Thursday, March 6, 2008

Problem of Personal Debt in UK

The UK has become a nation of borrowers. The savings ratio has fallen and an increasing number of consumers have taken on dangerously high levels of personal debt.

The UK is experiencing record levels of personal debt. Statistics from april 2007, suggest that debt levels in the UK have increased to £1.3billion
Britain's consumer debt mountain has topped £1.3 trillion in april 2007. This is more than the UK's total GDP.

To be fair a high % of this debt is secured against the value of houses. With UK house prices rising, most homeowners have assets greater than the value of their mortgage debt. However, stripping aside mortgage lending, there are many reasons to be worried about the UK's growing debt levels.

Bad Debts UK

Rise in Student Debts. UK student debt has increased to over £14bn BBC link This means that many students are leaving university with large debts. This makes it particularly difficult for them to enter the housing market. It displays the fact that debt issues are much worse amongst the young, contributing to intergenerational debt problems.

Rise in Extreme Debt. The number of people in debt by over £100,000 has doubled in recent years bbc link

Increase in bankruptcies. There has been a worrying increase in the number of bankruptices, partly due to the ease of declaring bankruptcy and also due to debt problems

Economic Effects of Debt

  1. Risk to households who fail to meet loan repayments. Can lead to home repossession and banruptcy.
  2. Economy is very sensitive to any interest rate rises. This could be a problem in an economy characterised by rising cost push inflation.
  3. High levels of debt mean the economy is more vulnerable should people wish to switch to being savers. UK economic growth has come to rely on a low savings rate and high levels of consumer spending. If the situation changed people may become pessimistic and start saving. This could cause a big downturn in spending and could lead to a recession.
  4. Financial Instability. The recent US sub prime crisis shows how vulnerable the financial sector is to a rise in loan defaults. Loan defaults do not just effect the bankrupt and the individual mortgage lender. They effect the whole financial sector, leading to a freeze in lending and rising cost of mortgages. This can dampen growth and lead to recession, e.g. America
  5. A culture of spending has left many people reluctant to take frugal steps with their finances.
  6. Large current account deficit. The high levels of personal spending and low savings is one factor behind the current account deficit, which is approaching 5% of GDP
The problem of consumer debt is compounded by high levels of government borrowing

References
  1. Record Debt levels threaten UK economy
  2. Diagram from ESRC
  3. UK Policy blamed for debt mountain at Telegraph

1 comment:

Gary said...

Very informative post.
I think personal debt is inevertable in times of poor economic growth,
people have less spare income due to rising costs but don't want to
curb their spending.
there is a catch 22 poor economy = bad debt.bad debt= poor economy