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10.09.2018

Eleven Years On: Is Another UK Financial Crisis Inevitable?

It is probably true to say you can foresee a financial crisis by counting the number of reports warning of it before it happens.

This was true before the last financial crisis, when reports began warning of a housing bubble, borrowers taking out mortgages that they could never pay back and consumers fuelling their spending splurges with equity from homes.

It’s also true today as more and more think tanks, government bodies and charities warn of problem debt levels in the UK.

In fact, the frequency of these reports has become so regular, that it might just be better to say that you can tell there is a growing problem by weighing the number of reports, as there has been that many it would be quicker.

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Many of them have been covered in this blog and are appearing at such regular intervals now, that you could compare them with the tremors that precede earthquakes.

And judging by the warnings that are being issued by these reports from the Citizen Advice Service, the Money Advice Service, and the House of Commons powerful Treasury Select Committee, when the platelets do move, the earthquake is going to be high on the Richter scale.

What the numbers say!

The most recent of these reports is one that has been released by the UK National Audit Office, the organisation which audits the UK’s Government’s finances. It could be described as the UK Government’s bean counter.

It found the government had a limited understanding of how problem debts are impacting on people’s lives and public finances and that there is no co-ordination between government departments and agencies as to how these problems should be addressed.

They have also revealed the amount of debt owed to the Government, utility companies, property owners and housing associations is now at least £18 billion.

They have found that government agencies and departments also have the worst record of accomplishment in recovering debts and are often the most aggressive and least sympathetic.

They found this is causing millions of UK residents to suffer anxiety and depression and was forcing them to turn to the NHS and become dependent on social housing.  The National Audit Office found this was costing the UK taxpayer at least £248 million a year and was bad value for money for the taxpayer.

That cannot be considered good feedback for anyone, but least of all for Government agencies involved in recovering debts: basically, their effort to get money in was so inefficient, it was unnecessarily costing more money than it should.

They also estimated that there was 8.3 million people struggling with problem debt in the UK, and of those 600,000 needed debt advice, but were unable to access it.

They also found that in 2018 there was £15 billion owed in mortgage arrears, and that four in ten in the UK cannot manage their money well.

The alarming report has also now been followed by another report (throw it onto the scales) by the Local Government Association, which has shown that local councils across the UK, by 2020 will have suffered 60% in cuts to their core funding since 2010.  This will mean that council tax bills will rise further and in turn lead to rising numbers going into arrears. It also means many council funded services will be cut further, which are those services the National Audit Office found people turn to when they are struggling with problem debts and include debt advice services provided by organisations like Citizen Advice Bureaux.

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When is the Tipping Point?

When is the tipping point is still anyone’s guess and not everyone is convinced that the UK’s personal debt problem cannot be pulled back from that tipping point.

Mark Carney, for example, Head of the Bank of England still does believe that the UK’s personal debt problem poses any risk to the UK economy. He understands that it is having a big impact on individuals but doesn’t believe it poses any significant risk to the wider economy.

He’s not worried.

You would think that would put people’s minds at rest, however, it’s worth remembering that neither Alan Greenspan nor Ben Bernanke, both former Chairmen of the US Federal Reserve, foresaw the last financial crisis. So Central Bankers do get it wrong.

What does appear to be beyond dispute, is large numbers of people in the UK are struggling with significant amounts of consumer debt and don’t even have £100 in savings.  It is likely, therefore, even the slightest income shock will put them into financial distress and the numbers of people struggling with problem debts will increase.

The reports, therefore, will no doubt continue, until possibly the weight of them makes reaching the tipping point inevitable.

Creditfix is the UK’s leading Personal Debt Solution provider and provides access to all the UK’s formal debt solutions, including Protected Trust Deeds, Sequestrations and the Debt Arrangement Scheme in Scotland; in England, Wales and Northern Ireland it provides Individual Voluntary Arrangements

To speak to a Creditfix adviser, call 0808 2085 198