In a recent contribution, Arestis and Sawyer (2015) argued that the increase in the UK household sector debt helped the recovery of GDP growth. Household debt increases substantially when households experience stagnating incomes (due to rising prices and falling wages) and borrow in order to finance their consumption expenditures, which in the UK amounts to two thirds of demand. The Bank of England (2016) suggests, “An uncertain macroeconomic environment raises the prospect that households could face challenges to their ability to service their debts.” The increase in the UK household debt has continued since then, and indeed has become even more worrying in view of the possible “normalisation” of interest rates and the monetary dimension in more general terms by the Bank of England; this possible emergence could have serious implications for the households in view of their high debt in relation to economic activity.
Interestingly enough, these developments, in terms of UK household debt, have worried the UK monetary authorities, which have initiated policy measures to avoid serious problems resulting from indebtedness. Indeed, the Bank of England (2016) in its Financial Stability Report suggested, “Highly indebted households are particularly vulnerable to shocks, such as falls in incomes or increases in interest rates, which threaten their ability to service their debts. If these households cut consumption sharply in order to service their debts, this may amplify any downturn in economic activity. Alternatively, if households default on their debts, this can test the resilience of lenders directly.” It is also stated, in the same report, “Total lending to households grew by 4.1% in the twelve months to September 2016, close to the fastest growth rate since the global financial crisis.” As a result of these and other risks in the UK banking sector, the Bank of England believes that tackling these problems is best through financial regulation and macro-prudential policies. The Bank of England’s Financial Policy Committee (FPC) decided at its May 25, 2016, meeting to increase the UK countercyclical capital buffer rate (or systemic risk buffers), which would ensure that banks could provide lending and other needed banking services in times of financial stress.