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.”
By Duncan Weldon | Published: February 20, 2013
Unemployment once again fell whilst employment rose but youth unemployment nudged up and the squeeze on real wages continued.
But looking at the longer term trend a worrying picture is starting to emerge of a UK economy which may be shifting towards a lower wage, lower productivity state.
The pattern over the course of much of 2012 is now familiar – employment growth coupled with real terms falls in earnings.
Average weekly earnings rose at an annual rate of 1.4% in December, less than half the rate of RPI inflation which was running at 3.1%. In real terms, average earnings fell by 1.7%.Real wages have now been falling in every month for the past three years.Over 2012 the rate of inflation has fallen from 4.8% to 3.1%m, which have provided a large boost to household finances, but as earnings growth slowed from 2.1% to 1.4% much of the slowing of inflation failed to filter through into improved real wages.
Indeed, since September the pace of real wage falls has been picking up again.
We known that in the 4th quarter of 2012 whilst output fell by 0.3% as GDP contracted, the total number of hours worked rose by 0.2%, over 2012 as a whole the number of hours worked rose by 2.6% whilst output was flat.In other words, productivity is falling. This is the so-called ‘conundrum’ of rising employment coupled with weak output growth, the UK’s ‘productivity paradox’.
The medium term picture of the UK economy over the course of 2012 is one of falling real wages, employment growth and falling productivity.
Whilst any increase in employment is obviously to be welcomed and it is far better for people to be in work than out of it, we may be seeing the start of a very worrying shift in the UK economy towards a lower wage, lower productivity model.
As the most recent TUC Economic Report, and the TUC’s Budget Submission this week, both warned there is evidence that hiring is being concentrated in lower productivity sectors. In a 2012 paper the economists Bill Martin and Robert Rawthorn argued that:
“The economy recovered in 2010 but disappointed in 2011. In those two years, around 550 thousand jobs were created in relatively low-productivity, low-paid largely private service activities that had less incentive than other activities to hoard labour during the preceding contraction and more to gain from the availability of cheaper labour. This expansion of jobs is another feature of a demand-constrained, lower wage economy.”
The combination of weak productivity, employment growth and falling real wages suggests that this trend continued into 2012. This is deeply concerning for the future – a lower wage, lower productivity economy means lower living standards in the medium to longer term.
By failing to expand demand now the government is further pushing the UK down this path.
In effect tight fiscal policy now means not only a weaker economy in the short term but potentially a weaker economy in the future. Long-term damage is being done to the UK’s growth prospects and living standards.
The city has a tradition of philanthropy dating back to the Rowntrees – and the council is determined that its workers will not bear the brunt of austerity
At the turn of the 20th century, the chocolatier and philanthropist Joseph Rowntree bought 150 acres of land north of York and created New Earswick, a low-rent garden village for his employees and others decanted from the rank slums of the city. A Quaker, he believed in investing in the wellbeing of his workers.
Today, New Earswick remains lavishly green and pleasant and is also home to a network of retirement bungalows and a care home in which Dawn Watson, 51, has worked as a general care assistant for 14 years. In January, her wage packet saw a dramatic and permanent increase of £200 a month, earned for the same job, and the same hours. The reason is that her employer, the Joseph Rowntree Foundation (JRF), now pays its staff the voluntary living wage of £7.45 an hour (£8.55 in London). “It helps with the cost of everyday life,” Watson says. “But it also makes me feel valued, better in myself – if better is the right word.”
This Tuesday marks the city of York’s 100th day as Britain’s first living wage city. The challenges it faces are immense. “Who is against a decent wage?” says Ian Gillies, leader of the Tory group on the Labour-held city council. “But it’s an issue of affordability. If we have to borrow to pay it, it becomes a political whim with dubious consequences.”
York, with a population 205,000, has significant areas of deprivation among large islands of affluence and a real housing crisis, with supply meeting only 8% of need. More than 250 jobs from a council staff of 7,500 will go over the next two years. By the end of 2015, the city will have cut 25% of its total budget – a sum amounting to millions. At the same time, £338,000 has been set aside to ensure that from April, 573 council employees will have salaries increased to the living wage. How can that make sense? Or is the living wage a compass by which progressive local authorities might steer a fairer way through austerity?
In 2011, the independent York Fairness Commission, sponsored by John Sentamu, the archbishop of York, was established. Commissioners came from JRF and Aviva, an important local employer, and included Kate Pickett and Richard Wilkinson of York University, who co-wrote a book called The Spirit Level. Its thesis is that a range of social ills, including illiteracy, violence, mental and physical illness, unemployment and low civic engagement – all costly to the public purse – are affected not by how wealthy society, is but by how unequal it is. Big gaps between rich and poor are bad for everyone, even the well-off. “Inequality is so much more widespread than many people realise,” Pickett says. “Once they do know, the first instinct is to say: ‘That’s not right’.”
According to the charity One Society, the pay gap between top and bottom earners is, on average, 15 to one in local authorities and a huge 262 to 1 in FTSE 100 companies. So far, one in eight local authorities have reduced the pay of chief executives and one in five are committed to paying employees the living wage.
In addition to the living wage, the Fairness Commission also recommended an investment in preventive action against inequality and a living wage clause in council contracts and procurements. All were adopted by the council. “Social justice is in the city’s DNA,” says Kersten England, the chief executive of the council. “We want to put money into the pockets of the poorest earned from a fair day’s pay. Money means status and has a psychological impact. York is a growth city but we want to take everyone on the journey, not just the privileged.”
“The living wage is necessary but not sufficient in itself,” Julia Unwin, JRF’s chief executive, points out. “It has to be part of a much bigger picture.” The Citizens Advice bureau in Blossom Street, York, deals with more than 60 increasingly desperate inquiries a day. Here, Unwin’s point is made manifest. “Two years ago, we always had a solution. It might not have been brilliant, but we had one,” says Clare Guinan of the CAB. “Now, we don’t.” For the working poor, income no longer matches expenditure while job insecurity is rampant. “You are no longer employed or unemployed for a period,” Guinan says. “It depends on the day.”
George Vickers, a manager at the bureau, says York has seen a 45% increase in involuntary part-time work in the past year. It is not uncommon for a person to work full time but be given a 20-hour-a-week contract. The reduction or withdrawal of benefits by Jobcentre Plus is widespread: in one case a man was given a job, beginning a fortnight later, and was sanctioned for not seeking work in the intervening 14 days. “That’s demeaning. The squeeze is on at such a fundamental level,” says Guinan.
The squeeze is also spreading. Julia Histon is the chief executive of York Housing Association, which pays the living wage and rents to those on the lowest incomes. She says: “People massively underclaim on benefits. We help them with budget planning and ways to avoid homelessness. But what’s now happening is that young professionals are also being squeezed out of the private rental market and they aren’t eligible for the housing we offer.”
Statistics reveal the scale of the crisis. The average income in the city is £20,420; the average house price £201,000. Nearly half of households have an income of less than £24,000 year but an annual income of £42,000 is required to rent a three-bedroom home. The waiting list to rent social housing is 2,690 names long and growing. “We are building 40 units a year but if you think of the scale of the problem, that’s tiny,” Histon says.
The council plans 5,000 affordable houses in four years. “Otherwise, the kids of our families can’t afford to live in their own city,” England says. “That’s also the challenge of income inequality.”
Martyn Weller is co-owner of a York business that organises adventure activities such as kayaking and caving. York has 800 small businesses employing, on average, a staff of seven. Weller’s has a turnover of £175,000 a year. Nationally, two-thirds of small businesses pay the living wage but it isn’t feasible for all. Weller pays his staff £6.50 an hour and himself £675 a month. The Ministry of Defence last year contracted his company at £255 a session, four sessions a week. Now, it’s two sessions, at £135 each. “That’s happening everywhere.”
According to KPMG, one in five of the national workforce are paid less than the living wage. In York, 103 of JRF staff have received a 20% pay increase while those at the top end have had no increase. JRF has commissioned a number of studies to assess the impact, but one bonus is already apparent. Previously, there was a 20-30% turnover of care staff, and it costs £600 to recruit and train each individual. “Turnover is much lower,” JRF’s Shaun Rafferty says. “The living wage can be a good deal for employers too.”
Six mornings a week, at Carecent, behind the giant Central Methodist church in York, volunteers provide free breakfasts, food, help and clothes to a large band of the homeless, many suffering mental ill health, all showing the wounds of permanent exile from society. Up to 60 come each morning. Donations from the public are plentiful. “York is that kind of place,” says Nicky Gladstone, project manager. Here, cuts and the living wage have little relevance. If you take nothing from nothing, you have nothing.”
“York looks pretty but it is very typical of a lot of England,” Unwin says. “Low income, low pay. What we have is strong leadership and a shared vision of what a sense of fairness might achieve. If it can be done here, it can be done anywhere.”