Tackling debt is about more than personal responsibility
In the latest edition of the ESRC’s Society Now journal, Victoria Boelman from the Young Foundation discusses the need for greater education in order to help households avoid becoming trapped in high-cost debt. Well-intentioned as such work may be, it ignores the role of structural forces on fostering indebtedness.
High-cost debt products include schemes such as doorstep loans and rent-to-own shops many of which impose higher costs than the infamous payday lenders which Boelman argues (though does not demonstrate) are now tightly regulated and lend at a better rate than mainstream lenders for short-term loans. Drawing on insights from Behavioural Economics, Boelman discusses the need to empower people to overcome the “short-cuts in their decision making” which she argues makes them “rely on heuristics and biases in thinking. For many of the same reasons so few people switch electricity supplier or bank”. She points to the fact that in a recent Young Foundation survey a quarter of all Welsh consumers could not calculate simple interest on an £100 loan.
Better financial education is all very apple-pie and motherhood. However, having just attended a fascinating talk hosted by the debt charity StepChange I can’t help but feel that the article glosses over a key element which drives people to debt. In the talk, by Professor Janette Rutterford, Professor Rutterford discussed historical efforts to encourage saving, among the working class, and in particular the National Savings Movement. Launched in 1916, the movement began at a time when the working class were relatively affluent. Many women had entered the workforce to staff the war industries, and previously retired workers were also often returned to employment and earning. All of this was in addition to ancillary income such as separation payments for the dependents of men in the trenches. In this climate it was possible to harness the resources of millions of new-savers.
It seems to me that this is what is missing, or at least under-addressed in Boelman’s analysis. The Young Foundation’s research makes clear:
“High cost credit customers come from all walks of life but are most likely to be young families. They are no less likely to be in employment but are often on low pay or ‘zero hours’ contracts”
There is an uncomfortable frisson of moralism that accompanies the connection between debt and bias or ignorance; which incidentally mirror one of the key themes of historical attitudes to debt and saving among the low paid. Leaving that to one side, if people cannot afford to meet the costs of the essentials without resorting to debt then financial education will be of very limited benefit to them. Last month the TUC published evidence that the levels of unsecured debt in the UK had rocketed up by £48bn between 2012 and 2015. Last week StepChange published a report that showed they had their busiest ever six month period, and that 29 per cent of their clients, over 50,000 people lacked sufficient income to make ends meet at the end of the month. Last month, we reported that OECD figures show real wages in the UK fell 10.4 per cent between 2007 and 2015. Only Greece saw a steeper decline.
Judicious application of nudge theory and some instruction in the principles of compound interest may well prevent a few from instinctively relying on rent-to-buy but it is insufficient to prevent a mounting debt crisis. In the long term, we need and economy that provides well-paid, secure jobs that allow families to afford the basics, and put a little aside to deal with sudden shocks. In the meantime, we need a more radical re-think of how we help people handle their debt, so that those struggling with can restructure their payments, minimising interest and in some cases have debt written down to a more manageable amount.