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Household debt is a problem- But its one our politicians don’t want to talk about

Household debt has risen dramatically in the last few years. Should the bubble burst there could be serious economic consequences.

Iwan Doherty by Iwan Doherty
2019-07-15 11:24
in Opinion
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The national debt is a pivotal issue in British politics. In 2010 and 2015 controlling our national debt was a key part of the Conservative message that helped deliver them victory but despite our national debt being higher than it was post-recession, its size does not concern most serious economists. The debt that does is this nation’s household debt, the debt held by citizens like ourselves. Household debt has risen dramatically in the last few years, fuelled by the enduring hardship created by austerity and should this debt bubble burst we would witness serious economic consequences. So why do we never hear about the substantial debt on our citizens? It doesn’t affect the wealthy of course.

The national debt has always garnered interest from our political class and now that our deficit has almost reached zero it will begin to fall. However, the drastic economic consequences of austerity have pushed up another debt, our own. The reduced spending on services that we need alongside falling wages have meant British citizens have been pushed into more and more borrowing. In fact, Brits now find their finances in deficit for the first time in 40 years. In 2017, households took out nearly £80 billion in loans but they deposited just £37 billion with UK banks, an economic situation that ratings agency Standard & Poor’s label unsustainable and should raise “red flags”. The situation has got worse since that data was gather.

The picture gets worse when we consider unsecured lending has increased to record levels. This is short term debt such as credit card debt and overdrafts rather than debt such as mortgages and is even more volatile than other forms of debt. In short we are one the worst debtors in Western Europe.

This dramatic rise is most likely caused by austerity and the government’s reduction of the deficit, though the post referendum stagnating wages and rise in inflation has also spurred on the level of debt.  The relation with public and private debt is one that is of increasing interest to Post-Keynesian economists especially those who put their faith in Modern Monetary Theory. MMT would suggest the dropping government deficit is pushing the rest of us into deficit but the way the government has gone about this may be a bigger reason for the substantial rise in debt.

Whatever the cause the rising debt has economic repercussions. Consumer spending is a vital part of our economy and while debt can help fuel spending in our economy, predictably those with higher debt also limit their spending and in our post-crash economy the impact of household debt has been to hurt growth via the limitation of spending. Equally the possibility of this debt has to cause serious problems in our economy should not be underestimated. If you want to know what happens when a bubble of debt burst research the 2008 financial crash. Credit can benefit the economy but always has risk and this level of it presents a threat to our economy.

We should ask serious questions of how our economy would fair in a recession caused by another factor that we may be heading into to. Wages have not recovered from the crash of 2008 and with household debt at record levels we are in a much worse place than we were when the global financial crash struck in 2008. Make no mistake the large household debt that hangs over us has an unrealised detrimental effect to society.

Debt also provides a deeper challenge to society, in both its welfare and liberty. According to philosophers like Lazzarato and Goodchild debt greatly reduces liberty and by binding us to the will of credit. In a wider economic sense this means that this dramatic rise in household debt greatly damages the liberty of citizens through the need to pay their debts. Therefore, elimination of this debt should be a priority of parties across the political spectrum, whether they seek to maximise welfare or liberty, yet neither party has substantial policies designed to address it.

The lack of political attention this issue gets is damming and while Labour do have policies, such a rise in minimum wage, that will help lessen household debt via rising wages no party has methods to directly solve the issue. Maybe this is due to the necessity and power of credit in modern capitalism. But parties should look to more sustainable lending institutions like credit alongside fiscal and monetary policies to solve our growing debt problem. For if it is not solved before the next recession the misery of the working classes with be greatly multiplied.

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