How worried should we be about consumer debt?
Your weekly briefing on the UK economy
Not very, at least according to Ben Broadbent, a deputy governor of the Bank of England, who spoke on the subject last week.
Growth in debt better predicts financial crises than the overall level, he said, but much of the increase in borrowing over the past few years is due to student loans and car finance deals know as personal contract purchases.
This debt isn’t really debt, he argues, student loans are equivalent to a graduate tax while PCPs are more like renting than buying a car.
The car owner can choose costlessly to walk away from the contract, at least once half the original price has been repaid. And if the value of the collateral should fall below that of the outstanding debt — say because of weakness in the second-hand car market — it’s the lender not the borrower that bears the resulting “negative equity” (the loans are “non-recourse”).
But even if Mr Broadbent is right and the rise in consumer borrowing is not a worry for financial stability there are reasons for economists to be concerned.
Data published last week by the Office for National Statistics showed that UK household spending in the year to last March reached the highest level since 2005, and as real incomes were under pressure that meant consumers either dug into savings or borrowed a little more.
Wage growth has been ticking up recently, but if consumers decide that all the political uncertainty means now is the time to rebuild their savings and pay down their loans, consumer spending could slow and the economy as a whole with it.