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Debt crisis 'looms for two million'

Politicians are ignoring a looming crisis in household debt which could see two million families driven to "the edge of their means", a leading think tank has warned.

The Resolution Foundation said the number of British households spending more than half their disposable income on debt repayments could triple by 2018 if interest rates rise faster than predicted.

It urged banks to start checking on debtors now, in case they are caught off-guard when the cost of borrowing goes up.

Chief executive Gavin Kelly said: "There is huge uncertainty about income growth and interest rates but under almost any plausible scenario there is going to be a big spike in the next Parliament.

"We could well be talking about this issue as much as we are currently discussing wages or energy bills. As yet there is little sign of the political or financial establishment giving this the priority it deserves."

The projections, based on figures from the Office of Budget Responsibility (OBR) which show household debt rising faster than income, lay out several ways in which the number of people facing 'debt peril' might rise from 2011's total of 600,000.

In a 'good growth scenario', where interest rates stay low and income grows evenly across rich and poor - something Resolution calls "a marked departure from recent experience" - the number of people facing 'debt peril' would still almost double, to 1.1 million.

But if interest rates go up and growth is slow or unequal, that figure would hit two million, rising from 5% to 9% in the bottom fifth of the income curve.

Matthew Whittaker, senior economist at the Resolution Foundation, said: "Even if we take a somewhat rosy view of how the economy will develop over the next few years the number of households severely exposed to debt looks as though it will double.

"This is an alarming prospect, where a large number of families find themselves struggling with heavy debt commitments.

"Even small increases in the cost of borrowing could push a significant number of families over the edge, and it's most likely to happen to those with the lowest incomes - who are already spending the biggest share of their budget on repayments."

Mr Whittaker called the worst case scenario speculative but plausible: if the Government's Help To Buy scheme created a new housing bubble, or spending increased among the affluent only, interest rates would be driven up without any accompanying recovery.

In practice, he said, the number would not actually hit two million. Instead, "a high number of people" would simply default on their debts after a few months, possibly losing their homes, and "drop out of the statistics".

Most of the UK's household debt is composed of mortgages, with the rest taken up by credit cards, personal lending, and payday loans. Since household consumption accounts for about 65% of GDP, any drop in disposable income could have a huge effect on recovery.

Mr Whittaker said: "In the worst case scenario you've got two million households in a position where they are struggling to make ends meet, which means you've got two million households that aren't contributing to any consumption.

"Worse, many of the people who are most over-exposed from pre-crisis debt are concentrated in the hands of particular banks and building societies, who could find themselves in a precarious situation."

Last year rent and mortgage arrears drove 5,000 people out of their homes, according to the Centre for Social Justice.

The right-leaning think tank, founded by Iain Duncan Smith in 2004, said there was £1.4 trillion of personal debt in the UK, with average household debt having doubled in a decade to £54,000.


From Belfast Telegraph