Unsecured debt hits new peak of £15,400 per household, TUC finds

Unions blame austerity and low wages as total unsecured borrowing, including student loans, hits £428bn

Ben Chapman
Monday 07 January 2019 18:45 GMT
Households each took on an average £886 extra unsecured debt in twelve months
Households each took on an average £886 extra unsecured debt in twelve months (Getty/iStock)

Unsecured debt has hit a new peak of £15,400 per household and now accounts for 30.4 per cent of income – more than it did before the financial crash.

Total unsecured debt, including student loans, rose to £428bn in the third quarter of 2018, a jump of £886 per household from a year earlier, according to analysis by the Trades Union Congress (TUC).

TUC general secretary Frances O’Grady warned that years of austerity and wage stagnation had pushed debt to “crisis level”.

According to Bank of England figures, which don’t include student loan debt, total outstanding consumer credit was £215.4bn at the end of November, a 7.1 per cent increase over the past year. Credit card debt was at £72.5bn, or £2,688 per household.

“The government is skating on thin ice by relying on household debt to drive growth,” Ms O’Grady said. “A strong economy needs people spending wages, not credit cards and loans.

“Our economy is not working for workers. They need stronger rights and bargaining powers. Trade unions should be allowed the freedom to enter every workplace to negotiate higher wages.”

Amit Kara, head of UK macroeconomic forecasting at the National Institute of Economic and Social Research, said student loan debt is a “different animal” from credit card debt, for example, because borrowers don’t pay money back unless they are earning over £21,000.

“This prevents the most extreme outcomes,” he said.

“In aggregate, consumer debt as a whole is below the level it was in 2008, although that is hardly a comfort and means there is still vulnerability.”

Mr Kara also pointed to concerns around the low level of saving by households. “If there is some kind of trigger or flare-up – most obviously a rise in interest rates or unemployment – that could have a negative effect on the economy.”

A sharp rise in interest rates could have a “material impact” on economic growth which, at 1.4 per cent, is already comparatively low, Mr Kara said.

On the positive side, he said the Bank of England’s stress tests demonstrate that lenders are in a better financial position than they were before the financial crisis, with more capital to act as a buffer in the event of a shock.

However, the central bank has much less room to manoeuvre than it did in 2008. Faced with a downturn the Bank of England’s Monetary Policy Committee (MPC) would typically lower interest rates, making debt cheaper and fuelling a recovery. But rates are already close to all-time lows.

On the other hand, if inflation were to rise the bank would typically raise interest rates to cool demand and rein in price increases.

Perhaps the most likely trigger for rising inflation in the near future is a potential fall in the value of the pound in the event of a no-deal Brexit.

While governor of the Bank of England Mark Carney has warned that rate rises could occur if the UK crashes out of the EU, the MPC would likely be reluctant to raise its benchmark too far or too fast for fear of damaging an already fragile economy at a time of upheaval.

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