Debt may loom as household finances deteriorate at record rate

An index measuring the financial wellbeing of households has seen its worst ever decline, suggesting many more consumers could be facing serious debt problems and may even need an IVA.

The Alliance Trust's UK Financial Reality Index fell in the third quarter from 79.6 to 56.7, taking the measurement of the state of household finance to its lowest level since late 2008, early in the recession.

It is made up of three elements – wealth, spending power and employment – all of which deteriorated, with net wealth being reduced by stock market falls, inflation squeezing incomes and the slowdown in economic output leading to growing joblessness.

Such developments may push more people into debt as their assets are eroded, bills become harder to pay and some face a sudden collapse of income.

Senior economic analyst at the Alliance Trust Research Centre Linsey Thomson said: "The record decline in our index in Q3 highlights just how tough conditions facing households are."

She added: "The combination of these factors suggests that consumer spending will slow further in the coming months," noting the survey has historically been effective in predicting near-future trends.

The issue of debt is likely to be a growing one for many if the squeeze on incomes continues, something noted in a speech on the economy at Liverpool University this week by general secretary of the Trades Union Congress Brendan Barber, who noted the Office for Budget Responsibility has projected the amount owned by individuals to grow to £2 trillion by 2015.

He described this as "an albatross around the neck of our economic future".

By James Francis