Consumer debt has risen sharply over recent years and is now approaching levels last seen just before the 2008 financial crisis. The OBR predicts that consumer debt will continue to grow for five years – peaking just after we leave the European Union.
Whilst expanding consumer debt is a concern for many, it can be good for the economy. Every pound of debt taken on by the public is an additional pound fuelling economic growth. Indeed, some argue the economy since 2008 has been kept afloat by the availability of cheap money generated by quantitative easing – encouraged by historically low interest rates – and the profligacy of the UK general public. Expanding consumer debt has, so far, been a largely benign outcome of official monetary policy over the last decade.
However, this benign outcome could turn malign. Asked whether this approach – encouraging borrowing to shore up the economy – amounted to a ‘Ponzi scheme’, Gertjan Vlieghe, a member of the Bank of England’s Monetary Policy Committee, avoided the question admitting, ‘undoubtedly at some point we will have another credit bust’.
The last time there was a credit crunch in the UK, trust in large retail banks collapsed. The sector has been working hard to restore its reputation ever since.
As the Treasury Select Committee launches an investigation into household finances, we put it to a cross-section of MPs that problem debt had risen by 15.4% since 2016, and that 8.3 million people in the UK were now living with a debt problem. We asked them who they thought was primarily responsible for rising debt and who was doing least to combat the problem.
Though divided on who is primarily responsible, MPs are united on who is doing the least to help people with problem debt: credit card companies, auto finance lenders and lenders excluding high street banks.
For opposition Labour MPs, assigning responsibility for problem debt to the Government satisfies both the gut instinct of ideology and the machinations of party politics. Among Conservative MPs, responsibility is less clearly defined, though most say that those in the private sector – in this case credit card companies and high street banks – have primary responsibility to help people with problem debt.
Given that the governing party sees the private sector as primarily responsible for helping people in debt, it is unlikely to address this issue with policy. If, as Mr Vlieghe says there will ‘undoubtedly’ be another credit crunch, as well as fallout for the individuals with problem debt, there will also be reputational fallout for the companies involved.
Where roughly two in five Labour (39%) and Conservative (36%) MPs say that high-street banks are primarily responsible for helping people reduce problem debt, few say these organisations are doing least to help them. This is good news for high street banks – and particularly their communications departments. After the financial crisis, many high street banks beefed up their consumer safeguards, and also articulated these efforts inside and outside of parliament. Many recognised that, unless they were seen by legislators to be proactive in protecting consumer interests, MPs would step in and restrict their business with even more regulatory hurdles.
Labour and Conservative MPs see credit card companies as doing the least to help people with problem debt. Auto-finance companies and other lenders are also on the hook after perceived inaction following high profile warnings from the Bank of England and others on problem debt.
Where few saw the 2008 financial crisis coming, credit card companies, auto finance and other lenders have the benefit of advance warning. These organisations should treat this as a shot across the bows from MPs.
As quantitative easing is unwound and interest rates rise, the availability of cheap money ebbs away. This is very likely to leave a group of people that cannot afford to pay back loans taken out when interest rates were at historic lows. Though in part responsible for this problem, do not expect politicians to take the blame. Undoubtedly those seen as doing least – credit card companies, auto and other finance lenders – will face a reckoning.