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

Alison McGovern
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Forget universal basic income - this is how we can include voters in economic growth

The links between economic growth of the country and that of the people, families and towns have broken. The state can fix them again. 

Economic policy is always boring, until it’s too late.

Pensions. How they are funded, who they cover, what happens if they fail. Boring. Until it was too late.

Mortgages. Who has them, who needs one, who should have one. Boring. Until it was too late.

Finance. Capital markets, their products, their structure, their risk profile. Boring. Until it was too late.

You see the point I’m making. It’s easy to look away from numbers. The data doesn’t necessarily tell us an obvious story. And then one day, a catalyst sparks an unforeseen, if, with hindsight, predictable event, and we all wonder why we didn’t see it coming.

Something similar happened with the Brexit vote. Of course, it was a perfect political storm: an overconfident Prime Minister calls a referendum that he only needs to have to pay off his right flank, safe in the knowledge that the mainstream voters and the leadership of the Labour party will carry him through. Except he forgets that there is someone more despised than even his right flank - him. 

But beneath all of that, the Brexit vote revealed a divided country. Between those who felt that Britain as it was before the referendum offered them a decent enough – if imperfect - future, and those who felt it offered them nothing of the sort. 

Could we have seen it coming? Perhaps we could. Take two graphs.

Real wages are still, today, on average below what they were in 2008, nearly a decade ago. At the point of the referendum, average wages were yet to return to the level they hit eight years earlier. The difference between real and nominal wages is inflation. People have watched prices steadily drift up while their wages have remained stubbornly flat. Not an overnight shock, but a long drawn out crisis all the same.

Vast numbers of pensioners (over 60 per cent of them) voted to leave the European Union, and pensioners incomes have not seen the same fall as incomes for the working age population (in fact they rose by 19 per cent in real terms in the last 10 years). But it is important not to overinterpret the data with hindsight. After all, there are nearly 32m British people of working age. That surely should have been enough to carry the vote, had far too many people had so little reason to back the status quo.

In the years running up to the crucial Brexit vote, the economy was, by and large, moving ahead. But in the case of the most crucial, most noticeable, economic transfer - a person’s wages - the economy was not moving ahead at all. In fact between the crash and the 2015 general election, wages largely only fell, and since then, pay has struggled to make up ground, against a picture of an otherwise ‘growing’ economy.

Worst of all - nearly 4m households in measurable (and therefore known) poverty include someone at work. Of the 17m Brexit voters, some were wealthy retired voters who always hated Brussels. But how many more simply had too little to lose, and couldn’t stand David Cameron?

The problem with all this though, and the reason we didn’t see it coming, is that no one’s life is a graph. I mean, we are all data points. But no one feels like a data point. And people are notoriously bad at providing logical, graph-like, mathematical reasons for their political judgements. "My individual wages have failed to keep pace with growth in the economy at large," said no person on no doorstep, ever. Unhappiness with what is on offer manifests itself in lots of different ways but it isn’t likely to be an analysis of the macro-economy.

We all know of course that people are much more likely to connect with politics (and politicians) emotionally. That is how we make our choices. But our emotions are informed by the facts of our life and are responses to the facts we see. So, whilst the graphs above cannot tell us all we need to know about why Remain lost, they do tell us about some facts likely to impact on the choices we make.

The challenge is to work out how we can change the trends shown on the graph, and how this in turn will affect those who lost out over the past decade. What can be done to repair the link between economic growth and economic growth for all?

This challenge is to create "inclusive growth". Or as I think of it, making sure there is a hard chain which links growth in the economy overall to the growth of wages and incomes of the many. When the country rises, so must all within it.

The hard links in the chain are what should have kept our country together. They are the rules that should have meant that the British economy doing better meant individuals, families, towns, cities all doing better too. You can see from the graphs above that the rules worked between 1997 and about 2005. Our country grew, and we all grew in capacity with it. But then the model stopped working. And 11 years later people were asked to vote for the status quo, even though the status quo was clearly failing the many.

We will never be able to see the trends until it is too late. We need rules that shape our markets, including the labour market, to achieve an outcome that people can see and feel in their pockets. Analysis of the past is only any good if it can help shape the future. 

It’s not enough to say that somehow our economy is rigged against people, as if this was one great fiddle. Rather, we should remember that policy choices have consequences. 

Now some people suggest that the correct response to falling wages, and precarious work, is some sort of universal benefit, or citizens’ income. But recent Fabian Society research demonstrated that the vast majority of people – about 80 per cent - feel positive about their work even despite the story told here about wages. So even if it were practical for government to raise taxes in order to transfer something in the region of the state pension to every person in our country, it hardly seems like it would be popular. 

If people, in general terms, actually like their work, the problem is then making sure they get paid enough and get promotions. It means recognising what the past decade has taught us: that the growth of the economy must mean economic growth for all within the economy, or else there will be consequences.

So, the question remains: what are the hard links in the chain between the economic growth of the country as a whole, and economic growth of the people, families and towns within it?

Unfortunately, this is where the boring stuff still matters. You can get paid more if you have better prospects. That means a buoyant labour market, and the skills to participate in it.

Now the government say that they are addressing the challenges in our economy by investing in infrastructure, through an industrial strategy. And along with buzzy new ideas like universal basic income (where citizens are guaranteed a certain income), everyone in politics loves announcing campaigns for new railway lines (me included). Trains are big, fast, expensive and showy. But travelling to work by train tends to be the preserve of those who already have a high-skilled job and are commuting some distance. We should worry a little more about those who get the bus to work.

Then take those who work in low-pay sectors like care, retail, hospitality, or construction. Each sector has its own challenges, but one thing that unites of all these sectors is the likelihood of people working in them to be working below their potential skill level. Hopefully our new metro mayors will be able to provide better education opportunities for those at or near the minimum wage. But what about in those areas without mayors? Do they fall even further behind? Skills transfers matter much more for future growth than a massive financial transfer like universal basic income.

And in case anyone should think that I have forgotten, with less than 15 per cent of people in the private sector represented by a trade union, it is little wonder that workers have insufficient power to command better wages. Our labour market leaves too many people on their own, without the strength of collective bargaining to get them a good deal.

Universal basic income fails for another crucial reason. It would fail for the same reason that tax credits were economically effective but open to political challenge. For most people, the part of government, of the state, that they wish to defend are the things they can see, they can touch, emotionally engage with. The hospital their child was born in, that cared for a sick parent, the school they went to, the park they played in with their grandchild. They prefer to earn their wages, and do a job they enjoy. Transfer payments from the state are always harder to defend, as the history books attest. 

So for me, truly inclusive growth means making the most of the institutions we already have – colleges of further education for example – and building new ones like universal quality childcare. Many members of our workforce are prevented from returning to work after the birth of a child, simply because of the cost of childcare. Universal free childcare would allow many more women to go back to work or have the time to gain more skills, should they want to. Moreover, good quality childcare would benefit all of our children by narrowing the attainment gap. These hard links in the chain - the links that ensure that growth in Britain involves economic growth of all of those people and places within it - are, in fact, the institutions of the state. 

These are the platforms Labour governments have built for ordinary people to stand on. But these are the very institutions under attack from current government policy. If we’re going to rebuild the chain, then the government must change tack. We need to develop new ideas and solutions and the all-party parliamentary group on inclusive growth can be a place to bring people together across the party divide. Theresa May has spoken about an economy that works for all. Now’s the time to protect the institutions that can deliver that economy and inclusive growth, before it is too late.

The APPG on Inclusive Growth's 'State of the Debate' event with the OECD, World Economic Forum, RSA and IPPR is on Tuesday 21st February at 6.30pm at Parliament. See www.inclusivegrowth.co.uk for full details.

Alison McGovern is Labour MP for Wirral South.