The debt the recovery owes to Britain’s debtors

Ben Chu

Iain Duncan Smith’s Centre for Social Justice has a new report out that sounds an alarm about household debt levels.

One of the headline figures in Maxed Out is that personal debt “remains close to its all-time high at £1.4 trillion.

It provides this chart as evidence:

CSJ The debt the recovery owes to Britains debtors

But those debt statistics cited by the CSJ could benefit from a bit more context.

It’s true that our aggregate household debt levels have remained pretty much constant in cash terms since the financial crisis six years ago.

But the usual way of measuring household borrowing levels is to look at debt as a share of household incomes.

And this (using Office for National Statistics data) shows a different story:

debt to income The debt the recovery owes to Britains debtors

Total incomes have risen (in cash terms) since 2007 while the amount of total debt has remained flat. That means debt as a percentage of incomes has been steadily falling.

Around 90 per cent of household debt is mortgage debt. But what about other forms of borrowing such as credit cards and unsecured loans?

This has actually come down even in cash terms from a £210bn peak in 2008 to around £160bn today as this (from the Bank of England database) shows:

consumer credit1 The debt the recovery owes to Britains debtors

Some of the concerns raised by the CSJ about the number of people whose finances are over-stretched, despite the recovery, are very valid. And they echo some excellent research from the Resolution Foundation think tank here over how vulnerable hundreds of thousands of families could be if interest rates were to rise sharply in the coming years.

But it’s misleading to imply that the British public as a whole haven’t been reducing their debt burdens in recent years.

This matters because that reduction in household borrowing and consequent fall in consumer expenditure is one of the reasons why the economy was so weak between 2010 and the beginning of this year.

Things have changed, of course.

Rising consumer expenditure this year is one the major reasons UK GDP is expanding again.

household consumption2 The debt the recovery owes to Britains debtors

Now this doesn’t mean the public as a whole are taking on more debt in cash terms or relative to their incomes (although some individuals probably are). But it does imply that, with real wages falling, people are saving a smaller share of their incomes. And that’s indeed confirmed by the official data on the savings rate here:

household saving The debt the recovery owes to Britains debtors

This shows that the savings rate was perilously low going into the crisis, whereupon it shot up as people started to repair their individual balance sheets. And now the savings ratio is heading down again, fuelling growth this year.

This is the reason economists are fretting about the durability of the recovery.

People suddenly felt they had too much debt relative to their incomes in 2008 and took corrective action.

But is it plausible that, with the aggregate debt to income ratio still at 140 per cent, they are now happy to stop saving so much and even, at some stage, to start borrowing again?

If one’s answer to this is “no”, one would (barring a surge in real wages) expect the saving ratio to rise again and for consumer consumption growth to fall back.

In short, one would be somewhat sceptical about this robust recovery continuing.

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