By Hannah Rich (Young Foundation)
Until recently, post-crisis discourse and policy on the economy has emphasised the problem of growing national debt. As the then British Prime Minister, David Cameron, said in a speech in January 2015:
“When you look at the children you love, do you want to land them with a legacy of huge debts?”
Not only in the UK, but across the continent, the picture is one of public debt as an increasing threat to economic stability:
- In six European countries, public debt outstrips national economic output.
- In 22 EU countries, the national debt is at least 50% as a proportion of GDP.
- Five countries, including the UK, have gross national debts of over €1 trillion.
If public debt is the consistent problem, what might the solution look like? In response to this, political parties in many European countries have responded by proposing and implementing fiscal austerity measures. Governments have tightened their national belts with the priority of reducing overall public debt.
However, austerity policies which aim to reduce national debt may have had the unintended consequence of raising debt at an individual level.
Spending cuts to the welfare state come at a social cost and have repercussions for the financial stability of households and individuals.
In the UK context, the decrease in government expenditure has led to reduced living standards and increased hardship for many families. With the safety net of the welfare state catching fewer and fewer people, households are increasingly turning to credit to meet their basic needs. Household debt is currently equal to 140% of UK national GDP. The figure is rising.
13 million people in the UK do not have enough savings to cover a month if they experienced a 25% drop in income. For many families, especially those with low-incomes, access to borrowing can be invaluable, allowing them to cope with this sort of unexpected change in financial circumstances.
But the forms of credit available to low-income households are often limited.
Loans and other forms of borrowing which are accessible to those with poor credit history typically come with the highest interest rates in the market. As our research, ‘Credit Where Credit’s Due?’ illustrated, this can further exacerbate the precarious financial situation which drives families to borrow in the first place. Half (51%) of high cost credit customers we spoke with had experienced difficulties in making repayments on at least one loan.
What does this mean for individuals affected by the high costs of credit? The impact of household debt is not just financial. The continual challenge of managing difficult financial circumstances has profound consequences for mental and physical health. 42% of the high cost credit customers we spoke with reported adult members of their household had experienced anxiety, stress, or other mental health problems, as a result of being in debt.
The cost of problem debt to the UK economy has been estimated at £8.3 billion, including the impact on relationships, education, health and crime and the strain this places on public services. Achieving the goal of a healthier economy may come at the expense of the most vulnerable sections of the population.
The economic principle of Pareto optimality describes a situation in which resources cannot be further reallocated so as to benefit one group without significantly reducing the wellbeing of another group or individual. In terms of the optimal balance between the health of the national economy and household financial wellbeing, austerity measures which cut public debt but increase personal debt are not Pareto efficient. It is counterproductive to reduce a national – shared and redistributed – deficit if the means of doing so drive individual, and often vulnerable, citizens into debt.
For a just economy, it is essential to view debt holistically. The social and economic costs of austerity policies designed to reduce public debt must be recognised, lest that debt be transferred to the people who are least able to service it.
 Statistics from 2015, quoted in the Telegraph (2017) European debt crisis: It’s not just Greece that’s drowning in debt. 3rd February. Available at: www.telegraph.co.uk/news/0/european-debt-crisis-not-just-greece-drowning-debt/
 The Guardian (2017). UK’s borrowing binge is worrying the Bank of England. March 27th. Available at: www.theguardian.com/business/2017/mar/27/uks-borrowing-binge-is-worrying-the-bank-of-england
 StepChange (2014). Life on the Edge. London: StepChange.
 Boelman, V., Kitcher, H., & Heales, C., (2016) Credit where credit’s due? Understanding experiences of high cost credit in Wales. Extended Report. [pdf] London: The Young Foundation. Available at: https://youngfoundation.org/wp-content/uploads/2016/10/Credit-where-credits-due_extended-report.pdf
 Guardian (2017b). Low income families forced to walk ‘relentless financial tightrope’. 14th June. Available at: www.theguardian.com/society/2017/jun/14/low-income-families-forced-to-walk-relentless-financial-tightrope
 Boelman, V., Kitcher, H., & Heales, C. (2016)
 Stepchange (2014). Social Cost of Debt. www.stepchange.org/policy-and-research/social-cost-of-debt.aspx