of holding debt is worse for poorer households than for richer households.
Aggregate debt: The impact on wellbeing of aggregate debt, as well as that of certain aggregations of debt such as standard cost debt and its constituent products, is less clear.
Previous debt: There is limited evidence that debt from previous time periods continues to affect present levels of wellbeing, and this impact is generally smaller than that of current period debt. In most cases these estimates are not significant at conventional statistical significance levels.
Conclusion: The authors conclude that policy interventions that alter the arrear status of individuals may wish to use the findings to account for the resulting wellbeing impacts in cost-benefit analysis, as it could provide a powerful means to aid the assessment of such interventions.
Points to consider
Methodological strengths/weaknesses: The authors use fixed-effects linear regression for their econometric model, which enables some level of control against unobservable variables such as macro trends or personality traits which may be correlated with both debt and subjective wellbeing.
- The sample may include individuals in the same household who are not financially integrated. However this is only likely to affect a small proportion of the sample.
- There is no way of controlling for what the borrowed resources allow an individual to do or buy – which may have a positive impact on wellbeing. For example, if a loan finances an extension to the house, is the increased value of the house factored into the survey response? This level of detail is too cumbersome for any survey to cover.
- The authors argue that there are some risks relating to the issue of causality – could a decrease in wellbeing lead to taking on more debt? However they content that fewer causality concerns apply to estimates of arrear-debt than to other types of debt. Most credit products are associated with the availability of financial resources that can be spent in ways which may increase wellbeing but arrear-debt is not.
- The WAS applies a systematic approach to identify and amend outliers, so no further measures were taken by the authors.
Relevance: This study is topical and important, particularly in the light of difficult economic conditions following the coronavirus pandemic.
Generalisability/ transferability: The data analysis is conducted with data from Great Britain only. However it is likely that the links between debt and wellbeing will also exist in other developed nations.
- This study is most applicable to those with an interest in assessing the cost-benefit of debt interventions. However anyone involved in the issue of consumer debt will find much of interest in this study – policy makers, policy implementers, support agencies, government, regulators and educators.