Personal debt soared prior to credit crunch

| May 15, 2012
Personal debt soared prior to credit crunch

Household borrowing soared in the decade leading up to the start of the financial crisis in 2008 according to a report by the National Institute for Economic and Social Research (NIESR) and the Resolution Foundation.

Household spending, GDP and property prices all increased steadily between 1997 and 2007 but the report suggests that this growth was heavily based on borrowing.

The study shows that during the decade to 2007 the poorest 10 per cent of UK households increased their spending by 43 per cent while disposable income grew by just 17 per cent.

Middle income households were also borrowing more, with a 33 per cent rise in income more than offset by a 46 per cent increase in spending.

The wealthiest households saw disposal income rise by 13 per cent during the decade, while spending increased by 28 per cent.

The figures expose the proportionally greater reliance of the poorest families on debt prior to the credit crunch, compared with higher income households.

Gavin Kelly, chief executive of the Resolution Foundation, said: “Looking to the future, we need growth that is sustained by gains spread across the whole income distribution – not ever more debt for those on the lowest incomes.”

The figures indicate that the buoyant economy prior to the credit crunch was fuelled by debt and was therefore unsustainable.

Jonathan Portes, director of NIESR, said: a�?This research suggests that there may well have been a connection between the rise in income inequality in the years preceding the crisis and the rise in household borrowing, particularly for those on lower incomes.

Post-credit crunch the problem of household debt still persists, with the latest figures from money charity Credit Action showing that the problem has worsened this year.

In March 2012 the average household debt, excluding mortgages, increased by A?19 to A?7,903 on a month on month basis, while average debt including mortgages rose by A?52 to A?55,436.

In 2010 and 2011 household debt fell each month, but with the UK back in recession, the latest figures show that this trend is reversing.

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