Will squeezed households really borrow more to prop up living standards?

Office for Budget Responsibility is challenged over the question of personal debt.

What are we to make of different views on the extent to which growing household debt will offset the squeeze in living standards in the coming years?

The independent Office for Budget Responsibility caused a bit of a stir at the time of the Budget when it suggested that household debt is set to rise over the rest of the parliament – from £1.6trn in 2011 to £2.1trn in 2015, or from 160 per cent of household disposable income to 175 per cent. Rising debt will sit alongside low savings, so the ratio of household saving to disposable income will fall to roughly 3.5 per cent – half its average over the past 50 years – for the duration of the OBR's forecast period.

The clash between these projections and the government's favoured narrative concerning the need for the country to rein in its debt-fuelled spending habits – public and private – attracted some attention and prompted an online debate about whether tighter fiscal policy is shifting the balance between public and private debt.

However, the underlying economic implications, and their impact on household living standards between now and the next election, remain largely unprobed. Last week the OBR published a little-noticed note that set out to clarify why it has changed its projections for household debt since last June. It makes for interesting reading – but doesn't really answer the most fundamental questions.

The most important argument that the OBR makes is that – regardless of high existing levels of debt – household indebtedness will continue to rise over the next four years as families battle to sustain their living standard, running down savings and ratcheting up more borrowing. And it is worth noting that the OBR explicitly says that its projection for household debt is premised on steadily easing credit conditions and a stronger housing market.

The savings ratio

The critical question is whether the OBR is right about how households will react: is a further rise in personal indebtedness, already at historically unprecedented levels, a realistic account of how households at the sharp end of the living standards squeeze will behave over the medium term in the post-crunch economy?

No one really knows. We can't. Never in modern times have we seen the combination of such a large fall in household incomes, the severity of the shock to the credit system, and plummeting consumer confidence. So it is very hard to know what the OBR bases its behavioural assumptions on when it claims that greater debt will prevent falling disposable incomes feeding through into reduced expenditures.

It's a view that seems to run counter to a range of recent expert opinions and forecasts. For example, the Council of Mortgage Lenders has referred to the OBR projection on the scale of the increase in household debt this year as "wildly optimistic" and at odds with its own forecasts, while PwC has projected household debt to be falling as a proportion of GDP throughout this parliament.

Roger Bootle of Deloitte has just marked down consumer spending growth in 2011 to -1 per cent, and takes issue with the notion that household savings will fall further in the medium term, saying that tight credit conditions and the current weakness of consumer sentiment will "surely mean that households will want to save more, rather than less". Likewise, the NIESR, in its most recent quarterly update, predicts that following a short-term reduction this year, the savings ratio will rise steadily until 2015.

Analysts in the US are similarly sceptical about the scope for medium-term falls in their savings ratio: Cardiff Garcia has argued in the Financial Times that, while such a position might boost the economy in the short term, "nobody would think it healthy" for the savings rate to return to the "absurd" levels of the mid-Noughties.

Room for manoeuvre?

So much for the forecasters and pundits; what does the public say? Despite a well-documented shift from borrowing to saving since the start of the credit crunch, UK households remain severely debt-stressed. Bank of England polling data shows that, at the end of 2010, half of all households said they were concerned by their level of debt.

Borrowing more remains off limits for many: one-third reported suffering some form of credit constraint. At the same time, one in three households reported savings of under £500 – leaving little scope for protecting living standards by dipping into these funds.

Our own analysis at the Resolution Foundation shows that those on low to middle incomes face sharper constraints than better-off households. As the chart below shows, while around one-third (31 per cent) of households in the top half of the income distribution said they were finding it harder to borrow to finance spending in 2010 than in 2009, this rose among those on low to middle incomes to over half (53 per cent), up from just 16 per cent in 2007.

And these are exactly the people who are going to feel the fall in living standards most acutely and who, presumably, the OBR expects to borrow more. Looking to the future, one-fifth of all households said they were saving more in anticipation of fiscal tightening. Just 3 per cent were planning on spending more.

Taken together, these findings provide powerful grounds for asking what would happen if the OBR used different assumptions about how households may run down, as well as build up, debt during the prolonged fall in living standards. Without this, existing projections appear to be a bit of a punt.

No doubt setting out different scenarios for debt in this way would expose some uncomfortable findings: growth is bound to be weaker if household expenditure tracks falling disposable income more tightly than the OBR currently expects. Projections for net exports and business investment can't just be pumped up to take up the slack. But that isn't a reason to avoid the issue.

Despite all the frothy rhetoric about "rebalancing of the economy", the growth of household consumption will be absolutely pivotal in the resumption of steady growth. Indeed, the key factor determining the strength of the UK recovery will be the uncertain reactions of millions of households, which are already close to the edge, to further falls in disposable income. The question of whether ever more personal debt can be used to fill the growing gap in living standards deserves far more serious scrutiny than it has received to date.

Gavin Kelly is chief executive and Matthew Whittaker senior economist, both at the Resolution Foundation.

This post originally appeared on the Resolution Foundation blog.

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In focusing on the famous few, we risk doing a disservice to all victims of child sexual abuse

There is a danger that we make it harder, not easier, for victims to come forward in future. 

Back in the 1970s when relations between journalists and police were somewhat different to today a simple ritual would be carried out around the country at various times throughout the week.

Reporters, eager for information for their regional newspaper, would take a trip to the local station and there would be met by a desk sergeant who would helpfully skim through details in the crime Incident Book.

Among the entries about petty thefts, burglaries and road accidents there would occasionally be a reference to an allegation of incest. And at this point the sergeant and journalist might well screw-up their faces, shake their heads and swiftly move on to the next log. The subject was basically taboo, seen as something ‘a bit mucky,’ not what was wanted in a family newspaper.

And that’s really the way things stayed until 1986 when ChildLine was set up by Dame Esther Rantzen in the wake of a BBC programme about child abuse. For the first time children felt able to speak out about being sexually assaulted by the very adults whose role in life was to protect them.

And for the first time the picture became clear about what incest really meant in many cases. It wasn’t simply a low level crime to be swept under the carpet in case it scratched people’s sensitivities. It frequently involved children being abused by members of their close family, repeatedly, over many years.

Slowly but surely as the years rolled on the NSPCC continued to press the message about the prevalence of child sexual abuse, while encouraging victims to come forward. During this time the corrosive effects of this most insidious crime have been painfully detailed by many of those whose lives have been derailed by it. And of course the details of the hundreds of opportunistic sexual assaults committed by Jimmy Savile have been indelibly branded onto the nation’s consciousness.

It’s been a long road - particularly for those who were raped or otherwise abused as children and are now well into their later years - to bring society around to accepting that this is not to be treated as a dark secret that we really don’t want to expose to daylight. Many of those who called our helpline during the early days of the Savile investigation had never told anyone about the traumatic events of their childhoods despite the fact they had reached retirement age.

So, having buried the taboo, we seem to be in danger of giving it the kiss of life with the way some cases of alleged abuse are now being perceived.

It’s quite right that all claims of sexual assault should be investigated, tested and, where there is a case, pursued through the judicial system. No one is above the law, whether a ‘celebrity’ or a lord.

But we seem to have lost a sense of perspective when it comes to these crimes with vast resources being allocated to a handful of cases while many thousands of reported incidents are virtually on hold.

The police should never have to apologise for investigating crimes and following leads. However, if allegations are false or cannot be substantiated they should say so. This would be a strength not a weakness.

It is, of course, difficult that in many of the high-profile cases of recent times the identities of those under investigation have not been officially released by the police but have come to light through other means. Yet we have to deal with the world as it is not as we wish it would be and once names are common knowledge the results of the investigations centring on them should be made public.

When it emerges that someone in the public eye is being investigated for non-recent child abuse it obviously stirs the interest of the media whose appetite can be insatiable. This puts pressure on the police who don’t want to repeat the mistakes of the past by allowing offenders to slip through their hands.  And so there is a danger, as has been seen in recent cases, that officers lack confidence in declaring there is a lack of evidence or the allegations are not true. 

The disproportionate weight of media attention given to say, Sir Edward Heath, as opposed to the Bradford grooming gang sentenced this week, shows there is a danger the pendulum is swinging too far the other way. This threatens the painstaking work invested in ensuring the public and our institutions recognise child abuse as a very real danger. 

Whilst high profile cases have helped the cause there is now a real risk that the all-encompassing focus on them does both victims of abuse and those advocating on their behalf a fundamental disservice.

As the public watches high -profile cases collapsing amidst a media fanfare genuine convictions made across the country week in week out go virtually unannounced. If this trend continues they may start to believe that child sexual abuse isn’t the prolific problem we know it to be.

So, while detectives peer into the mists of time, searching for long lost clues, we have to face the unpalatable possibility that offences being committed today will in turn only be investigated fully in years or decades' time because there is not the manpower to deal with them right now.

So, now the Goddard Inquiry is in full swing, taking evidence about allegations of child sex crimes involving ‘well known people’ as well as institutional abuse, how do we ensure we don’t fail today’s victims?

If they start to think their stories are going to be diminished by the continuing furore over how some senior public figures have been treated by the police they will stay silent. Therefore we have to continue to encourage them to come forward, to give them the confidence of knowing they will be listened to.

If we don’t we will find ourselves back in those incestuous days where people conspired to say and do nothing to prevent child abuse.

Peter Wanless is Chief Executive of the NSPCC.