With Brexit looming, the general public is fearful of how their finances will be affected, one might assume. But that assumption would be far from the reality; reports from the Office for National Statistics (ONS) show that many of us are on something of a borrowing binge. Household debt is creeping up while bank deposits are on the wane. Today we discuss the outlook and direction UK finances are heading in, and we consider what that might mean for UK citizens in the years to come.
The Current Financial Situation
In 2017, British households spent on average £900 more than they earnt; this money was predominantly borrowed, “though households also ran down savings.” On top of “anaemic” wage growth was a rise in inflation, causing workers’ money to be stretched even further.
Worryingly, it appears those at the lowest rung of the financial ladder are accruing the largest amounts in debt. Insights from Bank Underground, the Bank of England’s staff blog, outlined three key points in regard to the “rapid 10% a year” growth of consumer credit – firstly, subprime borrowers (or those with the worst credit rating) are not the driving force behind the increased uptake of credit (although this may be due to change in definition of subprime more than anything). According to the report, renters now make up the largest proportion of credit debt balances. They are now becoming the largest group amassing debt in the UK: “Rapid increases in indebtedness among renters could…be a vulnerability.”
The Bank of England’s staff blog also explained that while consumer credit may be cleared from one account the consumer often stays in debt “as they transfer balances, take our new credit products or draw down on existing credit lines”. Figures show that almost 90% of consumer credit was held by those who had debt two years earlier. Banks may report that debt clearance is healthy (to an individual bank this would seem to be the case); however, figures show that debt is simply moving from one place to another.
The amount of debt in unsecured credit – “such as credit cards and payday loans” – is at an all-time high of £205bn, said the Guardian. These loans are potentially problematic because they do not require collateral for approval and are, therefore, available to those who would typically not be approved. Such loans often come with high interest rates and high risk. Alongside the number of loans taken, the ONS’s data indicates that, for the first time since the 1980s, bank deposits are dropping dramatically while household loans are increasing: “if this were to continue, households could risk lacking enough collateral to cover their debts.”
Household budgets are under increasing strain, and people are becoming more dependent on loans due to slow wage growth. The Bank of England’s low interest rate is also encouraging consumers and businesses to take out loans. Problems may occur if inflation and interest rates rise: budgets would be squeezed as the pound devalues against everyday goods, and loans would be more expensive to pay back.
We are living in a period in which saving is not an option for many; the ONS report said “back in the early 1990s, the average household had around £120 left over to save from every £1,000 of income (after taking out their spending and taxes). By contrast, in 2017 this had fallen by two-thirds to just £41, which is the lowest ever.”
Short-term loans, according to the ONS, have now surpassed their pre-crisis levels. Not coincidentally, those with the least disposable income have the largest expenditure (measured as a percentage of income).
The ONS reported that “the poorest 10% of households spent two-and-a-half times their disposable income, on average, in the financial year ending 2017.” While interest rates remain less than 1%, low earners are likely to continue accruing more debt; as a nation that relies heavily on imports, the ramifications of a weakened, post-Brexit pound will likely hit those at the bottom hardest. Black Wednesday saw the Bank of England raise interest rates over 5% in a single day to ensure confidence in the pound; if the same thing were to happen after the UK leaves the EU, those relying on loans would find themselves in a dangerous financial position.
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