Britain’s $2.7 Trillion Consumer Debt Causing Alarm

Before the 2008 financial crisis, the Bank of England’s data on consumer debt in the UK was recorded at £2.08 trillion ($2.70 trillion).

As the crisis spread and markets were in turmoil, the first four months saw £200 billion of credit vanish. With the continuous real wage rate decline and rise in unemployment, total consumer debt dropped to £1.5 trillion in 2012, Seeking Alpha reported.

In January 2018, Britain’s consumer debt reached pre-crisis levels and, as of April was £2.1 trillion. Although the figure matches pre-crisis levels, the reasons for the build-up are largely different.

To remediate the effects of the crisis and recession, the Bank of England, among other stimulus packages, lowered interest rates to encourage spending and investment—which in turn would fuel growth. Individual borrowers saw this as a great opportunity to get their hands on ‘cheap’ money. Independently, the Bank of England’s interest rate policy follows sound economic theory, however, the government took a contrasting approach, which has led to this unique situation.

The Bank of England’s technocratic approach was semi-countered by government’s ideologically-driven austerity plan. On the individual level, a problematic scenario emerges: Cheap debt and tight government fiscal policy. In Britain, figures from February 2018 show that 44.8% of the population are either financially struggling (low income, benefit dependent, social housed, median savings of £50) or squeezed (low income, private renters, one shock away from problems, median savings of £580).

Consumer debt is an individual form of debt, which is composed primarily of credit card, household, and car leasing expenditure. Mortgages and student loans are not included as they are generally seen as investments. Consumer debt is not productive, it is simply for consumption.

In moderation, consumer debt is encouraged as it increases spending into the economy and incites growth. When debt levels climb at a constant pace, growth can continue to flourish. However, as soon as the market is spooked and business falters or unemployment rises, widespread debt can easily escalate a small treatable market blip.