During the 2008 banking crisis, the banks were bailed out with the government buying bad debt and offering debt on very favourable terms – enabling the financial system to recover. As a result of the recession that followed, people lost their jobs and their homes. In the decade of austerity that followed, wages stagnated, insecure work proliferated, social security was capped or frozen, housing costs rose and people entered the Covid-19 crisis with debt high and rising. In this crisis, it is people, productive businesses and the poorest countries that need the bailouts and protections that the banking sector was afforded in the last crisis.
During the 2008 banking crisis, the banks were bailed out with the government buying bad debt and offering debt on very favourable terms – enabling the financial system to recover. As a result of the recession that followed, people lost their jobs and their homes. In the decade of austerity that followed, wages stagnated, insecure work proliferated, social security was capped or frozen, housing costs rose and people entered the Covid-19 crisis with debt high and rising.
In this crisis, it is people, productive businesses and the poorest countries that need the bailouts and protections that the banking sector was afforded in the last crisis.
The shutdown of the economy is leading to unemployment, business collapse, and rising personal, business and government debt.
Government is the only actor that can borrow at low interest rate and act to control and reduce company and personal debts.
Following the global financial crash, the George Osborne and the Conservative-led government focussed relentlessly on government debt and the deficit. This suppressed economic growth and leading to the longest period of wage stagnation for two centuries.
Although estimates vary, it is widely expected that the budget deficit this year will exceed that of the financial crash a decade ago. It is however unlikely to exceed that inherited by the post-war Labour government of Clement Attlee. That government came to power in 1945 with a debt of over 200% of GDP (compared with c.80% following the banking crash). The Attlee government created the NHS, built the welfare state, and nationalised around one-third of the economy, as well as embarking on a large scale council house building programme.
That Keynesian approach led to impressive economic growth, full employment, rising wages and debt reduction. That government (and its successors in the 1950s, 60s and 70s) also borrowed for investment.
As the business lobby group the Institute of Directors recently argued, "the best way to address the public debt burden is actually by boosting growth and productivity. For now, the Treasury can tap low interest rates to help fund this".
While HM Treasury can access low interest rates for public borrowing, many people cannot. During the crisis people and companies have accumulated larger debts due to the necessity of lockdown shutting down the economy. Although the Bank of England cut the base rate of interest to 0.1%, credit cards, personal loans (secured or unsecured), payday loans and overdrafts all charge rates of interest tens or even hundreds of times in excess of the Bank of England base rate. It is in this way that banks and other lenders make profit, often from their least well-off customers.
The debt charity StepChange has estimated that since March, 4.6 million people have (by June) accumulated a "tsunami" of debt or arrears of more than £6bn. Debt can cause immense stress, leading to mental health problems and even suicide. It is estimated that 100,000 people attempt suicide every year due to debts. Tackling personal debt will have social, economic and health benefits.
One solution is to cap interest rates. This could be done as a multiple of the Bank of England base rate or as the BoE base rate plus a percentage. Currently, rates of interest on credit card debt can be in excess of 25% (250 times the Bank of England base rate), while payday lenders can charge up to 0.8% per day, equivalent to 292% APR or nearly 3,000 times the current Bank of England base rate).
Other proposals include capping the total amount that can be paid in overdraft fees or interest payments. In 2018, Labour proposed a total cap of 100% of the amount borrowed, including where someone is in persistent overdraft debt, so that the lender never repays more than 100% in interest of the value of their loan.
Many workers in insecure work with inconsistent hours (e.g. on zero hours contracts) are most reliant on debt in order to smooth their incomes. It is these workers that also need greater rights at work and better social security that does not leave claimants waiting five weeks for their first Universal Credit payment. Overall consumer debt in the UK was £225 billion at the end of 2019. This is the equivalent of £4,300 for every adult in credit cards, personal loans and overdrafts.
The mortgage payment holiday has extended mortgage terms for the 1.8 million people who have not been able to make mortgage payments for several months. The same applies to hundreds of thousands of people with credit card or personal loan debts. However, borrowers may have had their credit rating downgraded for taking advantage of the payment holiday scheme.
Many people have also gone into arrears on household bills and council tax. Italy suspended household bills during the coronavirus crisis, but the UK did not follow suit.
The Government suspended bailiff visits in June, but that temporary ban ends on 23 August. Bailiffs don’t just collect debt on behalf of lenders, but on behalf of those who have purchased debt on the secondary debt market. These vultures purchase (at knockdown prices) debts that other lenders have given up on recovering and pursue debtors. In her book, Should We Abolish Household Debts?, Dr Johnna Montgomerie advocates offering lenders “a tax break for cancelling debt instead of selling it”.
Both the UK lending market and the secondary debt market requires much stronger regulation from the Financial Conduct Authority in order to protect consumers and businesses.
A more wide-scale solution to debt would be for the Government to create a consumer equivalent of UK Asset Resolution, the so-called ‘bad bank’ that purchased problem debts from the banks to clean up their balance sheets.
Such a vehicle would allow people to offload problem debts and refinance at affordable rates, avoiding the excessive interest rates and extortionate fees made by some lenders and bailiffs.
As the coronavirus lockdown began, UK businesses borrowed a record £30.2bn in March, and an additional £8bn in April. Capping interest rates on these debts could help stop businesses going under, and jobs being lost.
Student debt is currently over £120 billion in England, with £17 billion loaned to students each year. There have been calls for the debts of student nurses, who have been placed in hospitals during the crisis, to have their tuition fees waived. But education should be a right for all – and tuition fees scrapped – without having to risk your life in a pandemic. Scrapping fees, as the Labour Party has suggested and has been done in many other European countries, is an essential part of tackling student debt. But existing debts also need addressing. Solutions range from a 0% interest rate on student debt to writing off the debt. Such solutions could be a positive opportunity to provide breathing room and relief, as part of ensuring we do not simply revert to some pre-covid ‘normal’ that caused hardship for so many.
A number of countries in the Global South have managed coronavirus far more effectively than the United Kingdom, adopting stringent quarantine and lockdown measures and responding rapidly to the threat of an outbreak.
But other countries face funding constraints and restricted public capacity, because of actions that the UK itself has taken or been involved in. Longstanding expropriation of resources from the Global South by imperial powers, especially the UK, has removed a key source of revenue for governments, contributing to high levels of government debt.
The World Bank and the International Monetary Fund have also required the downsizing of public services in the Global South. As SOAS academic Adam Hanieh has written, “repeated bouts of structural adjustment – often accompanied by Western military action, debilitating sanctions regimes, or support for authoritarian rulers – have systematically destroyed the social and economic capacities of poorer states, leaving them ill-equipped to deal with major crises such as COVID-19.” The UK has been active in supporting and entrenching these policies.
A May report from The Lancet claimed that South Sudan had just four ventilators and 24 ICU beds for 12 million inhabitants. Sierra Leona had 13 ventilators. In Yemen, where the UK has provided military equipment and training to back Saudi air strikes (leading to claims that the war in Yemen is “Britain’s war”), 18 million people lack access to hygiene, water, and sanitation, creating real public health threats.
The United Kingdom must begin by acknowledging that it is already involved in the world, because of its history of imperialism and contribution to international inequality through a range of channels. Refusing to engage internationally on covid-19 is hence a response that will simply perpetuate the inequalities and injustices for which the United Kingdom bears some responsibility.
The United Kingdom must avoid an approach based on pity or charity. Such a patronising position ignores the fact that our government has a lot to learn from countries in the Global South that have responded well to the coronavirus threat.
Elsewhere in these position papers the case has been made for rethinking international finance and international institutions, including by moving beyond the World Bank and International Monetary Fund. Alongside the need to pursue that goal, the United Kingdom must pursue debt cancellation in the short-term. The need to pay back debts is a significant block on public investment and measures to reduce the spread of coronavirus. It is also leaves countries in a sensitive position in the event of other future economic shocks.
In April, the G20 agreed to suspend some debt payments for 76 countries. But this involved only country-to-country debt, not debt to international institutions or the private sector. It was widely acknowledged that this measure was insufficient.
A campaign has grown for more robust debt cancellation. A letter signed by Bernie Sanders and Ilhan Omar was sent to the IMF in May calling for “extensive debt relief and financial assistance for all impoverished nations most at risk of the devastating human costs and the long-lasting economic injuries of COVID-19.” It was co-signed by over 300 lawmakers worldwide, including Labour MPs Diane Abbott, Paula Barker, Apsana Begum, Richard Burgon, Ian Byrne, Jeremy Corbyn, and John McDonnell.
Given the large volume of bonds issued by indebted countries on Wall Street or the City of London, action taken by the United Kingdom to support debt cancellation could have a far-reaching impact. The United Kingdom also took action to write-off significant debt owed by 41 of the world’s poorest countries at the end of 1999. Significant complete debt restructuring is needed now, and the United Kingdom could play a key role in that process.
In part, debt cancellation is justified because of the United Kingdom’s history of imperialism, which unjustly enriched the country at the expense of other countries, some of which are now indebted and in the Global South. However – especially following Black Lives Matter protests and increasing awareness in mid-2020 of the United Kingdom’s imperial legacy – this should be just the beginning of a process of determining the scale of reparations owed by the United Kingdom to countries, which can be paid out over a phased period.
Arguments that the scale of reparations cannot be calculated, or would incur cost to the Treasury, are significantly undercut by the fact that the United Kingdom was able to pay reparations, albeit to slave-owners up to 2015 (as a way to support slave-owners following the abolition of slavery). Estimates of what is owed can be drawn up; the experience of other countries who have made modest reparative payments can be taken into account. Much existing work can be drawn upon as guidance, including the CARICOM Reparations Commission’s ten point reparation action plan – which includes reference to apology, repatriation, technology transfer, and debt cancellation.
Debt is a pressing issue in the wake of coronavirus crisis. The position of those in deep debt must continue to be highlighted, and pressure put on the government for action. Like so many other issues discussed in these position papers, though, debt has both a domestic and an international dimension. This paper has pointed to a suite of policy measures that should be fought for on a domestic and international level, including: capping interest rates; capping what can be paid in overdraft fees or interest payments; interest-free student loans or cancellation of student debt; and debt cancellation for the Global South, as part of a broader initiative to make reparations for the United Kingdom’s imperial wrongs.
We are now at a crossroads, in this moment of major collective strain, where we have to determine the society we want to build. These demands must be made on government as we decide on our route out.