From the TUC

Household debt is higher than in 2008, is history repeating?

08 Jan 2017, by in Economics

The latest TUC figures on household debt show that consumer credit is still filling the gap left by anaemic wage growth.  Data from the Bank of England shows that total consumer credit (that is excluding both mortgages and student loans) grew by 10.8% in November 2016 compared with a year before. Analysis undertaken by my colleague Geoff Tily has found that total unsecured debt (i.e. not mortgages) hit £350bn in the third quarter of 2016, well above its peak of £290bn before the 2008 crisis. Some of this will be increased student fees, but as the BOE rate above shows, this cannot be all the full story.

Total figures have only limited use in any case. The real eye-opener comes when we look at debt per household. The chart below shows the nominal (cash) value of debt per household in the UK. As of quarter 3 of 2016 each household owed £12,887.45. That is a rise of over £1100 and the largest, single year increase since the turn of the century.

Share of debt per household (£)

Share of debt per household graph

This suggests that another comparison may prove illuminating: the rate of debt to gross disposable income over the same period. The chart indicates the level of debt owed by households by presenting the total stock of debt compared to the total amount of disposable income available. The rate of debt to household income was 27.4% in the third quarter of 2016, this is approaching the pre-crisis peak of 29% in the first quarter of 2008.

Debt to income ratio (%)

Debt to income ratio graph

Next year living standards are expected to decline.

The last few years have seen anaemic growth and calendar year inflation of effectively zero for much of the time. However, as we discussed in November’s economics roundup inflation has already begun to tick upwards and will continue to do so in 2017 as price increases from sterling’s devaluation feed through to consumers. Wages are not predicted to follow suit, or at least not to the same degree. Predicting the impact of inflation is tricky, as it’s possible for households to decrease expenditure in response to increased prices.  Reducing discretionary expenditure is all very well, but there’s a limit to how much you can reduce your non-discretionary spending. A family with children, for instance will struggle to put a very low floor on their spending on food or fuel both of which may start to cost more next year. As a result we are likely to see this ratio become even less healthy over the next few quarters.

Typically we would expect inflation to reduce the value of debt, which is a good thing for debtors; as the value of the stock of debt declines making repayments easier. Next year, however, households are facing a double whammy that means as costs and borrowing go up, while real earnings decline. Inflation is unlikely to counter-act this increased cost of living, with negative impacts on debt flows.

Employment has been strong but for how long?

Strong employment growth has been one of the defining features of the past few years. However, while unemployment has been the dog that didn’t bark of the downturn, there are signs that jobs growth may be petering out and unemployment is predicted to increase over 2017. Next year will see a number of in and out-of-work benefits cut which will put further pressure on household budgets.

As we’ve discussed before; there are two problems with levels of household debt like this. The first is the obvious pressure it places on individuals and households. The other is that debt like this creates a drag on growth, as money spent servicing debts cannot go on more economically productive spending.

We need action on this.

The Chancellor has already made some welcome moves towards fiscal policy, however as Geoff Tily pointed out last month, this is small beer compared to what is needed.  We need urgent action to increase job security and get pay moving in the right direction. Otherwise we leave families and our economy at the mercy of another rising debt bubble. And we all remember where that got us last time.

3 Responses to Household debt is higher than in 2008, is history repeating?

  1. Keith Paterson
    Jan 16th 2017, 8:15 pm

    Hi Kam and Geoff, as a mature student with lifetime in the TU movement, I very much welcome and value the TUC – Touchstone work but can you clarify your sources, items included and comment on your ratios on household debt compared, for example, to Matthew Whittaker over at Res Foundation . It may be you are just using different bases and categories of debt but I would value feedback. You cite Geof Tily saying unsecured debt hit £350bn in the third quarter of 2016. How much of this is student debt and items over and above the Bank of E’s consumer credit figure of £192bn at the end of Nov 2016? I get puzzled at what is and is not included in household debt figures as well as what is used in numerators and denominators in ratios. Similarly on the level per household of £12.8k what is included in this? The money charity stats quote a figure per hh of £7402 for October but that is just for consumer credit, so what are you including. Finally you quote a rate of debt in the third quarter of 2016 of 27.4% whilst Matthew Whittaker has a figure of 18%. Is this due to both numerator and denominator differences and if so what. Confused Keith, Aberdeen

  2. Kam Gill

    Kam Gill
    Jan 17th 2017, 2:11 pm

    Hi Keith,

    Thank you for your question. The figure of £350bn unsecured debt is derived from the ONS figures. We took total household debt: (NNRE) and subtracted debt secured on households (NNRP). We have previously used this method for our Britain in the Red Report: . The ONS figure includes non-profit institutions serving households (NPISH) and also payments to overseas institutions that I believe are excluded from the bank of England figures.

    As you point out some of this will be student debt, particularly following the increase in student fees in 2012. We would argue that student debt still constitutes a form of debt that will have a deleterious impact on household’s ability to manage their finances and in particular to manage other debts and so should be factored into this analysis.

    A house of commons briefing paper from the end of last year ( put the total stock of outstanding student debt at roughly £76.3bn, which would amount to about 21% of the total stock of outstanding debt by our calculation.

    Our figure of £12,887 per household is derived from taking the figure of £350bn unsecured debt / the 27,090 households recorded as the UK population in the ONS families and households dataset.

    Finally our 27.4% figure is derived from taking our calculation of £350bn unsecured household debt as a % of a rolling 4 quarter total of disposable income, using the ONS figures for disposable income (QWND)

    I believe that answers all your questions regarding our figures, I’m afraid I can’t speak to how other bodies may have derived theirs. If you have any further questions feel free to get back in touch.


  3. Investment decline + reliance on consumers = bad news for the economy
    Feb 22nd 2017, 12:32 pm

    […] crisis, this scale of reliance on the consumer seems more dangerous than ever (see also our debt work). Mark Carney was drawn on this yesterday at the Monetary Policy Committee appearance at the […]