A nation in hock to pawnbrokers

(Metro newspaper headline, 6 September 2010)

Introduction

People in the UK know times are hard. This can be seen from the levels of short-term debt (credit card, payday loans and so on), and from the difficulties many are having repaying long-term debt (mortgages, student loans and so on). Even back in 2008 personal short-term debts were higher as a proportion of assets in the UK than in most European countries (see Figure 1.0.1). Too many of us had ‘maxed-out’ on credit cards and other short-term loans. The small group who benefited from lending all this short-term debt were profiting to the detriment of the many. In 2008 – the most recent year for which we have data – in Europe, only Greece, Poland and the Slovak Republic had personal borrowing levels higher than those in the UK, and UK levels were only slightly lower than those in the United States. Personal debts in the UK in 2008 formed 6% of all households’ financial assets. Many households have no or very small debts. Many other households have what for them are huge debts in proportion to their income. Short-term debts tend to be highest among those who have least. The interest paid on those debts is redistributed indirectly to savers. Savers are disproportionately found among those who have most.

On top of those short-term debts are long-term debts, often seen as a sensible way to borrow, as rates of interest are much lower on mortgages than on credit cards or payday loans. However, long-term debt is similarly a mechanism that transfers wealth from those who borrow to those who lend. As house prices in Britain soared in the years up to 2008, saddling yourself with a huge mortgage became less and less attractive but less and less avoidable for people who were tired of the insecurity of renting and sick of high home rental prices. According to the charity Credit Action, as of September 2010, total UK personal debt (both short- and long-term) stood at about £1.5 trillion and was predicted by the government’s Office for Budget Responsibility to rise to £1.8 trillion by 2015, growing by £159 million a day – every day – for the next five years.