Understanding Britain’s private debt epidemic

During the COVID-19 pandemic, Britain’s reliance on private debt has been exposed once again. Research from debt charity StepChange has found that at least £6 billion of household debt has accumulated since the pandemic began, with the actual figure likely to be even higher. More than one in eight people on furlough have defaulted on loan or credit card repayments, while some figures suggest that less than half of all rent owed during the pandemic has actually been paid.

This mountain of debt will seriously hamper any recovery in the British economy post COVID-19. However, we need to recognise that these problems are not just a temporary response to the pandemic. High levels of private debt are hard-wired into Britain’s model of capitalism. For example, average household debt (excluding mortgages) in 1990 was £4000 in 1990. By 2018 it had risen to £15,000.

To understand how this came about, we must look back to the late 1970’s, the election of Margaret Thatcher and the steady neoliberalisation of the British economy over recent decades.

In the late 1970s, Britain, like much of the rest of the global north, was facing deep economic challenges. Low growth, low investment and rapidly rising prices combined to produce an era of ‘stagflation’. This was in part exacerbated by the strength of the British labour movement, whose attempts to keep wages in line with rising prices squeezed the profitability of British firms. This, coupled with years of economic decline compared to the economies of mainland Europe, meant that the outlook for the British economy was decidedly bleak.

The task of the Thatcher government set itself was to reduce the power and wages of the British labour movement. This project began with the government’s direct confrontation with its unions, both in the physical means seen at the “Battle of Orgreave” during the miners’ strike of 1984-5, and through legislative measures that greatly restricted union activity. This was combined with monetary policy which tolerated previously unimaginable levels of unemployment, up to 11.9% in 1984, which, by increasing the number of potential workers available for each job, hugely decreased the bargaining power of those whose jobs remained.

The results of this were clear and immediate. By the 1990s, wage earners were receiving seven per cent less of national income – the equivalent of some £100 billion a year – than they were in the post-war decades. On the flipside of this, profits increased spectacularly, with company director income increasing by 43% in Thatcher’s first 5 years of office alone.

These early moves were built on by 40 years of government policy aimed at producing a much more “flexible” workforce, through further reduction in the capacity of workers to organise, and the dismantling of much of the welfare state. The effects of this are clear, with wage growth falling from 2.9% per annum in the 1970s and 1980s to only 1.2% by the 2000s, producing a situation today where 58% of those in poverty are in work. 

The barrier of union power to the profitability of British capitalism had been removed, but this huge fall in wages meant that “aggregate demand”, the ability of the population to purchase the goods the economy produces, was seriously under threat. For British capitalism to function, this purchasing power had to be somehow maintained.

This is where debt comes in.