If Theresa May continues to break her own promise on personal debt, she could end up causing another recession

There is a known solution to this problem – it was even written in the Conservative manifesto. But for some reason, nobody seems to want to implement it

Vince Cable
Wednesday 18 October 2017 16:00
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There is a known solution to this personal debt crisis – and it's happening in Scotland. Why not elsewhere?
There is a known solution to this personal debt crisis – and it's happening in Scotland. Why not elsewhere?

One of the major warning signs of an impending financial crash over a decade ago was rising personal debt, much of it linked to mortgages in an inflating housing market. Despite falling in the wake of the financial crisis, household debt as a share of GDP remains high, and is rising fast. UK households are the second most indebted in the G7 group of advanced economies. The Office for Budget Responsibility predicts it reaching 153 per cent by 2022.

Weak growth and falling real wages mean living standards are only being maintained through personal borrowing, growing by 10 per cent a year. Recent Bank of England figures show unsecured debt (credit card spending and personal loans) growing at four times the rate of mortgage debt, while the household savings rate is at a historic low. Hence the recent news that total unsecured debt has surpassed £200bn, the amount it climbed to just before the financial crisis a decade ago.

High levels of personal debt increase the vulnerability of financial institutions to economic shocks, as the Governor of the Bank of England has warned, and when interest rates rise again, many individuals will struggle to cope. This debt can have a heavy human cost: physical and mental health problems, lost productivity and jobs, relationship breakdowns and housing issues – which quite apart from the misery, costs the state and wider society over £8bn a year.

According to the Children’s Society, children living in families with problem debt – and there are 2.4 million of them – are five times likelier to experience low wellbeing, and are at greater risk of developing mental health problems later in life. Forced to prioritise debt repayments, parents cut back on necessities such as clothing, heating and even food.

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The issue is rising up the agenda, with people across the political spectrum increasingly keen to work with the Liberal Democrats on this. Sensible Labour figures including Frank Field and Rachel Reeves have called for an independent public inquiry into unsustainable debt, while Nicky Morgan, chair of the Treasury Select Committee, is leading a country-wide investigation on the impact of debt.

I warned about the risks posed by unsustainable debt in the lead-up to the financial crisis, and am concerned that we have not changed course. With 8.3 million UK citizens suffering debt problems, this is too urgent to wait for a longwinded inquiry or a hypothetical Labour government.

There is in fact a readymade solution to this crisis. In their own manifesto, Conservative ministers called for a “Breathing Space” scheme so “someone in serious problem debt may apply for legal protection from further interest, charges and enforcement action for a period of up to six weeks”. Debtors would have time to “seek advice and assistance” and – if eligible – sign up for a statutory repayment plan to help them “pay back their debts in a manageable way”.

The Conservative party has forgotten that promise since the election. Scotland already has a scheme of this kind, while charities – including The Children’s Society and StepChange – have called for one to be introduced in England and Wales. Creditors are technically able to grant debtors breathing space but this happens infrequently and the protection has no legal basis.

How would a nationwide breathing space scheme help? Granting the severely indebted temporary protection would let them seek advice on resolving their debts, give them time to recover from temporary shocks – over 60 per cent fall into debt because of an unexpected life event – and where necessary allow them to sign up for a repayment plan. There needs to be debt advice, to ensure the scheme is not abused, and determining whether debtors only need brief respite or a longer period of protection.

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In Scotland those in trouble can secure a six-week moratorium on debt payments and then receive continued protection under a debt-repayment plan. Since its launch the number of people accessing this Debt Arrangement Scheme has increased from 5 per cent to almost 20 per cent, with people reporting an improved ability to pay debts, stabilised finances, and reduced stress.

With our economy slowing, and both wages and household savings falling, the overall level of household debt along with the number of people struggling to pay debts is likely to increase. A major economic shock, like exiting the European Union without a deal, could push many indebted families over the edge.

Reducing the economy’s dependence on personal debt to stimulate consumption is a long-term challenge but protecting people from the worst consequences of debt is an urgent priority. That is why the Government must act now to fulfil its manifesto commitment, and introduce a Breathing Space scheme for the millions of families suffocating under a growing burden of increasing bills and falling wages. It is time the Conservatives paid their debt to the electorate by fulfilling this promise.

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