Debt (Hansard, 2 December 2003)

§ Lord Sheldon
asked Her Majesty's Government:
How they propose to deal with the current level of household and personal debt.

§ Lord Davies of Oldham
My Lords, the Government aim to provide a framework of macro-economic stability and awareness of financial issues within which people can make informed and responsible decisions about how much debt it is prudent to incur. The Government will publish a consumer credit White Paper in the near future.

§ Lord Sheldon
My Lords, I thank my noble friend for that reply and his assurance that something will be forthcoming in this area. Is he aware that the ratio of house prices to income is now greater than it has been since 1989, after which there were very serious falls in the prices of houses? Will he acknowledge that the present low level of interest rates makes it easier to maintain levels of debt which would not otherwise be possible? When interest rates rise eventually this burden can be made unmanageable, as was suggested by the OECD in its report last week. Has my noble friend considered encouraging greater responsibility to the lending institutions which seem over-ready to lend under present circumstances? Is he having discussions with them?

§ Lord Davies of Oldham
My Lords, greater responsibility in certain areas with regard to lending will indeed be the subject of our consumer credit White Paper. On the more general issue, although my noble friend indicates the extent of household debt, the House will recognise that the issue is whether people are able to manage such debt. Interest rates and mortgage rates are much lower than they were in 1989, which is the date that the noble Lord quoted. With interest rates at only just over one-third of the rates at 181 that time, the problems which occurred with the massive crash in house prices will not be replicated in the present circumstances.

§ The Lord Bishop of Portsmouth
My Lords, are the Government aware that this is about far more than house prices? Are they aware of the extent to which debt is of concern to all sections of society? I speak of my own patch, which is not just leafy Portsmouth but the housing estates of Portsmouth and Ryde, where people are induced to buy goods from the backs of white vans on the never-never at rates of interest that will keep them poor for ever, or certainly for a long time to come. If the noble Lord would like to visit that part of the country, I should be delighted to show it to him.

§ Lord Davies of Oldham
My Lords, the right reverend Prelate has identified an area of increasing concern; that is, the exorbitant rates enforced on people who borrow unwisely or who are forced to borrow at the extremes of the market because of their circumstances. We will certainly tackle that area in the forthcoming White Paper.
On the more general issue with regard to debt, the House will recognise that the increase in debt is a reflection of households feeling increasingly wealthy. In fact, households have become considerably wealthier over the past 10 years. Borrowing against real wealth and resources in those terms of course can still be entirely prudent borrowing.

§ Lord Marlesford
My Lords, does the noble Lord recognise that many of these organisations which seek to lend money do so in a way which exploits people who do not understand the implications? Would he recommend people who get unsolicited offers to return them with the simple message, saying, "You may not have a problem lending to me, but I would certainly have a problem borrowing from you"?

§ Lord Davies of Oldham
My Lords, if the noble Lord. Lord Marlesford, is joining me in seeking to rein in some of the wilder excesses of unacceptable capitalism, I welcome his support in those terms. He is right that the Government need to address those areas and to look very seriously at the issue of loan sharks and the pursuit of victims—I put it that strongly—for outrageous interest rates.

§ Lord Newby
My Lords, in the debate on the Queen's Speech last week the Minister said that the White Paper to which the noble Lord has referred would deal with the Government's policy in respect of updating legislation on consumer credit. He also said that there would not be a consumer credit Bill. Will the noble Lord explain how legislation in this area might be updated without a consumer credit Bill?

§ Lord Davies of Oldham
My Lords, let us walk before we can run. It is quite customary for a White Paper to be produced first. The White Paper will address those issues which need to be tackled and it 182 will provide areas of potential action by the Government. Should those involve amendments to existing Acts, that will take place. If the noble Lord is saying, "Well, of course the only way to deal with this matter is to have a completely new Bill", that is his view. At this point in time, it is not the Government's view.

§ Baroness Noakes
My Lords, is the Minister aware that the noble Lord, Lord McIntosh of Haringey, in the debate on the gracious Speech last week said that household debt in macro-economic terms is not the problem that some suggest it is? With a debt to disposable income ratio of 125 percent and rising, will he say at what point the Government might think a problem may arise?

§ Lord Davies of Oldham
My Lords, I cannot give that specific answer to the noble Baroness. She would not have anticipated that I would give such a figure. We are concerned to ensure that so far as possible the rise in debt is against the background of manageability of costs which fall upon individual households. If a repeat occurred of the disasters of 1989—when she will recall another administration was in power—households may get into these difficulties. The point is that in circumstances of low interest rates which are moving up very marginally indeed—compared with the 1989 figure of 15 per cent, we are just edging up beyond 5 per cent— we should recognise that households will be able to manage this debt. That is not to say that the household market is not flattening out; it clearly is. But we are not facing the kind of precipitous decline that throws people into negative equity and appalling debt.

§ Lord Clarke of Hampstead
My Lords, will my noble friend join me in recognising the value of credit unions in the question of personal household debt, in particular in the avoidance of the position mentioned earlier by the right reverend Prelate about loan sharks? Credit unions establish a pattern of saving before people are encouraged to borrow. Will my noble friend further agree that it is time for the Government to encourage local authorities to assist in the establishment of credit unions, in particular, by waiving or allowing a reduction of council tax during the establishment of such credit unions?

§ Lord Davies of Oldham
My Lords, I am grateful to my noble friend for introducing this aspect. There is no doubt that the crucial role played by credit unions is for those people with limited resources, who are the very people most vulnerable to the high interest rates extorted by loan sharks when given the opportunity. We are keen to give what assistance we can to the development of credit unions, which, as my noble friend will see, the White Paper will encourage.

§ Lord Roberts of Conwy
My Lords, does the noble Lord believe that the present high levels of household and government debt are necessary to sustain current economic growth?

§ Lord Davies of Oldham
My Lords, the noble Lord should be a little more charitable. He should be 183 congratulating the Government on sustaining economic growth when the rest of the advanced world has been suffering from negative growth rates. There is a decided advantage and we glory in the fact that we still sustain economic growth during these difficult times. This Government do not intend to let people down in their management of the economy. Therefore, it is necessary to look carefully at the extent to which people are able to manage household debt. Perhaps I may say straightforwardly that the most crucial factor is interest rates, which are historically low and way below the average during the years—I choose the years randomly—1979–97.

§ Lord Peston
My Lords, I agree with the right reverend Prelate about the terrible position into which the very poor manage to get themselves. But the overwhelming majority of "excess borrowing" is by people who are relatively well off. Rather like the obese who always blame everyone but themselves for eating too much, these people blame the financial institutions because they borrow too much. If they do not suffer the consequences of their idiotic actions, when will they ever learn not to do it?

§ Lord Davies of Oldham
My Lords, my noble friend expresses himself in the kind of robust language which is unlikely to be quoted against him in his local newspaper when people get into difficulties. Of course, people must act with responsibility. However, we probably have some responsibility for increasing and improving the financial literacy of the nation against a background where people have greater disposable assets but often do not have the insight and knowledge to make best use of such assets. We all know that a fool and his money are soon separated. The essential job of a good community is to ensure that the fools are in the smallest number possible.

§ Lord Ackner
My Lords, have the Government considered what will be the state of the first-time buyers' market in, say, 10 years' time when the students have acquired an average overdraft of about £30,000?

§ Lord Davies of Oldham
My Lords, the noble and learned Lord has combined two difficult concepts in a most interesting way. Perhaps I may make the obvious point that changes in societal behaviour are issues that the Government must constantly address. He will recognise that one effect on the housing market is the extraordinary change in marital patterns where young people are marrying much later and there are more single households. That affects the housing market in an obvious and direct way.
The noble and learned Lord has succeeded in bringing into the equation another dimension; namely, how wealthy individuals will be a decade from now. The obvious point is known throughout the House: we have an average growth rate of just over 2 per cent and, as a whole, the country doubles its wealth in 25 years.

§ Lord Higgins
My Lords, is not part of the problem that credit rating agencies are not subject to effective 184 competition, tend to be inefficient and do not reply to complaints? They also frequently lead people who are a bad credit risk to obtain credit and stop people who are a good credit risk from obtaining credit. Can the Minister assure the House that this issue will be covered in the White Paper?

§ Lord Davies of Oldham
My Lords, that is an important consideration. As the noble Lord indicated, two abuses are being perpetrated by an ineffective and unfair credit market. There is a limit to which legislation can introduce help in every respect, but we are looking at this issue because it certainly has grown during recent years.

§ The Earl of Northesk
My Lords, what is the current total of household debt? What proportion of it is unsecured against assets? The reason I ask is because some forecasters are predicting that household debt will top £1 trillion by next year.

§ Lord Davies of Oldham
My Lords, I cannot give that figure to the noble Earl, but I can reassure him that the ratio of debts to assets in the economy is still very healthy among households. The reason why people feel that they can push the boat out with regard to credit cards is because they feel wealthier, although we all recognise that it can get out of hand in individual cases. People feel wealthier because, objectively, they are wealthier. Given the number of people who own property, there cannot be a 50 per cent average increase in house prices in the past decade without that being reflected in the wider population. There is an increased degree of security in terms of management of debt, particularly if people are managing debt not against raging inflation and very high interest rates, but under controlled inflation and very low interest rates. That is where confidence comes from for our fellow citizens.