Though Cowards Flinch

Unsurprisingly, much discussion has been had during Labour conference on the budget deficit and how the country can promote growth and create jobs while simultaneously trying to level national debt in a realistic period of time.

Of comparable importance to the level of national debt are levels of personal debt, which have seen a sharp rise in recent times. According to statistics by Credit Action personal debt in the UK (2010) was £1.5 trillion – a figure serviceable in better times, but increasingly a struggle since the recession. In the decade to 2008, average household debt in the UK increased substantially– from 93 to 161 per cent of disposable income – largely accounted for by mortgages – and is set to rise to an average of £81,000 per household by 2015.

The think tank Compass were so bold as to say over-indebtedness was linked to low wages rather than ‘consumerism’. A fifth of the 14 million lowest earners say debt is a heavy burden, more than a third have no savings at all, and one fifth have less than 1,500 in savings. Further still, social housing tenants represent 6 in 10 of the financially excluded, of whom one in 6 have no bank account (which the government should make a universal right).

In times of severe economic difficulty, ways and means of leveling ones personal debt can get extremely difficult. Such circumstances often follow a spike in high cost credit use. Peter Crook, the chief executive of Provident Financial – a short-term, unsecured loan agent – said in 2010 that “We may well see a growth in our target audience”. When we find out who their target audience is, we can really see what drives this market. The Office of Fair Trading’s High-Cost Credit Review (Annex C, p. 36), found that 10.4% of payday customers have incomes of less than £11,100 per annum, and that 49.1% of all customers have incomes of less than £19,200 per year.

So clearly there is a problem, but what is the solution.? Stella Creasy, the Labour Co-operative MP for Walthamstow, has been campaigning tirelessly for months to introduce a credit regulation bill to implement a cap on the total cost of credit – which means not capping the annual rates of interest on a loan, leaving it open for lenders to slap on high administrative fees to redeem their loss, but a cap on how much an individual will pay overall for a loan. Such a move has already been given the cold shoulder by the Tories who are instinctively against the regulation of the banking system – instead calling on more competition in the market – and by the OFT who have claimed a total cap is not necessary.

But the UK is one of only few countries in the world without such a cap. Lenders make money, not from how many times they sell credit to different customers, but on individual customers rolling over on their debts, or even taking out loans to service existing loans. As for initial measures, placing a cap on how many times a person can rollover seems a good short term move, but obliging lenders to fund financial counselling sessions would be an even more radical progression.

Further, linking existing credit unions to a modernised post office could both make the latter more relevant in an email age, and ensure more people are creditworthy and not falling into unserviceable debt.

A savings culture in this country once again needs a boost, and with the Tories scrapping the child trust fund and the savings gateway, it’s clear what side they are on. Debt, as many people – whether rightly or wrongly – will tell you is a necessary evil, and will take years of intervening to overcome; but making credit lending less dubious, and ensuring people don’t fall into severe debt cycles, especially in times of austerity, is the sine qua non for a government and a society committed to welfare.

Go to any event that’s vaguely socialist, and you will hear it being mourned that there is a widespread disenfranchisement of the working class and its institutions. Figures by the Department for Business, Innovation and Skills (BIS) last year revealed that the number of people affiliated to trade unions dropped by 165,000 in 2009.

The number of people in unions in the late 1970s was around 13 million – leagues away from the 7.1 million employed joined to a union.

You can tell there’s a problem when in a time of financial crisis the tabloid press doesn’t blame union greed – which it did during all other times of financial disaster – but public spending; as though the unions have already won their battle, have become irrelevant because the public sector have incorporated their demands.

Clearly, though, those demands have not been met – what the press are purposefully omitting is the sky-high wages for chiefs, the mounting consulting fees and waste. To be sure this money is not going on wage increases and pensions. While 9,000 public sector employees earn more than the Prime Minister, two-thirds earn less than £21,000-a-year and are facing a three-year pay freeze.

So what has cancelled out the union bargaining chip? Some have noted that credit, and thus debt, has saturated the enthusiasm to demand higher wages, and seemingly counterbalances low wages. If this is so, we, the Left, should be behind Stella Creasy and her campaign to curb high cost credit, because when credit dependency is removed, so returns the need for higher wages, and thus union power.

But, of course, Creasy doesn’t stop there (if she just stopped there, it would empower illegal payday lenders – and that’s another problem. Users of payday loans have quadrupled to 1.2 million over the last four years). She wants to increase the roll-out of credit unions which could be linked to the post office network (under pressure in the digital age), could provide links online (which keeps processing costs down) and therefore keeps loan costs down.

The issue that could be raised here is that this still allows for debt. But without doubt the creditworthiness of individuals needs to be matched by initiatives to promote savings. BIS and the coalition government say they want to better link up credit unions with the post office network (point 53 of this report – pdf) but they scrapped the Savings Gateway and the Child Trust Fund – initiatives which were the best of New Labour (it must be said that the best of Third Way-ism is Reformism, like savings initiatives; but the worst of it is neo-liberal economics).

The IPPR, geniuses that they are, may have found the magic bullet which doesn’t require those particular schemes. Tax credits could be rewarded to those accounts of low income earners who keep money in their savings accounts for longer. The problem, however, is that some families do not have enough at the end of the month to. Therefore there is no reason to think that the roll out of credit unions and tax breaks will disincentivise the enthusiasm to campaign for higher wages.

Debt is an anti-capitalist issue. Just as we sell our labour for a wage, now we sell our labour to service our debt. The choice for the Left is either to demand the impossible (cancel all debt), or demand the possible and support rewards for saving, reinvigorate the bargaining chip for higher wages and support our public services by properly modernising the post office (digitising it, for example, and linking it to credit unions).

The reformist way here, it would seem, is the most radical.

This Thursday a motion from Stella Creasy MP and Justin Tomlinson MP will be moved in the House of Commons calling for Government to give regulators the power to cap the total cost for credit.

In brief (and as I’ve written before), the consumer credit (regulation and advice) bill seeks to integrate credit services with the post office network, impose a levy on consumer credit agencies to fund debt counselling and advice services, and give councils greater powers to regulate the amount of credit agencies in their local area.

Creasy has received support for her bill from the End Legal Loansharking Campaign, and though the emotive word “end” – as in to ban – has been used, in actual fact what the bill recommends is far more clever in that it seeks to find a mechanism to reduce unrealistic rates attached to many high-street lenders, with the aim of reducing credit dependency altogether.

During her adjournment debate held on 9 November 2010 in the House of Commons, Creasy noted 1 in 10 customers of legal loan sharks earn under £11,000 per year, and that even lenders playing by the book are able to okay loans at 272% APR (compared to 9-10% by mainstream lenders).

The inclusion of a Tory MP (Tomlinson, who is MP for Swindon North, who has recently set up a Personal Finance Education Group) will help give the bill cross-party appeal, but the very notion of “regulation” seemed to be met with resistance from some Conservatives – peculiar, seeing as at the heart of the bill is a commitment towards bringing down personal debt, and providing a gateway towards a more savings-based culture (something the Conservative Party were once geared towards).

Personal Debt

According to Credit Action the total UK personal debt at the end of November 2010 stood at £1,454bn – which amounts to more than the whole country produces in a year. Additionally, total consumer credit lending to individuals was at £214bn.

David Willetts MP, Minister of State for Universities and Science, wrote for Bright Blue Magazine saying: “It is widely understood that what has broken our economy is our dependence on debt and borrowing. This is revealed in extraordinarily low levels of saving over the past decade.” We mustn’t avoid factoring in economic inequality to a broken economy, nor assume there is only one viable plan available to fix it with, but certainly the credit experiment hurt the worst off hardest.

By coincidence, Willetts was present at Creasy’s adjournment debate last November (he stepped in last minute) and noted that the points she raised in her bill would certainly be considered in the government’s ongoing credit review. Clearly Creasy’s recommendations are in step with his concerns about debt dependence and low levels of savings.

Willetts is not the only high-ranking Conservative politician who has spoken out on this issue. Before he was Prime Minister David Cameron addressed an audience on progressive conservatism, rallying against “Too much banking debt, too much personal debt and too much government debt”. Uncontrollable personal debt is clearly at odds with modern conservatism; Creasy’s bill should be seen as a solution.

Credit Unions or P2P

Part of the bill includes the recommendation that a levy be drawn up against lenders to afford financial literacy classes – for much the same reasons that alcoholic drink producers are obliged to promote the drink aware campaign on their advertising material. While P2P (peer-to-peer) lending may undercut illegal loan sharks, there can be no way for it to offer the kind of financial literacy advice that debt-dependents need.

Debt dependency will not disappear overnight. Credit unions are well placed to get people creditworthy, thus disincentivising use of illegal loansharks, or payday loan shops that charge astonishingly high APR rates, while simultaneously offering the kind of advice which will drive down personal debt in the future.

Savings culture

As Respublica researcher Sandra Gruesco noted last year, in 2003, George Osborne said:

“We greatly support the principle that the (Child Trust Fund) Bill is designed to promote (…) We think that having savings gives people a stake in society, gives them independence, encourages self-reliance and bolsters the freedom of the individual against the overbearing state.”

It was the conservative appeal to a savings culture that surprised a lot of Tories when it was decided the Child Trust Fund and the Savings Gateway – which have been noted as progressive conservative ideals (pdf) – should be scrapped.

Unfortunately nothing has yet been put in its place. OECD figures revealed that in each year from 2005 to 2008 British households were running negative savings, but thankfully the consumer credit (regulation and advice) bill seeks to address the very concerns expressed by high-ranking Conservatives themselves. It seems obvious that Conservatives should support Stella Creasy’s motion on Thursday.