Household debt in the UK has reached a record level. Individuals now owe £1430 billion. This compares with the UK’s general government debt of £1443 billion – also at a record level. These figures are illustrated in the chart (click here for a PowerPoint).
But these figures are nominal. If you look at the real figures (i.e. corrected for inflation), household debt has been falling. In today’s prices, household debt peaked at £1668 billion in March 2008. Also, if you look at household debt as a proportion of GDP, it fell from a peak of 100.96% in May 2009 to 87.43% in July 2013 (see chart). However, since then it has begun rising again, standing at 87.65% in October 2013.
So has household debt become less of a problem? In aggregate terms, the answer is probably yes. However, it is too early to know whether a continuing recovery in the economy will be fuelled by real debt rising again and whether the recovery will encourage people to take on higher levels of debt?
For many people, however, debt has become more and more of a problem. In other words, the aggregate figures conceal what has happened in terms of the distribution of debt. According to a Centre for Social Justice (CSJ) study:
Indebted households in the poorest 10 per cent of the country have average debts more than four times their annual income. Average debt repayments within this group amounted to nearly half their gross monthly income.
And the poorest families, often with very poor credit ratings, are frequently forced to turn to payday lenders, charging sky-high interest rates (see Capping interest rates on payday loans: a government U-turn?).
As mainstream banks reduced access to credit following the financial crash, the market for short-term high-cost credit (payday lenders, pawnbrokers, rent-to-buy and doorstop lenders) increased dramatically and is now worth £4.8 billion a year.
Payday lenders have increased business from £900 million in 2008/09 to just over £2 billion (or around 8 million loans) in 2011/12. Around half of payday loan customers reported taking out the money because it was the only form of credit they could get. The number of people going to loan sharks is also said to have increased – the most recent estimate puts it at 310,000 people.
With rising energy and food bills hitting the poorest hardest, this section of the population could find debt levels continuing to rise, especially if interest rates rise. As Chris Pond, who chaired the CJS study, stated:
The costs to those affected, in stress and mental disorders, relationship breakdown and hardship is immense. But so too is the cost to the nation, measured in lost employment and productivity and in an increased burden on public services.
Articles
£1,430,000,000,000 (that’s £1.43 trillion): Britain’s personal debt timebomb Independent, Andrew Grice (20/11/13)
Average household debt ‘doubled in last decade’ The Telegraph, Edward Malnick (20/11/13)
UK household debt hits record high BBC News (29/11/13)
UK debt crisis: poorest face ‘perfect storm’ Channel 4 News (20/11/13)
One in five struggle with serious debt The Telegraph, Nicole Blackmore (27/11/13)
It doesn’t matter what we do with Wonga: personal debt is about to rocket The Telegraph, Tim Wigmore (26/11/13)
Poorest families ‘need more help over debt’ BBC News (20/11/13)
Report
More than 5,000 people a year ‘homeless’ as household debt crisis deepens, CSJ warns Centre for Social Justice Press Release (20/11/13)
Data
Monthly amounts outstanding of total (excluding the Student Loans Company) sterling net lending to individuals and housing associations (in sterling millions) seasonally adjusted Bank of England
Public Sector Finances First Release – Public Sector Consolidated Gross Debt ONS
Household debt (Economics Indicators update) House of Commons Library (29/11/13)
Questions
- What are the macroeconomic implications of rising levels of household debt?
- Why may an economy which has high levels of household debt be more subject to cyclical fluctuations in real GDP?
- What are the problems of having a recovery driven largely by increased consumer expenditure?
- Why have many people in the poorest sectors of society found their debt levels rising the fastest?
- Why may rising levels of debt of the most vulnerable people make it harder for the Bank of England to use conventional monetary policy if recovery becomes established?
- What policies could be pursued to try to reduce the debts of the poorest people?
- Discuss the effectiveness of these various policies.
Growing inequality of income and wealth is a common pattern throughout the world. In the boom years up to 2008, the rich got a lot richer, but at least those on low incomes generally saw modest rises in their incomes. Since 2008, however, the continually widening gap between rich and poor has seen the poor and many on middle incomes getting absolutely poorer.
The problem is particularly acute in the USA. Indeed, in his 2012 State of the Union address, President Obama said that it was the ‘defining issue of our time.’
No challenge is more urgent. No debate is more important. We can either settle for a country where a shrinking number of people do really well, while a growing number of Americans barely get by. Or we can restore an economy where everyone gets a fair shot, everyone does their fair share, and everyone plays by the same set of rules.
The good news for the poor in the USA is that at last their incomes have stopped falling, thanks to stronger economic growth. But their share of the growth in GDP is tiny.
As The Economist article states:
The main message is a grim one. Most of the growth is going to an extraordinarily small share of the population: 95% of the gains from the recovery have gone to the richest 1% of people, whose share of overall income is once again close to its highest level in a century. The most unequal country in the rich world is thus becoming even more so.
Apart from the ethical question of whether it is desirable for a society, already highly unequal, to become even more so, there is the question of whether this growth in inequality threatens economic recovery. Joseph Stiglitz argues that the rich have a low marginal propensity to consume and that this is threatening recovery.
Then there is the question of investment. Because most Americans have not seen any significant rise in incomes, it is easy for them to believe that the country cannot afford to invest more. And certainly it is difficult to persuade people that higher taxes are warranted to fund education, infrastructure or research.
The following articles consider the problem and its implications and look at various policy alternatives.
Articles and videos
Inequality: Growing apart The Economist (21/9/13)
What is income inequality, anyway? CNN, John D. Sutter (29/10/13)
Inequality is literally killing America Press TV (22/11/13)
It’s Economic Inequality Stupid – What to Do About the Biggest Crisis Facing America Huffington Post, Robert Creamer (14/11/13)
US Inequality Now Literally Off the Chart Truthout, Salvatore Babones (8/6/13)
Inequality moves to the front line of US politics Financial Times, Richard McGregor (20/11/13)
Is wealth inequality slowing growth? BBC News, Linda Yueh (21/11/13)
American Inequality in Six Charts The New Yorker, John Cassidy (18/11/13)
Income Inequality ‘Profoundly Corrosive’ Wall Street Journal, Larry Summers (19/11/13)
21 Charts On US Inequality That Everyone Should See Business Insider, Gus Lubin (12/11/13)
Data, information and reports
Income inequality in the United States Wikipedia
Inequality Data & Statistics Inequality.org
Income Main United States Census Bureau
World of Work Report 2013: Snapshot of the United States ILO
World of Work Report 2013 ILO
StatExtracts OECD (Search for Gini)
Questions
- How may income inequality be measured?
- Comment on the Gini coefficients in the above link to the StatExtracts site.
- Why has inequality grown in the USA?
- The Swiss have just voted in a referendum to reject a proposal to limit executive pay to 12 times that of the lowest paid worker in the same company. What are the arguments for and against the proposal?
- What features of an unequal society tend to perpetuate or even deepen that inequality over time?
- What features of a well functioning market economy would help to reduce income inequality?
- Are higher marginal tax rates and higher welfare payments the best way of reducing inequality? What other policy options are there?
- Compare the views of Paul Krugman and Joseph Stiglitz on the effects of growing inequality on economic growth. How significant is the difference in the marginal propensity to consume of the rich and the poor in explaining the relatively low rate of US economic growth?
Pressure has been growing in the UK for people to be paid no less than a living wage. The Living Wage Foundation claims that this should be £8.55 per hour in London and £7.45 in the rest of the UK. The current minimum wage is £6.19.
There has been considerable support for a living wage across the political spectrum. Ed Miliband, the Labour leader, has stated that a Labour government would ensure that government employees were paid at least the living wage and that government contracts would go only to firms paying living wages. Other firms that paid less could be ‘named and shamed’. The living wage has also been supported by Boris Johnson, Conservative Mayor of London. The Prime Minister said that a living wage is ‘an idea whose time has come’, although many Conservatives oppose the idea.
The hourly living wage rate is calculated annually by the Centre for Research in Social Policy and is based on the basic cost of living. The London rate is calculated by the Greater London Authority.
Advocates of people being paid at least the living wage argue that not only would this help to reduce poverty, it would also help to reduce absenteeism and increase productivity by improving motivation and the quality of people’s work.
It would also bring in additional revenue to the government. According to a report by the Institute for Public Policy Research and the Resolution Foundation, if everyone were paid at least a living wage, this would increase the earnings of the low paid by some £6.5bn per year. Of this, some £3.6bn would go to the government in the form of higher income tax and national insurance payments and reduced spending on benefits and tax credits. Of this £6.5bn, an extra £1.3 billion would be paid to public-sector workers, leaving the Treasury with a net gain of £2.3bn.
But what would be the effect on employment? Would some firms be forced to reduce their workforce and by how much? Or would the boost to aggregate demand from extra consumer spending more than offset this and lead to a rise in employment?. The following articles look at the possible effects.
Articles
Living wage for all workers would boost taxes and GDP Independent, Nigel Morris (28/12/12)
Living wage could save £2bn – think tank research BBC News (28/12/12)
‘Living wage’ would save money, says study Financial Times, Helen Warrell (28/12/12)
Why the Resolution Foundation and IPPR can go boil their heads Adam Smith Institute, Tim Worstall (30/12/12)
Living wage for public servants moves a step closer The Observer,
Yvonne Roberts and Toby Helm (15/12/12/)
Living wage: Ed Miliband pledge over government contracts BBC News (5/11/12)
‘London Living Wage’ increased to £8.55 by mayor BBC News (5/11/12)
Q&A: The living wage BBC News (5/11/12)
Scrooges in UK firms must pay a Living Wage This is Money, John Sentamu (23/12/12)
Report
What price a living wage? IPPR and The Resolution Foundation, Matthew Pennycook (May 2012)
Questions
- How would you set about determining what the living wage rate should be?
- Distinguish between absolute and relative poverty. Would people being paid below a living wage be best described as absolute or relative poverty (or both or neither)?
- What do you understand by the term ‘efficiency wage’? How is this concept relevant to the debate about the effects of firms paying a living wage?
- Under what circumstances would raising the statutory minimum wage rate to the living wage rate result in increased unemployment? How is the wage elasticity of demand for labour relevant to your answer and how would this elasticity be affected by all firms having to pay at least the living wage rate?
- What would be the macroeconomic effects of all workers being paid at least the living wage rate? What would determine the magnitude of these effects?
More and more food banks are opening every week across the developed world. In the UK alone, there are over 250 food banks. These are run by volunteers and provide food and other basic provisions to those who struggle to feed themselves and their children. The food is donated by people or sometimes supermarkets. Some food banks receive financial help from local authorities.
According to the Trussell Trust, which runs many food banks in the UK, “In 2011-12 food banks fed 128,687 people nationwide, 100% more than the previous year.” But why, in mixed economies, where the State is expected to provide benefits to the poor, do so many people have to resort to food handouts?
Partly the problem is a cut in benefits – a response of many countries to rising public-sector deficits; partly it’s delays in receiving benefits or the complexities in claiming; partly it’s because some people have had their benefits suspended because of a change in their circumstances or changes in the conditions for claiming benefits; partly it’s the inability of people to afford to feed their families properly in times of rising food and energy prices and rising rents, where incomes are not rising in line with the personal rates of inflation that poor households experience; partly it’s the sky-high interest rates that many poor people, often deep in debt, have to pay to continue obtaining credit – often from ‘payday loan companies’ or ‘doorstep lenders’; partly it’s the inability of many poor people to find work which pays enough to feed their families and pay all their other bills.
Food poverty is a real and growing problem. But are food banks the answer? The following videos and articles look at the issues.
Webcasts
UK
Growing demand for food banks in Britain BBC Newsnight, Paul Mason (5/9/12)
Children will go hungry warn Bristol food banks This is Bristol, (2/7/12)
Children going hungry ITV News (16/10/12)
Food bank: We need more food to feed UK’s hungry The Telegraph, Gregg Morgan (27/9/12)
Food banks help struggling London families BBC News (21/6/12)
Europe
EU food aid to dry up by 2014? France 24 (16/10/12)
Spain
Food banks squeezed in Spain Euronews (3/11/12)
USA
As donations dwindle, food banks are feeling the pinch Komo News, Elisa Jaffe (28/9/12)
Articles
UK
Breadline Britain: councils fund food banks to plug holes in welfare state The Guardian, Patrick Butler (21/8/12)
Councils to invest in food banks LocalGov, Dominic Browne (22/8/12)
The growing demand for food banks in breadline Britain BBC News, Paul Mason (4/9/12)
Food banks: ‘I had no-one else to turn to’ BBC News (4/9/12)
Poorest starved of dignity as charity food parcels double in just two years Daily Record (4/9/12)
More and more banking on generosity to others for food South Wales Evening Post (13/11/12)
USA
Northern Illinois Food Bank Kicks Off Hunger Action Month St. Charles Patch, Rick Nagel (1/9/12)
Australia
More families get help as food becomes discretionary spend Sydney Morning Herald (21/8/12)
Information
How a foodbank works The Trussell Trust
Questions
- Why do so many people find themselves trapped in food poverty?
- What factors are likely to lead to an increase in food poverty in the coming months?
- Should the government subsidise food banks?
- Discuss ways of tackling the problem of poor families being trapped in debt and having to pay very high interest rates.
- Is rent control a good means of tackling poverty?
Since Labour’s historic pledge to eliminate child poverty in a generation, poverty data has been at the forefront of political debates. The recession has created unemployment and has moved more people below the poverty line, at the same time as causing rising inequality
The causes of poverty are diverse and a recent government commissioned report has drawn attention to just one of the key factors that is pushing more families into poverty – energy bills.
Fuel poverty has become more of a concern with the cost of household bills rising and this has led to calls for more money to be invested in cutting energy bills. Fuel poverty has been redefined by Professor John Hills, the author of the report, to focus on those households with a low income and also with relatively high energy bills.
Fuel poverty is undoubtedly concerning from a moral point of view – indeed, knowing that some families are unable to afford to heat their homes causes disutility for others. However, there are also wider economic implications. If families are unable to provide heating, this may adversely affect their children’s ability to learn and complete their homework, thus negatively affecting their productivity today and arguable causing further problems in their future. While this may have little effect today, the cumulative effect on economic productivity could be substantial in the long run. Inefficiency for the macroeconomy is therefore a problem, as a child’s productive potential will not be fully realized. Furthermore, there are also health concerns, as the government notes – fuel poverty is linked to 2,700 deaths per year. Again, this creates a blight on society, but it also poses economic problems, not least due to the strain on the NHS.
Fuel poverty has long been identified as a problem that needs addressing and as the Secretary of State for Energy and Climate Change said:
‘Fuel poverty is a serious national problem and this government remains committed to doing all it can to tackle it and make sure that the help available reaches those who need it most.’
Action is already taking place to insulate the poorest homes, as a means of cutting their energy bills and the government’s ‘Warm Homes Discount’ aims to provide help to the lowest income households in paying their bills. However, there are concerns that more households will move into fuel poverty, as this new definition doesn’t include those slightly wealthier households who still have high bills or the poorer households with relatively low bills. With the economy still in a vulnerable state, the latest data showing further rises in unemployment and household bills becoming increasingly expensive, the issue of fuel poverty is unlikely to disappear any time soon. The following articles consider this issue.
Fuel poverty seen for 3 million households by 2016 Reuters (16/3/12)
Fuel poverty to rise to 8.5m, report warns (including video) BBC News, Damian Kahya (15/3/12)
Nine million will live in ‘fuel poverty’ in the next four years Independent, Simon Read (16/3/12)
Fuel poverty to rise sharply Telegraph, James Hall (16/3/12)
Call for urgent action on fuel poverty Financial Times, Sarah Neville (15/3/12)
Fuel poverty worse than estimated The Press Association (15/3/12)
3 million fuel-poor households by 2016, report claims Guardian, Mark King and Zammy Fairhurst (15/3/12)
Questions
- What are the causes of poverty?
- How has the definition of fuel poverty changed? Is the change a good one? Think about the equity and efficiency of such a change.
- The BBC News article says that government measures to alleviate fuel poverty could be regressive. What is meant by this and why could this be the case?
- What are the economic consequences of fuel poverty?
- We can estimate poverty by looking at the poverty headcount or the poverty gap. What is the difference between these two measures? Which one is a more accurate measure of poverty?
- Are there any other actions that you think would be effective in alleviating fuel poverty? Would they be cost effective?
- Why does Age UK fear ‘the current proposals to improve energy efficiency through the Green Deal and energy obligation schemes are a woefully inadequate response to one of the most serious issues facing our country today’?
