Debts and tax – a small point


by David Malone

In the last two posts I have argued that debt has surpassed the importance of wages in increasing the flow of money and of driving first inflation and then, in the bust, deflation in those things traded and held in debt – such as property.

In this post I just want to make a fairly small side point, that the rise in our personal debt, quite apart from the larger debts which the banks created for themselves, has also helped to make our tax system less and less fair.  The figures I use are UK.  But the argument works just as well for what happened in the USA. This effect of debt has not, perhaps, been a major one in the scale of things, but it is one that bothers me.

First let’s look at the scale of what we are talking about. In the UK in 1997 household debt to earnings was almost exactly 100%. So a household earning 60k owed 60K.  These are averaged figures, don’t forget. The grand total of household debt for the nation was just over half a trillion pounds (£500 billion).  

Just seven years later, in 2004, total household debt had doubled to 1 trillion.  The Bank of England warned that,

“Now outstanding debt stands at 135% of household income. Mortgage lending by banks, meanwhile, is growing by 10% a quarter and unsecured lending in the form of credit cards, loans and overdrafts by 13% a quarter over the past year.”

Debt and the rate at which we were increasing it were rocketing. And yet Hilary Cook, investment strategy director at Barclays Stockbrokers, said the £1 trillion figure wasn’t as “scary” as it seemed because during the past nine years the value of people’s assets had risen by around 60% in real terms.

Debt wasn’t a problem, the bankers assured us, because we were all getting so much richer.  The problem was, we weren’t richer because we were earning more, in fact wage increases had been shrinking for most of the last two decades. (We were still getting pay raises but those raises were getting steadily lower.) We were getting richer mainly because house prices were inflating wildly. Thus if you step back, our ‘getting richer’ actually meant getting more in debt. If you had a house, you had a mortgage.  If you had a mortgage you were in debt. But because the re-sale ‘value’ of the house was increasing people counted themselves as having a huge asset. We were counting debt as wealth.  A strange topsy turviness greatly encouraged by the banks who had totally embraced the ‘debt is wealth’ world view, were in more debt than we were, ecstatic about it, and counting themselves as richer than ever.

We were all massively in debt and all was therefore well – they believed. And of course this was and still is the central sham of modern finance.

By 2007, according to Bank of England figures, debt was, standing at nearly £1.175trn, almost as much as our entire annual gross domestic product (GDP), of which mortgage lending accounts for about 84%… the rest being consumer loans, such as credit cards and overdrafts… on the back of rocketing house prices and the biggest consumer-spending boom in the UK’s history.

By 2008 household debt had got a lot worse.

Families in the UK now owe a record 173pc of their incomes in debts, official figures have shown. The ratio of debt to income is higher than any other country in the group of seven leading industrialised economies:

100% in 1997
129% in 2003
135% in 2004
173% in 2008

Total household debt:

1997 £0.5 Trillion    
2004 £1.0 Trillion    
2007 £1.175 Trillion

After the crash in January 2010 it had GONE UP to £1.463 Trillion.

Lastly, here are some figures for UK debts as of January 2010.

Average amount outstanding on mortgages is £111,474 per household. Each household pays an average of £2,710 just in interest on their debts. Average consumer borrowing via credit cards, finance, overdrafts and loans has risen to £4,667 per average adult in the UK by the end of January 2010.

Please bear in mind that sobering though this wall of figures is, it is only our debt and our debt was NOT the total, nor even the main problem. In this I haven’t touched at all on the far larger mountain of debts and bets and sham insurance that the financial system wound round itself.  Nor have I looked at the huge debts our governments have now piled upon us as they relieve their friends of their debts and make them ours instead. So, what is my point?

Well it’s not large, it’s just a footnote. It’s twofold. To show you that we didn’t get richer due to suddenly earning lots more. Wages did not shoot up, debt did. We called it getting wealthier, but it was in fact getting into debt.

But also to suggest that, as I said at the beginning, the move from spending what we earned to spending what we borrowed, substituting debt for earnings, does very odd and regressive things to taxes and to governments.

You see the key thing we overlooked, is that you can tax earnings but you can’t tax debt nearly so easily. And that has meant we have begun to shift slowly but regressively from graduated taxes to flat rate taxes. And this begins to explain something that always puzzled me.

You see, did it never strike you as a just a bit odd that during all those years of frenzied growth when things could only ever get better and better, our governments still went on about needing to find efficiencies and savings and looked to cut budgets and spending where they could?

There we were spending money we had not earned, on shoes and gadgets and coffee and make-overs for our kitchens in an orgy of bulemic consumption and waste, feeling that we’d earned it, though we hadn’t, feeling that we should have public services to match our new found sense of personal importance and spending power, feeling richer though we weren’t. But because it was paid for by debt on our credit cards which we then paid off by extracting ‘value’ from our houses, our governments were left out of this torrent of cash.  We weren’t earning it, so they found it difficult to tax it.  What were they to do to meet the demands for better services and produce a ‘better nation’?  They borrowed just like we did. Substiting debts for earning (think PPI) AND they started to shift from taxing incomes to taxing consumption.

And so our debt culture has promoted a regressive change in taxation. We have started to slide from a graduated taxes on income, to flat rate taxes on consumption like vat and duty on petrol, alcohol and cigarettes.  Now I personally have no great problem with high duty on things like alcohol and fuel. But I do have a problem with shifting tax from graduated income taxes, to consumption taxes, because consumption taxes are nearly always flat rates.  You can’t make someone earning 200k, pay more for their beer than the bloke next to him who earns 20K.

Debt shifts the tax burden away from those who earn the most, and spreads it more evenly across all those who consume. It is just another way in which debt is making our society less stable, less fair and less democratic.


David Malone is the author of the book Debt Generation. You can read and listen to excerpts from his book here: