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Britain facing potential household debt crisis, says think-tank

Up to 2 million UK families could be spending more than half their disposable income on debt repayments by 2018, according to the Resolution Foundation.

A study carried out by the think-tank, using the latest five-year growth projections from the Office for Budget Responsibility, shows the rise in the number of households left in ‘debt peril’ as a result of an increase in interest rates and household income.

The worst-case scenario shows that a rise in interest-rates to 5 per cent with weak corresponding wage inflation, could leave as many as 2 million UK families using more than half of their disposable income to repay debts.

Interest-rates are expected to rise in 2015, though a recent drop in unemployment has led to speculation that the Bank of England may take the decision to increase the base rate in 2014.

Even a lesser increase to 3 per cent, coupled with good household income growth could result in up to 1.1m households facing debt peril – a significant rise from the 870,000 families facing the same scenario in 2007.

The new Resolution Foundation analysis also comes in the light of a report from the Bank of England based on a survey by NMG Consulting which warned that homeowners with heavy debts could become overburdened if interest rates start to rise before household incomes pick up.

Separate findings from the Bank’s Financial Stability Report in November showed that household debt could rise substantially over the next 20 years – using a measure which could see it increase to almost 140 per cent of incomes compared to the current 100 per cent.

Resolution Foundation senior economist Matthew Whittaker says: “The point at which interest rates start to rise is still likely to be some way off. But we can’t afford to wait until monetary tightening becomes an inevitable prospect before we attempt to deal with the debt overhang that remains in place.

“Rather than waiting for a repayment crisis to strike, policy makers and lenders should seriously consider acting now while there’s still the chance to help people reduce their exposure to debt.”

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. ITHE PROBLEM IS EVEN BIGGER!

    Ok so up to 2 million UK families could be spending more than half their disposable income on debt repayments but because of Britain’s “unfunded obligations” – promises the Government has made on things like public sector pensions Britain’s total debts at around 950% of GDP. 9.5 times our disposable income. Now that is what I call a problem!

    The worst-case scenario shows that a rise in interest-rates to 5 per cent Britain’s would mean a UK default on “unfunded obligations” and politicians would be forced to do what they don’t have the courage to do – part of which is to face up to the public sector.

  2. Matthew Barsauckas 30th December 2013 at 7:24 pm

    This is a difficult issue that has never been properly tackled at all.

    Our elected leaders irrespective of their political orientations over generations have all followed the same line in “sleep walking” the nation hand in hand into the nightmare of UK Plc debt.

    Print more money, then out of office blame the other side.

    I have yet to hear of a practical planned fiscal solution that will resolve this issue or at least get us on the road to resolve. Not even from economists.

    In the past history has shown that such solutions to similar financial issues was to go to war, we have evolved beyond that option.

    But this cumulative debt must be faced, as part time political fixes are but plasters.

    It will be a real issue for all our Grandchildren and I would hate them to be looking back at us and pointing the finger of blame.

    I would be interested to hear of some views on how this issue can be addressed from MM contributors.

  3. We hardly need an expensive government think tank to tell us what everyone already knows. If the government, as it should be, is concerned about the social perils of excessive debt, then restrict it by way of regulation. God, these people’s heads need knocking together.

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