Do we need to worry about the evolution and distribution of debt in British society?


Debt is not necessarily a bad thing. Mortgages, for example, allow young(ish) people to borrow against future income in what many would consider to be a positive way. This is how people invest for their future as the value of housing generally goes up rather than down (periods of recession and housing market collapses, of course, are the exception); having a family home also provides psychological security in ‘normal’ economic circumstances and most people in Britain want to buy their own home.

But can too much debt have negative consequences? Scholars have recently argued that household debt is a major contributor to recession and economic malaise. You can see in Figure 1 that the total debt to household income ratio rose considerably throughout the 2000s but fell after 2008 as both borrowers and mortgage lenders became cautious due to the economic crisis. Nevertheless, even in this new economic environment of austerity, low growth and uncertainty our debt levels are still much higher now than in the 1990s.

Fig 1:  Total household debt-to-income ratio increased rapidly until 2007 Refers to total secured and unsecured debt in relation to household annual income. Source: ONS, BHPS, Eurostat, OECD.

Fig 1: Total household debt-to-income ratio increased rapidly until 2007
Refers to total secured and unsecured debt in relation to household annual income. Source: ONS, BHPS, Eurostat, OECD.

And what about indebtedness among different types of households rather than the whole of society? In Figure 2, you can see the debt to income ratios broken down by the level of household income (in this case we look at secured debt such as mortgages). The ratio is particularly remarkable for the lowest income group. In 2008 average debt for this group was 4.5 times average income, compared to about 2 times for the middle income group. It was also this lowest income group that saw the sharpest increase since the early 1990s. This may suggest that, now more than ever, we need to think whether the level of property debt among low-income families in British society is sustainable and whether these families need more help with their debts.

But debt is not only about mortgages, and Figure 3 shows the trends in unsecured debt. This includes credit cards, other sorts of bank loans, student loans and so on (these types of debt are often more expensive in terms of the level of interest paid). Here too, we can see large overall increases over the last two decades, and again it is the poorest households with the greatest debt level relative to their income. There have also been interesting developments by age group, whereby the steeper increases can be seen in the 18-25 age group, probably reflecting the introduction of student loans to replace grants in the 1990s.

Fig 2:  Secured property debt/income ratio is highest for people on low incomes  Secured debt to annual household net income ratio. Source: BHPS and UKHLS.

Fig 2: Secured property debt/income ratio is highest for people on low incomes
Secured debt to annual household net income ratio. Source: BHPS and UKHLS.

To conclude; the last two or three decades have seen a huge shift in the pattern of indebtedness in Britain. Now, more than ever, it is the poor and the young with greater levels of debt relatively speaking. Should we worry about this? During the economic recession one of the strategies from policy-makers was to lower interest rates and thereby provide relief to indebted households. While these measures might have given indebted households some breathing space, it is unlikely to be a permanent fix. British households remain highly indebted and in the future, especially when the interest rates rise and when incomes across the distribution do not grow as fast as expected, we can anticipate a spike in the numbers of indebted households struggling with their debt and unable to meet their obligations.

Fig 3:  Unsecured debt to income ratios increased more for young people and those on low incomes. Source: BHPS and UKHLS.

Fig 3: Unsecured debt to income ratios increased more for young people and those on low incomes. Source: BHPS and UKHLS.

A briefing note: CSI 16 Have we become more indebted? By Marii Paskov at the Institute for New Economic Thinking is published on CSI’s website today. This post was prepared by Lindsay Richards and Marii Paskov 19th November 2015