The debt collector's hammering at the front door. Will this be a wake-up call for Westminster?

Unexpected people are struggling. The middle is getting closer to the bottom. So what is the way out?

Charleen is talking to me by phone, and I can hear her three kids screaming in the background. She’s been working from 7am at home because she can’t afford the childcare to go into the office. The rent is due on Monday, and she’s running out of options. The TV and kids’ computer games have already gone to the pawnbrokers and her private landlord doesn’t give a damn. She already owes £2,000 to pay day lenders. Now she’s choosing between eating and heating.

“You can’t win, no matter how you look," she says, "I’m getting all sorts of panic attacks, I’m stressing about keeping a roof over me and my children’s heads… A lot of people feel the same. You can't afford to rent privately, pay the bills and eat.”

Millions of people around the UK are now finding themselves in the same position. As the credit card bills for Christmas thud through the letterbox, January 14 has been labelled “debt day”.

Those suffering are no longer just in the lowest income groups. They are not irresponsible spenders and they often work overtime. Charleen works as an accountant. She manages a company’s finances, but she can’t make the books balance at home. The cost of living is rising like a tide, and when wages don’t keep up, even middle-income earners struggle to stay afloat. The household buget on the back of an envelope goes in the bin. We borrow to plug the gap.

“People ask me why I’m lending from these places (pay day lenders) when there’s so much to pay back, but I have no choice. I just have to pay my rent. I’m Robbing Peter and Paul to pay Mike. I’ll try and catch up but everyone just wants their money.”

“To be honest it’s crossing into the family home – I’ve got arguments with the other half and I’m shouting at the kids constantly. I try not to burden the kids. I don’t want them to have a bad life . . . They ask why I’m not eating and I just say I’m not hungry, or I ate a bite whilst I was cooking. This is just the stuff you say.”

This government talks a lot about cutting state debt. But the figure it talks less about is personal debt held by individuals on loans and credit cards. According to Credit Action, that figure now stands at a whopping £1.4 trillion – and it’s growing.

In a twisted irony, experts say that some of the government’s desperate attempts to cut state debt may actually increase personal debt. When the benefit cap kicks in, Charleen says she will be borrowing more to plug the gap. Parents will go to pay day lenders to compensate for housing benefit changes. Students are already borrowing more for higher tuition fees to cover education cuts. Without doing more to help people, reductions in the state debt are being met by an increase in personal debt as Britons try to compensate.

Anna Hall knows all about this. She works as a money advice manager at Citizens Advice, a charity that registered 2.1 million debt problems last year alone. In the wake of the Christmas holidays, she knows that all advisers will be on call as the telephones ring off the hook. She says this year, it’s only predicted to increase.

“At the moment most of our calls are about benefit changes, but we’re expecting a knock-on effect as people take on more debt just to get through it. We’re all expecting it to get much worse. Meanwhile one of the cuts to hit local authorities is Citizens Advice services so we can’t even provide all the advice we want. It’s a perfect storm really.”

Hall says it’s hard to stereotype the people who are asking for help. In the last round of figures, 61 per cent of Citizens Advice callers were in some form of work. Most survive on the edge with low wages and high costs, so a sudden change can quickly push them under. A relationship breakdown. A dentist bill. A fridge malfunction. A funeral. With no financial space to meet these surprises, the debt spiral starts.

But Hall says it’s not just borrowers that are changing. It’s also the lenders.

“Before the crash it was easy to access to cheap credit,” says Hall, “Now people are turning to pay day loan companies and credit cards for rent, food and clothes – the really basic stuff. That’s the big shift. Benefits are already incredibly tight, including for those in work, and it’s harder to make ends meet.”

Walk down your local high street and you’ll see evidence of this growing borrowing culture just about anywhere in the UK. Wonga. Peaches. The Money Shop. In London the adverts are plastered on red buses. "Money in minutes!" scream local billboards. Money in seconds is available on phone apps from your bedroom. By the age of ten, a third of children have used their parent’s credit card to make an online purchase. We are a nation of borrowers and lenders. We don’t produce goods, we shuffle credit.

To put this problem in perspective, look at the graph (below) produced by Morgan Stanley. We can see that the UK is the most indebted country in the developed world – we are deeper in the red than Japan, the USA and Europe. But only a tiny fraction of our total debt is held by government. Most is held by the financial sector, but a good chunk of it is also held by households. In fact, the level of household debt in this country is actually greater than government debt.

The bulk of this household debt is not from credit cards or payday loan companies, but mortgages. But owning your own home doesn’t mean you’re secure. Take Christine, who works as a 999 call operator in Oxfordshire. She was just two years away from paying off her mortgage and taking several holidays a year until her husband walked out on her. Then everything changed. Making mortgage repayments and household bills with just one earner was impossible, and she racked up some £6,000 worth of debt on credit cards just buying basics and working overtime.

“Yes there are people who spend irresponsibly,” she says, “People say they have to have things but they don’t really. People say they have to buy their kids certain Christmas presents, but all they’ve got to do is say No. For me, it wasn’t like that. Everything was affordable until we broke up. It was an accidental debt.”

“Only now do I realise how little room there is to manoeuvre,” she goes on, “I’m over the moon if I get to the end of the month and have £20 in my account, but if something went wrong with the car or something then that would be it.”

But can’t she just move to a smaller place? Christine already moved out of her home to rent a £700 a month flat, and the only cheaper alternative she could find was full of cockroaches and still left her struggling. For others, moving often means leaving their job and family and friendship networks, not to mention uprooting their children’s education. For too many people, it doesn’t seem possible to work your way out.

“It breaks your heart sometimes”, says Christine, “I put in forty or fifty hours a week and what’s it for? Charity shops and egg on toast for tea. You can make a joke of it, but sometimes it wears a bit thin. It can happen to anyone at the toss of a coin.”

Given that the financial crisis was triggered by irresponsible lending, why doesn’t the government talk more about this? The answer from experts is worrying. When two thirds of the British economy is built on household spending, and when a large bulk of that spending is fuelled by debt, no one wants to pop the bubble. David Cameron found this out the hard way when he was forced to remove calls for Britons to pay off their credit card bills in his 2011 conference speech. He hadn’t clocked that this would plunge the economy into a much deeper recession.

“There is a bit of denialism about the role of debt in the recovery,” says James Plunkett, director of policy at the Resolution Foundation, “there is only just starting to be a realisation that this needs to be looked at.”

In fact, Plunkett argues, one of the biggest problems with the government’s recovery plan is that people aren’t borrowing enough:

“Early projections from the Office of Budget Responsibility assumed that households would borrow more than they have to compensate for declining real wages. The fact that they haven’t is one of the key reasons why growth isn’t going as well as we thought.”

In other words, the government was hoping for a more debt-fuelled recovery than the British people have given them.

But the fact that Britons, on average, are paying off more than we predicted, does not mean that debt isn’t a growing problem. Looking at averages hides the fact that there’s a long tail of people who are getting into deeper trouble. Some 3.6 million people in the UK are now “debt loaded” which means they spend more than a quarter of their income on debt repayments, and middle income earners are starting to be effected.

The scale of the problem was brought home to me last week when I was talking about this article with friend in a pub. Sitting opposite me with neat blonde hair and getting ready to leave early for work the next day as a middle manager, this highly educated and hard working woman told me she’d been forced to take out pay day loans several times last year to cover basic living costs. She’d not told anyone before then. People we don’t expect are struggling. The middle is getting closer to the bottom.

So what is the way out? Financial education is part of it, but that doesn't help when the cost of living is higher than wages. To make a real difference, we need to make work pay for the bottom half. The Resolution Foundation has put forward proposals for a £2bn childcare programme for example, which Plunkett argues could be funded in part by cutting universal pension credits:

“Part of the problem is that work related costs like childcare and transport have gone up. That’s why childcare is so important, and the living wage. For many families it doesn’t make sense for the second parent to go out to work because it doesn’t cover the cost of childcare.”

None of this is easy. The last government also failed to do enough. But for many outside Westminster the wake up call has already started. Charleen still hasn’t paid the rent. She’s on sleeping pills, and the anxiety is running high. The last financial crisis was built on private lending to insecure individuals. We can't afford the human or financial cost of repeating that mistake. We need to talk again about debt, and this time it’s personal.

Photograph: Getty Images

Rowenna Davis is Labour PPC for Southampton Itchen and a councillor for Peckham

Getty
Show Hide image

There's nothing Luddite about banning zero-hours contracts

The TUC general secretary responds to the Taylor Review. 

Unions have been criticised over the past week for our lukewarm response to the Taylor Review. According to the report’s author we were wrong to expect “quick fixes”, when “gradual change” is the order of the day. “Why aren’t you celebrating the new ‘flexibility’ the gig economy has unleashed?” others have complained.

Our response to these arguments is clear. Unions are not Luddites, and we recognise that the world of work is changing. But to understand these changes, we need to recognise that we’ve seen shifts in the balance of power in the workplace that go well beyond the replacement of a paper schedule with an app.

Years of attacks on trade unions have reduced workers’ bargaining power. This is key to understanding today’s world of work. Economic theory says that the near full employment rates should enable workers to ask for higher pay – but we’re still in the middle of the longest pay squeeze for 150 years.

And while fears of mass unemployment didn’t materialise after the economic crisis, we saw working people increasingly forced to accept jobs with less security, be it zero-hours contracts, agency work, or low-paid self-employment.

The key test for us is not whether new laws respond to new technology. It’s whether they harness it to make the world of work better, and give working people the confidence they need to negotiate better rights.

Don’t get me wrong. Matthew Taylor’s review is not without merit. We support his call for the abolishment of the Swedish Derogation – a loophole that has allowed employers to get away with paying agency workers less, even when they are doing the same job as their permanent colleagues.

Guaranteeing all workers the right to sick pay would make a real difference, as would asking employers to pay a higher rate for non-contracted hours. Payment for when shifts are cancelled at the last minute, as is now increasingly the case in the United States, was a key ask in our submission to the review.

But where the report falls short is not taking power seriously. 

The proposed new "dependent contractor status" carries real risks of downgrading people’s ability to receive a fair day’s pay for a fair day’s work. Here new technology isn’t creating new risks – it’s exacerbating old ones that we have fought to eradicate.

It’s no surprise that we are nervous about the return of "piece rates" or payment for tasks completed, rather than hours worked. Our experience of these has been in sectors like contract cleaning and hotels, where they’re used to set unreasonable targets, and drive down pay. Forgive us for being sceptical about Uber’s record of following the letter of the law.

Taylor’s proposals on zero-hours contracts also miss the point. Those on zero hours contracts – working in low paid sectors like hospitality, caring, and retail - are dependent on their boss for the hours they need to pay their bills. A "right to request" guaranteed hours from an exploitative boss is no right at all for many workers. Those in insecure jobs are in constant fear of having their hours cut if they speak up at work. Will the "right to request" really change this?

Tilting the balance of power back towards workers is what the trade union movement exists for. But it’s also vital to delivering the better productivity and growth Britain so sorely needs.

There is plenty of evidence from across the UK and the wider world that workplaces with good terms and conditions, pay and worker voice are more productive. That’s why the OECD (hardly a left-wing mouth piece) has called for a new debate about how collective bargaining can deliver more equality, more inclusion and better jobs all round.

We know as a union movement that we have to up our game. And part of that thinking must include how trade unions can take advantage of new technologies to organise workers.

We are ready for this challenge. Our role isn’t to stop changes in technology. It’s to make sure technology is used to make working people’s lives better, and to make sure any gains are fairly shared.

Frances O'Grady is the General Secretary of the TUC.