The personal debt bubble is fit to burst

We're almost in Wongaland already, writes Carl Packman.

Back in March 2012 the Office for Budget Responsibility (OBR) at least entertained the notion that economic growth would come from places other than an increase in household debt. Exports, investment, the lot. Today it doesn't bother, the consumer will have to go this alone, even with bank lending squeezed and wages left wanting. 

Even George Osborne, during his Mais Lecture in February 2010, offered us this gem: “The overhang of private debt in our banking system and our households weigh heavy on future prosperity”. How right he was, but his response was to lead us down the “road to Wongaland”. 

Despite the optimism of low interest rates, at least until unemployment rates are sorted out, critics have pointed out that Mark Carney's calls are really just a return to days where recovery will be fuelled by consumption and rising debt – as if we need more of that. 

Sure, people are returning to the shops, no doubt spurred on by the shiny weather, which is great for the economy, but what is the real upshot? Wages are falling in real terms and household debt is 153 per cent of GDP. On average each household in the UK is bagged with nearly £8000 in unsecured debt. Is the hope that we will get into more debt the only tool in the bag for economic growth?

Of course we should remind ourselves who the real winners are. Last year PwC said that credit cards were suffering a “mid-life” crisis as borrowers were using them less and taking out unsecured loans at a much faster rate. We're being told to spend more but we cannot afford to? The winners: who else but payday lenders.

In 2009, during the economic crisis, the payday lending industry was worth £900m. A mere four years later and the industry is worth over £2bn. One well-known player in the industry, The Money Shop, had 34 staff and a turnover of £2.9m in 1998, today with 2,300 staff their income is £172.3m. 

Not long ago the economist Tim Harford tried to allay our fears and said that compared to other forms of consumer credit lending the payday lending industry was relatively small and not to be worried about. But their rapid growth from an industry worth a measly £100m in 2004 should be better noted.

The industry is small in comparison but is growing at a far more accelerated rate than its mainstream counterparts. CityWire recently estimated that more than half (52 per cent) of new consumer credit loans are being made by "other" banking institutions and non-banks including non-standard mortgage lenders and sub-prime lenders such as pawnbrokers and payday lenders. 

And so it is, more of us are relying on high cost credit from payday lenders, personal debt profiles will grow dangerously large, less money will be circulated on the high streets, consumers will be less able to shield themselves from unseen financial shocks and the whole debt cycle starts again.

As the CityWire report notes, the OBR anticipated that a credit boom would sustain an economic recovery. But that boom is being held by fringe financial institutions such as payday lenders who are expensive and suck more money out of the economy than they put in. In turn the tune of increased payday lending, rather than being the silver bullet needed for economic growth, will be its death knell. 

If the economy is allowed to continue to run like this, with Britons being some of the most indebted in the world only able to supplement decreasing real wages and the rising cost of living with high cost credit, then a personal debt bubble will eventually burst. Osbornomics needs to change direction, fast. All the warning signs are there.

Cash Loans. Photograph: Getty Images

Carl Packman is a writer, researcher and blogger. He is the author of the forthcoming book Loan Sharks to be released by Searching Finance. He has previously published in the Guardian, Tribune Magazine, The Philosopher's Magazine and the International Journal for Žižek Studies.
 

Photo: Getty Images
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Why are boundary changes bad for Labour?

New boundaries, a smaller House of Commons and the shift to individual electoral registration all tilt the electoral battlefield further towards the Conservatives. Why?

The government has confirmed it will push ahead with plans to reduce the House of Commons to 600 seats from 650.  Why is that such bad news for the Labour Party? 

The damage is twofold. The switch to individual electoral registration will hurt Labour more than its rivals. . Constituency boundaries in Britain are drawn on registered electors, not by population - the average seat has around 70,000 voters but a population of 90,000, although there are significant variations within that. On the whole, at present, Labour MPs tend to have seats with fewer voters than their Conservative counterparts. These changes were halted by the Liberal Democrats in the coalition years but are now back on course.

The new, 600-member constituencies will all but eliminate those variations on mainland Britain, although the Isle of Wight, and the Scottish island constituencies will remain special cases. The net effect will be to reduce the number of Labour seats - and to make the remaining seats more marginal. (Of the 50 seats that would have been eradicated had the 2013 review taken place, 35 were held by Labour, including deputy leader Tom Watson's seat of West Bromwich East.)

Why will Labour seats become more marginal? For the most part, as seats expand, they will take on increasing numbers of suburban and rural voters, who tend to vote Conservative. The city of Leicester is a good example: currently the city sends three Labour MPs to Westminster, each with large majorities. Under boundary changes, all three could become more marginal as they take on more wards from the surrounding county. Liz Kendall's Leicester West seat is likely to have a particularly large influx of Tory voters, turning the seat - a Labour stronghold since 1945 - into a marginal. 

The pattern is fairly consistent throughout the United Kingdom - Labour safe seats either vanishing or becoming marginal or even Tory seats. On Merseyside, three seats - Frank Field's Birkenhead, a Labour seat since 1950, and two marginal Labour held seats, Wirral South and Wirral West - will become two: a safe Labour seat, and a safe Conservative seat on the Wirral. Lillian Greenwood, the Shadow Transport Secretary, would see her Nottingham seat take more of the Nottinghamshire countryside, becoming a Conservative-held marginal. 

The traffic - at least in the 2013 review - was not entirely one-way. Jane Ellison, the Tory MP for Battersea, would find herself fighting a seat with a notional Labour majority of just under 3,000, as opposed to her current majority of close to 8,000. 

But the net effect of the boundary review and the shrinking of the size of the House of Commons would be to the advantage of the Conservatives. If the 2015 election had been held using the 2013 boundaries, the Tories would have a majority of 22 – and Labour would have just 216 seats against 232 now.

It may be, however, that Labour dodges a bullet – because while the boundary changes would have given the Conservatives a bigger majority, they would have significantly fewer MPs – down to 311 from 330, a loss of 19 members of Parliament. Although the whips are attempting to steady the nerves of backbenchers about the potential loss of their seats, that the number of Conservative MPs who face involuntary retirement due to boundary changes is bigger than the party’s parliamentary majority may force a U-Turn.

That said, Labour’s relatively weak electoral showing may calm jittery Tory MPs. Two months into Ed Miliband’s leadership, Labour averaged 39 per cent in the polls. They got 31 per cent of the vote in 2015. Two months into Tony Blair’s leadership, Labour were on 53 per cent of the vote. They got 43 per cent of the vote. A month and a half into Jeremy Corbyn’s leadership, Labour is on 31 per cent of the vote.  A Blair-style drop of ten points would see the Tories net 388 seats under the new boundaries, with Labour on 131. A smaller Miliband-style drop would give the Conservatives 364, and leave Labour with 153 MPs.  

On Labour’s current trajectory, Tory MPs who lose out due to boundary changes may feel comfortable in their chances of picking up a seat elsewhere. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.