New figures on business confidence suggest that the one place where the service sector boom is on the ebb is in the consumer sector – hotels and restaurants, gyms and hairdressers. The twin pressures of rising inflation and slowing pay rises are squeezing household incomes. The ratio of personal debt to household income, which fell steadily in the years after the financial crisis, has now again begun to rise. Last week, new figures were published showing February brought the highest increase in credit card debt in 11 years.
The British economy’s failure to wean itself off an addiction to growth fuelled by an expanding consumer debt bubble is bad for consumers, and bad for the economy as a whole. It is no substitute for business investment, which the OECD has forecast will fall sharply in future years in a post-Brexit climate of uncertainty. It makes recession more likely, and, when it comes, deeper and longer. The human costs of getting into problematic debt are no less profound: people are a third more likely to develop mental health issues if they find themselves struggling with debt.
Historically, financial regulators have lacked both the power and the will to ensure that unhealthy levels of consumer debt are held in check. Customers who get into persistent debt tend, after all, to be very profitable for credit card and loan companies. Rather than help people struggling with repayments, it is in their interests to offer products that encourage consumers to use credit cards as an expensive form of long-term borrowing. The Financial Conduct Authority (FCA) estimates there are 2 million people carrying persistent debt on their credit card, defined as paying more in fees and charges over an 18-month period than the amount they borrowed in the first place.
From the embers of the 2008 financial crisis, a new regulatory regime emerged and there are some signs that it is now, finally, asserting itself. Andy Haldane, the Bank of England’s chief economist, first sounded the warning about rising consumer credit in 2015, but it was not until last week that the Bank announced that the Prudential Regulation Authority will be reviewing whether lending standards have become too lax, risking macroeconomic financial stability.
The FCA is now consulting on a new set of rules for credit card companies: it has proposed that they should be required to prompt customers with persistent debt to increase their repayment thresholds after 18 months, and, if they are still in persistent debt after a further 18 months, to propose repayment plans to help them repay and ultimately to take steps to make the debt more affordable.
But this is too little, too late. The rules are vague and leave far too much leeway for the companies, which are unlikely to change their behaviour without tougher action. There is too little emphasis on preventing consumers from getting into persistent debt in the first place – for example, by forcing companies to increase the very low minimum monthly payments they require from customers. It’s in the same vein as action the FCA has taken on extortionate overdraft charges, leaving it up to banks to set their own maximum cap on charges, rather than enforcing a cap of its own making.
None of this, however, will reduce the root causes of problem debt. The most common reason people get into unmanageable debt is a drop in their income. A growing number of low-income families face a grim mix of stagnant wages, increasing inflation and huge cuts to tax credits and benefits in the coming years, which will force growing numbers of people towards unsustainable debt. The most significant thing the government could do would be to reverse the unnecessary and expensive tax cuts it has planned for businesses and more affluent families, and use the proceeds to cushion the blow of its unfair and unwarranted cuts to benefits and tax credits.