As the Financial Times has reported, the cost of personal debt in the UK is rising rapidly, despite falling bank base rates. Rates are now very often over 30% per annum, and increasingly unaffordable as a consequence.
This is important. The reality is that an increasing share of households are borrowing not to spend, but to survive, and are paying heavily to do so. More people are now using credit to pay for essentials.
This is not a story about reckless consumption. This is a story about millions of people being unable to meet the basic costs of living from their wages, pensions, or benefits. This is a story of a system that is failing, and yet, this is not the debt crisis our politicians talk about.
Labour would rather have us focus on the supposed crisis of government debt, which, as I have often explained, is simply the consequence of the state injecting money into the economy so that it might function. That debt, when structured as bonds, is voluntarily held by financial institutions, is entirely serviceable, and wholly under the control of the government and the Bank of England via quantitative easing and quantitative tightening.
In contrast, there is a real crisis with household debt, primarily because the people involved don't have a central bank they can tell what to do. Instead, they have payday lenders and credit card bills. That is what politicians should be worrying about.
The background to this is easy to explain. First, household incomes in the UK have stagnated, at best, in real terms for most of the population since 2008. When inflation is taken into account, many workers are worse off now than they were fifteen years ago.
Second, the cost of essentials, food, energy, rent, and transport has risen dramatically. These are not luxury goods. These are the basics of life. Inflation in these areas has hit hardest those on the lowest incomes.
Third, at the same time, the welfare safety net has been undermined. Universal Credit is riddled with delays, sanctions, and caps. Local government support services have been cut to the bone. Housing benefit barely covers rent. The minimum wage is, in many places, still not a living wage, despite recent increases.
Fourth, in the absence of state support or adequate pay, many people have turned to debt, most especially to manage unexpected events, but also now because of persistent income shortfalls. This is poverty by design, not accident.
Fifth, this growing household debt crisis is socially and economically corrosive. It damages mental health, breaks up families, limits children's life chances, and ultimately weakens the economy through lost productivity and increased strain on public services.
Despite this, the government has done nothing to end this crisis.
It could raise wages.
It could reverse the national insurance increases that will keep them down.
It could increase benefits.
It could invest in social housing to lower rents.
It could introduce universal basic services.
It could guarantee the basic security that a decent society requires.
But it chooses not to. Instead, it talks about fiscal responsibility, as if that means keeping borrowing off the state's books when the reality is that every penny of debt that the state sheds is then dumped onto someone else, fueling the rise in household debt and associated costs in the UK.
This is not what political responsibility looks like. That is a political choice, and a deeply immoral one.
So, what should happen?
First, we must stop obsessing over government debt and start paying attention to the unserviceable and unaffordable debt that is afflicting millions of households.
Second, we must reject the false idea that government and household budgets are the same. The government can create money. Households cannot. Pretending otherwise is not just bad economics. It's a justification for cruelty. The claim that the government has a 'maxed-out credit card' has to stop; it's households that have those.
Third, a government that lets people fall into debt to meet basic needs is a government that has abandoned its core duty. That is what real fiscal failure looks like.
And finally, we must change the narrative.
The UK does not have a public debt crisis.
It has a poverty crisis.
It has a low-pay crisis.
It has a rent crisis.
It has a social care crisis.
And all of these are fuelling the real debt explosion — the one taking place not in the Treasury, but on kitchen tables across Britain.
If Labour wants to talk about economic responsibility, it could start by tackling this issue.
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The other point is that the government borrows at rates very close to inflation, and in fact has a slightly declining Debt to GDP ratio, so in affordability terms its debits are more under control already.
Household debts almost invariably pay above inflation, sometimes massively so.
Equally the government pays no tax on extra it gets in, so any funds raised can directly offset. Households mostly have to pay the highest level of tax they pay on any extra income they can get and may lose benefits from earning more, meaning they may have to earn 250% of the debt servicing amount to actually cover it.
Agreed
I watched an advert on the TV for borrowing at an APR of over 1,000%
The worst I have seen is over 4,000% – admitttedly 20+ years ago
Perhaps what is called ‘fiscal responsibility’ by Rachel from Accounts should be renamed ‘fiscal irresponsibility’?
[…] As an exercise, I have now done this using the transcript of this morning's post on personal debt. […]
I 100% agree.
The mainstream media only ever talk about government debt. Private sector debt is three times government debt and, as you say, far more costly. The UK is about average.
Private sector interest costs are killing economic growth and contributing to the rise of the far-right populists.
But here’s the catch. Debt cannot expand to infinity because a world paying interest on infinite debt would pay infinite interest, with nowt left for food and shelter.
This in turn means that there has to be a limit on how much credit can expand, which I call the financial system limit (and is the title of a short book on the problem, still available but the figures are a little out of date).
We can measure the ratio of interest cost to GDP, and it is this ratio that has to stay well below 100%. Globally I calculated it as 21% using 2018 data. The Economist published an article a year or two ago using a different methodology for, from memory, about 60 countries, and made it 12%. The truth may be in between. It is impossible to measure accurately.
The only evidence of where the limit may be is the Puerto Rican default, which happened on a different basis (because it included pension fund debt but not household debt). That was at a ratio of interest cost to GDP of 37%.
When governments stimulate, some of the new money has to be lent out to the private sector, who as you say pay high real costs of interest after inflation.
The global financial system has a very deep problem.
Martin Wolf of the FT argues that interest costs do not matter because interest is only a transfer payment (private correspondence). Another example of crap economic thought.
Thanks
Wold ignores the redistribution
Tim Morgan of Surplus Energy Economics at one stage produced an ‘Essentials’ price index for staple foods, energy and housing costs
Perhaps we need something similar ideally produced by Government to inform policy that affects low earners.
He also produced an excellent report that sadly has disappeared from the Internet, despite being a small c if not big C politically on the madness of high land and property prices and the economic benefits of Council Housing
This is supposedly core infaltion – but it’s a useless indicator, IMO
Unlike many IFA’s, I don’t refuse to take on clients because they “own” little – such individuals need more help, not, less and clearly fall within the FCA’s vulnerability criteria. I see people, not pound signs. Now, our business needs to be profitable, of course, and the regulatory and professional indemnity insurance costs are high, but I still enjoy my work at 61 years of age and hope to go on for a few years more at least.
I spend a lot of time helping people dig themselves out of a financial hole – these are often hard-working individual’s doing work at low wages that I wouldn’t like to do like caring or cleaning. Many of these people have burdensome consumer debt, often incurred because something personally terrible has happened to their health or employment status. Quite often, they will have various pension funds that are incomprehensible to them. Depending on their age (and many of these folk are no longer young), it can be the case that setting up any DB pension a little early or, better, taking benefits from a DC pension now can be exactly the right thing to do.
Right now, I’m helping a couple to do just that. They are the husband’s DC funds – he works night shifts as a warehouseman for a large supermarket, which is really hard work as he approaches 60. He’d love to drop a day or two and get some life back. In short, using his old DC pensions now will give them a lump-sum of over £55,000 and a guaranteed lifetime, RPI-linked, pension – now – of just under £7,000. This will enable them to finish up their mortgage, saving about £450 a month, tuck a bit away in a savings account as their ’emergency fund’, and have a pension of £540, gross, adjusted each year for inflation. The end result? No debt (at all), a net income gain of about £880 per month, enabling him to work a little less. our firm will earn about £1,000 for doing this (from the pension fund) – they spoke to two other IFA’s. One was not interested, the other wanted a fee of £6,000 (!).
A couple of years ago, I helped a Binman with his retirement. After having spent 35+ years collecting rubbish and recycling, he was suffering physically. His job had started with the local authority and had been ‘outsourced’ several times, meaning that there were six or seven pensions to sort out. A man who struggled to read or write (dyslexia) and with a child with lifelong dependency, life was tough. In short, I activated his state pension and arranged all of his DB pensions, buying an annuity with a couple of DC pots, earning about £800 in the process. He was able to retire, with indexed pensions adding up to £550 a month more than his salary! It was a really rewarding case to work on.
These are the people who need advice from a person – not ‘guidance’, not AI, but a chat over a coffee and an empathetic response to their circumstances. Not those with oodles of money that they wish to squirrel away from the tax authorities offshore.
I’m no saint (no-one is perfect, after all), but I very much enjoy cases like these, especially where the eventual outcome has profound benefits for the people concerned.
Mark
I used to do work like that.
We had quite a number of clients about whom we joked that if they paid any tax HMRC had a party, and if we were paid, we did. But we kept them because they needed our help.
Richard
Which just goes to show that when you make your business about making a living, not a killing, everyone benefits. This is the sort of business we need many more of.
Agreed
Those are my neighbours.
That is reaaly valuable work, you are literally saving lives.
🙂
There is no government debt crises, because the government has no debt.
Calling it such is a deliberate misdirection.
It is about time that this 40-year-old meme is buried, and government held to account.
One man’s debt is another man’s wealth. It won’t change under capitalism.
Interesting timing! My wife and I were discussing similar over dinner this evening. Not just UK private debt but private debt per se and how the most in need not only have to borrow but also have to pay the highest interest rate. Of course we understand the supposed risk re commercial bank lending but it does all seem perversely inverse, back to front and upside down that those that can ill afford it get charged the highest rates. So of course those that can least afford it are going to default. My wife and I have decided that bank lending should operate inversely to the current system and that the wealthier you are the higher the interest you have to pay! Progress lending!
The state could create a small loans bank with repayment straught from benefits, only availanble to those on beenfits, and precisely no risk of non-repayment then. What interest rate would be reuqired in that case? Base + 1%?
Pretty much our thoughts but not at a variable rate.
Fixed rate will always be set too high
Credit Unions were useful for some people but most appear to have folded now.
WHich I consider to be a shame
True
I think it would be more accurate to consider Labour to be wanting to be publicly seen and heard talking about economic responsibility entirely in terms of their own choosing, rather than to imagine Labour as actually aspiring to have an adult conversation about what economic responsibility might entail or how to implement the management of the economy via a strategy based on the execution of responsible economics.
The obvious thing to do would be to introduce usury legislation, limiting the charging of interest to a rate that is more reflective of the actual risk to the lender and related to the base lending rate. For instance, I cannot believe that banks are justified in charging around 40 per cent for overdrafts or 30 per cent on some credit cards. Obviously, we do not want to drive people into the hands of loan sharks, and banks don’t have to lend money to people with poor credit scores.
I suggest a strictly enforced cap of base rate plus 5 per cent on all lending. So, credit cards would be around 9 per cent. Personal loans and mortgages are now readily available at 1 or 2 percentage points above base rate, usually only to those with collateral or good credit records.
Commercial banks will no doubt howl in protest and lobby strongly against such measures. Also, recent governments have shown no inclination to help citizens who have drifted unavoidedly into debt, and seem to take a Victorian attitude to the plight of debtors, unless they are failing companies and their directors.
If rates were at that level arrangement fees would be charged instead and would be very high
We need to take this away from banks
@Lynn Padley
https://www.taxresearch.org.uk/Blog/2025/06/20/the-real-uk-debt-crisis-isnt-in-the-treasury-its-in-the-homes-of-millions-of-people/comment-page-1/#comment-1026653
Agreed.
I used to volunteer for a small local CU in Dorset, but after two mergers it folded and went bust.
I was then involved in trying, with some well connected people in our town’s business community including a national building society headquartered in our town, to set up a local finance initiative, a bit like “Bank of Dave”, but that got nowhere.
The legislative barriers & rules were very high, IMHO deliberately & corruptly so. They stopped us dead in our tracks but barely made a dent in “less ethically focussed” finance conspiracies such as HSBC or HBOS. (I choose my words carefully, being more accurate might attract the SLAPP Mafia).
Then we smelt the coffee, and started a foodbank. So much easier, because all we needed was caring human beings (a lot of those around still), and hungry clients in poverty, and that was the growth area of our neoliberal economy. Feed the poor! 2012 we started, and its been growth, growth, growth ever since. I visited for their 10th anniversary (we avoided calling it a celebration) and reminded one another what an appalling indictment our success was on our governments over that period and the importance of combining relief work with political protest and activism.
If you detect a hint of sarcasm here, you are correct.
It is not a coincidence that trying to set up fair community finance (to try and AVOID poverty) is so HARD, yet setting a thriving foodbank operation (to stave off the more embarrassing consequences of poverty) is relatively, so easy.
It’s a disgusting indictment of our governments and wealth collectors.
Thanks for what you have done
Don’t forget the global debt crisis, especially now “international & aid” have become dirty words in UK & USA.
2025 is a Catholic Jubilee year. Here’s something Pope Francis set up before he died, and Pope Leo apparently supports.
https://www.premierchristianity.com/opinion/the-vatican-wants-to-solve-the-global-debt-crisis-our-political-leaders-should-take-note/19617.article
By Bishop Simon Wright, Catholic Bishop of Hexham & Newcastle & Chair of CAFOD, the Catholic aid agency.
Thanks