Debt levels pressure individuals and governments alike

Following recent Bank of England data and an IMF report, debt appears to be impacting us at every level

Two recent news stories show how debt is damaging the prospects of states and individuals. The debt charity StepChange called out the Bank of England’s latest data on debt levels, saying that while the growth rate of debt had shrunk, the seasonally adjusted amount of consumer credit lending outstanding was at its highest ever. The figure of £209,175 million exceeding the previous high of £208,296 million hit ten years ago in 2008, at the height of the financial crisis.

“A decade on from the financial crisis, we must not lose sight of the impact of sustained pressure on already stretched household budgets in coping with the rising daily cost of living,” said Peter Tutton, head of policy for StepChange.

Tutton called on policy makers to review credit products that make it very easy for those in low income households to accrue debt but difficult to pay it off due to high interest rates, saying the government must do more to support those “inadvertently trapped in a vicious cycle persistent problem debt”.

“We estimate that severe problem debt currently affects some 3.4 million people in the UK, so tackling and preventing vulnerable households from falling into problem debt should be high on the policymakers’ agenda. The government must support affordable alternatives to affordable credit. At household finances level the risks are all too real.”

Levels of global debt by percentage of GDP per country. Source: IMF

Unfortunately those risks are also real at international level. Last month the International Monetary Fund (IMF) gave a warning on the levels of global debt saying the amount of money owed by the world has grown by almost $50 trillion to $164 trillion, up from $116 trillion in 2007 when the global financial crisis began. 43% of this increase has been attributed to the engine of growth that is China.

Such levels are unsustainable warns the IMF: the current figure represents 225% of global GDP. Like those struggling to make ends meet at home, states will also be struggling to keep citizens happy and prosperous as “interest payments are taking up an increasingly large share of taxes and expenditure”. The IMF estimated the burden of interest repayments on treasuries had doubled in the last ten years.

Additionally, the report mentioned the misappropriation of quantitative easing in the US: “In the United States—where a fiscal stimulus is happening when the economy is close to full employment, keeping overall deficits above $1 trillion (5 percent of GDP) over the next three years—fiscal policy should be recalibrated to ensure that the government debt-to-GDP ratio declines over the medium term.”

Such levels of national debt, largely created by the overuse of money printing, sadly make it much less likely policymakers will be able to help the most vulnerable while their own balance sheets remain in the red.