According to Citizens Advice, a charity, UK households face a debt timebomb. Others talk of an addiction to debt. A diet of low interest rates for many years, fostered to some degree by UK institutions such as the Bank of England, inevitably led to households maximising their borrowings to the extent that household debt is now apparently at about 131% of disposable income. The way in which the cost of mortgages has multiplied will have caught many people by surprise, and consequences, if the storm cannot be weathered, of losing a home is an experience to be wished on nobody. But is it not the case that it is fair that people bear the consequences of their own choices. Is that not how we learn, from mistakes, and how to assess risk and so on? Some commentators’ reaction to mortgage jeopardies was a frightening reflection on the level of lack of resilience and pride in independence. That was to propose that the State consider bail-out and personal subsidies as the immediate solution: fortunately, enough voices of common sense talked down that suggestion.
The bail-out culture surely needs to be reversed. The exceptionally vulnerable will always need as a moral necessity to be insured and protected by the able-bodied, probably in a society so complex as the UK through the State which embodies the taxpayers’ bank. For everybody else, belt-tightening may be the only answer, with short term pain for long term gain.
Where the State should surely play a part is in making hard decisions in the framework of regulation and enforcement it provides. There seems little doubt that the Bank of England, in not acting to control inflation earlier and instead, under both the stewardships of Governors Mark Carney and Andrew Bailey, propping up the financial system with free money (Quantitative Easing) too extensively and for too long failed the public. With hindsight people will ask whether the furlough scheme during Covid was too generous, and whether the way in which the Government succumbed to demands of sparing no expense through borrowing of hundreds of billions was correct or weak? As an idea, paying people to stay at home and do nothing sounds fanciful, especially given how much money, hundreds of billions of pounds, was saved by households in their banks. The security blanket also extended indiscriminately to businesses, perhaps many of which were barely viable any way. Propping up lame ducks is in the long term fruitless. The result is a State with a mountain of debt, just increased vastly through energy and other subsidy packages. There was a time when households simply managed through cost-of-living issues, of course suffering damage on the way. But suffering damage, bearing it, and acting to minimise it is a normal part of living. Yet today that is argued by some commentators to be unacceptable. That philosophy is a dangerous downward slope where the tap will run dry.
CAN WE ALL LEARN FROM THAMES WATER?
Thames Water is a public utility, a provider of an essential service – delivering water and managing resources and managing waste. It was privatised along with other water companies in the 1980s and 1990s, it being considered that the mismanagement and under investment in public ownership could be replaced by the greater properly incentivised resources of the private sector. Realising water’s importance, and the importance of all privatised utilities, electricity, gas and other energy, phones and so on, Government established regulators for these industries: the object was to ensure that the worst excesses of free markets did not inhibit these new companies from performing a vital service such as investing back into the industries which the regulators watch over. Life essential services could not be allowed to close.
Thames Water, it is said, is at risk of bankruptcy, largely through its debt mountain, of some £14 billion. All debt has to be refinanced one day, and if the market has turned adverse with interest rate rises, excess debt can be fatal. This is of course no different for individuals’ borrowings. Thames is also among the most guilty of water companies in the level of wasted water through leakage (but it does have perhaps the most ailing infrastructure of pipes etc.). Water companies have been allowed to release raw sewage in vast quantities into the environment. Meanwhile water company investors have taken out considerable returns by way of distributions to themselves. Something is obviously wrong. Perhaps the owner investors should voluntarily have behaved more responsibly, aware that cheap money eventually gets expensive in every financial cycle. However, it is apparent that here we witness a catastrophic regulatory failure across the water industry. It was surely the regulator’s role to be tough on environmental safety, forbidding dumping, and requiring proper investment in leakage prevention, and to ensure a financially stable and well capitalised, not an over leveraged, structure behind the water company. Thames has simply borrowed too much as well as underperformed its duties and over distributed profit to its owners, all of which the regulator should have controlled.
Only now too, somewhat late, is Ofgem, the electricity regulator, warning electricity companies to make investment before paying out owners, as reported in The Times of 4 July, exhorting them to be reasonable, that is evidencing a social responsibility.
LIFESTYLE CHOICES
The principal reason people borrow too much is to have things they want now but cannot afford. They take risks and sometimes assess them badly, or even if they balance the risks well, things can turn out unfortunately. The lessons for the future are obvious and perhaps these current harder times economically will teach greater prudence. Take mortgages, it still is possible to take out a 95%, loan to value, home mortgage, more expensive per pound than a less risky, say 75%, loan to value, mortgage. Is it prudent banking or wise for the nation, that Banks and other lenders lend on such a basis where the borrower is not a strong credit? Should the financial regulators limit this behaviour?
Regarding credit cards, the APR (annual percentage rate of cost) of a credit card borrowing is between 20% and 40%, when base rates are at 5%. Have we become addicts to the credit card, thinking it is not really expenditure? Using a credit card and paying it off monthly is prudent. But almost 66% of credit cards, some 37 million, have outstanding sums at the end of the month. Is that use of the card capable of reduction? Probably for a lot of people. The average representative interest cost of an unarranged overdraft with HSBC is, HSBC says, about 39% (effective annual rate). Are the rates banks charge fair or are market forces allowing lenders to make excess profits in an anti-social way, hitting the poorest hardest? Is this where free markets allow abuse? It is apparent that Banks have not been passing on to consumers who save their money the increases in interest rates, with base rate at 5% but deposit rates at between 0.85% and 1.35%. They are under pressure to do so. If they don’t, then are depositors being abused?
Banks can perhaps be thought of as similar to utilities – vital for society to function and so having special social responsibilities. And so too they and other financial institutions also have regulators. Perhaps, it would give people more faith in the value of banks to society and their behaviour if their regulators were more visible in working alongside them to ensure a fair balance between borrower or depositor and lender.
PLAN FOR THE LONG HAUL
Addiction to debt is a product perhaps of a short-term outlook which pervades social choices. Politicians need voters, and their immediate satisfaction drives decision-making. Individuals’ financial decision making, amassing debt, largely reflects short term wants. Investors demand returns today, which drives a short termism in business decisions. Company leaders are often incentivised by profit performance over short periods. Is it true perhaps that the levers to cure inflation and to reduce the cost of living are longer term than just an election cycle? For example, personal and corporate and Government debt mountains must come down, with a change in cultural approach? Planning for the long haul can require shorter term sacrifices and a shift in ambition. The improvement in living standards which is likely a common desire will be hastened if immediate wishes and expectations are shelved or reduced. Positive steps, rather than complaints about the past, and blaming others, to prepare and maximise advancing rather than stagnating will repay quickly.
Ours is a free market society. It is free markets which continue to drive down poverty levels – The Daily Telegraph of 23 June reminded the world that extreme poverty globally was at 30% in 2000, now its at 8.5%, and that has occurred in a period when half the time a financial crisis was dominant. The worst death rate, child labour and other statistics measuring misery are improving. Free markets work but only if those who operate and influence them behave sensibly and fairly while competitively. Within free markets people choose for themselves and bear consequences. Entrepreneurs and creativity are encouraged and rewarded. But today there are floods of stories of possible profiteering to the detriment of consumers – have supermarkets in the UK been guilty of not passing on fuel price reductions, as banks have not passed on interest rate rises to depositors? Are mobile phone operators, making huge profits, playing fair by customers?
Governments, regulators and big corporations must play their parts properly. Governments perhaps should interfere as little as necessary in free markets but ensure intense competition. People should exercise their treasured freedoms to choose, and get debt back in perspective, though taking a hit on the chin for poor and excessive life choices. Severe cost of living stress can be a short temporary blip with the right behaviours across the board.
