This article is part of a new joint SPERI-Finance Watch series on “Untold stories of personal debt in Europe” to which different guest authors contributed.
My recent book, Should We Abolish Household Debt (Polity, 2019), applies my working knowledge of International Political Economy, retail finance and macroeconomics to make the case for a modern debt jubilee, or a comprehensive package of debt cancellations targeted at the household sector. My argument is that coordinating monetary policy and making fiscal space for debt write-off for households – the same kind of coordination and space the financial sector received ten years ago – will generate macroeconomic uplift. Eliminating targeted segments of households’ private debt stock, which reach new historic highs year on year, will bring macroeconomic renewal by freeing up household cash-flow: It will signal an end to debt-dependent growth. In fact, targeting the household debt stock for cancellation will generate economic growth in the same way a tax-cut would: allowing people to keep more of their income as ‘pounds in their pockets’. Uplift is aggregated through current income flows into consumption, savings, or investment rather than into debt repayment. The mundane process of macroeconomic aggregation allows the radical idea of debt abolition to become a simple, but necessary treatment for the chronic debt-dependence of the UK economy.
Cancelling household debt: political repudiation or ‘technical’ adjustment
Cancelling household debt is simple considering that there is ample legal and regulatory scope in the UK for even small, technical fixes that can have big, radical effects. As Joseph Spooner’s masterful new book, Bankruptcy (Cambridge University Press, 2019), explains, if personal bankruptcy were equivalent to corporate bankruptcy, discharging debts would become routine and expected outcomes of the business-cycle. Debt cancellation for lenders is met by discharging their non-performing loans (NPLs) and buy-up of worthless assets. For borrowers, this can only be achieved through the painful process of personal insolvency and bankruptcy proceedings. Therefore, the revolutionary act of debt cancellation can be achieved by overt political repudiation or a small shift in the principles that govern financial regulation, or a combination of both.
Take, for example, the Rolling Jubilee (2014) social justice campaign, organised by the Strike Debt Collective, which has abolished $32 million household-level debt by crowd-sourcing funds to buy portfolios of discharged debts only to inform debtors their loans will be cancelled. This campaign made visible a simple way to eliminate bad financial practice and achieve social justice goals. Specifically, that cancelling already discharged retail loans is one relatively easy means of abolishing a very toxic element of household debt.
A regulatory fix? No more tax breaks for discharged non-performing loans
When lenders decide that an outstanding loan is not going to be paid (i.e. that it is a non-performing loan), they can discharge these debts, and the lender is given a tax break equivalent to the value of the loss against that asset. As Caroline Metz explains in her contribution to this series, lenders have made a practice of selling these loans to debt collection agencies, often for 2% to 10% of their face value. Debt collectors buy NPLs and try to make a profit by extracting payment from borrowers on which lenders have long given up. Debt collection agencies use practices of intimidation that are well known for causing emotional and material harm to people. In sum, the sale of NPLs can endanger debtors’ rights.
A simple regulatory change would be to make the tax-deduction on discharged non-performing loans (NPLs contingent on the accounts being closed, where the debt is cancelled and no one can ask for it to be paid back), rather than merely discharged (the debt is sold to a third-party which then demands full repayment). This would be a radical act that targets relief to those struggling most to repay their debts. Importantly, this would eliminate the regulatory loophole that allows debt collectors to buy discounted debts and go on to collect them at face value.
Imagine if you went shopping and bought a designer T-shirt on sale, originally £250, now £25. The next day you return to the shop and demand a full-redemption rate refund of £250, on the grounds that this is the item’s original retail price. No business would grant such a refund. Yet this is exactly what debt collection agencies do. That is a regulatory tax loop-hole that benefits no one outside of the debt collection industry. Moreover, the tax implications are considerable when we imagine that lenders have taken their tax deduction on the estimated loss on the value of the original outstanding loan.
Still, many will argue that cancelling any debts — even those debts long abandoned by the lender — will punish the prudent and reward the profligate. This is a gross misrepresentation of how the credit system functions and how retail financial markets operate. It is hard to believe that a debt write-off will cause more harm to those people who are unaffected by indebtedness, than it will benefit those already struggling. As the Rolling Jubilee demonstrated, even a self-help communitarian campaign to cancel pernicious debt can be dismissed as radical anti-capitalism. My rebuttal is that abolishing household debts, starting with the most pernicious and harmful, creates gains that are generalised and distributed across the entire UK macroeconomy and society.
Johnna Montgomerie – King’s College London