Debt: An Intractable Problem of the British Economy

The UK is currently doing well. Inflation is at a record low and unemployment is also downj. However, the long-term prospects remain worrying. Much of the recovery is fuelled by rising debt and an expanding housing market (mainly in London and the South East) rather than rising productivity and export growth.

Between 2008 – 2014, the ration of household debt to income fell, but it is forecast to rise sharply this year and through until at least 2020. Furthermore, savings have fallen since 2012, whilst retail spending has risen. Disposable income is being spent rather than saved and this has a knock-on effect on investments and imports. In order to encourage saving, the Bank of England plans to raise interest rates next year. All this against something of a mini-boom in the tax market, encouraged by the government’s Help-to-Buy scheme, in which the taxpayer is a major stakeholder.

A rise in interest rates, though welcomed by savers (usually the older property-owning segment of the population), will squeeze young families and single people in particular, who make up the majority of the working population and who, over the past 5- 7 years, have lived in a climate of apparently easy money, available on the high street at exorbitant interest rates (e.g. Pay-Day Loans). Higher interest rates will raise costs to small businesses and high-tech firms which have re-capitalised since 2012. First-time buyers will see their monthly mortgage payments rise and their credit card debt increase.

The government’s response is cautious. It is planning to place legal restricions on irresponsible lending, but these measures are only likely to provide short-term help to those on the margins of society. It will also introduce a financial education programme aimed at school children as of September, but by its belated nature this will take a generation to change established patterns of behaviour. Patterns which are in any case grounded in the economic and social needs of the borrowers. Tighter regulation of lending institutions is also required; far more attention should be paid to a potential borrower’s asset holding. Looking at these, at jtheir ob security and employment prospects should be mandatory before loans are given. Economic activity usually produces winners and losers, and this is not good news for young householders or massively indebted students.

Strategic solutions to the problem of debt require radi8cal structural change in the UK. The areas of greatest cost rises (house prices0 are in the south east and London. What is needed is investment elsewhere, in cities such as Manchester, Liverpool and Birmingham, which would draw people away from the high living expenses of the capital and into areas of relatively low cost housing. The High Speed rail link to the North of England is a good start, and all this will take time–it is easy to state but extremely difficult to achieve in practice–but there must also be a light at the end of this tunnel.