Sunday, September 23, 2018

With debt levels in the UK soaring, it is welcome indeed that Andrew Bailey, the chief executive of the Financial Conduct Authority, has gone public with his concerns about Britain’s reliance on credit. In particular, he has sounded a warning over what he says is a “pronounced” accumulation of debt among young adults. What he has said may surprise nobody; but it should alarm us all.

In the aftermath of the financial crisis, overall consumer debt levels in the UK declined as a consequence both of stricter lending criteria and general belt-tightening among nervous citizens. Now, with mortgages excluded, it has wormed its way over the £200bn mark, which puts it close to the pre-crash heights.

Fundamentally, of course, there is nothing intrinsically dangerous about credit, as Mr Bailey has noted in his remarks: it enables the economy to function by permitting regular flows of money. Yet plainly it becomes a concern if individuals are taking on debts they are not confident they can pay back. And that is all the more likely to occur when credit is being used to deal with the everyday cost of living, as it is for increasing numbers.

Last month a survey of 18- to 30-year-olds by the Young Women’s Trust concluded that nearly 25 per cent are perennially in debt, while close to half regularly have to borrow in order to make ends meet before their monthly pay cheque arrives. Tales abound of parents missing meals in order to ensure their children get enough to eat or walking long distances to avoid paying transport costs. By the age of 24, close to 40 per cent of individuals are in debt, according to the Money Advice Trust; a YouGov poll last year found one in 10 thought they would never repay what they owed.

Plainly there are a range of factors that have aligned to produce the present situation. Private sector rents are still on the up, while wages are stagnant; the cost of unsecured loans is high, yet interest on savings is nominal. Add into the mix the pressure borne by recent graduates who face the prospect of years repaying tuition fees and it is easy to see why young people are becoming disproportionately reliant on borrowing money to get by.

As Mr Bailey rightly notes, the concentration of indebtedness among younger people is part of a broader shift in the “generational pattern of wealth and income”. We have grown used to the notion of ever-improving living standards and of each generation enjoying, on average, higher incomes than their parents. This is no longer true. For one thing, millennials – those who were aged between one and 17 in 2000 – spend three times as much on housing as their grandparents, according to the Resolution Foundation. For another, earnings are frequently failing to keep up with inflation.

The pension gap is an additional problem, with many young people contributing little or nothing to their retirement pots. A YouGov study in January concluded that 40 per cent of 18- to 34-year olds had made no pension provision of their own at all. Many will wonder whether there will ever come a time in their lives when they can escape the use of debt to fund basic essentials such as food and heating.

For young people caught in never-ending cycles of credit, the affects can be profoundly negative, not only in respect of their material position but also with regard to their physical and mental health. That in turn can have an impact on individuals’ ability to hold down full-time employment, which merely exacerbates the potential need to take on more debt.

Ultimately, all this poses serious problems for British society as a whole, not only in terms of the potential cost of caring for those who may be incapacitated by illness, anxiety or homelessness, but because Britain’s economy already faces a desperately challenging future, even without mass reliance on credit. People who are constantly in debt are not spending their non-existent money on British products; individuals who rely on credit cards to get through the month are in no position to boost the UK as a centre for entrepreneurialism; young people who feel they have no hope are not likely to be drivers of a post-Brexit recovery.

It is imperative that the Government not only heeds Andrew Bailey’s warning but acts on it radically and soon. A housebuilding programme on a genuinely large scale is an obvious starting point, although the Prime Minister’s ambitions in that arena seem modest. Yet even that only addresses one element of the debt conundrum facing so many young people. At the moment they are paying the price of decisions made by a generation whose wealth and prospects they can barely dream of.