The Institute for Fiscal Studies says that a large chunk of the £200bn debt held by UK households is manageableby Andrew Hood / February 8, 2018 / Leave a comment
Recent years have seen growing concern about the amount of unsecured debt held by UK households. On the Bank of England’s measure households now hold a total of over £200bn of this kind of debt—things like credit card debt, unsecured loans from banks, and car finance debt. Of course the total volume of the unsecured debt for households might have important implications for financial stability, as the Bank of England itself has noted. But knowing the total amount of household debt in the UK tells you very little about whether debt is a “problem,” or more generally what impact it is having on household living standards.
Often lost in the concerned reporting and discussions of unsecured debt is that taking on debt can be entirely appropriate and in fact raise households living standards. Consider an individual offered a job in the next town, but without the cash in hand to buy the car they need to get to the new office. Clearly, borrowing to buy the car could boost rather than harm their future living standards.
And the evidence suggests that a large chunk of that £200bn debt does in fact look manageable. More than half of all unsecured debt is held by households with above-average incomes, and more than half of households with debt have enough financial assets (for example money in savings accounts) to pay it off.
On the other hand, there are clearly households that are struggling with the burden of debt. One potential sign is simply that lots of this unsecured debt is held by a relatively small group of households—10 per cent of households have debts of £10,000 or more and that same 10 per cent holds 70 per cent of all outstanding consumer debts. But even then some of those households might have sufficient income or wealth to render even five-figure debts manageable.
“Taking on debt can be entirely appropriate and in fact raise households living standards”
To fully understand and track when debt is a problem to households it is necessary to look at a wider set of indicators of the economic circumstances of households. New research by the Institute for Fiscal Studies draws on a large amount of data on households and their debt holdings to try to do exactly that.
Debts can have a negative impact on living standards in a number…