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The Nation’s Debt | A Ticking Timebomb

by The Bankruptcy Service

Posted on November 10, 2014 at 11:00 AM

The UK's Debt

The United Kingdom is a country weighed down by debt. The country itself is £1.45 trillion in debt, the government borrowing £12 billion in September 2014 alone.

The UK will soon post a sixth successive year of triple-digit, billion-pound deficits – whilst the economy may be growing again, the numbers still get worse and worse. It’s sobering to think that the Government spends as much on debt interest annually as on defence. At current rates, those interest payments will soon be bigger than the total spend on education. But it’s not just our government that is entrenched in debt, constantly spending more than it earns. Debt, a word that triggered feelings of shame in Victorian times, is now considered as natural as sunlight or a field full of corn. Bankruptcies and insolvencies may have shown a downward trend in recent years, but for how long?

Debt in itself is not evil, so it is only right that in the modern world we are rather more enlightened about dealing with it, and look more kindly on those that suffer from its effects. The government is hardly setting a good example anyway.

Borrowing is accepted as the norm, only the high-interest, short-term payday loan industry treated with distrust in the modern climate, and their wings have recently been severely clipped so their influence is waning as we speak. Personal debt is getting worse though, having dipped during the recession. Prior to the financial crash it averaged 170% of disposable income.

The strange thing is that the government wants personal debt, via unsecured borrowing, to get worse – in fact, it’s banking on it to help boost the economy. In George Osborne’s autumn statement, dominated by a change in the stamp duty regulations, there was talk of how to get the national deficit down, something the government has been promising to end for many years. The latest plan relies on us all spending big, and spending big with borrowed cash, as reported by the Independent newspaper[1] last week. The reason is simple – economies are sustained by spending. During the period of austerity from which we are partially pulling out of as a nation, the government kept spending to prop things up. Now they are stopping, so need the public to take over the reins, along with businesses and exports.

According to the latest report[2] from the Office of Budget Responsibility (OBR), the public is forecast to add to its mountain of unsecured lending, which includes credit card debt, overdrafts and the like, by a massive £360 billion over the next five years. The government is depending on it, because without this hike in personal debt, then growth is predicted to collapse, leading to another likely increase in the government’s deficit levels. This rise in debt is £90 billion more than the OBR predicted a mere nine months ago. With a growing economy, it is clearly expected that people will add to debts in increasing amounts. The financial crash tempered borrowing, with current levels of (unsecured) debt as a percentage of incomes almost 10% lower than in 2007, at 35% compared to 45%. The OBR projection sees this level rising to 55% by 2020.

Thus, even though the government preaches constantly about reducing debt, both at government and personal levels, do not expect any real action to help people do this – it appears it isn’t in their interest for us all to spend only the money we have already earned. It is a worrying trend. And as mentioned, the better the economy, the more we tend to borrow. With a strong housing market, the predictions may actually be underestimating the rise in personal credit.

A Money Charity survey[3] has provided stark figures for the extent of the problem. Their research showed that £1,185 is the average amount paid in interest on debt per person annually, £2,214 is the average household credit card debt, £17.8bn was the value of gross mortgage lending in September 2014, the average total debt per household – including mortgages – was £55,223 in September. Per adult in the UK that’s an average debt of £28,884 in September – around 116% of average earnings. 1,893 Consumer County Court Judgements (CCJs) are issued every day, with an average value of £2,278. Meanwhile, Citizens Advice Bureaux in England and Wales dealt with 6,405 new debt problems every working day during the year ending June 2014. Britons already own 70 per cent of Europe's credit cards and are carrying £57 billion of credit card debt – you have to wonder where the government expects all this extra spending to come from. Even a year ago, the BBC, amongst others, was reporting the increasing debt problem[4].

The OBR report also predicts a massive increase in household mortgage borrowing over the coming years, with it set to rise by £580bn between now and 2020. As quoted in the Independent news story, this means combined household debt will rise to £2.6 trn by the end of the decade, up from the current level of £1.7 trn. Incomes are predicted to rise too, but only by £366bn, leaving a £700bn hole, and raising the average household debt to household income debt ratio to 184% from the current 169%. Besides the obvious reasons, such debt levels causes additional worries because they can tend to lead to sudden cutbacks in spending by the public as they attempt to economise and cut debts. We can also expect more savage spending cuts by the government in the foreseeable future, whichever government we get.

A recent study by financial research firm Verum[5] further illustrates the mounting problem in this country. Their study showed that UK household debt has more than quadrupled since 1990, despite low interest rates. Their study goes against what the government wants to happen, by expressing concern that rising personal debt is bad for the economy, not good, due to the risk it poses to a recovery, especially as interest rates are expected to rise next year. While in the past those aged 35 to 44 have been the main drivers of economic growth, they are now the age group with the highest level of debt, burdened by mortgages and struggling to pay them back amid low wage growth, the report added.

Verum estimates that every 0.5 per cent increase in interest rates would cut £4.8billion from household spending and said a 2.5 per cent rise could drag the UK back into recession. Robert Macnab, Verum’s director of research said: “If interest rates were to hit 3 per cent, historically an abnormally low level, it could trigger a prolonged and socially damaging recession with collapsing house prices, rising property repossessions and a further dramatic increase in insolvencies.”

Currently they estimate that 5.6% of household income goes towards paying debt interest payments. They predict that if it were to rise to 12%, it could trigger another recession, as families cut back on purchases. What’s more, they also found there were three times as many customer insolvencies or bankruptcies in 2013 compared to the period of the last interest-rate recession in 1990, despite far lower interest rates. As mentioned earlier, the option of bankruptcy appears to be less common according to statistics, but this may be partly due to the greater number of alternatives available today. With personal debt on the irse year-on-year, bankruptcy will become a commmon sense option for many in the future.

Speculation has been growing recently that the Bank of England would raise interest rates in 2014, but it seems it will hold off such a move for now, due to earnings failing to grow as expected. The Bank has however stated that it thinks most households could cope with a rise in rates[6]. Just 4% of mortgage holders would need to take action if interest rates rose to 2.5% from their current 0.5% historic low, according to the Bank's annual survey of household finances - the calculation assumes a 10% rise in household incomes though. Without such a rise, 37% of mortgagers would need to act in response to a rise.

Despite this, the Bank said that the number of people falling into arrears on their mortgage should be fewer than in 2007.

This is not a phenomena unique to Britain, but instead quite a common European problem. In Sweden, gross household debt to income is 170 per cent, in Norway it’s 180 per cent, in Ireland 198 per cent, in the Netherlands 250 per cent and in Denmark, a jaw-dropping 265 per cent. By these standards, Britain is almost a prude in its spending. Often the common denominator is rising house prices, and thus rising mortgage debts, plus them being collateral for loans for other expenditure. We are spending more than ever, despite not having any more money than before. Nick Herbert, a former Tory minister, said the state should be scaled back even if there was no need to clear the deficit. “You can’t as a state go on living beyond your means.”
You have to wonder where all this is leading. When debt is encouraged, inevitably some will struggle to cope, and it is understandable that many turn to bankruptcy or other alternatives to address the problem of unbearable debts.

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