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Mr. Harris: My hon. and learned Friend is right. We could have a full day's debate on the various sharp practices used by banks and lenders, and perhaps we will have such an opportunity. Banks are not slow to penalise people for making late payments, but they are not particularly quick to come forward when they make a mistake—but that is a separate debate, Madam Deputy Speaker.
Many people do not save enough, and far too many people save nothing at all—I suspect that it has always been thus, and it has certainly been thus in recent history. The Opposition blame the Government for those ills.
Mr. Harris:
The hon. Gentleman is a partisan fellow, and he has his opinions. It is difficult for the Conservative party to blame the Government unless, of course, it turns a blind eye to some salient facts: it is difficult to cope with a large debt if interest rates are 10 or 11 per cent., as they were under the Conservative party; it is difficult to cope with a large debt if unemployment is more than 3 million, as it was under the Conservative party; and it is almost impossible to manage a large debt if inflation is in double digits, as it was on a number of occasions under the Conservative party. This Government have done more than any previous Government to encourage people on middle
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and low incomes to save, and they have done more than any previous Labour or Conservative Government to provide economic circumstances in which saving is not only a financial necessity, but a bonus that allows people to prepare for the rest of their lives.
9.3 pm
Mr. Mark Hoban (Fareham) (Con): The debate is important, and I support much of the analysis outlined by the hon. Member for Glasgow, Cathcart (Mr. Harris).
It is easy to be puritanical about increased consumer debt, which is approaching £1 trillion. It is also easy to criticise people who take out store cards, credit cards and personal loans, but who can blame those people when some of today's circumstances encourage them to do so? Factors such as low interest rates on savings and rising house prices lead people to ask, "I have got more money and more wealth; how can I best use that wealth?" However, the seeds of economic uncertainty for not only individual households, but the economy as a whole lie in the sense of increasing affluence and the ability to service higher debt, which is the point that I want to discuss this evening.
Hon. Members from both sides commented that lower interest rates allow people to service greater debts, and households are gearing their debt to reflect the lower cost of servicing it. The debt-to-household-income ratio is 140 per cent., which is one of the highest levels ever. People can service that debt at the moment. They are gearing up—borrowing more—because of the low interest rates.
People are optimistic about their future; they are prepared to continue to take on extra debt if they believe that the economy is stable, that they will stay in employment for the foreseeable future and that interest rates will be low. Moreover, if they sense that their personal wealth is increasing, they will start to borrow more. Equity in a house was previously viewed as an intangible asset that was difficult to realise without selling the house and downsizing; nowadays, it is realised in many different ways. My right hon. Friend the Member for West Dorset (Mr. Letwin) cited the increased use of retirement income schemes, which take out equity from a house to provide income for retirement. That was also mentioned by my hon. Friend the Member for New Forest, West (Mr. Swayne).
Another factor in the rise of the borrowing culture is the decline of the savings culture. Returns on savings are low. The FTSE 100 has barely moved during the past seven years, whereas stock market indices in other leading economies have gone up. We have already heard about the £5 billion raid on pension funds. We must also consider the rigidity of certain savings products: for example, it is very difficult to access one's pension fund before retirement; and if one takes money out of an individual savings account to meet a short-term financial crisis, one loses the tax relief on one's savings.
Some people are having to shoulder higher levels of debt at the start of their career. I do not wish to make partisan points about the level of student debt, but it is clear that top-up fees will saddle students with more debt that they have to pay off over a longer period, so they will not have the free cash available to put money
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aside for a pension or to save for the deposit on a house. The pension credit has a particular effect on tomorrow's pensioners' incentive to save.
On current returns, the structure of the savings market encourages people to borrow money instead of saving for the future. That sows the seeds of several economic problems. First, strong borrowing for personal expenditure adds to the volatility of the economy. If people perceive the economy as continuing to grow, they will continue to borrow on the assumption that their income will increase in future and they will be able to service the debt from it. One of the Bank of England's most recent inflation reports included a very good chart that showed the strong correlation between the increasing level of equity withdrawal from houses and household consumption: as people took more equity out of their houses, they spent it on a new car, a holiday, or a new kitchen or bathroom. People have started to borrow out of their principal asset—their house—to fund future consumption. Once they start to lose confidence in the future of the economy, they will borrow less, and consumer expenditure, which has been one of the main drivers of the economy over the past few years, will start to come under pressure.
Secondly, people have re-geared their debt to reflect low interest rates, which mean that they can afford to borrow more. Because of the significant increases in house prices, people borrow ever-higher multiples of their income in order to be able to afford to buy a new house. When I first bought a house, the maximum multiple was three times one's salary; now it goes up to four or five times one's salary. Such a high level of borrowing increases the volatility exposure of households to high amounts of debt. My hon. Friend the Member for New Forest, West expressed that eloquently in an earlier intervention. If interest rates are 5 per cent., a rise of 1 per cent. would increase the interest cost by 20 per cent. If interest rates are 10 per cent., a 1 per cent. rise would increase the debt service cost by only 10 per cent.
Mr. Tom Harris: Perhaps I did not address that point fully when the hon. Member for New Forest, West (Mr. Swayne) raised it with me. Although an increase of 1 per cent. is a large proportional increase, does the hon. Gentleman accept that the actual net increase in pounds per month would be exactly the same as the increase if interest rates were even higher?
Mr. Hoban: The hon. Gentleman needs to be careful because although there is an interest rate, we should not forget that people are also borrowing more. A repayment element therefore needs to be taken into account. Borrowing more means repaying more as well as paying slightly less in interest.
Mr. Gummer:
If one borrows when interest rates are low and house prices are high, without considering that house prices might not continue to rise but that interest rates could, one finds oneself absolutely out of kilter. That does not happen if house prices have ceased to increase so quickly or interest rates have been reasonably high for some time and one has made a
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decision in the context of high interest rates. It is a question of when one makes a decision and in what context.
Mr. Hoban: My right hon. Friend makes a powerful point. People who borrow when interest rates are high benefit significantly when they fall. Much of the increase in disposable income is a consequence of that. When the reverse happens, and one borrows on the assumption that low interest rates will continue for some time, but they rise significantly, disposable income, after taking account of interest payments, begins to diminish. Such matters lead to volatility starting to creep into the economy. People gearing up debt present a risk to both their personal finances and the economy. As people increase the amount of interest that they pay on their debt, they will be forced to reduce their personal consumption to keep their books balanced, and that will have an impact on the wider economy.
The deputy governor of the Bank of England summed up the matter neatly when he said in March:
"Since there are, at present, relatively high levels of debt and these are rising faster than income, it is likely that potential vulnerabilities from increased gearing are rising . . . And we know from experience that unexpected shocks from one source or another can upset individuals' predictions and behaviour."
My right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer) referred to those shocks when he mentioned the changes in the economy that force up interest rates. We should be mindful that we are considering not only straight economics but people's lives and that personal debt has a huge impact on all our constituents.
In my constituency, the citizens advice bureau said that, according to its referrals, in 2002–03 the average debt was approximately £11,500, whereas in 2003–04 it was £17,000. That shows some of the vast personal debt that people are incurring. We are therefore presented with a difficult position and the hon. Member for Luton, North (Mr. Hopkins) picked up on that when he probed Government and Opposition Front Benchers about interest rates.
The Monetary Policy Committee of the Bank of England is in a difficult position. Interest rate increases are significant and could lead to a hard landing for the economy as people cut their spending to meet high borrowing costs. Small increases in interest rates, however, might not send the right signals to consumers, and the house price increases might continue, forcing people to borrow more money so as to be able to afford a house. A difficult dilemma faces the Monetary Policy Committee; it has to get the interest rate right both in terms of controlling inflation in the short term and in regard to the longer-term implications for house prices, consumer debt and the long-term structural stability of the economy.
One might ask what the Government are doing in this regard. In an interesting article published last month, Ros Altmann, a Government adviser on pensions, wrote:
"The UK economy's remarkable recent performance has been supported by a housing boom and government spending on job creation in the public sector. Is this all part of the Treasury's plan? Rising house prices have a positive wealth effect, increase consumer spending on housing-related items and fuel sharp rises in borrowing, all adding to short-term economic strength."
That is the view of someone who advises the Government.
This is how we come to understand the nature of the economy. If we continue to fuel short-term growth—and as long as the economy continues to grow, and interest rates and unemployment remain relatively low—borrowing may well be sustainable. However, we cannot rely on a positive view of the economic outlook by the Government. Steps have to be taken to introduce stability into the economy. That is why we need stronger incentives for saving, not only for retirement but for the pre-retirement period. We also need less rigidity in the savings products that are available and encouraged by the Government, if we are to encourage more people to save. If we do not have the counterbalance of savings in the economy, the threat that borrowing poses to the stability of the economy in the medium to long term is significant. That is a challenge that the Government have yet to grasp, but my right hon. Friend the Member for West Dorset demonstrated in his opening speech that the Conservatives certainly have grasped it.
9.17 pm
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