The COVID-19 outbreak is causing significant concern for the global economy and individual households.
Ten million households in Britain have no savings and another three million have less than £1,500 saved, according to a report by The Money Charity. Not being able to work for even a month due to self-isolation caused by the Coronavirus could impose severe hardship on 13 million households in Britain.
The rise in households with no savings in the UK since 2010 indicates the reliance on credit in the UK, with the Trades Union Congress (TUC) finding that households now owing an average of £15,385 to credit card firms, banks and other lenders. The trade union body found that household debt rose sharply in 2018 as years of austerity and wage stagnation forced households to increase their borrowing levels.
In its annual report on the nation’s finances, the TUC said that the amounts owed by British households rose to a combined £428 billion in the third quarter of 2018 and each household owed £886 more than it did in the 12 months previously. The figures do not include outstanding mortgage debts but do include student loans.
The level of unsecured debt as a share of household income is now 30.4%, the highest level it has ever been. According to the Office for National Statistics (ONS), total household debt in Britain was £1.28 trillion in April 2016 to March 2018, of which £119 billion (9%) was financial debt and £1.16 trillion (91%) was property debt (mortgages and equity release). While interest rates have remained close to historic lows for almost a decade, data from the Bank of England shows that the average credit card interest rate in the UK was 20.77% at the end of 2019. The rate has been rising over the past few years and, in July 2019, the average credit card interest rate to UK households passed 20% for the first time in 20 years.
Clearly, household debt is at crisis level. Years of austerity and an entire decade of wage stagnation has pushed millions of families deep into the red. Without some form of savings buffer and a mountain of credit and loan debt, these households are at enormous risk of being unable to financially cope with the measures which will be required to help tackle the UK’s Coronavirus outbreak.
A particularly vulnerable group of workers will be the self-employed, who could also be forced into debt due to a lack of mandatory or employment sick pay.
The overall economic impact of the Coronavirus pandemic on many businesses could well a significant risk of bankruptcies or staff losses which, in turn, could increase the burden on household financial security.
In October 2008, the then Chancellor Alistair Darling announced a £500 billion bank package to prevent the collapse of the UK banking industry during the financial crisis. We are currently experiencing a human health crisis which will potentially result in a catastrophic household economic crisis. The next government financial bail-out has to be directed at the people first.