In United Kingdom(UK), in March 2012, total household debt stood at £1,518.5bn in today’s prices compared with £1,630.1bn in March 2017. So in the past five years household debt has increased by an inflation-adjusted rate of 7.3%. (Inman and Barr, 2018) As of December 2017 average household debt is 57,830 pound and this figure is nearly 114% of average earnings. The UK personal deficit which can be described as the amount by which personal debts like credit card bills and car loans exceed household’s incomes will be 3% of total GDP . Since the wages growth adjusted for inflation is just 0.7% in UK, it is expected that households are going to be turning to credit to buy most of the essential goods. Cost of mortgage loans are much lower than what was expected due to interest rates being very low. As of 2017 UK’s total household debt’s 82% is mortgage loans, 6% is student loans and 12% is consumer credit.(Inman and Barr, 2018)
In the last 5 years British people have not cleared all their credit and store card bills. Due to this reason and and high interest rates on those cards personal debts increased. According to the Office for Budget Responsibility(OBR) UK household debt will become 47% of income by 2021. Bank of England figures show unsecured consumer credit jumped 4.9% in the past year when adjusted for inflation. The total increased from £192bn (in today’s money) in July 2016 to £201.5bn in July 2017. Regarding the car market in UK, recently established personal contract plans (PCPs), which covers the depreciation on a car between 3-5 years, have increased car purchases drastically in the last few years. These PCPs made financing a car cheap and as a result of this, PCPs dominated 86% of the car market. In addition, auto-finance from dealerships – when the funds are supplied by car manufacturers – has increased by doubling in the past five years from £14.6bn in 2011, in today’s money, to £31.7bn in new credit issued in 2016. (Inman and Barr, 2018) Mortgage loans have not seen such steady increase even though mortgage market grew in UK. This is due to government’s efforts to revive the mortgage market after the banking crisis in 2008 with its Help to Buy scheme. This scheme boosted house sales since it subsidized the deposits of first time buyers. Another benefit this scheme enabled is supporting a Bank of England project by offering low mortgage rates to buyers and re-mortgagers to support lenders. The fear is that most of the mortgage borrowers have never seen an increase in interest rates and if in such a case when the rates rise, they would be unable to cope with the debt. Student debt on the other hand has rocketed in the last few years due to broad changes regarding how the universities are funded. Central government provided the majority of the funding for UK universities until 2013. University fees first rose to £9,000 and then £9,250 this year. This has increased the burden on students who borrow from the Student Loan Company(SLC). March figures show outstanding debt on loans jumped by 16.6% to £100.5bn, up from £86.2bn a year earlier. (Inman and Barr, 2018) Low wages growth, rising taxes and the shift to insecure working practices are all elements that will likely make it more difficult for students to repay their loans in the future.
UK has a large trade deficit which demonstrates that citizens are spending more than they earn, thus preferring imported goods and borrowing from foreigners. While UK government experiences a downfall in government spending, corporations are rich in cash and operates with healthy balance sheets. Although British citizens suffered from low growth in wages in the recent years, they were able to extend their spending via credit due to low interest rates. Another issue rising from low interest rates might be the acceleration of household debt which would harm the financial stability of UK. The problem is that if a recession hits and incomes decline or interest rates rise consumers will be in trouble. Policies need to carefully balance minimizing the risks of growth in household credit for financial stability without harming the potential long-term benefits of development.
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