During the course of the Labour leadership contest there has been much soul-searching within the party about what counts as a credible economic plan, leading to renewed debate about balancing the books, reducing the deficit and the national debt.
But while these issues remains of high importance, political leaders now also need to take rising personal debt more seriously – something that, silently, has reached crisis point.
Collectively we owe £172bn in unsecured credit (debt not taken out against an asset such as a house or a car), which equates to a terrifying £6,454 per UK household - and this is increasing month-on-month (as recently as January this year we owed £168bn).
Research by the consumer credit regulator, the Financial Conduct Authority, shows that around 9m are in serious debt in the UK, and a further 1.8m are in denial about their debts. Call centres for debt charities such as Stepchange and the National Debt Helpline are inundated with enquiries about debts spiralling out of control. The number of calls received about household debt by one charity rose 140 per cent between 2007 and 2014.
All the while Britain is going backwards in tackling poverty. Between 2004 and 2012 the incomes of those in the bottom quarter fell by around nine per cent, to levels no higher than in 2000.
Many Britons today have no savings. Over a quarter of us have absolutely nothing put away for a rainy day, and nearly 60 per cent have less than £1000 of savings.
A toxic mix of all these things have contributed to worrying levels of over-indebtedness in the UK.
This does just affect those households, but wider society. Where a large proportion of the population is paying down their debts, rather than investing in assets or spending on the local high streets, jobs and local growth are impacted.
There have been various instances in recent times where writing off debt seems like the only option. A government-backed scheme in Croatia earlier this year cancelled the debts of more than 60,000 Croatians who had their bank accounts frozen. A similar scheme is now being planned in Slovenia.
There is wisdom in this idea. It doesn’t take a genius to realise if we concentrated more on making consumers solvent rather than in dangerous levels of debt, the national economy, by consequence, will be healthier.
Giving people a fresh start is not so radical an idea anymore. Late last year the Financial Conduct Authority wrote off the debts of 330,000 people who had taken out loans with Wonga.com, the infamous payday lender, for whom it was decided loans were underwritten irresponsibly.
Similar moves were taken by the regulator with companies such as The Money Shop and Cash Genie.
The point is this: many predatory lenders in the market took advantage of low-income households, offering them loans they knew they couldn’t afford but were certain meant they would return as customers. Writing off debts, as the FCA moved to do, was punishment for what was effectively a mis-selling scandal among payday lenders.
But while debt cancellation where necessary is one option, and compensation for victims of financial irresponsibility vital, we more crucially need the design of financial products that are appropriate for low-income households – to avert the problem before it begins.
For a short while it was assumed credit unions could provide an alternative to predatory lending on the high street. Advocates as high-profile as the Archbishop of Canterbury spread the good word about these small, ethical financial institutions.
However it would be a generation or more before they were able to serve customers otherwise visiting payday lenders. A research paper I recently co-authored found that as credit unions grow and take on riskier customers, they increase the risk insolvency themselves, constrained by the losses made on loans to people who struggle or fail to pay back on time.
There’s no reason for pessimism, though. We are at an exciting juncture in finance where smaller firms, working digitally and via mobile applications, without the same level of overheads as traditional firms, are seeing the value in developing products for low-income households.
A report published earlier this year by the Centre for Social Justice, sponsored by JPMorgan Chase Foundation, highlighted the work of smaller companies like Moven, providing mobile apps that give financial wellbeing updates in real time, and Ffrees, a digital alternative finance provider.
Whatever the potential merits in the future, these firms already disrupt and challenge traditional models, and soon all financial providers will ignore them at their peril.
However slow politicians are at talking about it, the UK has a personal debt problem, pegged to many different factors. Simultaneously, financial services for low-income people become stuck between ill-suited and outright predatory (and, predictably, both). It’s high time we bridge the divide between social responsibility and financial innovation.Reuse content