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Vera Baird (Redcar) (Lab): A generation ago, Britain was a country in which debt carried a stigma and borrowing was known as living beyond one's means. Now, however, personal borrowing has risen to £1 trillion. There has been a profound cultural change, and the key to that is our affection for home ownership. As many hon. Members have said, 80 per cent. of the £1 trillion consists of mortgage borrowing, but the impact of the housing market boom goes much wider than the headline figure. Many people have seen the value of their home double in the last five years. People who were never asset-rich before have become so, probably faster than at any time in history. At the same time, with low interest rates, low inflation and low levels of unemployment nationwide—although not throughout all the regions—it is cheap to borrow.
Low interest rates also fuel the notion that it is not profitable to save. I have never been entirely sure whether that is right, because inflation—which fuels higher interest rates—makes savings look attractive, but if they are fuelled by inflation, their benefits are wiped out. However, it looks as though it is not worth saving at the moment, and that illusion is widespread. Lenders, too, have obviously become—let us put it generously—flexible, but as long as everyone agrees that credit is being used as a tool for financial flexibility in a manageable way, it is part of economic growth. It creates employment in the service sector and contributes to gross domestic product, and our economic performance has outshone that of France and Germany recently.
I listened to a commentator from Ernst and Young on the BBC recently. I was impressed that the hon. Member for Twickenham (Dr. Cable) gets his views from professors; I listen to the BBC. That is the best I can do. The spokesperson from Ernst and Young made it clear that, without the explosion in borrowing, UK growth rates would have been much lower, the UK economy would have been much smaller, and the corporate sector would have been less profitable. There would also have been fewer jobs without the impetus of personal borrowing. There seems to be consensus among financial commentators at the moment that people are
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in the main still servicing their debt reasonably comfortably because of low interest rates, but I accept that, as hon. Members on both sides have pointed out, it does not take much of an interest rate change for that to become a problem.
However, there is an historical point. Capital Economics, quoted in a Money Observer article that I read recently, cited the fact that from the late '80s, long before economic gearing started to peak—we have talked about the levels of economic gearing tonight—people in households took action to cut their debt. It has been shown that the recent increases by the Monetary Policy Committee are having an effect on mortgages. Secured lending rose by only £8.5 billion in May, which is the lowest increase for nine months and down from an increase of £9.2 billion in April. So, one hopes that people are reading the signs as they come and that there will not be any real developing crisis.
A MORI Market Dynamics poll recently referred to the fact that thousands of pounds of credit card debt are in the hands of people it calls convenient controllers—that is, by and large, people who cope with paying off their balance every month. Only about 5 per cent. of card holders are classified as spiralling debtors with large debts relating to their income. It is right to point out, however, that the Consumer Credit Counselling Service says that 5 per cent. represents an enormous number of people. With 61 million credit cards, that is likely to be true.
I want to point out some oddities that presented themselves to me in recent days as I reflected on this debate and which have perhaps pushed people towards borrowing rather than saving.
Mr. Tom Clarke (Coatbridge and Chryston) (Lab): My hon. and learned Friend's analysis is absolutely correct. One wonders whether Opposition Members are amazed, and even perplexed, by the fact that the figures she has given on inflation, interest rates and the rest have all been achieved under a Labour Government. Perhaps it is difficult for them to come to terms with that.
On the specific issue of credit cards, does my hon. and learned Friend agree, on the basis of constituency experience, that many people are deeply worried about the increase in credit card fraud? Therefore, should we not quite properly be addressing it?
Vera Baird: My right hon. Friend is correct. People are very concerned about credit card fraud and about identity theft, which can go beyond credit card fraud. It is a most serious issue indeed. There are, of course, steps that the Home Office is countenancing now to try to make clearer what people's identities are in the hope of at least partly combating that issue.
May I return to credit cards specifically and some oddities between pressures that push people towards saving or push them towards taking credit? A number of people have said to me in the last few days that having a savings account in a bank for several years does not help a person to get a credit rating—particularly not a young person, apparently. Getting a credit card does help a young person to get a credit rating.
In addition, people who go to buy a car in cash are told that they should borrow the money if they want a discount, because cash purchases are no use to the
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salesperson. Discounts are available only for credit. I recall that there used to be discount for cash, but it seems that the clear message now is that there is no point in saving up for a car because people who do so will not get as good a ticket price as they would if they borrowed the money.
Whether those factors play a role it is hard to know, but it is hard to suspect that they do not. Of course, inequity has come into play. The pattern is that the lower the person's income, the higher the interest charged, together with, as my hon. Friend the Member for Glasgow, Cathcart (Mr. Harris) said, penalty charges for being late by a day and penalty charges for paying debt back a few days early.
Over-indebtedness is a real problem for people on low incomes and it can result in significant costs—health problems, depression and deterrence from moving into better employment leading to homelessness. There are 3 million households in arrears with credit repayments on household bills and problem debt is primarily concentrated in low-income and other socially excluded groups. For example, 57 per cent. of over-indebted households have an annual income of less than £7,500.
Of course, low-income groups also experience the most directly serious debt—priority debts—such as utility and council tax bills, which are likely to result in eviction, imprisonment, disconnection or repossession. High repayments also leave people with little disposable income. According to the Office of Fair Trading family expenditure survey, in this day and age, 5 per cent. of the poorest decile spend 90 per cent. of their income servicing debts.
The debt problems of the lowest group are not caused primarily by irresponsible money management. Mostly, people on low incomes have reasonably sophisticated budgeting skills—I suppose that, by necessity, they must have. In most cases, initial triggers for debt are life events: losing a job, moving in and out of work, separating, becoming ill, developing a disability, having children, or being on a long-term low income. One in five households in arrears or financial difficulty attributes it to redundancy, and one in seven people cites living for long periods on a low income as the cause. Those are the kinds of people whom Redcar citizens advice bureau deals with. Last year, 42 per cent. of the 23,500 issues that came before it related to debt, and it has dealt with approximately £2.5 million worth of debt.
In addition, the community legal service partnership in Redcar has found a high need for debt and money advice in the borough. It now has a money advice worker who has dealt with 100 clients over the past financial year and debts totalling about £1 million. Apparently, the average debt is around £10,000, and that partnership too finds that the reasons why people get into debt tend to be life events and not mismanagement. It points, however, to a number of features that exacerbate the situation—for example, the fact that debt is easily accessible. In particular, once into debt, people get another debt to pay off the last one, and again and again.
Problems are apparently encountered with the commercial side of debt advice, in which individuals tend to be recommended to consolidate their debts into
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a personal loan, which will have "a lower interest rate", but which will go on for very much longer, and therefore, in the end, be very much more costly to service. In particular, people get talked into secured personal loans, which will not only increase the amount that they will have to pay back over the years but put the roof over their heads at risk if they are unable to make the payment. I was shocked to find that there are commercial debt counsellors who charge for debt counselling. I was completely unaware of that. Happily, free services are provided through the CAB and National Debtline, although it is a moot point whether those are sufficient.
A further problem is that 41 per cent. of adults on Teesside have numeracy and literacy problems, which feeds the problem. People do not understand contracts, do not know how to choose the best deal, and do not understand what APR is, although, as my hon. Friend the Member for Glasgow, Cathcart (Mr. Harris) said, which one of us does? Furthermore, they do not know what the term "interest free" may mean, as, again, many of us do not. Addressing adult numeracy and literacy problems will help people to have greater financial understanding. Redcar CAB does some proactive work in schools and at Sure Start venues, where it tries to teach people how to avoid debt from as early as 15 or 16 years of age, which, I would imagine, is the type of work that the Government would like to encourage even further.
I want to mention only two things that the Redcar CAB and the welfare advice department are concerned about, because their effects are capable of making matters worse. Under changes to income support from January 2005, no amounts will be provided under it for children, and claimants will be moved on to child tax credit to support their children. That means that some people will be lifted off income support, even though they will not get any additional money paid to them. As a result, they will stop being passported through to the social fund, although budgeting loans and community grants are important to enable people to buy large items that wear out, such as washing machines. The question is: if people are no longer able to access the social fund, what will that do to families who are currently struggling and just managing to hold off debt? In addition, the new working tax credit, which of course aims to help low-income workers with children, is perhaps a tad unresponsive to changes in the household, such as someone going sick, or someone leaving the household, as it is based on the last year's income. Many people in the Redcar area who suffered overpayments through no fault of their own are having to repay from this year's award.
I know that the Government, who are very concerned about these issues, will want to consider those two potential problems, and decide whether they are likely to have an impact or whether there is already a solution to them.
I do not believe that the current levels of borrowing constitute a crisis, or are seriously damaging at the moment. I think that we can take it easy in the short term, although we must not be complacent. For a narrowing band of society, however—the poorest—there is a serious debt problem, and where debt has its impact in that sector it is very severe.
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Let me say a quick word about pensions. If the basic state pension were increased to pension credit level, that would do no good to the 87 per cent. of women who have no basic state pension. Their pension credit would be wiped out pound for pound. It would benefit only the more affluent pensioners whose savings take them well above pension credit level, most of whom receive occupational pensions. That would clearly be regressive in terms of income distribution, but above all it would be deeply sexist.
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