How can you reconcile these two pieces of information? The number of individual insolvencies has soared, more than doubling over the last two years, and yet average disposable wealth is rising rapidly too, (although admittedly not quite as fast as debt) seeing a 7% jump in the last year.
There are no prizes for guessing one cause for the rise in debt. We have been borrowing too much, the buy now pay later culture, the plethora of TV ads trying to persuade us to put it on credit, has led to irresponsible borrowing – or is it lending? It was obvious it would end in tears; it always does.
And yet, is the UK plc worse off as a result? It is largely thanks to our overspending consumer that the UK avoided recession at the beginning of this decade, and as an aside, remember it’s our Anglo Saxon cousins across the pond taking an even more relaxed attitude to debt that is propelling the world economy forward. As an advertisement for the economy might say: “ the cost of borrowing: the rate of interest; the cost of the UK avoiding economic recession – priceless.”
Some say that the real reason for the number of bankruptcies is the loosening of rules concerning personal bankruptcy. They say it’s easier to go bankrupt today, therefore the number is rising. But that claim is not, in our view, borne out by the data, since individual voluntary arrangements, (IVAs) in which interest payments are often frozen and debt reduced in return for a monthly payment being made, are increasing at a much faster rate than the number of bankruptcies.
Some would argue that actually it’s all a symptom of the same problem. IVAs are up because these days the media is awash with companies promoting their ability to solve “your debt problem,” whereas in the good old days, people just struggled on, making their payments – somehow. The rise in the number of bankruptcies is a symptom of the same problem – goes the argument – we as a society are softer on debt.
And yet…According to KDP, the average disposable wealth available to British households has topped £40,000, for the first time ever. Disposable wealth is defined as savings, shareholdings and housing equity net of mortgages and other debt. Apparently, in the South East disposable wealth is now £68,534, £63,548 in the South West, £53,030 in East Anglia, £36,574 in the Northeast, £31,369 in the Midlands, £30,834 in Wales and a mere £30,756 in the Northwest. The average Londoner has £81,732 of wealth at his or her disposal.
Actually, it’s quite easy to reconcile the two figures. It’s partly down to the rise in house prices – and it’s partly down to the fact the UK economy has been doing pretty well over the last few years. And you can’t ignore the fact that high borrowing, including individuals taking out mortgages up to the hilt has been behind all this.,
In short, debt and wealth could be added to that song from My Fair Lady; “It goes together like love and marriage.”
But there is another point. For the UK to truly move up the value chain, for the UK to compete on the world scale, it needs entrepreneurs, and by definition, these people are risk takers. A softening on the law regarding personal bankruptcy might encourage some to borrow irresponsibly, but it will encourage others to take business risk. Those who argue against limiting risk for our entrepreneurs are like those who argued against the move down from the trees a couple of million years ago.
© Investment & Business News 2013