As real wages fall, household debt is set to reach record highs
This year, household debt is set to be higher than ever before. TUC analysis finds that unsecured debt per household is set to reach £13,900 in 2017. In 2016, unsecured debt per household was already £13,200 – higher than at any other point since the financial crisis and only marginally below the peak of £13,300 in 2007.
By 2020, it will exceed £15,000.
Unsecured household debt is any household financial liability excluding lending secured on dwellings, such as mortgages. It includes debts like credit cards, store cards, pay day loans, bank loans, student loans and car loans.
Isn’t this all just student loans though?
Student loan debt does account for a significant portion of unsecured debt. However, not as much as you might think. In 2016, for example, the overall level of unsecured debt was £365 billion. Outstanding student loan debt for the same year was just less than a quarter of this (£86 billion).
Student loan debt is growing, but we’d be wrong to overhype its role in recent years. A few years ago, the annual change in student loan debt was regularly much higher than the annual change in overall unsecured debt.
However, this has changed drastically in the last few years. Since 2013, annual changes in student debt have gone from massively outstripping the changes in overall unsecured debt to being less than a third of the annual change.
Between 2015 and 2016, for example, the annual change in student loan debt accounted for just below a third of the annual change in unsecured debt. In both 2014 and 2015, it was more than half.
Even if the growth in debt was largely comprised of student loan debt, it’d be flippant just to dismiss it. Student loan payments, like any other debt, have to be made each month and therefore place a further burden on cash-constrained households.
Is credit being used to compensate for low wages?
Alongside the rise in debt and the use of credit, real wages are falling. Those in the UK are still, on average, being paid £20 per week less than before the financial crisis a decade ago. The latest figures from the ONS show that real wages recovered slightly between mid-2014 and early 2016, before stagnating and then beginning to fall again.
In this context, it’s unsurprising that households feel a need to turn to credit to get by. Credit cards and payday loans offer a short-term solution.
This isn’t set to get better. The OECD has forecast that that real wages in the UK are set to fall by 0.5% by the close of 2018. The Bank of England (BoE) is also pessimistic about the coming year. Mark Carney, at the release of the Bank of England’s latest inflation report, said:
Over the course of this year … the wages that people are getting are not going to be sufficient to compensate for the rises in consumer prices, prices in the shop. So this is going to be a more challenging time for British households … Real income growth, to use our terminology, will be negative, to use theirs, wages won’t keep up with prices for the goods and services they consume.
The BoE is predicting that real wages will improve from 2018. Even if this materialises (and their record here is not good), there will be little relief to those who are currently struggling to get by on low wages. People are currently using a short-term solution to solve a long-term problem. As real wages drop further this year and next, this may prove unsustainable.
We’re already seeing evidence of this. Earlier this year, the debt relief charity StepChange reported that demand for their services has never been higher, with 600,000 contacts just in 2016.
The next government must have a plan in place to tackle this living standards crisis.