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Baroness Noakes: My Lords, the timing of my noble friend Lord Northesk is immaculate. He has allowed us to debate the increase in personal debt at the very time that the debt is hurtling towards the £1 trillion mark—and many noble Lords have referred to that. It is not, as the noble Lord, Lord Newby, said important in its own right, but breaching such a major hurdle has a totemic significance.
I believe that this debate is important because the rising level of personal debt creates dangers for the economy in the short term, dangers for long term savings and it has particular dangers for individuals. The bottom line is that the financial well-being of our country is under threat. I am not too gloomy, but I am considerably more circumspect than the noble Lord, Lord Skidelsky, and I am an unashamed "worrier", to use the terminology of the noble Lord, Lord Newby.
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I was slightly alarmed by my noble friend Lord Selsdon's introduction with his desire not merely to join the noble Lord, Lord Skidelsky, on the Cross Benches, but to cross the Floor completely and sit with the noble Lord, Lord Davies of Oldham.
Lord Selsdon: My Lords, that was only because I thought that he was lonely.
Baroness Noakes: My Lords, indeed. That was a kind thought of my noble friend, but I will say that when his speech was developed I was not quite so alarmed. That is not to say that I agree with all that he said, as he will find out as I continue my speech, but I agree with him about the build up of debt among those who are relatively illiterate in financial terms, which was also mentioned by the noble Lord, Lord Newby.
Secured lending has been growing at an annual rate which topped 15 per cent at the end of last year. That has contributed to house price inflation, which has been running at well over 20 per cent. The ratio of house prices to average annual earnings is now its highest in 50 years and shows no sign of letting up. Does that matter? I am sure that it matters to individuals. First time buyers find it increasingly difficult to afford house ownership, particularly in high cost areas such as the south-east—and we heard some of the problems that the buy-to-let market is causing in the housing market.
But as well as the impact on individuals it also matters to the economy overall, because the personal finances of those individuals are becoming more exposed to the cost of debt servicing. It has often been argued, as it has this evening, that the interest burden as a proportion of household income is at low levels and is considerably lower than in the early 1990s when house prices peaked. That is true, but the forward projection of total debt servicing costs, including principal repayments, prepared by the Bank of England, shows that with current interest rate expectations the ratio will rise and will possibly even exceed that experienced at the previous peak.
At that level, we could see a major house price correction. I do not say that it is inevitable that we shall have a house price bubble with the serious consequences that we experienced on the previous occasion. I agree with my noble friend Lord Northbrook on that. However, I do say that it is a plausible outcome and one about which I hope the Government have done some serious thinking.
The proportion of income which has to be diverted to service debt has an impact not only on house prices but also on the amount available for consumption. Since 1997, household consumption has been an increasing proportion of GDP, rising from 61 to 65 per cent in 2003, and that increase has shown no sign of abating. We can see a strong correlation between the growth in household consumption and the growth in secured borrowing and, in particular, in the levels of mortgage equity withdrawal.
The Chancellor's latest projections for GDP growth show that increasing private consumption will continue to be the biggest single element of GDP
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growth. Let us suppose, just for the sake of argument, that householders thought that, with rising debt service costs, they had to borrow less and spend less. Even the Chancellor in the previous Budget conceded that the biggest downside risk in the UK was consumer spending. I suggest that it is quite plausible that fairly soon householders will hit a point at which they will check back on their spending and, therefore, potentially impact the consumption element of GDP.
The latest Budget arithmetic shows that the Chancellor's golden rule has a headroom of 0.1 per cent. If consumers spend less and if growth falls away, will the golden rule be breached; or, perhaps even more likely, will the golden rule be met but with further tax rises to meet the gap?
When the Minister responds this evening, I hope that he will say what levers the Government have to deal with rising debt. The Government have placed the most powerful lever—the interest rate—in the care of the Bank of England. The Bank of England remit, as we have heard, is to achieve a particular inflation figure, which the Government have perversely constructed using the index of consumer prices so that the impact of house prices is ignored, as my noble friend Lord Northesk has already pointed out.
The Bank of England is required by Section 11 of the Bank of England Act to support the Government's economic policy, as well as to achieve monetary stability. The Government are entitled, under Section 12 of the Act, to tell the Bank of England what their economic policy is. To date, the Government have chosen only to tell the Bank to achieve,
"high and stable levels of growth and employment by raising the sustainable growth rate and creating economic and employment opportunities for all".
Will the Minister say whether the Government continue to regard that as an adequate instruction to the Bank? Do the Government have no policy towards personal debt or asset prices to which they believe the Bank should have regard? My noble friend Lord Campbell of Alloway alluded to that problem. He also pointed out the extra problems that we would have if we yielded further control to Brussels, as the draft constitution currently permits. Perhaps I may be permitted a small digression along with that of my noble friend Lord Campbell of Alloway. That is, of course, another very good reason to say "no" to the euro. But let us return to the matter of personal lending.
I have dealt with the subject of secured lending, but the position on unsecured lending is much the same and it is also a real problem in the making. It is clear that unsecured lending growth has contributed to consumption, quite possibly at levels that are not sustainable. But my concerns about unsecured lending, which is a much smaller proportion of the total, have far more to do with the impact on individuals than the impact on the economy overall.
We know that the debt to disposable income ratios have been rising strongly and are now at 130 per cent or more—way above the previous peak a decade or so ago. I do not believe that that can simply be explained
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by distribution, as the noble Lord, Lord Skidelsky, attempted to argue earlier. The increase is very much more significant than distribution would probably allow for, but I think that it is worth looking at in more detail.
However, the real problem is that the ratio is far higher for the poorest households, and it is those households that are most likely to be in arrears. They are the ones that are much more likely to be paying the high interest rates on credit cards and store cards. My noble friend Lord Northbrook spoke eloquently about many problems in this regard. Around 3 million households—an astonishing number—rely on the services of money lenders, who of course are not known for their bargain rates of interest.
As we heard from my noble friend Lord Northesk and others, the National Association of Citizens Advice Bureaux has been reporting a rising level of inquiries relating to consumer debt, and the statistics on arrears and problem debts are on a rising trend. Behind those statistics are human tragedies. The poor, in particular, find it easy to slip into debt levels which they cannot sustain. We were reminded of that recently when an 84 year-old pensioner managed to run up a £30,000 credit card debt, despite the fact that her pension was less than £80 a week.
I know that there are no easy answers on this. The response of my party has been to set up a Debt Commission, chaired by my noble friend Lord Griffiths of Fforestfach. The commission has only just started its work, and it is too soon to say what its findings will be. But I believe that the existence of the commission, which draws together both the commercial and voluntary sectors, is a constructive response.
The obverse of rising debt is low levels of savings. The Government have presided over a debt boom and a savings crash. The savings ratio is at about half the level of the one that the Government inherited. In the six years to 1997, the ratio was never lower than 9.3 per cent, but in the following six years it has never risen above 6.7 per cent and is now considerably lower.
The Government not only have no effective savings policies; they have also systematically set about undermining the savings culture that they inherited. We have the infamous £5 billion annual raid on pension funds, which is one of the major causes of today's pensions crisis, and that, in turn, has led to a loss of confidence in savings for pensions. The Government abolished the popular PEPs and TESSAs and replaced them with ISAs. But they worried about those becoming too popular and so they have now set upon a policy of squeezing them out of existence. The latest statistics show that they are, indeed, being successful in doing that.
I say to the Government that a set of policies that encourages personal debt while discouraging savings is the worst kind of short-termism. The Government might well get their GDP figures shored up in the short term but the problems that they are storing up for the future are considerable. They are, in my view, unbalanced and fundamentally unsustainable policies, and they are not policies that a Conservative government would pursue.
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I cannot finish without reflecting on the role of the Government's economic management in setting the climate for personal financial decisions. The Government have embarked upon a debt-supported spending spree. We have seen the amount that the Government expected to borrow last year rise from the £10 billion forecast before the last election to £37.5 billion, as set out in the previous Budget Statement. The Chancellor expects to borrow another £157 billion over the next five years. That is without counting the off-balance sheet debt of which my noble friend Lord Selsdon reminded us. My right honourable friend Oliver Letwin has rightly described the Chancellor as the "credit card Chancellor". His Budgets are "spend now, pay later" Budgets. It is hardly surprising if the electorate follows suit.
Seven years of Labour Government have been characterised by economic prosperity, brought about in large measure by the strong economy that they inherited in 1997. But, in my view, that is under threat. If personal debt levels continue to rise, it will not take much to push our economy out of its comfortable trajectory. That will be bad for the economy and a tragedy for some individuals. Those are the dangers of which these Benches have been warning. To date, in reply we have had complacency from the Benches opposite. I hope that this evening the Minister will give a more convincing response.
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