Is UK debt on the road to recovery?

3.2 million UK households have problem debt, according to research undertaken by the Trade Union Congress (TUC) and public service union, Unison. 

If a household or individual has to spend more than a quarter of their gross monthly income on unsecured debt repayments, then this is considered to be problem debt. This includes repayments such as credit cards, personal and payday loans, overdrafts and store cards. The report by TUC and Unison, entitled Britain in Red, states: “Very little has been done [since the 2008 recession] to directly assist British households to either pay down or restructure their debts.” 

The number of indebted households has significantly increased from 2.5 million or one in ten households in 2012, to 3.2 million or one in eight households in 2014. 1.6 million households are spending as much as 40 per cent of their gross monthly income on debt repayments, which does not include housing debts such as mortgage or rent payments. 

A key concern highlighted within the report is the rising house prices which will increase mortgage repayments, therefore potentially causing an increase in the number of indebted households. This could have further implications if interest rates are to be raised by the Bank of England. According to the research: “An increase in the household debt burden is likely to limit domestic demand, act as a drag on Britain’s economic growth, and increase the vulnerability of the economy to external shocks.”

The number of 18-34 year olds in debt has risen immensely, from two per cent in 2012 to ten per cent in 2014. The average unsecured debt for 18-24 year olds has nearly doubled in the last three years, from just under £7,000 to £13,190. The report suggests that the main factor for this dramatic increase is a buildup of debt from credit cards, loans, overdrafts and store cards, and that fixed interest and repayment rates of student loans mean they are not a large contributor to monthly debt. With the rise of maximum student tuition fees from £3,290 to £9,000 in 2012, the consequence is not so much an increase in debt paid each month, but the decreasing chances of the younger generation saving the capital necessary to become a home-owner. 

Low income families are among the hardest hit by rising debt due to record numbers of people affected by zero hours and casual working contracts, low paid self employment, underemployment and severe cuts to state support for working age households. With economic growth failing to reduce the burden of debt repayments, many households are being forced to borrow more than they can afford, and are therefore finding themselves increasingly indebted by continuous repayments. 

The report by TUC and Unison reveals that the household debt to gross household disposable income ratio is expected to rise by 26 percentage points to 170 per cent by 2020. This is slightly higher than the debt to income ratio was just ahead of the economic crash in 2007, which resulted in the 2008 recession. With consumer debt identified as one of the causes of the financial crisis, and a key restriction for successful economic recovery in the years following, the report raises the concern of the damage of British households’ current debt problems. 

The conclusion of the report, Britain in Red, is that not enough focus is being given to the ongoing household debt issues, and that this could affect economic recovery. It warns that this problem could escalate if interest rates are increased by the Bank of England, which is predicted to happen in 2016.