Dealing with Debt: Debt is manageable now but keep an eye on the near future

Published on Friday 18 September 2009 19:02

IT NOW appears that the economy is easing out of recession and will slowly be improving in the coming months.

This is welcome news and has undoubtedly been assisted by extremely low levels of interest rates, coupled with the enormous amounts of money being spent by the Bank of England on quantitative easing.

There remains a concern, however, that the record low interest rates may actually be masking an underlying problem of indebtedness. A base rate of 0.5 per cent has helped many millions of mortgage customers to manage their payments better and to reduce the pressure of debts, and this has contributed greatly to the economic recovery we are currently experiencing.

However, these rates will rise quickly – once next year's election is over, the new government will need to start to repay some of the enormous debts incurred in bailing out the banks and in encouraging spending.

Interest rates will rise at the same time as public-sector spending will be cut and taxes are likely to rise. This triple whammy of job losses, higher costs and greater tax burdens will mean that many, who have been able only just to survive this recession, will be forced into insolvency. Debts which are manageable now only because of the benign base rate will become untenable if rates rise by 1, 2 and 3 per cent, as they surely must do.

We will therefore see a continuing increase in the rate of personal insolvencies as the economy comes out of recession, and this, coupled with expected tax rises and increasing job losses, means that the overall growth is likely to be severely muted for the next two to three years.

What this means for individuals is that, while the bad times may appear to be behind us and the good times on the horizon, it is important to remember that the reckless lending bank policies of pre-2007 will not be repeated in the years to come, and that house-price growth will not increase to get people out of debt.

Therefore, while things are looking up at the moment, there needs to be a strong note of caution, as debt problems will be with us for at least the next three to four years, and perhaps beyond this time.

This will be dependent on whether the credit market eases and individuals and businesses find it easier to raise funds. The concern is that, as the banks have become more solvent, they have used the additional revenues to bolster their balance sheets, rather than to ease their lending criteria. Until this situation changes, the availability of credit will remain difficult.

But, rest assured, there will be no return to the pre-2007 era, when credit was given without adequate checks and people could fund lifestyles through continuous equity release. It was reported last week that every household in the UK lost an average of 31,000 because of the recession, and this will not be won back through an increase in property prices, but, instead, through cost-cutting and an improvement in the level of savings.

So while news that the recession is apparently over is welcome, we need to learn something from this economic crisis. Unfortunately, the hangover of indebtedness from this period will linger for many years to come among the most financially vulnerable in our society.

&#149 Bryan Jackson is a corporate recovery partner with accountants and business advisers PKF.