§ 6.17 p.m.
§ The Earl of Northesk rose to call attention to levels of personal debt, including mortgage debt; and to move for Papers.
The noble Earl said: My Lords, your Lordships will recall the heady days of the last few years of the previous century. The Prime Minister proclaimed a new political order based on new Labour's "Third Way". The Chancellor of the Exchequer, on the back of his
immediate decision to transfer the setting of interest rates to the Bank of England, claimed the equivalent of economic sainthood. His comments in a Statement on the Government's economic and fiscal strategy in June 1998 give a flavour of the rhetoric that prevailed at the time:
The spending plans that we set must ensure sustainable finances over the whole economic cycle—rigorous financial discipline that, together with monetary stability, ends once and for all the boom and bust that for 30 years has undermined stability, hindered long-term investment in our public services and prevented this country from achieving its potential".—[Official Report, Commons, 11/6/98; col. 1195.]
That claim of fiscal alchemy—the banishment of boom and bust—dripped from the lips of Treasury Ministers like so much honey.
§ In terms, the situation that prevails at the moment is one of booms in house prices and consumer spending, both fuelled substantially by debt. Perhaps we should not be surprised that the Treasury has become more circumspect about claiming that boom and bust has been banished. Even the Chancellor's affection for prudence—formerly so strong—seems to have cooled.
§ Nevertheless, we should give credit where credit is due. Noble Lords on these Benches might wish that the Government had been a little more generous in acknowledging their golden economic inheritance. Despite that, it would be churlish not to admit that the economy has performed tolerably well in recent years. However, although, outwardly, some of the headline trends continue to seem adequately robust, clouds are gathering. We cannot tell how dark they may be or what economic hailstorms they may carry, but of one thing we can be certain: they are gathering. Not least among them are current levels of personal debt.
It is as well to put the matter in context. According to the most recent figures from the Bank of England, net lending to individuals stands at £985 billion. Personal debt is currently rising at the rate of £1 million every four minutes, with the breach of the £1 trillion mark imminent. In common with my right honourable friend Oliver Letwin, I do not suggest that this,
will lead to an economic meltdown, but it is a timely wake-up call".
Unsecured personal debt has grown by more than 50 per cent since 1997, twice as fast as incomes, and now stands at £5,330 per person. Total unsecured personal debt stands at £172 billion and is growing at over 10 per cent a year. Credit card lending grew by £963 million in March, the largest increase in two years. As to mortgage lending, this grew by £9.34 billion in March, the highest amount for five months.
Here, worrying signals are beginning to emerge. At what the Government might call the affordable end of the market, many people with limited experience of the rental sector are entering the buy-to-let market. This is fanning the flames of house price inflation. However, as revealed in last week's Sunday Times, there is growing evidence that people's expectations of the return on their investment are pitched too high. In such circumstances the effect of even a relatively modest increase in interest rates could be profound. As Shelter has observed:
If buy-to-let investors cut and run this could be the catalyst for a severe slowdown".
§ Shelter's research provides us with an insight into the standing of the unaffordable end of the market by showing that buying a first home is now 33 per cent less affordable than it was 10 years ago, and that first-time buyers accounted for just 29 per cent of all buyers last year—a fall from 50 per cent in 2001. In addition, 55 per cent of all mortgage lending is to homeowners borrowing against the value of their existing homes and, incredibly, that 50 per cent accounts for 50 per cent of the rise in consumer spending. From this we can infer that a sizeable proportion of mortgage debt is being used to fund either day-to-day living expenses or lifestyle choices.
§ The reverse side of the debt coin, saving, exhibits similar properties. The savings ratio has halved under the current administration. According to the Family Resources Survey, 27 per cent of households have next to no savings at all, and a further 23 per cent have savings of less than £1,500. Charles Bean, the Bank of England's chief economist, has noted that one-third of British households have virtually no liquid assets to draw on if the need arises. In the six years from 1998 to 2003, the household saving ratio has never been higher than 6.7 per cent; in the previous six years to 1997 it was never lower than 9.3 per cent.
§ By all available measures people are saving less and borrowing more than when the Government came into office, which, as reflected in the statistics, is causing increasing problems. Some 1.5 million new consumer debt problems were brought to Citizens Advice Bureaux during 2001–02, a 50 per cent rise on 2000–01. Inquiries to CAB about consumer credit and debt have gone up 46 per cent during the past five years. Twenty-six per cent of people struggle with debt repayments from time to time, and 11 per cent have more serious problems. Over 3 million households now rely on the services of moneylenders. Individual bankruptcies are at their highest level since late 1993, with those going bankrupt during the past year rising by nearly a third.
§ What is more, debt is impacting disproportionately on the most disadvantaged. The debt to income ratio is highest for the poorest households, where it has also risen faster than in any other group, doubling between 1995 and 2000. Households earning less than £15,000 are twice as likely to be in arrears than more affluent households.
Despite the commitment of the Chancellor at the 2003 Labour Party conference,
to abolish pensioner poverty in this generation",
the proportion of pensioners living in households below 60 per cent median income before housing costs in 2001–02 remains relatively unchanged from 1994–95 levels. A MORI survey, published earlier this year, has found that student debt has risen by 74 per cent over the past four years, with students now graduating with average debts of £8,031, as compared with, according to the Government's own figures, £840 in 1995–96, £2,530 in 1998–99 and £3,210 in 1999–2000.
All in all, this is a curious, not to say surprising, legacy of the Government's protestations of "prosperity not for the few, but for the many". It is not as if the Government
have been suddenly blindsided by personal debt as a specific feature of the economy. As long ago as October 2000, the DTI convened a meeting with various financial institutions, prompted by research from the Citizens Advice Bureaux showing unprecedented demand for debt counselling, to discuss ways of stemming the growth in unaffordable debt. At the time Dr Kim Howells commented: "It's"—that is, personal debt—
become a major concern to almost everyone, not just the people who are out there trying to give advice".
And yet, judging from subsequent responses, the Government have become ever more reticent, not to say blasé, about the matter. In March of last year, the Treasury Minister Ruth Kelly held out consumer debt as a badge of honour for, and almost a source of pride in, the Government's economic policy, stating:
Growth in household debt reflects strong fundamentals with a robust labour market, low interest rates and strong gains in housing wealth".—[Official Report, Commons, 10/3/03; col. 21W.]
The noble Lord, Lord Sainsbury, reiterated this sentiment in his response to an Unstarred Question from my noble friend Lady Wilcox:
Our stable macro-economic framework has delivered sustainable economic growth, with the growth in borrowing reflecting the strong fundamentals of the UK economy".
He added, for good measure:
The economic success is to some extent fuelling the issue of consumer debt".
To be fair, the noble Lord did qualify his comments by stating that,
this is an issue which the Government take very seriously. We are working to address the problem".—[Official Report, 21/10/03; col. 1582 col. 1582.]
In November of last year the noble Lord, Lord McIntosh, sought to offer a similar reassurance, when he said:
The Government are alert to the risks"—
well that is all right, then—
but debt at present remains affordable".—[Official Report, 11/1/03; col. 1209.]
Despite the way in which the figures for debt have surged in the intervening period, he added:
I deny the inexorable rise of household debt".—[Official Report, 11/11/03; col. 1211]
Even the Minister has got in on the act. Last December he offered this analysis of the totality of the debt problem saying 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 … People feel wealthier because, objectively, they are wealthier".—[Official Report, 2/12/03; col. 184.]
Most, if not all, of these pronouncements share an odd feature. Paraphrasing Gordon Gekko in the film "Wall Street", they say, "Debt is good". They translate as exhortations to borrow. In truth, this should not surprise us unduly. As my noble friend Lord Saatchi observed in a similar debate some eight months ago,
the Government have a vested interest in the continuation of the present build up of debt".—[Official Report, 21/10/03; col. 1580]
§ Paradoxically, the current booms in consumer spending and house prices are propping up the performance of the economy, and on the basis of the evidence this week from the CBI and the Halifax, neither is showing any signs of slowing. With that in mind, it is perhaps worth contemplating how Government policy interacts with the issue of debt.
§ I accept that the Government are not in the business of telling people how to run their own finances. Nevertheless, policy has a role to play in establishing the economic climate and sentiment in which they live their lives. Over the past seven years the Chancellor has conspired to introduce a whole range of measures—the removal of advanced dividend tax credit, the introduction of means-testing via the convoluted tax credit system, and so on—which act as disincentives to saving. In conjunction with this, the Government are throwing huge sums of public money at public services.
§ The Chancellor, far from continuing to ally himself with prudence, is funding today's spending from debt in the expectation of jam tomorrow. Irrespective of current affordability, there is a sense in which the psychology of public policy has shifted from thrift to profligacy. Perhaps we should not be surprised if, learning from the example, the public exhibits the same sort of attitudes towards saving and debt as the Government.
§ Moreover, if, as seems to be the case, the broad sweep of public policy is predicated on the concept that debt is good, there is scope for suspicion that this is motivated as much by requirements of political expediency as a wish to sustain the economy in robust and vigorous health. We are in a significant electoral period and there are those, not least the Item Club, who suggest that the Chancellor has deliberately engineered the current debt-funded pre-election boom.
§ The Minister will no doubt insist that Bank of England independence pre-empts this. As we all know, the Monetary Policy Committee is statutorily required to consider interest rate policy within the limits of the symmetrical inflation target. It cannot deviate outside these bounds other than in exceptional circumstances. Accordingly, it is in a somewhat anomalous position: because it is tied to measuring inflation with CPI rather than RPIX, it is obliged to ignore council tax and all other housing costs. House price inflation is, of necessity, a closed book to it.
George Trefgarne, writing in the Daily Telegraph last month, is particularly robust in his criticism. He said:
Of all the scandals involving this Government and its manipulation of numbers and targets, the fiddling of the inflation target is quite the most reprehensible … It is precisely because of this fiddle that the house price and credit spiral has suddenly become so political".
In a subtle and roundabout way, the independence of the committee to set interest rates according to the prevailing circumstances of the economy has been compromised with potentially damaging consequences.
By way of comfort to the Minister, I accept that some of the headlines and media reporting of personal debt in recent weeks have been overblown. Indeed, I have taken
due note of MORI's report last week on credit card debt. Certainly it is premature to assume that current levels of personal debt presage an impending crisis. Nor do I envy the Government their task. Consumer confidence as a major plank of the economy is a fragile and fickle phenomenon at the best of times. Nevertheless, there does seem to be growing evidence that current levels of both debt and house prices are unsustainable. As Ken Rogoff, the International Monetary Fund's chief economist, has said:
Forty per cent of all housing booms are followed by busts, with housing price drops that typically average 25–30 per cent".
Nor should we be immune to his explicit warning that,
the long boom in house prices—up 28 per cent in the US since 1996, and 70 per cent in the UK since 1994, adjusted for inflation—put them in danger territory".
§ As we all know, other eminent commentators have issued similar warnings, not least Sir Andrew Large, the Deputy Governor of the Bank of England. It would be irresponsible to ignore them. To do so would be to run the risk of engineering the "bust" to the current "boom". How hollow the Chancellor's words would sound then.
§ My time is up. That being so, I very much look forward to the contributions of other noble Lords during of debate. I have no doubt that they will elaborate on some of the themes—and, doubtless, others—that I have outlined with much more eloquence and expertise than I can muster. I beg to move for Papers.
§ 6.33 p.m.
§ Lord Campbell of Alloway
My Lords, the problem is the build-up of debt and the shift from thrift to profligacy. But the main object of this speech is to clarify the approach to the retention of control of our financial and budgetary affairs—a matter of national interest affecting the state of our economy—which already has become a sharp political issue.
As a subsidiary matter in context with the levels of personal debt and mortgage debt, recently the question has arisen of whether the Government's proposal to amend the Consumer Protection Act 1974 to clarify APR—or, in ordinary English, the total cost of credit—would have little effect other than to confuse and increase the cost to consumers. On this, it is not proposed to comment.
To revert to the main object, the introduction of my noble friend Lord Northesk rightly affirmed that fiscal and monetary control is unitary in the sense that measures to adjust the level of household and government debt not only interact but have an effect on taxation, on inflation, to which my noble friend referred, and on the economy, to which he also referred.
Albeit that no noble Lord with former practical experience as Chancellor of the Exchequer is to speak, at least we are to have the benefit of the expertise of the noble Lord, Lord Skidelsky, and the other noble Lords whose names are down to speak. My noble friend Lady Noakes speaks from the Front Bench on Treasury affairs, which are totally within the remit of the object of this speech.
320 The hope is that the timely introduction of my noble friend, for which we should all express gratitude, will herald a fully fledged, prime-time debate on the draft EU constitution, but before the conclusion of the negotiations. The question arises whether the unitary fiscal and budgetary control is to be retained or surrendered. The draft EU constitution—and this is no time to go into detail—broadly speaking, is a federal structure which appears to afford no veto in the national interest and leaves wide open the crucial aspect of conferral of competence, to which the noble and learned Lord, Lord Scott of Foscote, referred the other day.
Already some of the red lines that we read about—we have to say "read about" because no one knows what they are—have been erased. In this context, an assurance is respectfully sought that the Government shall retain budgetary and fiscal control unfettered by EU objection, imposition or sanction. If no such assurance can be given—and that may well be the case—what is the Government's approach to this retention of control? Perhaps, if he is able, the noble Lord, Lord Davies of Oldham, will inform the House. If he is not able to do so, it would be no cause for surprise.
But until the Government approach is known, it simply is not possible to formulate constructive opposition—certainly for those who, as at present advised, are not inclined to support the UKIP, which would take us to the brink without having seen the books. Albeit an issue of cardinal importance, there are always objections to a one-issue party.
Household debt, which is only one aspect of the problem of debt, is now about £100 billion. It is increasing, as my noble friend said, by £1 million every four minutes. In addition to the bank figures, there was £9.8 million mortgage debt in April and as yet no figures for May.
Your Lordships may think that the only way in which to put on the brake—and a brake must be put on—is to raise bank rates to over 5 per cent; perhaps further if need be, but initially by at least a step towards 5 per cent. That is a balancing act on the tightrope of bankruptcy, which has now topped the high watermark recorded 10 years ago. A vast area of imponderables has to be taken into account, including the extra burden on those who have borrowed at other than fixed rates. It is no easy exercise and I do not pretend that it is.
The Government handed over bank rates in a most curious way to the MPC of the Bank of England to control inflation without a remit to control household debt. That was the most dotty exercise that anyone could have conceived. They are now about to start to redress the situation by what we hope the MPC will do tomorrow. The main long-term beneficiaries of the situation appear to be the financial institutions.
Government debt has risen to £13 billion, notwithstanding 66 stealth taxes since 1997. It is not known what action should be taken other than to increase taxation or whether the Government intend to take such or any action. Can we continue to borrow and spend much more and avoid an increase in 321 taxation—the theory proposed by Maynard Keynes—and what will the City take in terms of government debt beyond the current figure?
Has the frail thread of confidence been stretched too far? I can ask those questions but I am unable to answer them. I do not have the expertise. Fortunately, I am in a position to defer to the opinion of the noble Lord, Lord Skidelsky, and my noble friends who are due to speak and who have the requisite expertise in the area.
Retention of fiscal and budgetary control is not only requisite for the reasons already given, but also for the protection of the realm from those who believe it to be the will of God to destroy themselves if in the process they can destroy us.
There has to be an immediate long-term continuing massive financial commitment, which the Budget has to bear and take into account, not only for the defence, intelligence and emergency services, but for the British Council, diplomacy, the World Service and aid for the rehabilitation of those deprived of their homes and human dignity assailed by deadly high-tech weaponry that they do not possess.
§ 6.45 p.m.
§ Lord Skidelsky
My Lords, I am grateful to the noble Earl, Lord Northesk, for introducing the debate and giving us a chance to discuss a topic that I know arouses strong moral feelings. My wife cannot be the only person in the world who believes that an overdraft is the first step on the road to ruin—a view seemingly backed up by today's sad story of the young father who hanged himself because he could not pay back the £70,000 debts he had accumulated on 19 separate credit accounts.
The story reminds one of the marvellous Victorian moral tale Eric, or Little by Little, that I read as a child. The speeches of the noble Earl, Lord Northesk, and the noble Lord, Lord Campbell of Alloway, seemed to have a little of the same flavour: little by little on the road to ruin.
What are the facts of the case? The annual growth of total lending to individuals runs at 14 per cent compared to average annual earnings growth of 4 per cent. The rate at which households are incurring debt is rising three times as fast as their incomes. That is the central fact for those who claim that the current rate of growth of debt is unsustainable. I know that there are other figures with which we can be dazzled, but those seem to be the crucial ones.
The rate of household borrowing is strongly associated with house price inflation. The majority of personal debt is mortgage debt. Since personal disposable incomes are rising at less than half the rate of house prices, this suggests, in the words of the Monetary Policy Committee,that household income gearing [is] likely to rise over the next few years towards levels last seen in the early 1990s".That could increase the vulnerability of the bottom end of the household sector to any rises in interest rates or unforeseen shocks.
322 Such facts are used by those who claim that levels of personal debt are rapidly becoming unaffordable or—in the jargon—unsustainable and that a rise in interest rates is needed to curtail them. I hope that I am not a Pangloss. I agree that there is meaning in talking about unsustainable levels of debt, but the fact that debt is expanding faster than incomes does not mean that it is becoming unsustainable. It may simply mean that the sustainable level of debt has been rising. That is largely what has been happening.
What grounds do I have for saying so? First, Britain has enjoyed unprecedented macroeconomic stability for the past seven years; not just high and stable levels of employment, but stable growth of earnings. There are two main reasons. The first is the macroeconomic framework established by the Chancellor of the Exchequer, by which I mean giving responsibility for setting interest rates to the Bank of England and establishing credible fiscal rules.
That was a bold, even revolutionary step at the time, and it has paid off by making policy much more predictable. One of the advantages of being on the Cross Benches is that it is much easier to give credit where credit is due.
Secondly, the British labour market has become much more flexible. For that the Thatcher labour market reforms must take most of the credit, although the decline of manufacturing has also played a part by dampening certain cycles that made our economy less stable. The proof is that since 1997, the British economy has survived a threefold increase in oil prices as well as a substantial rise in the sterling-euro exchange rate with scarcely a blip. Contrast this with the experience of the 1970s when a fourfold rise in the price of oil produced a massive stagflation. The contrast is overwhelming.
The result has been that we have enjoyed not just greater security of income but also more predictable growth of incomes. That is the background against which a higher sustainable rate of debt creation has emerged.
There are other factors: the banks have become more expert at assessing the creditworthiness of potential borrowers. That has made it safer not only for people to borrow but for banks to lend. It is not just that the demand for credit has been growing—the supply of credit has been growing as well.
Thirdly, there have been important changes in the way in which the consumer market works today. The essential one is that you can now spread payments over a longer period, making a purchase more affordable. For example, before, you would have to put down a large deposit to buy a car and pay off the borrowing during the lifetime of the car. Now you can make a constant stream of payments for a succession of cars—in effect, a leasehold system. You own the car but pay only for the cost of its use, which means that the sustainable amount of borrowing for any level of income has gone up.
323 Finally, a large number of people have assets other than income out of which to pay service charges on loans. More than 60 per cent of householders are now house-owners. If you have wealth, small changes in your income do not matter so much for your consumption. Technically, possession of wealth makes borrowing more sensitive to income changes. When your income falls, you do not reduce your consumption but you can borrow more. If wealth is rising, consumption can rise too, regardless of income, which basically means that you can borrow more.
Last month's minutes of the Monetary Policy Committee implicitly accepted the main proposition I am advancing—that the sustainable level of borrowing has gone up—when it said:Bank contacts with the major lenders … suggested that most borrowers could service their loans at a significantly higher repo rate, provided that unemployment did not rise materially".There is another interesting feature of today's loan market, which needs to be teased out from a rather paradoxical set of statistics. Studies show that the level of household debt is closely associated with the level of household incomes. How does this square with the fact that debt has been rising faster than earnings or incomes? It is partly due to the fact, as I suggested, that the sustainable ratio of debt to income has been rising. But I suspect that it reflects something else as well, which is that some groups are increasing their earnings far faster than the national average, while the earnings of other groups are increasing less than the national average. In other words, the distribution of income is becoming more unequal. That would partly explain the growing gap between the rise of debt and the rise of incomes. I think that the relationship is extremely interesting and deserves further exploration.
The conclusion of my argument is that we ought not to be too gloomy about the growth of household debt. It does not reflect the collapse of prudence or the decay of civilisation or, more mundanely, even relentless advertising by credit card companies, but merely the fact that with greater security of income, more stable income growth and a wider distribution of home ownership, people can afford to borrow more.
Our public rhetoric, however, continues to emphasise the evils and dangers of falling into debt. Indeed, there has been some evidence of that in this debate. This rhetoric obviously reflects deep-seated moral attitudes. However, the contradiction between our rhetoric and the reality makes it very difficult to have a coherent debate on such topics as top-up fees for universities, for example. The noble Earl, Lord Northesk, mentioned student debt, but the very people who worry about the burden of student debt would not think twice about borrowing much larger sums for other purposes.
The point about borrowing is that it enables you to anticipate your future income. As long as the anticipation is correct, it makes sense to borrow against it. In today's world, increased borrowing is a sign of success, not of failure.
§ 6.55 p.m.
§ Lord Selsdon
My Lords, it is always a great pleasure 324 to follow the noble Lord, Lord Skidelsky, as I have done from time to time. I shall probably sing off the same hymn sheet as him. When I first went to school, somebody hit middle C and said, "Sing it". I could not get it and they said "You just can't sing".
I really would rather be singing from the Labour Benches. I remind the noble Lord, Lord Davies of Oldham, that land prices in Oldham have been rising faster than almost anywhere in the country. He seems very lonely on his Bench. Since Wednesday debates are usually for Back-Benchers, I would like to make a point that I have made before. We might have a word with the various Whips to encourage people to speak from the Back Benches. I had asked if I could speak from the Minister's Bench today. I was told that under the rules of the House, I could sit there, but it would be deemed rather frivolous if I were to speak. So. I shall probably now make a frivolous speech.
Are we so indebted that we need to be worried? Are we on our way to Carey Street, which, as your Lordships will remember, is somewhere near the Old Bailey? We seem to go to the Old Bailey more and more for other reasons. From there, of course, we go to the Clink—Clink being the liberty that could be granted by the Bishop of Winchester. I went to school in Winchester so I have a moderate knowledge about this.
If we are in that position, the Government should have told us. Alexander Hamilton said that national debt, if not excessive, is to us a national blessing. Sometimes, to encourage or have growth, you need to have debt—you need to borrow and to beat the banks. For years and years, interest rates were way below the rate of inflation and the only way you gained was by buying fixed assets so that you beat the banks. We had no industrial growth and limited real growth in our economy.
My noble friend Lord Northesk, who is sitting behind me, staring down my neck, will realise that, being an ancient banker, my brief is dated noon today. Last month, the level of mortgage borrowing was £16 billion but there has been a fall this month. It is coming down, the new demands are lower, and mortgage debt is not as worrying as people feel. I shall try to explain why.
We are a house-owning nation, unlike much of continental Europe, which consists of lease-owning or renting nations. Throughout continental Europe, when people reached retirement age—I made this point in the Second Reading debate on the Housing Bill so I ask noble Lords to forgive me for repeating myself—people would put their savings into property which they would rent out, knowing that they were in control of their income and would have a regular income which would not go up and down according to interest rates. Noble Lords will remember the time when, in Switzerland, one had to pay 1 per cent for one's money on deposit. We were never used to having low interest rates, and we thought that savings would be safe in a bank. But you cannot live off your savings.
I had a very good friend, a wise old man, who said to me, "Malcolm, I have a worry about your government. When you Conservatives first came in, having sold my 325 business, I could live on the interest on the interest. The Conservatives managed to reduce inflation and bring interest rates down and, having paid for houses for my family, I found I couldn't live on the interest itself. So I had to invest".
This is what seems to have happened. Most of us realise that you cannot keep up with inflation when inflation is above interest rates—the returns from the bank are negligible. So where does the money go? Some of it went on the stock markets, but they have not performed that well, and a large amount went into asset-earning investments, particularly property. In parallel, one has seen an enormous growth in what is called the venture capital market. That is private money that says it can do better by going into private ventures than by going into a stock market.
That has distorted our attitude to debt and assets. Average unsecured debt is more than covered by financial assets in the case of a large chunk of the population. However, we have moved from being the cash society of maybe 25 years ago, when only a third of people had bank accounts, to a form of paper-transaction society where few people are paid cash wage packets each week and where 91 per cent of the population has bank accounts. That percentage has tripled in a short period.
One used to worry that banks took on people without following the historic rules that one must have good references. When I was sitting on the Committee of London Clearing Banks, I would complain that we should not allow people to open accounts unless the references were taken up. The banks would say that the references were not worth taking up. Noble Lords should look at the change. Now one cannot even open a bank account without one's application going to some security man in the United States and exposing everything. One's banking secrecy has disappeared. Almost any teller in any branch can look at what is in one's account and one feels slightly insecure. I am not saying that money is going back under the mattress, because it is not.
The distortion arises not just from the movement in payment to banks. People do not use banks in the way that they once did; they use plastic or cards. There are 125 million to 150 million cards in issue which go into a machine, which can withdraw money or which one can use for credit. In general, those are what we would call credit cards. Their holders fall into a number of groups. Most of them, surprisingly, pay off their debt each month automatically by direct debit. They know that they are inefficient and they do not want to pay the extra charges that would be incurred. Another group of credit card holders will use them to manage their affairs. When they are going on holiday, they will draw money out of the facility that they have. Almost everyone has a gold card now; platinum has run its course. I do not know what comes next. Those credit card holders will use their card to manage their affairs, sometimes quite efficiently, sometimes not so.
Then there is another little group which banks and credit card companies do not like. They switch credit cards every month according to when they get a free 326 deal and believe that they can make some money on arbitrage. The remainder of card holders, which make up only a relatively small number, often get into debt. That is where the biggest social worry lies. People who have never had a bank account before are now being sold credit on a vast scale. Twenty-five million store cards are now in circulation, where one is encouraged to open an account in the belief that free credit is on offer, but one does not necessarily pay it off. That is a cause for worry.
Noble Lords have already referred to people who are not used to the whole concept of borrowing and its consequences. I shall give just one of many examples that have been presented to me. A young man in his early 30s, with learning difficulties, decides that he does not want to have a bank account any more. He is unable to maintain a full-time job and is maybe earning the minimum wage. Within six months, because he has learned how to use a computer, he manages to open eight different accounts and obtain a borrowing facility of more than £12,000, of which £10,000 is drawn down with no way of repaying it. He sees another advertisement on the television from an organisation that claims that it will spread out his debt with no charge. He feels that he is secure, but all he is doing is paying a fee each month to that credit agency, which is extending the life of the loan and he is not aware of it. Then, when he finds that he cannot borrow any more money to live on and needs more money, he goes into a bank and asks it to help him become a song-writer. The bank tells him that he can have a business loan. Without interviewing him, it gives him a £5,000 business loan. When I followed the matter back with the many of the agencies and the people concerned, I found that such stories are common. I also found that many people who are granted such facilities are required to pay an extra amount for insurance. The lending agency, if I may call it that, is not necessarily totally exposed; it has cover and it does not have to worry too much.
My concern, therefore, is for the lower sector of those who are given credit. Some people are being sold credit. I am not suggesting that the Government should legislate, but I wish that people would look at all the advertisements that are being made. One sees 0 per cent on balance transfers being offered to people who are not aware of what APR is. In his reply, the Minister will no doubt tell me about the DTI's new study on APR. I gather that such a study is being organised, but I have almost forgotten what it involves. However, it would be nice if every offer of credit came with as big a health warning as does a packet of cigarettes. It should be wrong for organisations to be able to sell credit by direct mail, to gain access to mailing lists, or even to advertise it. That is radical, but such credit promotion is increasing levels of personal expenditure.
However, the ratio of household debt to expenditure is only 23 per cent, which is not desperately high. Our worries are greater than they need to be. My worry is not so much the level of consumer debt, but the level of hidden government debt or off-balance sheet debt. I am not a proponent of PPP or PFI, but when it defers any liability on government balance sheets, I start to worry. When I see that the Government are going to 327 build nine hospitals this year and 11 the year after, at vast expense, and when I see the expenditure that has to go on the railways, on the roads and on education, I am worried. The level of indebtedness there can rise.
I have no panacea, but I am just beginning to feel that we have a secure economy. The older generation is recognising that it cannot survive on savings alone, which is why we are seeing remortgaging or equity release. One is realising that as one's house rises in value, it takes one past £250,000 limit that can be handed on to one's heirs and successors under current inheritance tax rules. One says to oneself that it may pay in some way to take out a loan that will release equity and help one's children to buy their own houses or pay student fees. It is a round robin of debt.
I am not worried about it. I am just worried about the Government. I am worried about the consumer only in respect of the store credit cards. In general, I do not think that we shall all end up in the Clink. There are easier ways of doing that. As Kipling said:I am here in the Clink for a thundering drink and blacking the Corporal's eye".The Government should realise that people historically got into debt on account of drink, and that governments got into debt on account of war. We have had an expensive war that is going to hurt the Government. The drinks scene worries me and an awful lot of people's eyes are being blacked. The Government should concentrate on what they were put in power to do, and not on surreptitiously increasing the level of taxation and expenditure. I am worried more about the Government than about the house-owner.
§ 7.8 p.m.
§ Lord Northbrook
My Lords, I begin by declaring an interest as an investment fund manager. I thank my noble friend Lord Northesk for initiating this important debate. I slightly disagree with the rosy picture painted by the noble Lord, Lord Skidelsky, in his interesting speech.
My only disappointment is that the noble Lord, Lord McIntosh of Haringey, is not responding for the Government on such a major economic issue and that no Labour Back-Benchers have spoken or are in the Chamber. I had hoped that the noble Lord, Lord McIntosh, would be here, but I wish him well on his trip to an unpronounceable organisation in Paris.
This is a timely debate. It comes a week after April UK consumer borrowing figures revealed, as many noble Lords have said, that total secured and unsecured lending is now approaching the staggering figure of £1 trillion. That milestone is expected to be reached later in the summer. Other noble Lords have said that secured lending has shown the highest-ever percentage monthly increase, rising by £9.8 billion or 1.2 per cent in April. That total now stands at £810 billion, which, according to Bank of England statistics, is 82 per cent of the total lending outstanding to individuals. The not insignificant figure of £174 billion—the noble Lord, Lord Skidelsky, should take note—or 18 per cent, is categorised as consumer credit. Therefore, the figures show that the secured debt is more than four times the unsecured, but the unsecured is still a significant figure.
328 The difficult questions to answer are: first, do either the proportion or the actual levels matter? Secondly, should the lenders themselves be alarmed by this? Thirdly, should the Government do anything about the situation in regulation or legislation? I shall deal with each of those in order.
First, I turn to whether the actual level or proportion of debt matters. If the housing market continues to rise at the current rate, the secured loans will have a satisfactory level of cover. Even if the rate of growth of the housing market is less, at half the current rate of 20 per cent, there will not necessarily be a problem. However, in my view the real difficulties start when there is a sustained fall in property values. In the past this has occurred when interest rates have increased very sharply. At this time I have to say that that situation does not appear so likely, but there are some straws in the wind which could cause interest rates to be raised much more than expected. A sustained increase in the oil price would be one. It should be noted that this was the major cause of our inflationary problems in the 1970s. The inflationary impact of this now is much less than it would have been then as manufacturing plays a much less important role in our economy now and the share of goods in the CPI has fallen from 70 per cent to just over 50 per cent.
The next straw is the general increase in consumer spending. The Bank of England is focusing heavily on this, which is being financed to an extent by a mixture of mortgage equity withdrawal and consumer credit. I do not think that enough speakers have focused on the problem of mortgage equity withdrawal which, according to the Bank of England, is now running at about 8 per cent of household disposable income—up from nil per cent in 1997—that is, borrowing secured on property which is often used for consumer spending.
The other straw is the increase in average earnings, which is particularly evident in the private sector in the past six months. The public sector increases of 2002 and 2003 have reversed somewhat although this could still be a problem in the longer term. The combination of these factors, if they continue to increase at the current rate, could mean that we may well get higher interest rates than expected, thereby jeopardising individuals' ability to repay their debt.
So in reply to the question whether the proportion or the actual amount of debt matters, it is clear that if interest rates rise by an unexpectedly high level, house owners or consumers in debt may be caught out. The area in which they may be particularly caught out, as my noble friend Lord Northesk stated, is the buy-to-let market. Here there has been a huge expansion in the past few years as investors have borrowed at, say, 4½ per cent—which will be rising now—and have been able to let out the properties at, say, a 6 per cent yield while also enjoying a rise in the capital value of their properties. However, as more and more people have seen this opportunity, the net yields on property are declining. According to some commentators in central London they are now at the level of 4½ per cent. This 329 makes the mathematics much more difficult for the buy-to-let investor and there is a danger that this could be the first part of the housing market to collapse.
My second question is whether the lenders should be alarmed by the potential scenario that I have just mentioned. If they have lent sensibly on a cautious percentage of the value of the property—say, 60 to 70 per cent—there should not be cause for concern. However, anecdotal evidence suggests that the bad habits of the late 1980s are reappearing, and that even 100 per cent mortgages are being awarded by some lenders. According to the latest Bank of England inflation report, the ratio of house prices as a multiple of earnings stands at 5.7 times—well in excess of the historical average since 1952 of about 3.7 times. Again, as in the 1980s, this can lead to trouble if there is a major hike in interest rates.
The third aspect is whether the Government should be doing anything about the situation by way of regulation or legislation. While I do not believe that it is correct to interfere in the operation of the housing market, I think it is reasonable that the Bank of England should keep an eye on lending institutions and discourage the granting of 100 per cent mortgages. A publicity campaign could also be initiated on the dangers of borrowing a multiple of more than, say, four times salary. However, in my view, there is no need for legislation.
In my opinion this is not the case in the area of consumer credit. The debate in April in the other place on the Treasury Committee report on credit card charges contains much of interest on this topic. The honourable Member John McFall reminded the committee that it was 30 years since the passing of the original Consumer Credit Act 1974, and that they were still waiting for a review of it. The problems that he concluded needed to be addressed were several. The honourable Member said:First, important information is buried in the small print and written in technical jargon, which makes it extremely difficult to compare cards".Can the Minister give the House any assurance that the use of larger print will become a regulatory requirement?
Then there is the problem of the annual percentage rate charged, or the APR as it is known. Providers are at present allowed to calculate the annual percentage rate—the figure most commonly used to compare credit cards—in more than one way. The honourable Member continued:The true cost to the consumer of different cards is concealed behind complex interest rate calculation methods, not taking account of the APR, and seemingly unreasonable charges are levied which are sometimes not specified in advance".—[Official Report, Commons, 22/4/04; col. 143 WH]With store cards in particular he found a serious problem of lack of transparency. Will the noble Lord, Lord Davies of Oldham, confirm the promise made by the Minister in the other place to the honourable Member John McFall that a single method of APR calculation will be introduced by October 2004? There has been an announcement today but I have not had time to digest it. Several Members of the Treasury Committee 330 stated how at present it is calculated in different ways by different companies. The Consumers' Association, for instance, identified 10 different methods of interest rate calculation currently in use in the UK credit market.
Credit card company marketing practices also gave the committee cause for concern. Among these are the receipt of unsolicited credit application forms, some of which offered misleading credit terms. For instance, Barclaycard offered a,0 per cent for ever offer",which the OFT chairman, John Vickers, concluded was completely misleading, and the promotion of it was stopped.
As the committee reveals, the amount of inquiries received by citizens advice bureaux about consumer debt has increased by 46 per cent in the past three years. I welcome the Government's establishment of the over-indebtedness advisory group and a cross-ministerial advisory group to look at the issues. I also welcome our own party's commission set up under the chairmanship of my noble friend Lord Griffiths of Fforestfach to study the whole issue of household debt.
Other major issues raised in the debate on the Treasury Select Committee report back in April were: clarifying the consequence of making the minimum payment, unsolicited increases in credit limits, not stating the rate of interest and credit card cheques. Of all these the last seems to be the most serious. Apparently, according to the committee, credit card cheques are sent to about 16 per cent of households—5 million in total—and almost every dispatch is unsolicited. If you are unwise enough to bank one of these, debit interest starts accruing immediately even before you start spending the money.
The main venom of the committee was reserved for store cards, which on average, according to the honourable James Plaskitt MP, charge as much as 30 per cent per annum, despite historically low levels of interest rates. For instance, the lending institution GE Capital has not cut its interest rates since 1999.
I want to ask the Minister about the relationship between today's announcement of a credit industry shake-up and the White Paper that the DTI has produced, which looks forward to a consumer credit market appropriate to the 21st century. The White Paper suggests that a lot of problems that the Treasury Committee has unearthed can be addressed through secondary legislation. What will change as a result? I hope that the Minister will answer that. Also, what definition of "responsible lending" will be used in implementing the White Paper's proposals? Does the Minister agree that the issuing of credit card cheques is not responsible lending?
Today's announcement—the standardisation of APR—is to be implemented through secondary legislation. I welcome proposals for the clarification and presentation of different interest rates, or a standard way of calculating interest rates on credit cards. However, consumer groups are worried that the changes are not enough. Doug Taylor, the Consumers' Association spokesman, said that it was concerned 331 that there would still be loopholes, particularly within the advertising regulations, which may be open to misinterpretation.
Although the Government are not positively encouraging debt, they are certainly discouraging savings by the withdrawal of ACT and the cutting back of the PEP and ISA limits. The scenario that I have painted is much less rosy than that sketched out by the noble Lord, Lord Skidelsky, and there are serious warning signs on the horizon of things that could come to pass if interest rates were to rise sharply.
§ 7.22 p.m.
§ Lord Newby
My Lords, I too thank the noble Earl, Lord Northesk, for bringing forward the debate at this time. As a number of noble Lords have pointed out, we either have passed or are about to pass the point at which household debt reaches £1 trillion. Although that is an unimaginable figure in many ways and has no particular practical consequence, it may be an appropriate time to give some thought to whether it matters. The debate has demonstrated that there is no common view at all about whether it matters. We have two groups—the worriers and the optimists.
The worriers, who include the chairman of the FSA, point to record levels of household debt in relation to post-tax income—now 120 per cent, as opposed to 40 per cent in 1980. As several noble Lords have pointed out, four-fifths of that is secured against depreciating house prices, which, in relation to income, are at levels comparable to those just before the house-price crashes between 1973 to 1975 and 1990 to 1992. There is also growing evidence of debt distress in the form of record personal bankruptcies. The Bank of England's own analysis suggests that 10 per cent of debtors regard debt as a heavy burden, and that 20 per cent of those with unsecured debt are borrowing to service the loans. On that side of the balance, recent FSA figures show that 6.9 million families are having difficulties with their borrowing commitments—an increase from 6.1 million families the same time the previous year.
The optimists, of whom the noble Lord, Lord Skidelsky, is in the van among your Lordships this evening, argue that there has been a shift in the sustainable levels of debt for a number of reasons, which he enumerated. They argue that the debt-to-income ratio of debt holders is not deteriorating, that the debt-servicing ratios of households are at historically low levels, and that the relationships between secured debt and assets and between unsecured debt and financial wealth cannot depart far from historic averages. For their part, the banks claim to have learnt the lessons of the late 1980s and early 1990s, and to be very careful to assess their customers' ability to pay before making loans.
In a number of respects, both sides of the argument are right. The difference is about not current facts, but expectations of the future. The worriers emphasise that consumers are taking on debt on the assumption that employment will remain at recent high levels, interest rates will remain relatively low, income growth will remain strong and house prices will remain high. The optimists argue that those fears are misplaced.
332 There is also confusion in the debate, in that there are two distinct debt problems, both of which have been discussed. First, there are the minority of borrowers, mainly in low-income households, who are in severe difficulty with debt. Analysis shows that the most serious problems relate to unsecured debt and families in social housing. That is a very different problem from that of the home- buyer borrowing over the odds to get a foothold on the home-ownership ladder. Debt as a manifestation of poverty is a real issue.
The other debt problem is potential rather than actual. Continuation of comfortable balance sheets of households with big mortgages depends on the absence of a serious crash in house prices, plunging substantial numbers of people into negative equity. The optimists believe that house prices are being driven up by real and enduring scarcity in the housing market, caused by more and more people and households chasing seriously constrained increases in the housing stock. That was one of the main conclusions of the Barker report. They also believe that, barring some major unforeseen shock, policies designed to ensure financial stability will ensure low interest rates, low inflation and steady growth without a destabilising housing boom and bust.
The worriers take a different view—that, although Gordon Brown's estimable commitments to financial stability may work in aggregate, there can still be boom and bust in asset markets, of which in Britain housing is by far the most important. Just as stock markets see irrational exuberance, so do property markets. On the lending side of the market, a few aggressive lenders are undoubtedly pushing loan-to-value ratios and income multiples into hitherto uncharted territory, leaving their more conservative competitors lagging behind and faced with the dilemma of either following suit or losing market share.
Whatever the larger banks say about their assessment of potential borrowers, anyone who gets the flood of direct mail that I do, from all kinds of banks of which one has never heard and about which it is difficult to discover very much, cannot believe that they are acting with the degree of responsibility that the British Bankers' Association might wish. With such lenders about, there are undoubtedly ingredients for a potentially unstable asset bubble. It will be clear only with hindsight whether the worriers or the optimists are right.
It seems to the Liberal Democrats that the fact that we do not have the benefit of hindsight should not mean that we sit on our hands. A problem with the current situation is that the Bank of England worries about a potential house price bubble, but claims that it cannot take action to deal with it because its single policy tool—interest rates—is quite rightly focused on a much broader set of variables than simply house prices. The FSA, the Treasury, the DTI and the OFT all have responsibilities in the area, but there is a danger that primary responsibility is often not desperately clear. In 333 that is the danger that some measures that could be taken are left untaken, because everyone looks at everyone else to take it.
Therefore, I would like to make a number of suggestions that, whichever view one takes of the overall borrowing situation, could usefully be implemented. I have two suggestions regarding high and rising debt, as far as individuals, in particular those on relatively low incomes, are concerned.
The first relates to advice. A number of speakers have mentioned the increasing role that the citizens advice bureaux play in giving financial advice. But they are tightly constrained in what they can say and I believe that there is a need to establish a framework for providing independent, low-cost financial advice supported by the credit providers and the investment industry. The banks and the investment industry are already looking at that area and are doing something, but they are not doing very much and they are not doing it with any great urgency—and they could do more.
Secondly, it would be sensible to widen the remit of the social fund to permit an emergency short-term lending fund for low-income families in financial crisis. That would be a failsafe measure which, it is hoped, would not be needed in the vast majority of cases. However, as the case mentioned by one noble Lord about a man who committed suicide demonstrated, we are talking about issues that have fundamental impacts on the ability of households to live normal lives.
The second raft of changes that are needed relate to the way in which the banks operate. First, I agree with the suggestion of the noble Lord, Lord Selsdon, that there should be a credit health warning on the tidal wave of unsolicited credit promotion that we are all bombarded with. I am not sure what the research evidence is on the health warnings on cigarettes, but I cannot believe that it has no impact whatever. Secondly, regarding low-income households in particular, there needs to be a crackdown on exploitative loan sharks. It is an area that is very much within the remit and focus of the review of consumer credit, but as we have debated previously in your Lordships' House, the pace at which that review is being undertaken leaves much to be desired. It would be sensible if the often hidden penalties for the early redemption of debt were ended, because that would encourage people when they are in a position to reduce their debt to do so without incurring financial penalty.
There needs to be stronger enforcement of OFT rules to prevent abuse associated with misleading advertising by debt management and advice services and excessive interest rates on store and credit cards undoubtedly need to be more rigorously policed by the competition and trading authorities. There has been some debate about the proposals on simplifying APR and making that clearer. That is a sensible step, but I doubt whether it goes far enough. I hope that it would be possible one day to produce with every financial product sold the equivalent of the sheet that one receives when one obtains a medicine, to which the drug companies devote enormous effort. It describes what the drug is, what its ingredients are, what it might 334 do to you and what the side effects are. One does not have the equivalent of 20 pages of minute print in a packet of aspirin, but something that describes the key features of that drug. That kind of document is almost entirely lacking in financial services products—not least, because, while the drug companies have to go though immensely rigorous procedures to make sure that the information on that piece of paper is correct, that piece of paper is sadly missing in many financial services products.
Finally, there is the question of, as it were, macro management of credit, where we have three suggestions. First, we believe the Government should publish and monitor, along with the Bank of England and the FSA, measures of sustainable household debt along the lines of the Government's fiscal rules. The Government have clear rules about what should be happening to taxes. They should have equally clear views on what are sensible measures of sustainable household debt.
Secondly, there should be guidance to banks on safe loan-to-value ratios and income multiples for mortgage borrowers based on independent assessments of asset values by a group operating in a similar manner to the Bank's Monetary Policy Committee.
Finally, there is scope for the active use of reserve deposits to reduce destabilising boom and bust in mortgage lending. I realise that this last point is extremely controversial within the banking fraternity—indeed the Bank of England claims that in the multinational world in which we operate and in global liberalised capital markets it is virtually impossible to do that. But frankly, given that there is a raft of regulations of which the rules about solvency ratios are but one, it is worth looking at the option of adjusting ratios to reflect the state of asset markets and, therefore, the risk of loans.
There are a raft of proposals that we believe make sense, whether one is an optimist or a pessimist about prospects for household debt. I hope that the Government might adopt them.
§ 7.36 p.m.
§ Baroness Noakes
My Lords, the timing of my noble friend Lord Northesk is immaculate. He has allowed us to debate the increase in personal debt at the very time that the debt is hurtling towards the £1 trillion mark—and many noble Lords have referred to that. It is not, as the noble Lord, Lord Newby, said important in its own right, but breaching such a major hurdle has a totemic significance.
I believe that this debate is important because the rising level of personal debt creates dangers for the economy in the short term, dangers for long term savings and it has particular dangers for individuals. The bottom line is that the financial well-being of our country is under threat. I am not too gloomy, but I am considerably more circumspect than the noble Lord, Lord Skidelsky, and I am an unashamed "worrier", to use the terminology of the noble Lord, Lord Newby.
335 I was slightly alarmed by my noble friend Lord Selsdon's introduction with his desire not merely to join the noble Lord, Lord Skidelsky, on the Cross Benches, but to cross the Floor completely and sit with the noble Lord, Lord Davies of Oldham.
§ Baroness Noakes
My Lords, indeed. That was a kind thought of my noble friend, but I will say that when his speech was developed I was not quite so alarmed. That is not to say that I agree with all that he said, as he will find out as I continue my speech, but I agree with him about the build up of debt among those who are relatively illiterate in financial terms, which was also mentioned by the noble Lord, Lord Newby.
Secured lending has been growing at an annual rate which topped 15 per cent at the end of last year. That has contributed to house price inflation, which has been running at well over 20 per cent. The ratio of house prices to average annual earnings is now its highest in 50 years and shows no sign of letting up. Does that matter? I am sure that it matters to individuals. First time buyers find it increasingly difficult to afford house ownership, particularly in high cost areas such as the south-east—and we heard some of the problems that the buy-to-let market is causing in the housing market.
But as well as the impact on individuals it also matters to the economy overall, because the personal finances of those individuals are becoming more exposed to the cost of debt servicing. It has often been argued, as it has this evening, that the interest burden as a proportion of household income is at low levels and is considerably lower than in the early 1990s when house prices peaked. That is true, but the forward projection of total debt servicing costs, including principal repayments, prepared by the Bank of England, shows that with current interest rate expectations the ratio will rise and will possibly even exceed that experienced at the previous peak.
At that level, we could see a major house price correction. I do not say that it is inevitable that we shall have a house price bubble with the serious consequences that we experienced on the previous occasion. I agree with my noble friend Lord Northbrook on that. However, I do say that it is a plausible outcome and one about which I hope the Government have done some serious thinking.
The proportion of income which has to be diverted to service debt has an impact not only on house prices but also on the amount available for consumption. Since 1997, household consumption has been an increasing proportion of GDP, rising from 61 to 65 per cent in 2003, and that increase has shown no sign of abating. We can see a strong correlation between the growth in household consumption and the growth in secured borrowing and, in particular, in the levels of mortgage equity withdrawal.
The Chancellor's latest projections for GDP growth show that increasing private consumption will continue to be the biggest single element of GDP 336 growth. Let us suppose, just for the sake of argument, that householders thought that, with rising debt service costs, they had to borrow less and spend less. Even the Chancellor in the previous Budget conceded that the biggest downside risk in the UK was consumer spending. I suggest that it is quite plausible that fairly soon householders will hit a point at which they will check back on their spending and, therefore, potentially impact the consumption element of GDP.
The latest Budget arithmetic shows that the Chancellor's golden rule has a headroom of 0.1 per cent. If consumers spend less and if growth falls away, will the golden rule be breached; or, perhaps even more likely, will the golden rule be met but with further tax rises to meet the gap?
When the Minister responds this evening, I hope that he will say what levers the Government have to deal with rising debt. The Government have placed the most powerful lever—the interest rate—in the care of the Bank of England. The Bank of England remit, as we have heard, is to achieve a particular inflation figure, which the Government have perversely constructed using the index of consumer prices so that the impact of house prices is ignored, as my noble friend Lord Northesk has already pointed out.
The Bank of England is required by Section 11 of the Bank of England Act to support the Government's economic policy, as well as to achieve monetary stability. The Government are entitled, under Section 12 of the Act, to tell the Bank of England what their economic policy is. To date, the Government have chosen only to tell the Bank to achieve,high and stable levels of growth and employment by raising the sustainable growth rate and creating economic and employment opportunities for all".Will the Minister say whether the Government continue to regard that as an adequate instruction to the Bank? Do the Government have no policy towards personal debt or asset prices to which they believe the Bank should have regard? My noble friend Lord Campbell of Alloway alluded to that problem. He also pointed out the extra problems that we would have if we yielded further control to Brussels, as the draft constitution currently permits. Perhaps I may be permitted a small digression along with that of my noble friend Lord Campbell of Alloway. That is, of course, another very good reason to say "no" to the euro. But let us return to the matter of personal lending.
I have dealt with the subject of secured lending, but the position on unsecured lending is much the same and it is also a real problem in the making. It is clear that unsecured lending growth has contributed to consumption, quite possibly at levels that are not sustainable. But my concerns about unsecured lending, which is a much smaller proportion of the total, have far more to do with the impact on individuals than the impact on the economy overall.
We know that the debt to disposable income ratios have been rising strongly and are now at 130 per cent or more—way above the previous peak a decade or so ago. I do not believe that that can simply be explained 337 by distribution, as the noble Lord, Lord Skidelsky, attempted to argue earlier. The increase is very much more significant than distribution would probably allow for, but I think that it is worth looking at in more detail.
However, the real problem is that the ratio is far higher for the poorest households, and it is those households that are most likely to be in arrears. They are the ones that are much more likely to be paying the high interest rates on credit cards and store cards. My noble friend Lord Northbrook spoke eloquently about many problems in this regard. Around 3 million households—an astonishing number—rely on the services of money lenders, who of course are not known for their bargain rates of interest.
As we heard from my noble friend Lord Northesk and others, the National Association of Citizens Advice Bureaux has been reporting a rising level of inquiries relating to consumer debt, and the statistics on arrears and problem debts are on a rising trend. Behind those statistics are human tragedies. The poor, in particular, find it easy to slip into debt levels which they cannot sustain. We were reminded of that recently when an 84 year-old pensioner managed to run up a £30,000 credit card debt, despite the fact that her pension was less than £80 a week.
I know that there are no easy answers on this. The response of my party has been to set up a Debt Commission, chaired by my noble friend Lord Griffiths of Fforestfach. The commission has only just started its work, and it is too soon to say what its findings will be. But I believe that the existence of the commission, which draws together both the commercial and voluntary sectors, is a constructive response.
The obverse of rising debt is low levels of savings. The Government have presided over a debt boom and a savings crash. The savings ratio is at about half the level of the one that the Government inherited. In the six years to 1997, the ratio was never lower than 9.3 per cent, but in the following six years it has never risen above 6.7 per cent and is now considerably lower.
The Government not only have no effective savings policies; they have also systematically set about undermining the savings culture that they inherited. We have the infamous £5 billion annual raid on pension funds, which is one of the major causes of today's pensions crisis, and that, in turn, has led to a loss of confidence in savings for pensions. The Government abolished the popular PEPs and TESSAs and replaced them with ISAs. But they worried about those becoming too popular and so they have now set upon a policy of squeezing them out of existence. The latest statistics show that they are, indeed, being successful in doing that.
I say to the Government that a set of policies that encourages personal debt while discouraging savings is the worst kind of short-termism. The Government might well get their GDP figures shored up in the short term but the problems that they are storing up for the future are considerable. They are, in my view, unbalanced and fundamentally unsustainable policies, and they are not policies that a Conservative government would pursue.
338 I cannot finish without reflecting on the role of the Government's economic management in setting the climate for personal financial decisions. The Government have embarked upon a debt-supported spending spree. We have seen the amount that the Government expected to borrow last year rise from the £10 billion forecast before the last election to £37.5 billion, as set out in the previous Budget Statement. The Chancellor expects to borrow another £157 billion over the next five years. That is without counting the off-balance sheet debt of which my noble friend Lord Selsdon reminded us. My right honourable friend Oliver Letwin has rightly described the Chancellor as the "credit card Chancellor". His Budgets are "spend now, pay later" Budgets. It is hardly surprising if the electorate follows suit.
Seven years of Labour Government have been characterised by economic prosperity, brought about in large measure by the strong economy that they inherited in 1997. But, in my view, that is under threat. If personal debt levels continue to rise, it will not take much to push our economy out of its comfortable trajectory. That will be bad for the economy and a tragedy for some individuals. Those are the dangers of which these Benches have been warning. To date, in reply we have had complacency from the Benches opposite. I hope that this evening the Minister will give a more convincing response.
§ 7.50 p.m.
§ Lord Davies of Oldham
My Lords, the whole House is grateful to the noble Earl, Lord Northesk, for introducing this debate, which has provoked some interesting contributions. The division that has been identified between the gloom-mongers and those who are more optimistic is a fair analysis. My joy this evening is that what has always been defined as the gloomy science of economics has had the most optimistic and constructive perspective put on it from the outstanding economist present in the House, the noble Lord, Lord Skidelsky. At one stage I thought that he was going to render my response to the debate otiose. He covered so much of the ground.
In response to one point made by the noble Lord, Lord Skidelsky, on whether the distribution of income and resources has been skewed, and whether some are getting more rapidly better off and others poorer, I thought he might give us some credit for the numbers of children who have been taken out of poverty, which has been the result of constructive policies by the Government. We need to address ourselves to what has been recognised on all sides as certain extreme aspects of the economy about which we need to be concerned.
First, it is clear that low-income families are more vulnerable to loan sharks and to the high cost of credit than others. In a moment, I shall turn in more detail to the measures that have been announced today, and which were the subject of the contribution from the noble Lord, Lord Selsdon. I want to reassure him on that front. Secondly, I shall refer to the wider reaches of the lending industry and the necessity of reigning in some of that by making consumers more aware of their rights and providing clarity of information. I want to 339 comment on that in a little more detail. I believe that we are on common ground on those two points. Measures need to be taken and I emphasise that that is what the Government believe too.
On the more general issues, it would not be surprising to the House if I did not place myself firmly among, not the optimists but, the realists who recognise that this is a secure economy which has a base, as the noble Lord, Lord Skidelsky, identified, that changes the terms of some of these arguments. The noble Baroness, Lady Noakes, emphasised the problems of the decline in the savings ratio. Of course, there has been a decline. People feel more secure.
The reason why they borrowed under the previous administration was that they had to guard against the shocks and difficulties of an insecure economy, not least of which were the levels of unemployment at that time that could strip away a household's income. The fact that the people today are prepared to reduce their savings ratios is a reflection of the fact that they have faith in the Government's handling of the economy. They have the experience of certain aspects of the economy working very much to their advantage, not least, of course, the fact that we have the highest numbers of people in work that this country has ever known.
Although the contribution by the noble Earl, Lord Northesk, was on the more pessimistic fringe, he was very fair about certain aspects of debt—certainly on credit card debt. We should recognise that the vast majority of people who incur credit card debt, and who add to the total, meet their monthly commitments. They borrow at a negligible rate of interest—I am sure that this is a position shared by all in this House—and they borrow in an entirely responsible manner. They take out three to four weeks' credit and meet their obligations at the end of that time. That accounts for the majority of our fellow citizens. Although that may lead the noble Baroness to be dreadfully concerned about the overall levels of debt reaching proportions that we have not known before, that may be a reflection of the fact that people have security about the economy as a result of direct experience, and that enables them to take on such obligations without fear.
The noble Earl, Lord Northesk, also excoriated the Government—I cannot repeat his phrase with total accuracy—for shifting the inflation targets. The Government gave the Bank of England the new inflation targets—CPI at 2 per cent—to improve the quality of the targets and to help to ensure that inflation expectations in the UK remain in line with those in the euro area. CPI is a more comparable measure of inflation internationally. It represents international best practice. Adoption of the CPI enables a more direct comparison between inflation rates in the UK and the euro area. I do not believe that the Government have anything for which to apologise. It is not a matter of fiddling with the inflation rates at all, but choosing a more accurate, an effective and an appropriate measure.
340 The noble Earl also suggested that the Government were selling pensioners short. I have already mentioned that children have been taken out of poverty. Over 400,000 pensioners between 1997 and 2001 have been taken out of relatively low income, after housing costs. Pensioners are, on average, £13.50 a week better off with pension credit and other measures—than if the earnings link had been in place since 1997. The poorest third of pensioners are around £26 a week better off. So I refute the charge that the Government have not responded to the needs of pensioners. I can assure the noble Lord that the Government are certainly committed to ensuring that all pensioners are able to share in rising national prosperity.
Finally he suggested that the reason why individuals were getting into debt was because they were aping a profligate Chancellor. I can assure the House that the Chancellor is not profligate, but is following extremely realistic perspectives. Tomorrow various elections are taking place and there may be a number of shocks for established parties, as is being reflected in the press—I notice the anxiety on the other side. But what is it about our present political culture that is often commented upon? It is that individuals do not have the highest possible regard for their political leaders and leadership. Suddenly to suggest that the whole country is pursuing particular strategies with regard to household incomes because they are out to ape the Chancellor, is a very odd concept indeed. They would be acting with some probity if they followed him, but I doubt whether we are in a position to claim that particular form of emulation.
The noble Lord, Lord Campbell, put these issues into the context of the European Community. I was grateful for that. I am not in a position to deal with that in a debate that is so limited—we shall need another debate before we address ourselves to the fundamental questions of European membership to which he referred. Suffice it to say that, as far as the Government are concerned, our membership of the European Community is certainly showing us in a very strong economic light, often to the envy of our European colleagues.
We do not underestimate the fact that there are challenges ahead, but it is scarcely for me in this debate to respond to the issues of the European constitution. This was ground that the noble Baroness, Lady Noakes, was keen to drag me onto, but I feel I cannot do justice to that aspect of the debate given so many other issues directly related to the main topic before us.
The noble Lord, Lord Selsdon, was kind enough to suggest that I might be lonely on the Government Benches: who could be lonely when accompanied by the noble Lord, Lord Evans, as a helpmeet in these circumstances? I also heard what the noble Earl, Lord Northbrook said. We all miss my noble friend Lord McIntosh who normally responds to these debates, but he is unable to be here today. He cannot fulfil every conceivable obligation in government, so from time to time the House will have to put up with a rather doubtful substitute.
341 What I did appreciate about the contribution of noble Earl, Lord Northbrook, was his suggestion that there were limits to what the Government could do with regard to lending. He is right in those terms and it would ill-behove members of the Opposition to suggest that their position, having put their thinking-caps on, is that the only way we can extricate ourselves from what they define as a crisis, because of the level of our household debt—but which the Government of course deny is in those terms at all—is through a significant government action.
§ Baroness Noakes
My Lords, I thank the Minister for giving way. Can he remind me which noble Lord referred to this as a crisis?
§ Lord Davies of Oldham
My Lords, perhaps I have exaggerated by using "crisis", and I withdraw that particular word. I bring again as evidence into this debate the prospect the noble Lord, Lord Skidelsky, indicated he had already heard; namely, a certain amount of pessimism. All of that emanated, as I saw it, from the Opposition Benches. I do not think the noble Baroness did anything to lighten the gloom when we were able to have her contribution on that perspective.
I want to assure the noble Earl, Lord Northbrook, and also the noble Lords, Lord Newby and Lord Selsdon, that we have been concerned today to make announcements on the question of consumer credit. We certainly are taking steps to ensure that there is one measure of APR. I do not know how big the print will be that justifies this; but I do recognise the importance of the small print problem when people are not aware of the nature of the contract that they have signed.
Our announcement today is concerned with producing the first move in a set of regulations in the Government's shake-up of the consumer credit market. It is only a first move and does not implement the whole of the White Paper. I was asked on one occasion in the House whether legislation would follow the White Paper: well, it may do, but we can do a certain amount of constructive good based upon the propositions in the White Paper through regulation. That is the aspect we have introduced today.
The new requirements will tighten up credit advertising so that consumers will be better able to compare products; and it will also introduce a standard way of calculating the APR, which will mean that when an APR appears in an advertisement it must always be more prominent than all the other financial information. The most basic facts will, therefore, be clear to the consumer.
I do not pretend that the latter will solve all the problems of consumer lending. We know there are the vulnerable and we also know that we could all become vulnerable to certain seductive literature submitted through the post. However, today we are introducing a clear approach to cardinal issues which are critical to the consumer. I give way.
§ Lord Campbell of Alloway
My Lords, I am grateful to the Minister for giving way and I shall not take long. Neither my noble friend Lady Noakes, nor anyone else, was suggesting—I certainly was not—that we are in a position of crisis. We were suggesting that unless something is done about the extent of debt, and done fairly soon, it will not be tolerable for the economy in the future.
§ Lord Davies of Oldham
My Lords, I am grateful to the noble Lord. He will have recognised that under the promptings of the noble Baroness I withdrew that term. Nevertheless, the noble Lord contributed to certain elements of gloom about the present position, which I want to refute. I want to refute another area of significant concern which was mentioned today; that is, the housing market.
There are problems with certain aspects of the housing market. Borrowing against an asset which is being enhanced does not appear to me to be a major problem in the economy, but we must certainly have regard to first-time buyers. That is why we commissioned the Barker review and from that have developed a whole series of proposals which will be brought to fruition to meet the mismatch between the demand for and the supply of housing.
We all recognise why it is difficult to generate a rapid response in terms of supply with regard to housing, but we also recognise that with the increase in the number of households—an important factor in regard to housing demand—we need to think more seriously about extending house building and house building opportunities. That is the burden of the Barker review and it is the basis on which the Government intend to act in order to relieve some of the pressure upon the housing market.
Against the background of a strong economy, judicious action to look after the most vulnerable and our concern as regards fundamental issues such as the housing market, I emphasise my view that the Government should not be complacent about personal debt. That is why action has been taken today in the way I have described. There is a whole range of other fundamental actions being taken by government. We are in the position which was summed up so much more accurately than I can by the noble Lord, Lord Skidelsky; namely, that, because of changes in the structure of the economy and legitimate changes among our people regarding expectation, what 15 or 20 years ago might have been looked upon as potential for very serious problems as regards the economy will not manifest in those terms. Far from it; what we have are aspects.
Let me give one obvious illustration. The proportion of homes repossessed by lenders is at a historically low level. The current position does not represent a very stark contrast with the position which I think the Official Opposition this evening were prone to describe. That was the position of 15 or 20 years ago with the appalling consequences of the housing crash. 343 I maintain that the strength of our economy is such that no such crash will be repeated this time. The Government are acting judiciously and are in control of the situation. We recognise that there is no room for complacency, and that action needs to be taken in certain crucial areas.
Nevertheless, we are also appreciative of the fact that alarm and gloom should not be spread against a background of a rising economy—one in which there has been considerable prosperity in recent years—where the majority of people take judicious decisions on the handling of their household incomes and wealth.
§ Lord Selsdon
My Lords, before the noble Lord sits down, I wonder whether he could help me—not necessarily today at this moment. I have been asked if I could produce a comparison between government borrowing and consumer borrowing on a like-for-like basis. Perhaps the Minister can send me a short letter stating, for example, that the level of consumer borrowing today is "this" and that the level of government borrowing is "that". It would be a sort of simple comparison, because both sides have a right to know.
§ Lord Davies of Oldham
My Lords, I am happy to give that assurance. I shall write to the noble Lord and make sure that all other contributors to the debate receive the same letter.
§ 8.11 p.m.
§ The Earl of Northesk
My Lords, I am hugely grateful to all my noble friends—I still prefer to include the noble Lord, Lord Skidelsky, among their number—for their contributions to the debate.
It has been a delight to listen to everyone's comments. In fact, in contrasting the speeches of the Minister and the noble Lord, Lord Newby, and other contributions, albeit to varying degrees and from varying directions, I detected a degree of consensus. It strikes me that we are all agreed that of itself personal debt does not constitute an immediate threat to the economy. We are all much more concerned about its current impact in individual cases. Importantly, there are concerns as to what the potential outcomes of the current trends in the statistics, if sustained, might be.
To that extent the delineation of the noble Lord, Lord Newby, between the worriers and optimists was accurate. In so far as concerns gloom, it centres around anxieties as to whether the Government are properly focused on these trends.
Having articulated both sides of this coin to the benefit of the Government and the Treasury, tonight's proceedings have, I believe, been extremely useful. Of course, now is not the time to rehearse the debate in its entirety. Once again, I am hugely grateful to all noble friends who have spoken. It only remains for me to beg leave to withdraw the Motion for Papers.
Motion for Papers, by leave, withdrawn.