Household Debt

Written by Vincent Cable MP and published in Richmond Informer on Tue 5th Aug 2003

Some alarming figures emerged this week from the government Office of National Statistics. Average household debt has grown by half in the last five years to £37,500. Disposable - after tax - income, which we need to service debt, had grown by only a quarter, to £28,800. A generation ago, in 1980, average personal debt was 50% of incomes; now it is 120%. Savings have declined; debt has mushroomed.

There is nothing wrong with borrowing as such. When my family came to Twickenham in the mid-1970's I was mortgaged to the hilt, as young local families are today. Borrowing is the only way to get into the house-ownership market. But many are now borrowing heavily to pay for cars or holidays.

There are still risks. Many people wrongly assume that interest rates will stay low and that the present long boom and full employment will be with us forever. We hope! Many people, especially on low incomes, are falling into the murky world of re-mortgaging and debt 'advice' from loan sharks.

The new fashion for equity release - borrowing against the value of a home - can be genuinely liberating especially for older people with valuable homes and small pensions. But a lot of care is needed. There are some dodgy lenders and limited consumer protection.

Although temperamentally an optimist, I am quite worried about where all of this is heading. The economy is being carried along not by investment and export growth but on a debt bubble. Bubbles burst.

There is no need or call for a return to old-fashioned credit rationing. But prudent limits on bank and building society lending should be set by the government's financial regulators before it is too late.