We are great spenders. Consumption is the lifeblood of the British economy. Consumer spending topped £340 billion in the last quarter of the 2019. A high proportion of that is debt funded. Household debt is typically equivalent to over 80 per cent of GDP. At the end of last year outstanding consumer credit stood at £225 billion, not counting student loans.
In the last two months the picture has changed. Consumer lending fell by £11 billion in total over March and April. Nevertheless we remain dependent on credit now and will do so over the coming months to fuel our economic recovery.
Government has itself become massively more indebted through the furlough scheme, social security payments, grants to local authorities and loans to business. It cannot be said that the Chancellor has not been open handed. At the same time Government has had help from the lending institutions to keeping households and businesses in funds. Never before have lenders been so willing to help their customers keep afloat and so avoid dependency on social welfare. FLA members alone have received over 1.5 million requests for help with their loans. They have deferred repayments and in some cases waived their right to extra interest. The cost has been huge.
Lenders will continue to treat their customers’ requests for help fairly, and with respect for their circumstances. However, the cost of providing help is not affordable indefinitely and the longer it is provided, the less new lending will be available. Government must not expect to just co-opt lenders as an arm of social policy in this crisis. Instead it needs to build a partnership with lenders based on three principles.
First, lenders should be free to do what they know how to do best: talk to their customers about their needs and develop support that meet those needs, rather than just comply with a one size fits all edict on payment holidays. Support needs to be sustainable for the borrower, not plunge people into debt they will not be able to repay.
Second, lenders will themselves need financial assistance so that they can afford to continue to support their customers. All discussion of payment deferrals has been about the next three months. A sustainable strategy needs to look at longer term scenarios. It needs to take into account of the fact that this crisis might well not be over in another few months, that there could be another peak in infection.
Third, the UK, almost uniquely in the EU, has a new breed of lenders who have grown up since the financial crisis. They are not licensed banks. They raise funds on the capital markets and from banks. They make a major contribution, especially by lending to business. They are innovative and customer-focused. However, not being banks means they do not have direct access to Bank of England Term Funding support, and that funding is not flowing to them through the banks which do have access to that funding as Government hoped it would. The contribution of these institutions is too precious to lose and the labyrinth of obstacles around Term Funding needs to be straightened out.
It is sometimes said that UK consumers are over indebted; do not save enough; and that the country needs to wean itself off consumption and onto investment. For the future, the balance of the economy does indeed need rethinking, not least in response to the now evident need to maintain a stronger NHS, better welfare provision, a better infrastructure and a greener planet. For now, however, we need to start spending again, with lending available to enable it. And that requires a compact between Government and lenders that will deliver support for borrowers sustainably for more than a few weeks.
Published 04 Jun 2020