On borrowed time? Dealing with household debt in an era of stagnant incomes

Published on Housing, Wealth and Debt

On borrowed time? examines how and why household debt grew in the pre-crisis years, before turning to study the current scale and distribution of exposure to debt across households. Finally, the report looks at the link between household debt and prospects for economic growth, setting out a range of broad policy considerations that will frame our future work.

  • Ultra-loose monetary policy, lender forbearance, a resilient labour market and sticky house prices in the UK have meant that debt has not produced the debt crisis that many envisaged at the start of the downturn. But that is not to say that we can be relaxed about debt.
  • This paper has shown that for a significant minority of households, particularly those on low to middle incomes, debt remains a very real concern. For many, liabilities outweigh assets, and servicing costs consume a large share of monthly income, despite the historically low level of interest rates. The prospect of interest rates rising and forbearance being removed while incomes continue to stagnate heightens the risk of future defaults. Such an outcome may yet slowdown, or stall, economic recovery: at some tipping point the micro issue becomes a macro one. In this eventuality, we may find that the green shoots of recovery just sprouting in the UK economy prove to be living on borrowed time.
  • To reduce the risk of this eventuality, there is a need to consider the costs and benefits associated with a range of options for household deleveraging. We have argued that doing nothing and allowing households to simply go to the wall is not really an option: the human, social and economic costs are too high. Neither is there much to be gained from using public funds to prop up families with little prospect of ever recovering their financial position. There are, however, a range of options between these that we can consider in order to help solvent but debt loaded households.
  • In particular, options designed to reduce the cost of debt servicing can allow households to unwind their position while still being an engine for demand growth in the economy. Such routes may be particularly effective if they also facilitate the removal of problem debts from banks’ balance sheets and so improve lender confidence.
  • The details of such options will clearly require careful consideration. In this project therefore, we will dig more deeply into the landscape of household debt. We will look at levels of exposure across the population, to determine just which households look most vulnerable to future monetary tightening and quantify the potential impact in relation to a range of potential trajectories for GDP, incomes and interest rates. We will look also at developments in other countries, both in reaction to the current crisis and in relation to earlier financial crashes. In conjunction with experts in this area, we will develop a series of policy recommendations designed to ensure that the household debt overhang does not turn into yet another headwind facing UK economic recovery.