The Office for National Statistics (ONS) has released a new report on household debt inequalities between July 2012 and June 2014. While the report is littered with all kinds of interesting data that deals with household debt (outside of mortgages), four points are particularly worth highlighting:
- Debt burdens continue to fall disproportionately onto the lowest income earners.
- The youngest income earners have the highest average value of financial liabilities and the highest level of debt relative to their income.
- While women tend to have a much lower level of debt compared to men, women have to dedicate the same proportion of their income to servicing debt when compared to men.
- The most common form of debt was credit or store cards, but the highest value debts were student loans.
The report clearly shows that throughout the UK, the burden of debt continues to be unevenly spread throughout the economy. To better understand how money and debt influence the UK economy, we need a public inquiry to investigate these issues – we need a money commission.
Debt and Low Income Earners
The report confirms that the relative and absolute burden of debt continues to fall disproportionately onto low incomes earners. For example, 58% of households in the lowest two wealth quintiles have financial liabilities (debts that do not include mortgages), compared to just 36% of households in the highest wealth quintile.
However, as the report analyses the debt of households outside of mortgages, what it terms ‘financial debt’ or ‘financial liabilities’, it becomes more important to consider the individuals within the household. This is because “Unlike mortgage debt which is predominantly “household” based (for example, often the responsibility of both people in a couple), financial debt is usually the responsibility of a single person.”
As with the household, individuals living in households on lower wealth quintiles are more likely to have financial liabilities. Accordingly, individuals living in households in the lowest wealth quintiles (46%) are two times as likely to have financial liabilities than those in the highest wealth quintile (23%).
While wealthier income earners are more likely to have a higher average level of debt, the amount of debt relative to income is substantially higher in lowest income quintile when compared to the other 4 income quintiles. Indeed, between July 2012 and June 2014, half of individuals with financial liabilities in the lowest income quintile had a debt of at least 83% of their net income, compared to 12% for those in the highest income quintile.
Debt and Young Income Earners
The ONS data set also breaks down the financial liabilities for different age groups. Almost half of all individuals aged from 25 to 44 have financial liabilities, whilst a third of individuals aged from 16 to 24 have some form of financial liabilities.
Individuals with debt aged from 25 to 34 also had the highest median value of financial liabilities, with more than half of this age bracket facing at least £2,800 of debt. The 16 to 24 year-olds with debt did not fall far behind, with a median value of financial liabilities of £2,600.
Unsurprisingly, the 16 to 24 year-olds had the highest level of debt relative to their incomes, with a median individual debt to income ratio of 40%. Next, 25 to 34 year-olds had a median debt to income ratio of 19%.
To put the latter figure into context, 50% of 25 to 34 year-olds are already spending 20% of their income on debt that does not include a mortgage. This suggests that these individuals will already have a large proportion of their income dedicated to debt servicing before they take out a mortgage to get onto the property ladder.
Over the long run we can either expect debt to income ratios for 25 to 44 year-olds to increase significantly; or for less and less young people to be able to afford a mortgage. Most likely, it will be a cruel combination of both.
Gender, Debt, and Debt Servicing
The ONS dataset also offers figures on the financial liabilities by gender. An equal percentage of both men and women have financial liabilities; 35%. Yet, over half of all men have financial liabilities of £2,800 or more, compared to £1,800 for women.
But while women tend to have a much lower level of debt than men, their debt to income ratios are virtually the same (at 15% and 16% respectively). This is illustrative of the issue of women receiving disproportionately lower pay when compared to men. It ultimately means that men can borrow more than women; and that men will still have a higher value of disposable income at the end of the month, once debt-servicing costs have been accounted for.
Student Loans and Consumer Lending
The report also splits financial liabilities according to the type of debt for households and individuals. Credit cards and store cards with an outstanding balance were the primary forms of debt held by individuals. Indeed, for indebted individuals, 45% of their debt came in the form of credit or store cards – with half of them having an outstanding debt of £1,300 or more.
However, the highest average value of debt type was student loans. Of the individuals with student loans, half of them have an outstanding debt of £10,000 or more. Moreover, over 62% of individuals with student debt of £10,000 or more will have some other form of financial debt (over and above a mortgagee).
A Money Commission?
With the government attempting to cut spending and little hopes of the UK turning into a net exporter anytime soon, the only way to grow the economy is to get the private sector to take on more debt. Debt fuelled consumption is currently what ultimately underpins UK economic growth. The absolute and relative burden of the debt that we need to grow our economy continues to disproportionately fall on to low-income earners, i.e, on women, students, and young income earners.
This is one of the many reasons that we need a public inquiry on money, debt, finance and their effects on society. The last time the British government established a commission to investigate whether the banking and financial system was helping or hindering the British economy was in 1929, after the 1929 stock market crash which caused the Great Depression.
Join Positive Money supporters across the country and the world by signing our petition for a Money Commission.