Chill out about the debt bubble?

Not yet.

What role did high levels of household debt play in generating the crash and what do they mean for our economy over the next few years? 

Well-worn questions, you might think. And no shortage of people have asserted answers.  Following 2008, a whole new crunch-lit genre of books emerged to explore this. There is – or perhaps, was – something of a post-crash orthodoxy that the rise of easy credit, fuelled by run-away rewards for the super rich, and a squeeze elsewhere, encouraged ever greater borrowing. 

A favoured narrative, often echoed by the coalition, is that debt ballooned as consumers (and home buyers) went on an irresponsible binge – it was all demand-led.  Others argue, particularly in the US, that exploding debt reflects an act of policy – whether explicit or implicit – to increase the supply of easy credit for low and middle income groups who were seeing their wages stagnate.  From this perspective, it was less a story of families living beyond their means and more about coping when their means stopped growing. 

More recently, however, there has been a counterblast to these prevailing views.  The FT’s economics editor Chris Giles, a leading authority on our current economic predicament, maintains that fast-rising household debt should be greeted with little more than a shrug of the shoulders. Ben Broadbent of the Bank of England’s MPC makes a similar case. Higher debt is essentially about mortgages and it reflects rising house prices (let’s leave to one side for now the fact that rising debt and assets signifies a big transfer between the generations, benefiting the old at the expense of the young). And once we do take assets into account we find that the net financial position of households is roughly similar to the position twenty years ago. Relax.

Nor should we get het up about the banks having undertaken an orgy of easy and ill-judged lending. Few of the loans made to UK households have turned nasty. Banks made stupid mistakes, to be sure, but they mainly came in the form of bad loans made overseas, not in the UK (as highlighted in this good blog by Ben Chu discussing the speech by Broadbent). 

So, rather than fret about the enormous size of our debt overhang and what it means for our future growth prospects, we should move along and worry instead about something more meaningful.

This account is right, of course, to point out that not all the growth in household debt is problematic.  Plenty of households will have borrowed  more for an asset (a house) that is worth a bit more, and achieved this by taking on a debt they are capable of servicing. Nothing much wrong with that. But in scoring this point, advocates risk downplaying a bigger one: debt still matters.

First, the distribution of debt burdens across different income groups is important.  Aggregate data often conceals far more than it reveal. As the chart below shows, at the bottom of the income distribution the growth in consumption appears to have massively outstripped increases in income – unsustainably so.  (A health warning is necessary here: survey data on the lowest - and highest -  incomes can be highly imperfect, so a degree of caution is warranted on the precise numbers, but the overall pattern is likely to be correct). 

Source: NIESR analysis for the Resolution Foundation

What was driving this growth in consumption is less clear cut. Part of it is likely to be underlying shifts in the cost of living that bore down hard on low income families. Another element will have been increased mortgages (though the proportion of the poorest holding a mortgage barely rose from 1997-2007, so this isn’t likely to be the only thing going on here). And if the UK consumer is anything like their US counterpart, high levels of inequality may have played a role in generating ‘trickle-up consumption’ – whereby lower income groups strain to keep up with the spending of the affluent.  

Second, we shouldn’t be complacent about the number of bad loans or repossessions. Depending on the definition applied, between 5 per cent and 8 per cent of mortgages are  currently in forbearance – an agreement between mortgagors and their bank which usefully allows repayments to be rescheduled – but this stay of execution cannot be expected to last indefinitely or resolve the underlying affordability issues that hang over many households.

Third, the revisionist argument is in danger of downplaying the risks – potentially scary ones – of what might happen if, eventually, interest rates rise before we have strong household income growth (a point highlighted on this blog before).  True, at the moment, with the economy crawling along the floor and the euro-zone teetering on the brink, talk of higher interest rates feels very far-fetched.  But with inflation still stubbornly above target, and the Bank yet again claiming it will be another year before it falls into line (meaning inflation will have been above target for most of eight years) the medium term outlook for interest rates remains uncertain. At some point the interest rate hawks will regroup – and eventually a more normal level will return.  

All this matters greatly because a high debt burden means many households are already highly exposed; we just tend not to talk about it much because the headline Bank rate is so low. Consider the current burden of servicing mortgage payments for low to middle income households.  It is broadly similar, incredibly you might think, to the burden faced in the late 1990s when interest rates were 5 to 7 per cent. That’s partly due to the rapid growth in interest rate spreads, and partly due to the greater stock of household debt. 

An increased burden: proportion of gross income accounted for by mortgage payments among low to middle income owners

Source: Resolution Foundation 

Which takes us on to the final point: the extent to which the burden of debt will continue to bear down on UK consumers – or at least a sub-set of them. The truth is no-one really knows whether or how far household debt needs to fall. If we listen to McKinsey, we’d believe that the UK is only just beginning the painful adjustment – behind countries like the US – and it could take a decade before the ratio of UK household debt to disposable income returns to its pre-bubble path.  Other analysis  argues that to be "sustainable", household debt needs to fall from the current level of just below 150 per cent relative to income to nearer 115 per cent - a process that is likely to take until 2019 (after fiscal balance has been achieved). If so, deleveraging as well as public austerity will be a drag on consumers.  

Four years on and we’re still to have a full reckoning with the crisis. UK household debt didn’t cause it all. And high levels of debt aren’t always bad in themselves.  But we’d be silly to be sanguine.  The debt mountain makes us highly vulnerable, and will be living with it for some while yet.

In the shadow of a debt mountain. Photo: Getty Images

Gavin Kelly is a former adviser to Downing Street and the Treasury. He tweets @GavinJKelly1.

Photo: Getty
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Slowly but surely, the patriotism question is making its way into Labour

John Denham observes a strange but happy outbreak at Labour party conference.

It’s a measure of Labour’s distress that it managed to settle the leadership while resolving so few of the challenges it faces. Over the past two years, the party’s electoral base has been torn apart by identity politics. Huge numbers of Scottish Labour voters abandoned party loyalty to vote for separation and then to dump the party itself. In England, voters feared SNP support for a minority Labour government; many others turned to Ukip. In the final blow, millions of former Labour voters, particularly those who felt mostly sharply English, backed Brexit. Many of the party’s MPs wonder how many will ever be coming back.

Faced with this tsunami of political rejection, the issue was simply airbrushed out of the leadership campaigns. Over four months neither Jeremy Corbyn nor Owen Smith even acknowledged, let alone addressed, the potent power of identity. Both cleaved to the belief that the complex weave of hope, fear, powerlessness, aspiration, community and security that are bound up in our sense of ‘who we are’ could all be stilled by the promise of ‘anti-austerity’.

One of the left’s less appealing habits is believing that it understands what voters really want better than voters do themselves. (You tell me you are worried about how quickly migration is changing your community, I tell you’re really worried about spending cuts).  Jeremy Corbyn’s statement that “we are not concerned about numbers” is probably enough to lose Labour the 2020 election on its own. No comprise here with voters on the issue that has dominated public concern for 15 years. To be fair, Owen Smith never offered a radically different perspective. It was never part of the debate.

Yet reality has a fortunate habit of intruding into the debate. In early, sometimes stumbling ways, identity politics is beginning to concern people right across the party. At Liverpool, most of the think-tanks held meetings addressing national identity in England, Scotland and the Union. Most attracted healthy audiences who, by and large, did not think identity was the property of the far right. (Declaration of interest: I was a speaker at some of these). Policy Network, IPPR, LabourList and the Fabians were amongst those taking the debate forward. Much of the New Statesman’s “New Times” edition is preoccupied with the same issues. Newer organisations from different parts of the party are engaging. The Red Shift group of Liam Byrne, Shabana Mahmood and Nic Dakin called for an explicitly English Socialism. Veteran Brexiteer John Mills, is supporting a new Labour Future organisation. Both are exploring how radical national policy and national identity fit together.

More surprising was the overt insertion of patriotic themes into the speeches of Corbyn’s front bench and the leadership itself. Military service sits as easily with the socialism of Clive Lewis as it does with Dan Jarvis. Rebecca Long-Bailey told the conference  Patriotism is not just about waving a flag during the World Cup. It is a real, life-long commitment to the people around you….When you pay your taxes, you are investing in the British people..This commitment to British people should be woven into every aspect of the British economy,

This is a potentially powerful and unifying theme for Labour. National identity and patriotism may still be a minority interest, yet it attracts people from all the party’s wings.  Tristram Hunt, Lisa Nandy, Owen Jones and some of Corbyn’s key supporters are all engaged.

These are early days. National identity was hardly the dominant issue of the conference, let alone Momentum’s parallel event. Too often the tone is narrow and defensive, as though people on the left don’t have identities but we need to understand those who do. There’s a temptation to believe that Labour simply needs some St George flags to unveil on council estates and put away elsewhere. At its best, progressive patriotism can uniting disparate interests and communities. It opens up conversations with people who would reject a political label. It can be a foundation for holding the powerful to account.

In his speech, John McDonnell praised Christians on the Left for promoting the hashtag “patriots pay their taxes”; a message that was reinforced in Corbyn’s own speech: “there is nothing more unpatriotic than not paying your taxes”.  As Hillary Clinton exposed this week, patriotism can separate those who accept their obligations to a wider society, and those who think it is clever to avoid them. In English radical history, the notion of the common weal held that the measure of the powerful was how well they looked after the commons. It has a powerful resonance today and Labour needs to mine it more.

John Denham was a Labour MP from 1992 to 2015, and a Secretary of State 2007 to 2010. He is Director of the Centre for English Identity and Politics at Winchester University