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Published on:February 7, 2014Author:The Debt Advisor

Figures published today by the Insolvency Service show that company liquidations in England and Wales in the fourth quarter of last year were down 7.4% on the previous quarter and down 7.1% on the same quarter in 2012. Similarly, personal insolvencies reduced in the fourth quarter of 2013 to 24,282 and a decrease of 4.6% on the same period 12 months ago.

Bev Budsworth, managing director of The Debt Advisor commented: “Today’s figures show that 2013 saw the lowest level of personal insolvencies since 2005 and total corporate insolvency last year was at six year low. This is clearly fantastic news and shows that the many avenues of practical debt help and support in the UK are working and we have a really successful rescue culture.

“However, looking beneath today’s figures, we can see it’s still a real mixed bag out there. One minute we are being told that the economy is growing at its fastest rate since 2007 and that construction of new homes is at its highest level for five years. However, the next minute, the Office for National Statistics (ONS) is saying that real wages have been dropping consistently by around 2.2% since 2010, the longest period of falls in 50 years.

“For me, the acid test for personal insolvency will be when the Bank of England starts to raise interest rates and people’s mortgage payments follow suit.”

Private consumption

“Sure, the economy is on the rise and that’s great but I worry about how it is being supported and if it is really sustainable? The problem we have got at the moment is that, according to the Resolution Foundation, over 60% of our GDP originates from so-called ‘private consumption’ – all the spending by individuals – and therefore it’s the consumer, who is propping up the economy. I question whether this is really sustainable given that wages have been decreasing by over 2% for the last three years!

“Prior to the credit crunch and the recession, consumer spending was fuelled by high wages and easy credit. The onset of the recession saw consumer spending drop and people starting to save again. However, we are now seeing consumer spending on the rise again but without the support from free-flowing credit or rising wages – a situation which needs to change.

“It’s clear that with all the state cuts and austerity measures, government spending is unlikely to increase and redress the balance so it’s up to employers in the short-term to have the confidence to pay their staff more.”

Tough for businesses

“Although today’s figures should be encouraging for businesses, the previous five years of little or no growth have taken their toll on weaker firms who continue struggle to compete with those better equipped to capitalise on the improving economy.

“Unfortunately, businesses have accumulated considerable debt since the recession and therefore find the prospect of increasing their wage bills understandably daunting,” continued Bev.

According to financial think tank, Resolution Foundation, for every one pound of household income earned, 60 pence is spent. Bev added: “If we factor tax and VAT into this ratio then this roughly equates to around one to one. So, given that GDP is currently made up of 66% private consumption, if the Office for Budget Responsibility’s latest forecast of 2.4% growth in 2014 is correct, consumers will consequently need to see a 4% increase in household income.

“Considering many employers have themselves suffered reduced incomes and had to implement wage freezes, it’s hard to see how they will fund increases of nearly 4%.”

‘Debt peril’

Many forecasters are predicting that household income will only see an increase of around 1.4% this year meaning the consumers will continue to have to use their savings, Bev concluded: “Dwindling piggy banks will have to be raided further in order for households to maintain their standard of living. Add to this the suggestions that interest rates may be as high as 5% by 2018 and growth in household income may be turbulent, then, according to the Resolution Foundation, two million people could be heading for ‘debt peril’ – a term used for households spending more than half of their income on repaying debt.

“It’s a timely warning that we can’t get too used to the historically low interest rate we are currently enjoying so need to assess how we conserve our income. The outlook is positive but not free from uncertainty so if people do find themselves under serious financial pressure, the main thing is never to bury your head in the sand; seek out advice and take steps to getting your debt under control so you can cope with future increases in mortgage payments.”