News from the New Party

Sunday, January 14, 2007

Live now, pay later

It has been some time now since the phrase "UK rate rise" and the word "shock" have appeared in the same sentence. This week it happened, however, as the Bank of England wrongfooted the City, the media and everybody else in unexpectedly raising the base lending rate to 5.25%. This is intended to reduce inflationary pressures - in itself not a particularly surprising move apart from the timing, which is a month or three ahead of what was expected. The implication is that inflation may be on the rise faster than anticipated, and speculation is rife that December's figures, when published, may show consumer price inflation running at over 3%, and this in turn has sparked further speculation that further increases may bring the base rate to 6% before it peaks.

There has been a mixed response to the rise, with economists generally happier than property specialists, who are understandably concerned about the effect on house prices. And while higher interest rates may be good news for savers, the news is very much less welcome for borrowers. Increasing mortgage payments are placing mounting burdens on homeowners, with repossessions expected to rise. And since credit card bills for December's Christmas shopping drop through letterboxes in January, the huge levels of personal debt may see ever more people in "debt crisis" this year.

The New Party has long recognised the dangers of unsustainable levels of personal debt (see here). While there is a legitimate, indeed vital, role for borrowing in our society, whether for buying a home or starting a business, the massive expansion in personal credit offered by the finance industry has created a "live now, pay later" environment with ever larger numbers of people caught in a credit trap. Clearly better financial education is needed, and even more clearly the era of unfettered access to credit has to end. The New Party believes that credit controls are inevitable and essential, with stricter controls on lending to those under 25, and deposits required for all purchases on credit above a defined threshold. For those people already in difficulties, the New Party would establish a debt remedial bureau operated by the financial sector itself, funded by a levy on all lenders and credit card issuers.

Low interest rates cannot be guaranteed forever, and massive levels of personal debt cannot be sustained indefinitely. While individual householders and the finance industry cannot evade their responsibilities in this matter, neither can government stand idly by. "Live now, pay later" is not a healthy philosophy for our society to live by.

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Live now, pay later