The Bank of England kept interest rates at 4 per cent last month, but, according to a Reuters survey, many leading economists believe that a further hike in rates of at least half a per cent is inevitable in the immediate future. The reason? To try to curb Britain's burgeoning domestic debt. There has been a blizzard of statistics in the past month warning that by the summer, the total personal UK debt will be around one trillion - that is, one thousand billion pounds.
By the end of February it had reached 956 billion, a growth of 14.1 per cent on the previous year. According to figures compiled by Richard Talbot of Credit Action, personal debt has grown twice as fast as income since 1997 when Labour came to power. Analysts Mintel reckon that Britain is now the only country in Europe with more credit cards, at 63.9 million, than people.
The growth in secured lending on homes in February topped 784 billion, compared with 346 billion in 1994. Similar astronomic rises have taken place in unsecured consumer credit to individuals. It had soared to 172 billion in February 2004, compared with 53 billion in 1994.
Cause for concern
Why should childcare businesses be concerned? Because even within the Bank of England there are fears that present debt levels are unsustainable and could trigger a collapse of the housing market and plunge many borrowers beyond the point where they can service their debts, let alone repay them. According to Credit Action's statistics the average person already works 45 days just to pay off the interest on their debts.
The bank's deputy governor, Sir Andrew Large, has argued for a rise in rates to dampen down consumer spending, but also warned that a modest increase would mean that a household's servicing of its debt would rise from about 10 per cent of their net income 'towards the peak last seen in 1990'. Then, rates soared to 15 per cent. Few people believe they will go that high again. But Sir Andrew warns that consumers have borrowed so heavily in recent years that the cost of servicing debts could be as high as the early 1990s, even at much lower interest rate levels.
There is also concern in the Government. The Office of Deputy Prime Minister John Prescott has published an 'Action on Debt' fact pack this month from the Social Exclusion Unit. It highlights the social damage that debt can cause and gives a practical guide to what organisations can do to tackle debt problems (see further information).
Jeff Rooker, minister for regeneration in the House of Lords, said at the pack's launch, 'Debt is a significant factor in social exclusion. It exacerbates health, employment and housing problems. It is damaging not just to individuals but to communities, the public sector and the wider economy.'
Seeking help
The Credit Counselling Service says the number of people seeking help with debt has risen 12 per cent in the past year. Most of its clients carry an average of 25,000 debt, but it is increasingly being approached by people owing more than 100,000, not including mortgages.
Citizens Advice Bureaux report a similarly alarming increase in the scale of the problem, with 47 per cent more consumer credit debt difficulties over the past five years and more than one million debt issues in 2002-2003. A quarter of those in debt are receiving treatment for stress, depression and anxiety.
Lord Rooker said, 'We are developing a cross-Government strategy to minimise serious debt and improve support and advice for those in debt. But local action from the public, private and voluntary sectors is essential to help families in need now and to ensure the success of the strategy in the future' (see box).
The average household debt in the UK, is 6,800 excluding mortgages or 40,000 including them. The average personal debt for each UK adult is 4,426, excluding mortgages, an increase of 30 per cent in the last year.
But, despite the statistics, research published by the Institute for Fiscal Studies last month says the burden of debt is falling more heavily on lower income families who do not own their home or have access to credit cards. Nottingham University researchers Sarah Bridges and Richard Disney concluded that 'problems of debt arise from low incomes, rather than from "irresponsible lending" to home owners by high street institutions'.
Effect on childcare
The alarming rise in debt has implications for parents seeking affordable childcare and providers operating within narrow profit margins.
Daycare Trust director Stephen Burke says, 'Affordability of childcare is the number one issue for parents and the most commonly cited in calls to our helpline. A lot of childcare provision is beyond their means and until that issue is addressed through reform of the childcare tax credit system, there will continue to be a knock-on effect on the sustainability of some childcare providers.'
National Day Nurseries Association chief executive Rosemary Murphy agrees. 'We urge the Government to build on the initial success of tax credits by raising their value to low- income families, particularly where more than one child is in childcare.'
The Government's spate of childcare initiatives has been accompanied by the new right for employees with young children to request flexible working arrangements. But for many this will not be an economic option. A survey of 100 parents by the Maternity Alliance found that while 68 per cent of working parents had been granted their request by employers, 27 per cent had been forced to accept a pay cut, a demotion or heavier workload to secure flexible hours.
Alan Bentley, director of the Childcare Corporation, says that 'bad debt has always been something of a problem in the nursery sector'. The chain, which has operated a standing order system to reduce the possibility of bad debt, will be switching over to direct debit this month so nurseries can take varying amounts from an account each month if payments change.
Mr Bentley says, 'The accounts department will receive instant failure notices if the direct debit fails, which can be communicated to the nursery manager. If a payment fails for the second month, a bad-debt procedure is put in place.'
The manager will discuss with the parent why payments are failing. Often it is due to short-term financial problems such as illness, unexpected family expenses or redundancy. He says, 'Every assistance is given to try to co-ordinate a temporary payment plan to cope with the problem. In 95 per cent of cases the issue is then resolved.
'Such issues are always sensitive and require the utmost care in their handling. The quality of our managers, and their ongoing training, makes all the difference in providing a satisfactory resolution for both parties.'
Michael Fallon, managing director of the Just Learning nursery chain, says that bad debts 'may have become worse in recent years'. His chain has a tough line on debt and does not hesitate to take those who do not pay to the small claims court. He says, 'If you are known as a soft touch, it's fatal. We know that some debts come about because of unfortunate circumstances and our managers are trained to be understanding. But it's vital that debts are not allowed to escalate.'
The prospect of interest rates rising in the coming weeks will have implications for childcare providers. Those with mortgages will have to brace themselves for higher repayment levels, while an interest rate rise to curb consumer spending will mean people paying more to service their existing debts and having less disposable income to spend on things like childcare.