By Tianzi Li
How can we deal with a broken financial system that enriches the few at the expense of the many? How can we ensure people have the necessary resources to finance the lives they want to live, and achieve more inclusive and sustainable forms of prosperous living? The Institute for Global Prosperity’s (IGP) Financing Prosperity Network was created to explore these questions. In this article, IGP PhD student Tianzi Li examines how network members provide solutions of the UK’s debt crisis.
Despite ongoing concerns about the future of the economy due to Brexit, personal debt levels in the UK continue to increase every month with no sign of stopping as wages have lagged behind the rising cost of living. In a recent report, The Money Advice Service estimated that 8.9 million people in the UK are over-indebted and that one-fifth of British adults have less than £100 in savings, making them highly vulnerable to financial shocks such as job loss or unexpected bills. More troubling is that for many individuals it is impossible to ever escape from being indebted. Paying debts sometimes can feel like fighting a fire: one flame is put out and another one pops up. The deeper in debt people become, the more they are forced to rely on high-cost loans.
People go into debt for various reasons in a variety of circumstances
Debt has long been regarded as a dirty word and is often associated with blame. On the demand side, ordinary people are blamed for lacking financial capabilities, for having too many desires and purchasing cars and houses and receiving higher education that they could not afford. On the supply side, financial institutions are blamed for the marketing and easy availability of personal loans and for issuing debt to people who clearly could not pay it back. However, structural problems run deeper than personal blame. People go into debt for various reasons in a variety of circumstances, whether that is ill health, unemployment, or relationships breakdown. Yet, these external shocks are often the tipping point of iceberg. Why do households overwhelmingly choose debt as a safety net to cope with emergencies? The answer is that becoming indebted is not a choice for most people, but the only possible solution. Years of austerity and wage stagnation, coupled with increasing in-work poverty and the rising cost of living, have forced individuals and families to increase their borrowing to cover basic living expenditures, such as food and electricity. People must also rely on debt to fund increasingly expensive education, housing, private pensions and insurance schemes. The poorest households - who already face the most severe forms of economic hardship - suffer the most. Most need to use debt to make ends meet and yet are often forced to pay the highest costs to borrow money, creating what is termed the poverty premium.
At the Financing Prosperity Network’s Dealing with Debt symposium, academics, practitioners, and activists discussed sustainable solutions to the current debt crisis. Debt cancellations (‘jubilees’) offer one solution to reduce the burden on highly indebted people. Johnna Montgomerie proposes that we need a household debt bailout that is modelled on the bailout of the financial sector in 2008. Her research suggests that abolishing household debt is an economic necessity in the age of austerity because it will reduce both the debt overhang and the reliance on debt-driven growth. Artists Dan Edelstyn and Hilary Powell made debt cancellation a practical reality in their Bank Job project. They opened a community bank and raised funds to purchase and write off £1.2 million pounds worth of local predatory debt.
Debt can be a very lonely place. The popular narratives continue to individualise debt as a personal problem. In many situations, people lack information about where to obtain financial support and advice, while the guilt and shame of losing control and getting into problem debt isolates individuals from seeking help. More must be done to relieve debtors from the mental pressure and moral stigma attached to their situations and to empower those facing debt challenges to navigate finance. Social enterprises, such as Money A&E, create forms of resilience among disadvantaged people and communities by providing accessible and effective financial advice and education. Engaging a range of groups including credit unions and charities, Nottingham Financial Resilience Partnership work to reduce the barriers that vulnerable groups face when accessing financial services and to strengthen the financial resilience and capacity of communities across Nottingham, the city with the lowest average income in the UK. Efforts have also been made to increase the use and awareness of ethical alternatives to high-cost loans, such as credit unions, which promote mutual benefits among members. Credit U, for example, has been created as an online platform to help people find affordable loans and savings from local credit unions.
Better social service provision is also essential to eliminate the need for debt. Fair by Design is dedicated to addressing the poverty premium by reshaping essential services, such as energy, credit, and insurance, to be fair and inclusive so they do not cost more for low-income consumers. IGP’s proposal for Universal Basic Service is leading the move towards an enhanced but affordable social safety net. Expanding universal access to basic services, such as housing, food, and transport, can efficiently reduce the reliance of lower-income households on debt to make ends meet, breaking the vicious cycle of the debt trap and financing a prosperous life.
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