News ID: 167412
Published: 0316 GMT August 23, 2016

UK Stagnant wage growth causing debt crisis for low-paid

UK Stagnant wage growth causing debt crisis for low-paid

Years of stagnant wage growth have left more than one million of Britain’s low-income households struggling with debt problems, according to a report from the TUC.

The trade union group argues that even though record-low interest rates have kept the cost of servicing debt at historic lows, many households are acutely financially vulnerable, FT reported.

Based on its analysis of official and survey data, the TUC report estimates that, of 1.6 million households in what it terms ‘extreme problem debt’, 1.2 million have an income of below £30,000.

That threshold is defined as households who have to pay out more than 40 percent of their gross household income on unsecured debt repayments.

Frances O’Grady, the TUC general secretary, said she was concerned that these numbers are set to increase, as consumer credit is increasing at double-digit rates.

Families can’t continue relying on credit cards and loans to get by,” she said, adding: “Higher wages must be at the heart of the government’s economic plan. We need a return to proper year-on-year pay rises, and a higher national minimum wage.”

Unions have been lobbying hard for the government to stick to its plan to raise the national living wage to one of the highest rates in the developed world by 2020, as some employers’ groups resist the proposal. Although the policy has lost its champion in former chancellor George Osborne, Theresa May, the Prime Minister, has stressed her desire to help low-paid workers.

In aggregate, British households have reduced their appetite for debt since the financial crisis. The latest numbers from the Office for National Statistics suggest 52 percent of households have no unsecured debt such as credit or store card balances at all.

At its peak in early 2008, debt as a proportion of household income rose to 160 percent, before falling during the recession to just over 140 percent, where it has remained.

That is because, while wage growth has remained subdued, near-zero levels of inflation have meant disposable incomes have kept pace with debt increases. Interest rates are also much lower than before the financial crisis, making debt payments more affordable.

But the TUC report argues that focusing on household debt servicing costs as a metric for judging the affordability of debt can be ‘misleading’. It calls for policymakers to focus instead on debt servicing costs as a proportion of the amount of money households have left over once living costs have been taken into account.

Rising costs for both rents and childcare pose a particular threat to low-income indebted households, the report suggested.

“The consumer boom may be less explosive than before the crisis, but it is even more unaffordable,” it argued.

As household consumption accounts for about 60 percent of gross domestic product, whether current levels of spending are sustainable is a key concern of economists.

The sharp fall in sterling since the vote to leave the EU is expected to push up inflation, bringing a renewed squeeze on real wages in the absence of meaningful pay increases.

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