The claim
“The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills.”
David Cameron, October 5 2011
The background
Advance drafts of David Cameron’s speech to the Conservative Party conference contained a curious piece of advice.
The Prime Minister was expected to say that consumers, like the banks, should start paying off their debts in a bid to put the economy on a surer footing.
Economists and debt advice specialists queued up to pour scorn on the idea that the recovery will begin at home.
Nick Pearce, director of the Institute of Public Policy Research, said the economy would shrink if everyone paid off their card debt too quickly.
And Joanna Elson, chief executive of the Money Advice Trust, warned that people could land themselves in deeper financial trouble if they tried to make repayments too quickly.
Others said Mr Cameron was simply catching up with consumers, who have already started to get their borrowing under control despite the temptation to max out the credit card at a time of squeezed household budgets.
Is the Prime Minister right to warn people to get their spending under control, or is he pushing against an open door?
The analysis
Mr Cameron’s speech coincided with new figures from the Office for National Statistics, which showed that total household expenditure fell by 0.8 per cent in the second quarter of this year.
To put that in context, that is the fourth consecutive quarter in which household spending has fallen. The start of this decline, in the third quarter of 2010, marked the first fall since records began.
So there is evidence of an unusual and a sustained effort by households to rein in their expenditure in response to the economic crisis. What about debt?
The Bank of England’s figures for consumer credit – which lumps together credit cards with other loans – shows a slight recent increase in growth from a very low base.
The long-term trend is one of very high annual growth in the late 1990s and early 2000s, a dramatic plunge from around 2005 to a historic low of zero per cent growth in 2009, and a return to very low positive growth since then.
On these figures, there’s no evidence of irresponsible borrowing and it will be a very long time before growth rates reach anything like their pre-credit crunch levels.
What about credit and store cards, which Mr Cameron specifically singles out?
The British Bankers’ Association (BBA) produce a wealth of detailed statistics on credit card spending alone, stripping out other loans but including most major store cards, which are treated as credit cards.
Their figures show several distinct patterns, all of which suggest that the British consumer is already being more prudent about borrowing money on plastic than ever.
The UK’s total outstanding credit card debt levels reached a peak of more than £67bn in 2005, and hovered consistently around the £65bn mark until 2009, when they started to fall.
Since May this year unpaid card debt has fallen to below £60bn and stayed there.
This decline has been matched by similar falls in the number of credit cards issued by lenders and the number of accounts held.
And perhaps most importantly, the percentage of accounts where the card holder actually has some interest to pay on their balance has consistently fallen from nearly 75 per cent in 2009 to around 66 per cent in August this year.
At the same time, the number and value of purchases made using credit cards has gone up.
So it’s not that people have suddenly cut up their flexible friends. But there is strong evidence that we are using them more prudently in the wake of the credit crunch.
People are generally borrowing less on cards.
Consumers are consolidating their debts and cutting fees and charges by having fewer cards in their wallet.
And significantly more people who have credit cards are sensibly paying off their balance every month rather than getting into debt at all. They are increasingly using the card as a payment tool rather than a source of credit.
BBA statistics director David Dooks told FactCheck: “The household generally is hunkering down.
“What with higher household costs in general from commodities and utilities and interest rates quite low, people are simply spending less and repaying down their mortgages and other debts.
“I think that’s the frame of mind the consumer is in. Households are looking at being cautious and careful with their finances.”
The verdict
All the figures we have suggest that Mr Cameron is indeed way behind the curve on credit card debt.
He’s calling for action on a problem that doesn’t seem to exist. And the solution he proposes could even harm the economy, according to some economists.
It’s interesting to note that the Prime Minister includes himself in the equation when he says that “all of us” need to pay off our debts.
Mr Cameron didn’t actually disclose whether he needs to worry about his borrowing. And as his own personal finances are not in the public domain, they are difficult to FactCheck.
What we do know is that he earns £142,500 a year.
The Camerons own a £2m house in North Kensington, which they rent out. Their second home in Dean, Oxfordshire, was bought in 2001 with a £350,0000 mortgage.
The taxpayer picked up the bill for the repayments – something that was perfectly within the rules for MPs’ expenses at the time.
By Patrick Worrall
Update: When Mr Cameron delivered his speech to the Tory faithful on Wednesday, there were one or two changes. In the draft of the speech distributed to journalists on Tuesday night, the line on consumer debt read: “That means households – all of us – paying off the credit card and store card bills.” In the later version, Mr Cameron said: “That’s why households are paying down their credit card and store card bills.” It’s not the first time a speech has been hastily re-written after criticism from the media. Last week the shadow home secretary, Yvette Cooper, redrafted her speech at Labour’s conference in Liverpool to take out a dodgy claim that FactCheck had spotted.
