[A-List] UK economy: consumer debt burden

["Michael Keaney" <michael.keaney@xxxxxx>]

UK debt rests unevenly on the poor
By Ed Crooks, Economics Editor
Financial Times: November 19 2002

Fears of a sharp slowdown in consumer spending and rising debt problems have
been heightened by research showing much of Britain's mountain of household
debt has been taken on by people who may not be able to afford it.

Analysis by the Institute for Fiscal Studies shows that the burden of
consumer debt is spread unevenly across the population, with many borrowers
having low incomes or few liquid assets. If interest rates or unemployment
rise, economists fear a retrenchment, triggering economic slowdown or even
recession.

The spending spree of the last few years has driven household debt to a
record £801bn. The Bank of England has become increasingly concerned about
this binge which has become one of the factors militating against a cut in
interest rates.

In the year to September, household debt grew by 13.1 per cent, the fastest
rate since the Bank began collating figures in 1993. Last week its inflation
report warned: "The larger the build-up of household debt, the greater the
risk of a sharp correction."

The issue is not just about the total amount of debt, but who is borrowing.
The Bank fears that many of the people piling up debt are those that will be
most vulnerable to a deterioration in the economy - concerns that will be
reinforced by the IFS research.

The IFS, the leading independent public finance think-tank, says the 10 per
cent of the population with the biggest debts are at least £4,248 in the
red, excluding mortgages.

Its analysis of official survey data from 2000 shows that among the bottom
fifth of the population by income - people earning £8,730 a year or less -
34 per cent have debts, which average £3,337.

People in their late 20s and early 30s are most likely to be borrowers: of
those aged 30-34, 70 per cent have debts, averaging £5,301. Borrowers are
less likely to have significant assets. Of people with more than £5,000 in
savings and investments, only 36 per cent are in debt, whereas of people
with less than £1,000 in those liquid assets, 53 per cent have debts.

James Banks of the IFS said the figures had implications for the
government's aim to encourage long-term saving and pensions provision.

"For most families, there is no pot of money squirrelled away that can
offset these falls in pension wealth," he said.

Another study, by academics at Nottingham University, shows how many
families on low incomes are in trouble with their debts. Of a sample of
single parents and families on benefits or in low-paid jobs, roughly half
had loans, and 18 per cent of those were unable to keep up the payments.

Of those renting their homes, 33 per cent were behind with their rent, while
8 per cent of homeowners were in arrears with their mortgages, owing an
average of almost £2,000. Some 36 per cent of the total were behind on at
least one utility bill.

That so many people are struggling with debt suggests serious problems are
likely if the economy deteriorates.