Understanding Britain’s private debt epidemic

The COVID-19 pandemic has thrown the indebted nature of Britain into the spotlight once again – but this is a problem with much deeper historical roots

This is the second blog in a new series by undergraduate students on the ‘Britain in the Global Economy’ 3rd year module, which is convened by Dr Scott Lavery at the Department of Politics and International Relations at the University of Sheffield. Read the first blog in the series here.

During the COVID-19 pandemic, Britain’s reliance on private debt has been exposed once again. Research from debt charity StepChange has found that at least £6 billion of household debt has accumulated since the pandemic began, with the actual figure likely to be even higher. More than one in eight people on furlough have defaulted on loan or credit card repayments, while some figures suggest that less than half of all rent owed during the pandemic has actually been paid.

This mountain of debt will seriously hamper any recovery in the British economy post COVID-19. However, we need to recognise that these problems are not just a temporary response to the pandemic. High levels of private debt are hard-wired into Britain’s model of capitalism. For example, average household debt (excluding mortgages) in 1990 was £4000 in 1990. By 2018 it had risen to £15,000.

To understand how this came about, we must look back to the late 1970’s, the election of Margaret Thatcher and the steady neoliberalisation of the British economy over recent decades.

In the late 1970s, Britain, like much of the rest of the global north, was facing deep economic challenges. Low growth, low investment and rapidly rising prices combined to produce an era of ‘stagflation’. This was in part exacerbated by the strength of the British labour movement, whose attempts to keep wages in line with rising prices squeezed the profitability of British firms. This, coupled with years of economic decline compared to the economies of mainland Europe, meant that the outlook for the British economy was decidedly bleak.

The task of the Thatcher government set itself was to reduce the power and wages of the British labour movement. This project began with the government’s direct confrontation with its unions, both in the physical means seen at the “Battle of Orgreave” during the miners’ strike of 1984-5, and through legislative measures that greatly restricted union activity. This was combined with monetary policy which tolerated previously unimaginable levels of unemployment, up to 11.9% in 1984, which, by increasing the number of potential workers available for each job, hugely decreased the bargaining power of those whose jobs remained.

The results of this were clear and immediate. By the 1990s, wage earners were receiving seven per cent less of national income – the equivalent of some £100 billion a year – than they were in the post-war decades. On the flipside of this, profits increased spectacularly, with company director income increasing by 43% in Thatcher’s first 5 years of office alone.

These early moves were built on by 40 years of government policy aimed at producing a much more “flexible” workforce, through further reduction in the capacity of workers to organise, and the dismantling of much of the welfare state. The effects of this are clear, with wage growth falling from 2.9% per annum in the 1970’s and 1980’s to only 1.2% by the 2000’s, producing a situation today where 58% of those in poverty are in work. 

The barrier of union power to the profitability of British capitalism had been removed, but this huge fall in wages meant that “aggregate demand”, the ability of the population to purchase the goods the economy produces, was seriously under threat. For British capitalism to function, this purchasing power had to be somehow maintained.

This is where debt comes in.

Alongside attacks on organised labour, UK governments have actively deregulating the financial sector over the last 40 years, allowing financial institutions to massively increase the amount of credit they could lend out. This allowed for the creation of financial instruments such as credit cards, payday loans, and mortgages, which meant people could now borrow money to consume the commodities that their wages no longer stretched to cover.

This meant that wages could stay low enough for the profitability of British business to remain unhindered, without hampering the aggregate demand the economy needed to function, all while opening up new spaces in society where the British financial sector could turn astronomical profits.

Through the growth of this dynamic, private debt has become an essential part of the British economy. After never having exceeded 72% in the 100 years prior, the British private debt to GDP ratio has almost tripled in the 40 years since Thatcher was elected, reaching a peak of nearly 200% in 2010. Moreover, Britain’s housing market, fundamental to its economy, and to the social base of homeowners upon which support for neoliberalism rests, is also wholly dependent on this private debt. The rise of house prices by 259% between 1997 and 2016, a period in which wages rose only 68%, was premised solely upon sustained deregulation of mortgage lending, making mortgages increasingly accessible for people, and so continually raising the demand for houses while their supply remained largely constant.

These huge levels of private debt are therefore not an unfortunate by-product of the British economy, but a central plank upon which it rests. It maintains the mass consumption capitalism requires, while keeping wages low enough to not impede businesses’ profits.

Consequently, the additional private debt which some households have accumulated during the coronavirus pandemic cannot be understood solely as the product of the one-off shock of Covid-19, but rather as the exacerbation of an essential, yet hugely unstable, dynamic upon which the British economy depends.

The COVID-19 pandemic did not create Britain’s private debt crisis – it has merely brought contradictory dynamics that have been bubbling away under the surface of the British economy up to the surface once again. For Britain’s private debt crisis to be resolved post-Coronavirus, it is these forces that will have to be tackled, something only a deep, structural transformation of the British economy will be able to manage.