The Coronavirus Debt Crisis

UK household debt hit an all-time high before the coronavirus. Now it's the next crisis the government has to tackle – and only a suspension of repayments will do.

In the midst of a global pandemic, we have been given a rare glimpse into how very human ‘the economy’ really is. This once-in-a-century disaster descended at a time when the UK economy was already in a deep stagnation. 

The cause of this stagnation is clear: the underlying condition of chronic debt dependence, euphemistically termed ‘secular stagnation’ by economists. After decades of public policy encouraging the build-up of all kinds of debt, the economy is trapped by the debt overhang. Prior to 2008, private debt levels grew rapidly each year until the Global Financial Crisis struck, and for over a decade since public debt has grown too, with the Bank of England’s balance sheet growing by over 500%. 

To put it simply, the current UK economy operates based on an overlapping set of dependencies on debt. Financial institutions use debt as a major source of profits; households depend on debt to participate in the economy and sustain their standard of living; and of governments of all stripes depend on private debt to keep the economy growing and, when this strategy fails, use public debt to fill the gap. 

It all begins with households. Households are central pillar of debt-led growth because their ability to maintain monthly remittance of income as debt repayments into global financial markets is paramount to the overall stability of the UK and global economy. The Money Charity publishes monthly statistics on the overall picture of private household debt in the UK; for February 2020, at the cusp of the Covid-19 outbreak, the indicators are stark. Overall, UK households owed £1,675 billion (or £1.7 trillion) – the highest amount ever recorded, equivalent to 112% of average earnings. These statistics demonstrate without doubt that the entire household sector is quite literally ‘under water,’ because their debts exceed their incomes. 

However, the £139 million per day transferred from households into financial markets as interest payments is essential for financial markets to survive, and this is a big problem when it comes to coping with Covid-19. The banking system and the government are as dependent on households servicing their debts as households are – without that money everyone is in real trouble. Covid-19 has the potential to catalyse the deepest peacetime recession we have ever seen, bringing with it the potential for large scale human suffering because the economy is as sick as its people.

The problem facing households prior to the pandemic was income insecurity and financial fragility, caused, in part, by debt. People had jobs but their incomes were increasingly insecure, and most people in work were also loaded up with debts. This has always been blind spot for most economists and public policymakers because they frame the economic problems facing households in terms of unemployment and the cost-of-living, which were the major economic problems in the 1970s. This policy bias is why the economic challenge of the Covid-19 response seeks to support the banks and business, or the supply-side: the hope is that these emergency loans will keep people employed.

In this sense, just as in 2008, the response to Covid-19 induced economic shock is to treat the symptoms without combatting the underlying disease: make more cheap debt available to banks and firms without ever considering how it will be paid for.

As with austerity, the household, or ordinary people, will absorb the shock of the oncoming economic collapse, but with the added stress of trying to survive a pandemic. The UK’s Covid-19 response expects households to continue working, continue spending, continue paying old debts and continue to take on more debt to help the economy survive. This is as irresponsible as it is fanciful. Unlike in 2008, we must protect households from bearing the brunt of this crisis. To do so, two main interventions are required. 

First, temporarily suspend existing debt payments. My recent book, Should We Abolish Household Debt, shows how equivalents to the bailout packages now on offer for banks can be made available to households as a means of ending chronic debt dependence. In response to Covid-19, a temporary suspension of debt repayments would immediately give households more money at their disposal. It would be easy to implement through existing regulation for lenders to offer forbearance to borrowers struggling to meet payments. The recent Bank of England cut to interest rates can be passed on to households by offering all debtors a 0% balance transfer of up to £14,000 of outstanding debt for all borrowers (called a Long-term refinancing operation, or LTRO). 

Next, supporting incomes is paramount. The government’s 80% wage guarantee for those employed was a start, but it didn’t go far enough for the precarious or the self-employed. Income supports – either through increased unemployment benefits or direct transfers – are urgently needed for these groups. The Resolution Foundation has published proposals for automatic stabilisers such as extending Statutory Sick Pay (SSP) targeting small and medium size businesses and those earning less than £118 per week (£120 from April), who are currently ineligible, and increasing the amount to £160 per week. Alternatively, Guy Standing advocates introducing a guaranteed minimum income as a means of protecting people from the harm caused by the economic shock of the Covid-19 pandemic. 

Together, these economic measures will provide some basic social security for a population coping with a virulent disease. Economist Steve Keen explains how they can be funded using Coronabonds, which would give markets, people, and the state the money they need now to cope with the pandemic and its aftermath. What is not clear is whether the government are listening.