We’re all ten years older and deeper in debt

Yesterday marked the ten-year anniversary of the last interest-rate rise in the UK.

On 5 July 2007, just a few short months before Northern Rock alerted the great British public to the fact that all was not well in the credit markets, the Bank of England voted to raise the Bank’s key rate to 5.75%.

It was the fifth interest-rate rise in a year. It meant that rates were at the highest level in six and a half years.

And although no one knew it at the time (all the talk was of whether rates would hit 6% or not), it was all going to be downhill from there.

Now we have the lowest rates in (at least) 5,000 years, according to Bank of England chief economist Andy Haldane. We’ve been through bailout after bailout.

And yet, when you look at the state of our balance sheets, we’re no further forward…

Remember when you didn’t know who Robert Peston was?

Ah, July 2007. It was a different world.

The iPhone – the very first one – had just gone on sale the week before. Imagine that for a moment. A world without smartphones. A mobile meant you were always available, but you weren’t yet always “on”.

Netflix had just introduced streaming services that no one had the PCs or bandwidth to use. Tesla’s first car was yet to be built. It really is striking how rapidly consumer technology has changed in that short space of time.

So has politics. The chattering classes thought that George W Bush was the biggest buffoon who could ever possibly occupy the White House.

Meanwhile, in the UK, the world’s luckiest politician, Tony Blair, had just – with utterly exquisite timing – handed the reins of power over to Gordon Brown. Political columnists spent their time moaning about how it was almost impossible to tell Labour and Tory policies apart and what a problem for democracy that was.

As for the economy: the financial crisis – the one that would go on to be immortalised in the initials GFC – had already begun. The subprime mortgage market in the US was already falling apart. Just a month earlier, two Bear Stearns hedge funds, which had borrowed heavily to invest in subprime securities, had stopped their investors from withdrawing their money.

Yet the wider world was oblivious. Robert Peston was still just that guy with the oddly strangled delivery who would crop up in the business slot to explain boring investment stuff. Fred Goodwin was still a knight of the realm and the taxpayer didn’t own his bank.

And even although everyone at the MoneyWeek offices knew something was up – and something pretty drastic at that – if you’d told us that within a couple of years, central banks would be literally printing money to buy their own governments’ debt, we’d have been somewhat shocked, to say the least.

Ah, what innocents we were!

Now we’re right back at square one

Anyway, ten years later, where are we? I talked about what 0% rates have wrought last week, so I won’t repeat that here.

What’s most interesting to me is that technology has moved on, politics has moved on (which I’d suggest is a direct result of the sense of insecurity engendered by the financial crisis) – but our financial and economic problems remain very similar.

We have a ludicrously overpriced housing market that consumes way too much of everyone’s intellectual, emotional and financial resources – and no way to fix it that doesn’t involve one group of people losing a lot of money.

And we are, in absolute terms, even more indebted than we were back then. As Hargreaves Lansdown points out, consumer credit was £191bn in July 2007; it’s now £199bn. Mortgage debt was £1.1trn; now it’s £1.3trn.

Because interest rates are so low, and because wages have risen since then (if not by much), the household debt-to-income ratio is lower than it was ten years ago. In July 2007, it peaked at just under 160%. Now it’s 143%. But that’s with interest rates at their lowest levels in history. That’s with the average mortgage rate sitting at 2.6% now, versus 5.8% back then.

When you look at it like that, you start to understand why the Bank might want to raise interest rates. In July 2007, personal bankruptcies were already at record levels, and that was with an economy that – while falling apart behind the scenes – was viewed as pretty healthy.

The Bank cannot afford for British consumers to stretch themselves that thin again. We’re already hugely vulnerable to any rise in rates. But at the same time, ever-increasing consumer spending is the thing that makes the economy go around. So it can’t afford to choke them off either.

The good news is that the majority of mortgages are fixed. So rising mortgage bills are unlikely to tip anyone over the edge. But ultimately, there’s only one solution to this: wages have to go up, and at a rate that exceeds inflation.

How can that happen, if our persistently disinflationary world means that there’s no pressure to raise wages or even prices? (I’m not sure I agree with that, by the way, but let’s assume this is correct for the moment.)

Well, there is another way to boost wages. Shift some of the burden of taxation from income (ie cut income tax, particularly at the low end) to wealth (I’d target housing wealth and the easiest way to start is by removing the capital gains exemption on principal residences).

I am not one for “soaking the rich”. I’d rather that taxes across the board were low and that people got to keep as much of their money as possible. But tax does need to be raised, and Britain is also heavily in debt. It always amazes me that the first tax everyone wants to raise – income tax – is the one that targets labour most aggressively.

If we want people to have more money in their pockets, and at the same time discourage over-indebtedness, then we should stop taxing labour as heavily as we do. Simplify income tax, make National Insurance more transparent, and get rid of all the “cliff edges” in the system, from the tax credits at the bottom end to the tapers at the top end.

Meanwhile, start making residential property – the one thing that most people buy with huge levels of leverage (borrowed money) – less attractive as a savings vehicle. This is not about punishing anyone – it’s about creating better incentives.

I know. It’s a vote loser. But then, what isn’t these days?


  • Peter Edwards

    Why not just quantitative ease into citizens bank account.

    Better still create an government account for everyone then the Government can make the money time limited.

    That will stoke up a bit of spending direct into the economy and set up the scene for Universal Income…

  • Brucie

    Best way to put up taxes is combine National Insurance with income tax, that will capture a lot of OAP’s (like me) who get a 12% discount just when they get expensive & unproductive ! You could also take away the fuel allowance (a friend of mine gets it & he lives in the Cayman Islands!). It could be sold as well because the entry level for tax would go up from the current NI one (£8k or so) to the income tax entry level. For the record this move would also remove the objectionable beneficial treatment, under NI, of higher rate tax payers.
    upset, anyone?

  • Triple H

    Why are you guys censoring my comments? Is it because you cannot bear the thought of someone questioning your reasoning and proposing alternatives (good or bad is a different debate)? It’s almost like you guys are Clergymen working close to the pope or the Church of England. For crying out loud, publish them and engage (or let us readers engage) or announce that this is a private/closed forum of like-minded people.

    • Nobody’s “censoring” your comments. It seems to have been snaffled by Disqus’ spam filter for some reason.