UK Credit card debt has reduced dramatically since February 2020 from £72bln to £61bln. This is good news, right?
On the face of it a 14% reduction in credit card debt shows that things are going the right way. What it probably shows is that workers, working from home on full salary are not spending on travel and lunches. It also shows that with no pubs or restaurants to frequent people have not been going out and incurring this expenditure.
What this figure actually shows is rising inequality. Those who have not paid down debt in the last 9 months are those who are least likely to be able to afford it. What this chart hides is growing financial distress for many in UK society. The difference between mainstream banking and credit facilities and the facilities on offer to the financially insecure. In other words, ‘The Poverty Premium’.
The low paid have many challenges even without looking at how their finances are affected. The very nature of mainstream finance creates inequality as those who need to borrow are forced to pay more to borrow and can become prisoners to their situation.
Earning less and with greater outgoings, the ability to save is the stuff of dreams. Who are most likely to be caught in this situation? BAME communities, the younger generation, women who left the workforce to bring up children.
This inequality creates a reliance on the state and without a significant change in circumstance, that reliance carries on into retirement.
So, where are we? Lower income, living costs that take up a greater proportion of their income, higher borrowing costs and an inability to save. The people in that are most likely to be impacted are the young, BAME communities and women, and these issues follow people through their lives.
We have an aging population with a growing proportion of that population unprepared for retirement and therefore reliant on the state. What does this mean? It means that there will not be enough tax receipts to pay for what the state needs to do to look after this aging population, in other words a fiscal gap. So that means either higher taxes or reduced public services. Increasing taxes is never a vote winner but with the public debt to repay anyway from the current, and lengthening Covid-19 crisis, taxes are an inevitability.
This is the current status quo unfortunately; I do however see a chink of light at the end of the tunnel in the form of open banking, which can do something to help the ‘pension poverty gap’. Data is a great leveller as everyone’s data has a value, and more importantly can create value for them.
Merchants want customers and no matter how much people have, they still need to spend, in their own way, and on the things that are important to them. Linking people’s expenditure to provide for their future, now there’s a good idea. Even better if it could take advantage of the tax relief on pension contributions.