Debt - What's The Problem?

Debt Repayment Problems

More than 1.7 million people in Britain have debt repayment problems and 1 million debtors face likely insolvency. According to figures published last week, as a nation we now owe more than 1 trillion on mortgages, loans, credit cards and other consumer credit plans.

However, Dr Carl Emmerson, Deputy Director of the ESRC's Centre for the Microeconomic Analysis of Public Policy (CPP) at the Institute of Fiscal Studies argues that we need to put the headlines in perspective. He says: "One cause of rising debt could simply be that individuals are taking out mortgages against properties that have a similarly high value. As long as house prices are maintained then this means that high debt is not a concern".

Dr Emmerson also believes that reasons for rising debt could be changes in the macroeconomy - the fact that the economy has grown steadily over the last few years - or the fact that more people are now completing higher education. So, he argues, "rising debt could be due to individuals now being more confident about their prospects for future earnings and employment".

Stephen McKay, Deputy Director and Senior Research Fellow of the Personal Finance Research Centre at Bristol University agrees, that in general people are behaving responsibly. He points out that less than a fifth of outstanding UK debt is owed on consumer credit, and he says, "even within the figures for consumer credit, much credit card 'debt' is routinely repaid each month".

The more interesting issue, he argues, is how debt and additional borrowing is distributed among different groups and whether organisations should be lending so much.

"In the past people praised saving, security, deferred gratification, living within one's means, and so on... We are now more inclined to live for the here and now"He says: "It's important to remember that for many families - many of whom don't have credit or wouldn't be able to access it if they wanted to - being behind on household bills is more significant than credit. Recent research has shown a much stronger link between low income and arrears on bills, than with consumer credit problems."

Professor Karel Williams of the ESRC Centre for Research on Socio-Cultural Change (CRESC), agrees that the debt issue is more complicated than much media coverage would suggest, though he says the issue of 'Why do certain people get into trouble?' is worth exploring.

ESRC-funded researcher Dr David Voas of the Cathie Marsh Centre for Census and Survey Research offers one possibility. "Increasing debt reflects changing values as well as economic conditions", he says. "In the past people praised saving, security, deferred gratification, living within one's means, and so on. Religion reinforced these values and promised heavenly rewards for the virtuous. We are now more inclined to live for the here and now".

Dr Voas believes that, while it would be wrong to blame materialism on declining church attendance, secularisation and indebtedness are both attributable in part to "an ethos of individualism in a consumer society."

CRESC researchers place the blame for increased debt and insolvency firmly at the door of financial illiteracy. Professor Williams comments that "Most people don't have the competence to deal with complicated financial problems and would have difficulty explaining even APR (annual percentage rate of interest)".

He adds: "This understanding 'gap' is compounded by an attitude 'gap'. People either don't want to think about personal finance or, particularly among the 'middle classes', have a deluded view of their own financial capability".

Professor Williams sees this as a socio-cultural problem not an economic one, and says: "CRESC research suggests matters will not be improved by more financial education (as favoured by HM Treasury) but by simplifying and structuring the financial choices available to consumers".