Growth, ‘securonomics’ and financial stability: How does tackling debt fit into Labour’s plans?
Our Senior Influencing Manager, Grace Brownfield, on why tackling debt should be a key part of Labour's plan for economic growth
Posted July 10, 2024
During the election campaign, Keir Starmer talked about the moments in his childhood when his family had their phone line cut off – a result of his parents being unable to pay their bill. He’d previously recounted the experience to the BBC, saying he knew “what it is like to sit around the kitchen table not being able to pay your bills.” As his new Government takes office, many millions of people up and down the country can sadly say the same.
There was much talk during the election of the big issues that would dominate the in-tray of the next Government – regardless of which party took power. Labour’s approach has focused on driving growth, and one of Rachel Reeves’ first moves as Chancellor has been to announce a new Growth Delivery Unit within the Treasury. In her first major speech on Monday, she set out that Labour’s approach to generating economic growth will rest on three elements: stability, investment and reform.
She’s talking from a macro-economic perspective, but there’s much to think about on a household level, too, especially when it comes to the first of the three: stability.
‘Securonomics’ for households?
The Chancellor has talked about the concept of ‘securonomics’, saying she wants to deliver an economy that is ‘more secure and resilient in face of shocks’.
That quote could just as equally apply to the ambition we need to have for households too. Research by the FCA suggests around one in four UK adults (24%) have low financial resilience – with little capacity to deal with a financial shock, such as a £50 reduction in their monthly income or losing their main source of income for one week.
For some, it’s not just about resilience to weather future shocks, but about the crisis they are already facing in their finances. Next week, we’ll be releasing new analysis on the situations of the people we’re supporting who have a ‘negative budget’ - people who simply do not have enough income coming in to cover their essential costs. People who, like the Prime Minister, can say they know what it’s like to sit around the kitchen table trying to work out which bills to pay and what to go without.
After several financially challenging years, driven first by Covid and then by high inflation, it’s clear this Government will be judged on its ability to deliver greater financial security for everyone.
Tackling problem debt and making sure people have enough to cover their essentials is crucial to that. People can’t feel secure when they are constantly worried about paying their bills, putting food on the table, or being chased for a debt they can’t pay.
Labour’s manifesto commitment to review Universal Credit to ensure it tackles poverty is vital in this context. There is an important debate to be had about the level payments should be set - and, crucially, how this is determined - to ensure people can afford the essentials. Meanwhile, reforming debt deductions from Universal Credit (the majority of which are taken to repay debts to government, like benefit overpayments) would present a quick and low cost way to provide immediate help to people on low incomes. Labour’s commitment to develop a financial inclusion strategy provides an opportunity to turbo-charge efforts to build financial resilience.
Labour’s growth focus: How might it be impacted by household debt?
And what about the link between debt and growth – the lens that so much of Labour’s policy will be viewed through? Evidence shows that ‘debt’ – in the form of taking out credit to enable people to buy things (a car, house, goods) that improve their standard of living – can be a good thing for growth. It lets people spend now and repay over time.
But if debt becomes unaffordable, people have to cut back on spending to make their repayments. Typically, this happens because people experience a life shock – such as losing their job, a relationship breakdown or a bereavement - or because other essential costs rise (as we’ve seen over the last two years). High interest rates also mean people spend more on their debts. If large numbers of households find their debts are unaffordable, it can lead to significant reductions in consumer spending – which contributes to wider economic growth.
Research by the International Monetary Fund (IMF) looked at economies around the world and what happens when the ratio of household debt (that is household debt as a proportion of GDP) increases. It found that, in the short term, an increase in the household debt ratio is “likely to boost economic growth”. But within three to five years “those effects are reversed; growth is slower than it would have been otherwise”.
Much of this focuses on credit and other lending, such as for mortgages. But what we’re seeing is a greater number of households falling behind on the basics. During the election period, we got new figures on council tax arrears and energy debt – showing both have risen to new record levels (£6.2 billion and £3.3 billion respectively).
If the new Government wants to achieve its ambitions, helping people out of debt will need to be a priority. Take their Warm Homes Plan which aims to upgrade the energy efficiency of 5 million homes, delivering an economic boost by creating and supporting jobs, while helping individual households cut their energy bills long-term.
Research shows that people are more likely to engage in energy efficiency schemes when their immediate financial pressure is reduced. We’ve consistently called for a Help to Repay scheme to provide repayment matching and limited debt write-off for people struggling to repay their energy debt. Bringing this in as part of their Warm Homes Plan could not only lift more than half a million households out of energy debt, but also make them more willing (and able) to have energy efficiency measures put in place – with the aim of lifting them out of energy debt and fuel poverty.
Making tackling debt a priority
There is a moral and economic imperative for the new Government to prioritise tackling and preventing problem debt. While some of the measures needed will require investment, other changes could be done at little to no cost to government. Introducing independent bailiff regulation and reforming deductions are two good examples. As Ministers settle into their new roles, we hope they will be looking at how they can achieve this, for people up and down the country.
Grace is the Money Advice Trust’s Senior Influencing Manager. She previously worked in the policy team at StepChange Debt Charity. Before that she worked on issues related to the financial impact of cancer at Macmillan Cancer Support and NSPCC. View all posts from Grace Brownfield.
