As a highly indebted society we quickly became comfortable with extraordinarily low interest rates. Photo: Getty
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Too many households with modest means are shouldering too high a debt burden

As we anticipate interest rates rising, how can the government help households in debt through the painful transition?

Whether it is this autumn, the New Year or shortly after next May’s election, everyone knows that interest rates are going to start rising sometime relatively soon. Yet despite the endless "guess the month" speculation about the precise timing of the first rise, little thought has actually been given to the bigger and longer-term question of ensuring the right framework is in place to ease the painful transition back to more normal interest rates for Britain’s borrowers.

The nature of the debt challenge tends to get oversimplified. The mere fact that levels of debt in cash terms sound scarily high isn’t necessarily cause for panic. We’d expect, for instance, a gentle rise in house prices to generate a steady growth in household debt. No, the biggest problem is essentially a distributional one. Too many households with modest means are shouldering too high a debt burden. Today they are already struggling even with rock-bottom interest rates. Tomorrow they could be pushed over the edge – or that, at least, is the fear.  

To appreciate the extraordinary period we have lived through, consider that a household with a mortgage of £75k has received a cumulative ‘windfall’ of around £12.5k in the years since the crisis, relative to the cost of servicing the same mortgage before 2008 (double that for a mortgage of £150k).That’s a very big gain and - for many homeowners, as opposed to renters, has compensated for the squeeze in real incomes. Looking to the future, if interest rates rise in line with expectations, to around 3 per cent by 2018, and typical mortgage rates go up as a result by say 1.5 per cent (some might think this optimistic), it adds £1.5k to the annual costs of a £150k mortgage. If you assume sharper rate rises the figures get truly scary.

All of which would, you’d think, help focus minds.

Yet I haven’t heard a single politician talk about the issue and what, if anything, might be done to prepare for it. That the next parliament will be overshadowed by prolonged, if largely unspecified, fiscal austerity is now a ubiquitous point. That it could also be shaped by steady monetary tightening rarely gets explored.

Given that this trajectory is near-inevitable, even if the pace and scale of rate increases are still up for grabs, how might policy-makers help cushion the burden of adjustment for debt-soaked households?

It’s a vexed question as there are two potentially contradictory goals: prevent a future credit-fuelled boom while at the same time carefully defusing the economic and social problems caused by the last one. (Think of it as avoiding a hair of the dog recovery while nursing those suffering an almighty hangover back to full health). Both are vital: but take the wrong approach on the former and you take risks with the latter.         

Navigating a way through this requires deft policy. According to a new report from the Resolution Foundation, first and foremost we must get the sequencing right. The Governor of the Bank of England has – correctly and repeatedly - indicated that rates are unlikely to go up until household incomes are climbing. Contrary to the city analysts itching to find evidence of resurgent wage-pressures (at a time when earnings growth just fell to its lowest ever recorded level), let’s not get too trigger happy.

The worry is less the MPC’s stance and more that the measure of household incomes that the Bank relies on is misleading: it consistently overstates income growth compared to other more authorative measures. Indeed, it is alarming that our authorities rely on a measure which would have us believe that disposable incomes were flat during the downturn when, as we know, they fell. What’s more, it’s a measure that doesn’t tell us anything about how different parts of the income distribution are faring. Given the debt-challenge is intrinsically a distributional one this is a rather large blind-spot which needs sorting.  

Second, some households have got used to rock-bottom rates and will need to be jolted to prepare for what is to come. The remaining window of opportunity should be used to get exposed borrowers to review their finances, consider how they will adjust to higher repayments and whether they could switch to deals that will better protect them. The financial regulator, the FCA, should force all banks to engage with 2m potentially exposed borrowers, even though this will feel like an unwelcome intrusion for some individuals.

Third, consumer regulation needs strengthening. Large numbers of households are likely to be severely constrained in their capacity to switch to a better deal. These potential ‘mortgage prisoners’ may struggle to refinance given the tougher lending criteria that banks have been told to adopt meaning that they will have no option other than sitting, precariously, on their bank’s standard variable rate. Pre-crash, these borrowers were awash with offers; now they are shunned. Given the market is unlikely to work for them, for now at least, regulation needs to ensure that they get treated reasonably.  

Finally, in a world of higher rates and sluggish income growth for some, it will inevitably be the case that there will be a spike in the numbers of homeowners unable to meet their obligations. Repossession can be both traumatic and expensive (often shifting cost onto the housing benefit bill and piling up problems in the rental sector) so thought needs to be given to how to make it easier for households to stay in their homes while reducing their equity and their debts (a sort of ‘shared ownership’ in reverse). To this effect, the report sketches out something that might be dubbed ‘help not to be repossessed’, a programme likely to serve more of a social purpose in the years ahead than Help to Buy.

Emerging out of a massive debt-overhang in reasonable health requires carefully calibrated monetary policy backed up by sympathetic regulatory and welfare measures. At the moment we are hoping things are alright on the night.

The post-crisis era has taken us on a journey into the monetary unknown. As a highly indebted society we quickly became comfortable with extraordinarily low rates. That era is coming to an end: time to prepare for the journey back to normal.

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

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"We repealed, then forgot": the long shadow of Section 28 homophobia

Why are deeply conservative views about the "promotion" of homosexuality still being reiterated to Scottish school pupils? 

Grim stories of LGBTI children being bullied in school are all too common. But one which emerged over the weekend garnered particular attention - because of the echoes of the infamous Section 28, nearly two decades after it was scrapped.

A 16-year-old pupil of a West Lothian school, who does not wish to be named, told Pink News that staff asked him to remove his small rainbow pride badge because, though they had "no problem" with his sexuality, it was not appropriate to "promote it" in school. It's a blast from the past - the rules against "promoting" homosexuality were repealed in 2000 in Scotland, but the long legacy of Section 28 seems hard to shake off. 

The local authority responsible said in a statement that non-school related badges are not permitted on uniforms, and says it is "committed to equal rights for LGBT people". 

The small badge depicted a rainbow-striped heart, which the pupil said he had brought back from the Edinburgh Pride march the previous weekend. He reportedly "no longer feels comfortable going to school", and said homophobia from staff members felt "much more scar[y] than when I encountered the same from other pupils". 

At a time when four Scottish party leaders are gay, and the new Westminster parliament included a record number of LGBTQ MPs, the political world is making progress in promoting equality. But education, it seems, has not kept up. According to research from LGBT rights campaigners Stonewall, 40 per cent of LGBT pupils across the UK reported being taught nothing about LGBT issues at school. Among trans students, 44 per cent said school staff didn’t know what "trans" even means.

The need for teacher training and curriculum reform is at the top of campaigners' agendas. "We're disappointed but not surprised by this example," says Jordan Daly, the co-founder of Time for Inclusive Education [TIE]. His grassroots campaign focuses on making politicians and wider society aware of the reality LGBTI school students in Scotland face. "We're in schools on a monthly basis, so we know this is by no means an isolated incident." 

Studies have repeatedly shown a startling level of self-harm and mental illness reported by LGBTI school students. Trans students are particularly at risk. In 2015, Daly and colleagues began a tour of schools. Shocking stories included one in which a teacher singled out a trans pupils for ridicule in front of the class. More commonly, though, staff told them the same story: we just don't know what we're allowed to say about gay relationships. 

This is the point, according to Daly - retraining, or rather the lack of it. For some of those teachers trained during the 1980s and 1990s, when Section 28 prevented local authorities from "promoting homosexuality", confusion still reigns about what they can and cannot teach - or even mention in front of their pupils. 

The infamous clause was specific in its homophobia: the "acceptability of homosexuality as a pretended family relationship" could not be mentioned in schools. But it's been 17 years since the clause was repealed in Scotland - indeed, it was one of the very first acts of the new Scottish Parliament (the rest of the UK followed suit three years later). Why are we still hearing this archaic language? 

"We repealed, we clapped and cheered, and then we just forgot," Daly says. After the bitter campaign in Scotland, in which an alliance of churches led by millionaire businessman Brian Souter poured money into "Keeping the Clause", the government was pleased with its victory, which seemed to establish Holyrood as a progressive political space early on in the life of the parliament. But without updating the curriculum or retraining teaching staff, Daly argues, it left a "massive vacuum" of uncertainty. 

The Stonewall research suggests a similar confusion is likely across the UK. Daly doesn't believe the situation in Scotland is notably worse than in England, and disputes the oft-cited allegation that the issue is somehow worse in Scotland's denominational schools. Homophobia may be "wrapped up in the language of religious belief" in certain schools, he says, but it's "just as much of a problem elsewhere. The TIE campaign doesn't have different strategies for different schools." 

After initial disappointments - their thousands-strong petition to change the curriculum was thrown out by parliament in 2016 - the campaign has won the support of leaders such as Nicola Sturgeon and Kezia Dugdale, and recently, the backing of a majority of MSPs. The Scottish government has set up a working group, and promised a national strategy. 

But for Daly, who himself struggled at a young age with his sexuality and society's failure to accept it, the matter remains an urgent one.  At just 21, he can reel off countless painful stories of young LGBTI students - some of which end in tragedy. One of the saddest elements of the story from St Kentigern's is that the pupil claimed his school was the safest place he had to express his identity, because he was not out at home. Perhaps for a gay pupil in ten years time, that will be a guarantee. 

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