Binge Borrowing Will Put Brits £1,000,000,000,000 In Debt By Summer

12.00.00am GMT Tue 3rd Feb 2004

British people will have debts of a staggering £1,000,000,000,000 (one trillion Pounds Sterling) by summer 2004, LibDem Shadow Chancellor Vincent Cable warned today.

British households now owe banks and other creditors as much as the total external debt of Africa, Asia and Latin America combined. Dr Cable called on Gordon Brown to take responsibility for reining in irresponsible lending on mortgages, personal loans and hire-purchase deals. Rising interest rates, falling house prices, and mounting personal debt are all danger signs for the British economy, Dr Cable said. Gordon Brown, as Chancellor, would be abdicating his responsibility to the public if he didn't act quickly.

Launching the new Liberal Democrat ten-point plan on debt, Dr Cable said: "British consumers have been on the biggest borrowing binge in history. It is staggering that we are on the way to borrowing one trillion Pounds by this summer.

"Consumer borrowing has been keeping the British economy going but this isn't sustainable. Any sensible person will know that you cannot simply keep on borrowing more than you can afford to pay back."

"Yet at every turn people are being encouraged to borrow more. Supposedly interest free loans are dropping out of the sky, mortgages are given at four or five times our earnings, credit card companies are falling over themselves to encourage us to spend more. Unsecured debt has risen by over 50% since this government came to power."

"Although interest rates are currently low they are rising. A £100,000 mortgage could well involve increased payments of £40 per month were interest rates to rise by 0.5% this week when the Bank of England's Monetary Policy Committee meets to set interest rates."

"Gordon Brown, as Chancellor, has a duty of care towards the British people. Even if we, as consumers, are unable to recognise that we are borrowing too much, it is simply not in the Government's interests to return to a boom and bust economy. Sometimes, people have to be saved from themselves."

"The Liberal Democrats are today launching a ten-point plan for tackling household debt. Our policies will result in a sustainable borrowing framework that protects consumers from unsustainable levels of personal debt, and protects the financial services industry from the damaging threat of a boom and bust economy."

The Liberal Democrats' ten-point plan for dealing with household debt includes:

1. The publication and monitoring by the government along with the Bank of England and the Financial Services Authority of measures of sustainable household debt, along the lines of the government's own fiscal rules.

2. Guidance to banks on safe to loan value ratios and income multiples for mortgage borrowers based on independent assessments of asset values by a group operating in a similar manner to the Bank's Monetary Policy Committee.

3. Active use of reserve deposits to reduce destabilizing boom and bust in mortgage lending.

4. Curbs on the tidal wave of unsolicited credit promotion by demanding a prominently displayed 'Credit health warning'.

5. A crack down on exploitative loan sharking, with promised legislation on consumer credit to tighten up on the issuing and monitoring of credit licenses, coupled with harsher penalties for those guilty of bad practice.

6. Stopping early, often hidden, redemption penalties, so as to discourage the early clearance of debt.

7. Stronger enforcement of OFT rules to prevent abuses associated with misleading advertising by debt management and advice services.

8. Excessive interest rates on store and credit cards to far more vigorously policed by the competition and trading authorities.

9. An extensive network of centres for independent, low cost, financial advice supported by credit providers and the investment industry.

10. Widening the remit of the social fund to permit emergency short term lending in a reaching fund for low income families in financial crises.

Ends

Notes for Editors

1. The total external debt for Sub Saharan Africa is $216 billion, Latin America $765 billion and Asia is $750 billion.

2. Bank of England figures show that lending to individuals totals £934,008 millions (BofE Statistical Release, 30 January 2004), of which £764,621 million was secured on dwellings, and £169,387 million was consumer credit, the total is currently growing at around 1% per month.

3. In a recent Parliamentary Answer to Dr Cable the Government revealed that unsecured debt (i.e. loans not secured on assets or property) per person has grown by over 50% since 1997, while incomes have risen by only 23%. Parliamentary Question asked by Vince Cable MP

Dr. Cable: To ask the Chancellor of the Exchequer what the average (a) unsecured debt per person and (b) annual income per person was in each year since 1997. [129931]

Ruth Kelly: The information requested falls within the responsibility of the National Statistician. I have asked him to reply.

Answer: The National Statistician has been asked to reply to your recent question on unsecured debt per person and annual income per person. I am replying in his absence. (129931) The information requested is shown in the table below. The data for unsecured debt (households' total financial liabilities other than secured debt) and income (households1 gross disposable income) used in the calculations are national accounts series for the combined household and non-profit institutions serving households (NPISH) sectors. The accounts for the household and NPISH sectors are currently combined; separate estimates are not available.

The average annual disposable income and unsecured debt person can be obtained by dividing the appropriate national accounts totals by the UK population aged 16 and over. These are shown for the years requested in the table.

Average annual income and unsecured debt per person, UK, 1997-2002

Annual Income per person (£) Unsecured Debt per person (£)

1997 12,400 3,540

1998 12,680 3,790

1999 13,330 4,090

2000 13,980 4,470

2001 14,980 4,900

2002 15,310 5,330

Most informed commentators expect BoE interest rates to rise over the next year, to a possible high of 5%.

Four mortgage values and two repayment types are set out in the table below, showing the monthly payments before and after a 0.25% rise in the interest rate. Figures from House of Commons Library.

The calculations use the mortgage calculator on the website of the Council of Mortgage Lenders. The interest rate of 5.32% is the November 2003 weighted average of the 'headline' rates on standard variable mortgage rate loans for Banks and Building Societies.

Please note: these figures may not represent all consumers in the mortgage market; some may have fixed or discounted mortgages. Additionally, not all consumers borrow from Banks and Building Societies. It is also worth noting that interest calculations can vary between mortgages and changes in the Bank of England base rate are not necessarily passed on in full by lenders.