Although the economy seems to be healthy, 10,000 people a month are going bust in England & Wales. What's our problem?
Although the UK economy appears to be in rude health, there are signs that things aren't quite so rosy below the surface.
For example, take the latest insolvency figures, which were released this morning. According to the Insolvency Service, over 30,000 people in England & Wales became bankrupt or insolvent in the first quarter of 2007. In other words, more than 10,000 people a month are going bust, which is an all-time record.
What's more, personal insolvencies are up almost a quarter (24%) on the first three months of 2006, when 24,274 people became bankrupt or insolvent. As you can see from the table below, more and more people go bust with each passing year:
England & Wales (2005 population: 53.5 million)
Year | Bankruptcies | IVAs | Total | Annual |
|---|---|---|---|---|
1998 | 19,647 | 4,902 | 24,549 | - |
1999 | 21,611 | 7,195 | 28,806 | 17 |
2000 | 21,550 | 7,978 | 29,528 | 3 |
2001 | 23,477 | 6,298 | 29,775 | 1 |
2002 | 24,292 | 6,295 | 30,587 | 3 |
2003 | 28,021 | 7,583 | 35,604 | 16 |
2004 | 35,898 | 10,752 | 46,650 | 31 |
2005 | 47,291 | 20,293 | 67,584 | 45 |
2006 | 62,956 | 44,332 | 107,288 | 59 |
Q1 2007 | 16,842 | 13,233 | 30,075 | 24 |
Although the number of bankruptcies was up by three-quarters (75%) between 2004 and 2006, the real growth has been in Individual Voluntary Arrangements (IVAs). In the same period, these more than quadrupled, up an astonishing 312%.
However, banks are taking a tougher line with borrowers who try to shrink their debts via an IVA. Indeed, according to accountants KPMG, almost two in nine IVAs (18%) proposed in the first quarter of this year were rejected by lenders, which is almost twice the rejection rate of Q1 2006.
By my reckoning, it's likely that at least 130,000 people in England & Wales will go bust during 2007. To put this figure into context, it's equal to the population of a small city or large town, such as Oxford, Preston or Wrexham. Sadly, I guess that soon we'll all know someone who has opted for bankruptcy or insolvency in order to defeat their debts.
Scotland (population: 5.1 million)
In Scotland, the equivalent of personal bankruptcy is known as Sequestration, and the equivalent of an IVA is a Protected Trust Deed. Here are the figures for north of the border:
Year | Sequestrations | Protected | Total | Annual |
|---|---|---|---|---|
1998 | 3,016 | 1,449 | 4,465 | - |
1999 | 3,195 | 2,144 | 5,339 | 20 |
2000 | 2,965 | 2,801 | 5,766 | 8 |
2001 | 3,048 | 3,779 | 6,827 | 18 |
2002 | 3,215 | 5,174 | 8,389 | 23 |
2003 | 3,328 | 5,452 | 8,780 | 5 |
2004 | 3,297 | 6,024 | 9,321 | 6 |
2005 | 4,965 | 6,881 | 11,846 | 27 |
2006 | 5,430 | 8,208 | 13,638 | 15 |
Q1 2007 | 1,505 | 1,966 | 3,471 | 12 |
Although the Scots have experienced a 'busting bonanza' of their own, personal insolvencies have grown at a far slower rate than those in England & Wales. Thus, the Scots' reputation for financial common-sense is partially intact.
Northern Ireland (population: 1.7 million)
However, the situation is more promising here. The good folk of Northern Ireland may have seen the light earlier than their counterparts across the Irish Sea, as personal insolvencies actually fell by a sixth (16%) between the first quarter of last year and Q1 2007. Long may this trend continue!
Also, the Insolvency Service did announce another piece of good news. While consumers and the government are borrowing and spending like there's no tomorrow, in contrast, UK businesses are doing well. Indeed, company insolvencies and liquidations in January to March were down by almost an eighth compared to a year earlier.
So, what's making us go bust in record numbers? Essentially, our household budgets are being squeezed by:
1. A record debt burden. According to the Bank of England, we now owe £1,103 billion to mortgage lenders and have a further £214 billion in unsecured debts (including credit card, personal loans and overdrafts).
2. Record house prices. With buyers being forced to stretch themselves to the limit to get on or climb the property ladder, many people have taken on oppressive home loans which leave their household budgets finely balanced on a knife-edge.
3. Rising interest rates. Since last August, the Bank of England has raised its base rate three times, increasing it from 4.50% a year to 5.25%. What's more, the Bank's Monetary Policy Committee is sure to raise the base rate again on 10 May, probably by another quarter-point, but perhaps by a half-point.
4. Rising inflation. As I explained in this article, the cost of living has risen rapidly over the past year, partly thanks to surging energy prices. Indeed, the Retail Prices Index measure of inflation hit 4.8% in March, which is a sixteen-year high. Given that wages have risen by around 4% over the past twelve months, our disposable income has declined in real terms, after accounting for inflation.
5. Higher taxes. Government spending is exceeding tax revenues, which forces HM Treasury to borrow more money than it intended to, while raising the tax burden to try to make up the widening shortfall.
Finally, I believe that none of the above factors is the underlying cause of our financial problems.
My personal view is that the main reason for the UK serious financial mismanagement is our inability to live below our means. As I warned in Does Wealth Make Us Worse?, our national obsession with money, possessions, physical and social appearances, and 'celebrity culture' is damaging our personal finances, mental well-being and national identity. Let's hope that we see the error of our ways and learn to stop 'keeping up with the Joneses' soon!
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