30th December 2013
As many as two million UK families could be in ‘debt peril’ by spending more than half their disposable income on household repayments by 2018
The study from independent think tank the Resolution Foundation suggests that if interest rates rise to 5%, in the worst case, but still plausible scenario the number of households in Britain who spend at least half their disposable income on repaying debts – and are therefore deemed to be in debt peril – could more than triple, from 600,000 in 2011 to two million by 2018.
Even under a more optimistic environment in which interest rates do not rise above 3% by 2018 and in which household incomes grow more strongly than the Office for Budget Responsibility has projected, the number of families in debt peril would almost double – to 1.1m.
Currently most analysts expect interest rate rises to start in 2015 though recent sharp falls in unemployment, bringing it closer to the 7% threshold at which the Bank of England may consider raising rates, has led to speculation there may be pressure to raise rates later in 2014. The Resolution Foundation analysis suggests a sharp increase in the number of households exposed to very high levels of debt by 2018 – on any economic scenario that looks likely given the latest official forecasts.
This would mean Britain reaching higher levels of perilous household debt than those in 2007, just before the financial crisis. The number of households spending more than half their net income on debt repayments stood at 870,000 in 2007, just before the crash, but had fallen to 600,000 by 2011 as interest rates plummeted and households deleveraged during the recession.
These increased household debt levels would have profound implications for households, banks and policy makers and for the wider economic recovery. The Resolution Foundation analysis is still based on cautious assumptions, such as GDP growth rising in line with the OBR’s projections, household debt growing as expected by the OBR to around £2.2 trillion by 2018, and the spreads between market interest rates faced by borrowers and the Bank of England rate falling halfway back to their historic levels.