Soaring UK personal debt wreaking havoc with mental health, report warns

Centre for Social Justice says poorer people ‘bearing brunt of storm’ as debt hits £1.4tn – almost as high as economic output
A pile of credit cards

Credit card debt has trebled to £55.6bn since 1998 while overall personal debt including mortgages has reached £1.4tn. Photograph: Alan Schein Photography

Personal debt in Britain has reached £1.4tn – almost the same amount as Britain’s national economic output – according to a report that warns debt is wreaking havoc on people’s mental health and wellbeing.

Poorer people are “bearing the brunt of a storm” during which average household debt has risen to £54,000 – nearly double what it was a decade ago, the report by the Centre for Social Justice thinktank warns.

The report, entitled Maxed Out, found that almost half of households in the lowest income decile spent more than a quarter of their income on debt repayments in 2011. More than 5,000 people are being made homeless every year as a result of mortgage or rent debts.

Christian Guy, director of the thinktank established in opposition by the work and pensions secretary, Iain Duncan Smith, said: “Problem debt can have a corrosive impact on people and families. Our report shows how it can wreak havoc on mental health, relationships and wellbeing. Across the UK people are up until the early hours worrying about their finances and bills.”

The report, written by the former Labour work and pensions minister Chris Pond, found that:

• Personal debt in the UK, including mortgage lending, stands at £1.4tn – an average of £54,000 per household compared with £29,000 a decade ago.

• Consumer debt had trebled since 1993 and now stands at £158bn;

• More than 8m households have no savings, including half of low-income households;

• Outstanding debt on credit cards has almost trebled since 1998 to reach £55.6bn;

• There were 300,000 arrears on mortgage in 2012 – with 34,000 homes repossessed. This is a reduction of 30% from the peak of the recession but a 60% overall increase since 2006.

Pond said: “With falling real incomes and increasing costs of basic essentials, many – especially the most vulnerable – are sliding further into problem debt. The costs to those affected, in stress and mental disorders, relationship breakdown and hardship is immense. But so too is the cost to the nation, measured in lost employment and productivity and in an increased burden on public services.”

The report found that the decision of mainstream banks to refuse credit to the less well off has led to a dramatic increase in the demand for short-term credit – from payday lenders, pawnbrokers and doorstop lenders – which is now worth £4.8bn a year. More than 1.4 million people have no access to a bank account and “are effectively excluded from the entire financial sector”. This contributes to the “poverty premium”, a £1,280 annual surcharge on everyday goods and services faced by low-income households.

Payday lenders have increased their business from £900m in 2008-09 to more than £2bn – accounting for around 8m loans – in 2011-12. The number of people resorting to loan sharks has increased to 310,000 people.

The report says: “For the most financially excluded, there is often no option but to turn to illegal moneylenders. It is estimated that over 310,000 people borrow money from these criminals each year. Illegal moneylenders extort money from their victims, often arbitrarily raising interest rates, demanding payments or charging penalties. Their use of violence and intimidation terrorises people and communities, enforcing a ‘veil of silence’ that allows them to escape detection. This is an inexcusable crime in modern Britain.

Many of the side effects of problem debt can also work to drive people further into debt, creating a vicious cycle. While it is often hard to prove causation, there is a clear relationship between the following and problem debt: unemployment, family breakdown, addiction, and poor mental health. Similarly, many of these factors are interrelated, meaning problem debt can have diverse causes, requiring multidimensional support in order to fully resolve the underlying problems.”

How a bank like Barclays makes us pay

Comment is free || Tony Greenham

Barclays avoided nationalisation during the crisis, but like other banks it profits from hidden subsidies

When Barclays turned to Qatar, Abu Dhabi and China in 2008 to shore up its balance sheet, rather than the UK government, did it have half a mind on future results announcements and bonus rounds such as the one we’ve just had? It would have been easy to guess that generous bonuses at taxpayer-owned banks would be controversial. Perhaps chief executive Bob Diamond thought it had avoided this potential bear trap by looking east for new capital instead of to Westminster, and that is why he was unwilling, under prompting from the Treasury select committee, to offer his thanks to UK taxpayers.

He did concede that Barclays benefited from the system as a whole being bailed out with taxpayer support. But is there more to the story than this? What if Barclays’ profits are propped up in other ways by taxpayers and swollen by lack of real competition?

Banks make too much money. Of course banks need earn a reasonable return, but we at Nef (the New Economics Foundation) have set out several ways in which banks profit excessively at the expense of taxpayers, customers, investors and corporate clients. Not only is this bad news for the broader economy, but it also calls into question whether the extraordinarily high levels of “performance-related” pay in the banking industry are quite so performance related.

The free-market theory is that excess profits are competed away, yet since the great neoliberal experiment of laissez-faire banking began in the 1970s,banks’ profitability has more than doubled and has outstripped non-financial sectors. Why?

To start with, being “too big to fail” is profitable. Based on calculations by Andrew Haldane, the executive director of financial stability at the Bank of England, we estimate the value of this subsidy to UK banks to be around £30bn a year. The subsidy arises because banks, effectively guaranteed by the government, are able to access much cheaper wholesale funds than would otherwise be the case.

But this is far from the end of the matter. We also identified windfall profits to banks from the additional trading in gilts required by the Bank of England’s programme of quantitative easing. This is ironic to say the least, as QE was brought in to revive the economy after a banking crash.

Customers are proving a good source of profits, too. The interest spread – the difference between the interest rate that banks pay for funds and how much they charge us – has widened dramatically since 2008. Although arguably too narrow before the crash, this suggests that the burden of rebuilding banks’ balance sheets is falling disproportionately on customers instead of shareholders, executives and bondholders.

Institutional investors and corporate customers are also getting a raw deal from investment banks. In the case of rights issues we identify a near trebling of investment banking fees since 2000, having been at a steady level for decades. This has reaped an additional £1bn in fees just through a rise in commission rates.

The British Bankers’ Association likes to assert that banks create wealth. This is stretching the meaning of the phrase to breaking point. Banks are intermediaries between wealth creators and investors, and the higher their cut the bigger the drag on wealth creation in the real economy. This is far from underplaying the importance of banks; theirs is a vital role for economic health. But as with all other vital support services (including public services), we need them to offer high levels of customer service at the lowest possible cost, not the other way round. If these hidden subsidies and causes of excess profits were eliminated, not only might we find the UK more prosperous, but we would also be likely to find that the source of the lavish and contentious bonus culture suddenly dries up. Not so much tough on bonuses, as tough on the causes of bonuses.