March 31, 2020

Rishi Sunak has rightly been praised for his swift and extensive support for employees. The Chancellor has also delivered roughly parallel measures for the self-employed — albeit with certain omissions. But that can’t be the end of it.

Lessons must be learned from the 2008 financial crisis — in particular we must pay attention to who benefits from massive government support and who doesn’t. Back then, it was the wealthy who took the most from the bailouts and from quantitative easing, which pushed up the value of financial assets and property. And as recession turned to recovery, that advantageous position further compounded inequality by rewarding the already advantaged as we saw house prices move upwards again — and out of the reach of aspiring homeowners.

This time we need to make sure that government intervention puts ordinary people first.

That’s certainly what the Job Retention Scheme does by making payments covering 80% of the wages of workers who’d otherwise be laid off — up to a cap of £2,500 per month. It’s clearly focused on the protection of those on modest wages.

However, it’s not only household incomes we need to worry about, but also outgoings — not least of which are debt repayments.

Debt weighs most heavily on those least able to afford it — both in terms of borrowing costs and type of debt (eg. mail order) and as a proportion of their income. The issue with our current unsecured debt burden is a distributional one which means it impacts those least able to cope more.

Consider the following from a Resolution Foundation study, published back in January. The poorest 25% of the population are far more exposed to consumer debt than anyone else – the median level of consumer debt constituted 17% of their pre-tax income in 2016 -18, compared with only 4% for those in the richest fifth of the population. Furthermore, the report found that “typical consumer debt-to-income ratios remain more than three times higher for lower-income households as compared to their higher-income counterparts”.

These issues are all the more concerning given the rise in households struggling with other forms of debt. Take for example Council Tax arrears — if you miss a single payment, the whole yearly sum can become due. You can go from owing £167 (the average monthly payment) to more than £2,000 in less than 9 weeks. In 2018, the charity Citizens Advice found that 2.2 million households in England and Wales were behind on their Council Tax. Councils made 2.6 million debt referrals to bailiffs 2018-19, 1.4 million of which were for council tax. The number of callers with council tax arrears to National Debt Line hit 30% last year up from 15% in 2008.

Debts to energy companies are another pressing issue. Between 2016 and 2018, the number of households in debt to energy suppliers rose from 2.4 to 2.9 million.

A decade or more of stagnating wages has driven households to higher levels of unsecured lending (up 7% year on year in 2018). That’s especially true of families with children. In the 2016 to 2019 period, nearly 7 in 10 families with two or more children used consumer credit. And that’s not accounting for their accommodation costs — be that mortgage or rent. Worryingly, over half (53%) of working-age households with children and consumer debt in the bottom 20% of the UK population reported they were struggling to meet accommodation costs, up from 33% in 2006-08.

The high level of financial fragility experienced by the poorest among us shows just how little it would take for them to go to the wall. And this current emergency is anything but small. If anyone doubts how insecure people now are, the DWP permanent secretary announced today at a Select Committee (24th March 2020) that there had been 477,000 new universal credit claims over the past nine days. Does anyone think these people can get another job or exist on benefits and pay their debts and support their families?

To support the household finances of those struggling to get by in this testing time, we need action on debt outgoings as well as income. Escalating personal debt problems won’t just deepen the current economic crisis, they will have a permanent scarring effect on individual and national prosperity for decades to come.

What the Government needs to do is announce a moratorium on personal unsecured debt. This means suspending weekly/monthly repayments and charges for credit cards consumer purchases, personal loans, overdrafts etc, for all those who can’t reasonably make them, for the duration of the emergency. There are also good arguments for suspending the financing of secured debt on mortgages (the Government has already conceded this principle with a mortgage payment holiday for buy to let mortgage holders; so why not pass this on, as a mandatory relief, to those renting from landlords who are enjoying this payment holiday) as well as on cars and examining what sort of measures might be brought in to have a moratorium on personal rental payments which in all likelihood won’t be recovered (a government write off of capital gains for landlords for income foregone suggests itself).

Whether for unsecured or secured debt during this medical and economic emergency, credit status needs to be protected. Stopping the immediate consequences of non-payment in other outgoings such as rent — e.g. eviction prohibition — is not enough. We have to act in the round and secure people’s present income against needless external unproductive expenditure (which in our current crisis is what paying interest charges represents).

If we still allow credit ratings to be downgraded, that will be a semi-permanent blight on many people’s future opportunities. If we really want people to remain at home in order to save lives, we have to protect them against the fear of either losing their home or never having the opportunity to own one.

Remember, this is not their fault. People bear no personal responsibility for the impact of the pandemic on their ability to repay debt. Indeed, strictly speaking, it is state-imposed restrictions that are the immediate cause. Therefore, it is the moral and financial responsibility of the government to prevent this turning into a widespread personal debt crisis and one that especially impacts the poor.

The state can take immediate action in regard to the debts owed to it by individuals — Council Tax demands, for instance, but HMRC and tax recovery must play a role as well. In particular, the various mechanisms used to punish non-payment must be suspended, if we are to keep people at home and secure families against the various and manifest penalties in our society of not being able to pay your debts.

However, the debt moratorium must be implemented by the private sector too: the mortgage and credit card industries, the vehicle finance providers and the utility companies. All must all hold off while the economy, and people’s ability to repay debt, is in freefall. I’m not talking about writing-off the debt completely, the sums owed will remain owing it’s just that no payments should need be made to finance these accounts and no interest charges or penalties of any kind should apply – they can just be held in suspension for the length of the emergency.

Note that cooperation with the debt moratorium would not be an act of charity or self-sacrifice by the private sector. Unless the lockdown comes to an unexpectedly rapid end, the alternative to a moratorium in an extended lockdown is one in which many hundreds of thousands of borrowers may well become insolvent. Bankruptcy on this scale would overwhelm the financial system, bringing down creditors as well as debtors and supressing the value of assets for years to come. It is in everyone’s interest to make allowances during this period of extraordinary turmoil. Indeed, if this lasts well into next year, lenders must be ready to bear a share of the inevitable losses — if need be accepting ‘haircuts’ on what they’re owed (just as was the case in the Greek debt crisis).

Individuals should not be penalised for a situation that is and was not of their making, nor should they face financial ruin for obeying the government of the day and trying to save the lives of their fellow citizens. Over a decade ago, the finance industry was saved by the Government. It is now time for the institutions concerned to play their part in saving the people. We urgently need a moratorium option on personal debt both secured and unsecured, something that allows families to afford to stay at home and protect us all which ultimately is what the economy relies on for ‘there is no wealth but life’.