Reform roundtable seminar on family finances on Tuesday 15 May 2012. Introduced by Lord Wilf Stevenson, Chair, Consumer Credit Counselling Service.

By Patrick Nolan

Earlier this week Reform held a roundtable event on Putting family finances on a sustainable footing. Lord Wilf Stevenson, Chair, Consumer Credit Counselling Service (CCCS), introduced the event, which was held under the Chatham House rule.

Many UK households are on a financial knife edge. CCCS research shows that 8 per cent of households in Great Britain spend more than half their incomes on total debt repayments and the average household pays nearly £200 per month in interest payments. 30 per cent of households have no spare cash at the end of the month and more families are turning to high cost credit. These challenges are not confined to a relatively small group of low income families; CCCS research has shown that families on higher incomes are struggling with debt too.

The upshot is that many families would struggle to cope financially if they experienced a drop in income, increase in expenses, or other changes in circumstances. And they are likely to remain vulnerable for a while. The labour market outlook is weak and prospects for real wage growth are not great. Concern has been expressed over food, fuel and utility bills, HMRC debt recovery procedures, and increasing rent bills and mortgage rates. Already 10 and 6 per cent of CCCS clients are in mortgage and rent arrears, respectively.

Policy changes, such as the public sector wage freeze and reform of the welfare system, have increased pressure on some families. The Universal Credit will test families’ financial capability through paying benefits monthly and paying housing benefits to recipients not to landlords. Problems with debt can often be part of a downward spiral – with there being, for example, a link between problem debt and depression.

While it is relatively easy to point to problems, developing workable solutions and identifying the role that government should play in these solutions is harder. Developing solutions will require facing up to some hard questions, which will be the subject of future Reform events. These questions include, for example:

• Is the supply of credit to some vulnerable communities too high? What would be the best way to influence the supply and level of credit in these communities? Or, indeed, should government set out to influence this?
• Should interest rates of, for example, 4,000 per cent per annum be allowed (bearing in mind that an annual rate can be misleading for a loan with a term shorter than a year)? Or should interest rates be capped? Would capping interest rates restrict the supply of credit (including to people who can afford to borrow) and risk other charges or fees going up to compensate?
• How should financial products, lenders and debt management companies be regulated? Are current regulations sufficient, and is the only problem one of enforcement? What role should financial services (e.g., self-regulation through voluntary codes and kite marks) and employers play in improving standards and helping people make the right choices? How can confidence in financial services as a whole be improved?
• What should happen when people get into problems? Should the attitude towards debt forgiveness change? How can consumers be directed to the right sorts of advice?

But perhaps the biggest question raised at the event was whether the broader attitude to debt in the UK needs to change. A model of growth driven by consumption funded by household borrowing requires ever increasing capital gains on housing assets or increasing real wages. A “borrow now, pay later” model will always face problems when growth stalls or when the economic environment changes (e.g., when the population ages and dependency ratios increase). The big question is how to ensure sustainable growth in household incomes in the long term – simply borrowing more cannot be the answer.