Category Archives: Politics

Britain, Consumer Affairs, Economic, Government, Politics

Consumer Affairs: Payday loan firms…

PAYDAY loan firms will not be banned from charging excessively high interest rates, despite a promised Government crackdown on sharp practices in the industry.

Leading companies were summoned for talks in Whitehall with Consumer Affairs Minister Jo Swinson MP, today, amid a myriad of concerns that they are driving desperate families to financial ruin.

In a toughly-worded intervention, Miss Swinson, the Member of Parliament for East Dunbartonshire, said she is determined to curb ‘irresponsible behaviour which exploits vulnerable consumers in financial strife’.

The minister of state confirmed payday loan firms such as Wonga will not be ordered to cut their interest rates. The LibDem MP cited concerns that people could be forced into borrowing from even shadier loan sharks.

Critics of payday loan firms insist that the exorbitant interest rates, which can reach 5,000 per cent a year, are the root cause of misery suffered by hundreds of thousands of people taking out payday loans.

Recently, the Archbishop of Canterbury, Justin Welby, called for a legal cap on payday lenders and the level of interest they are allowed to charge.

The Archbishop said:

… Once you have taken out the loan, it is difficult to get out of the cycle. With the rates offered, simply paying off the interest becomes a struggle.

Consumer organisation Which? published a study showing a million families a month are forced to take out payday loans. It found some 400,000 people take out the high interest loans to pay for essentials such as food and fuel. A further 240,000 need the cash to pay existing loans.

Which? says that almost half of the people taking out payday loans could not cover their repayments, forcing them deeper into debt as their ‘short-term’ loans are ‘rolled over’, with fresh interest added.

The Whitehall summit comes days after the £2 billion industry was referred by the Office of Fair Trading (OFT) to the Competition Commission. It will have the power to ban or limit the industry’s products, but will take up to 18 months to report.

It is understood the OFT has given the 50 lenders until the end of July to respond to calls for them to clean up their act or face closure. Five firms have since surrendered their licence, but only 20 have responded to date.

Labour MP Stella Creasy accused ministers of being too cosy with the industry. She said:

… Having a summit about payday lending without talking about capping interest rates is like discussing arson without mentioning matches.

In reply that interest rates should be capped, Miss Swinson said that could shut down short-term loans and force people towards illegal loan sharks or by taking other extreme measures. She has suggested, though, that the focus should be on limiting the ease with which loans are ‘rolled over’.

The Consumers Affairs Minister also raised concerns about automatic payment systems that let lenders raid bank accounts of clients to claw back money they are owed.

COMMENT

Payday lenders are notorious by the way in which they operate and the rates they charge should be capped. This opinion is based on the assumption that lending money to people with poor credit histories at sky-high interest rates is wrong. Unfortunately, the problem of unsecured lending is a warren of complexity.

The empirical evidence elsewhere is important to consider. In many other countries, including France, Germany, Australia and Japan, and in many states in America and provinces in Canada, interest rates are capped at a ceiling – such as 36 or 48 per cent a year. But this means that companies cease to offer loans to risky customers, who are then forced into the hands of illegal loan sharks, often run by organised crime gangs. Arguably, it is better to have payday lending in the legal economy, where it can at least be regulated, than to drive it into the criminal underworld.

Stella Creasy MP has campaigned tenaciously against irresponsible lending. She has said that the problems with a rate cap should not mean that we cannot act. Rather, she says, we must work harder and learn from others how best to act. She has proposed a cap on total repayments to try and break the cycle on compound interest and rollover debts that end up many times the size of the original loan. A way needs to be found without choking off the legitimate market for emergency short-term borrowing.

This, however, should be just the start of a programme of reforms to limit abuses in the payday-loan market. Further issues should be addressed by the Competition Commission following the investigation launched last week.

The Commission’s task is to look at unfair competitive practices that are suspected of giving borrowers a bad deal, such as convoluted information about interest rates and how they are applied. Lenders are also known to make it hard for borrowers to switch to a rival company.

A plethora of reforms are needed within the payday-loan industry. Any programme of serious reform should start first with the underlying causes of problem borrowing. Advertising, for example, should be restricted, on similar principles that have already been applied to the advertising of alcohol and tobacco. Adverts for payday loans could carry information about where to get debt advice. Payday lenders could be required, too, in paying a levy to fund helplines and services to help with addictive and self-destructive behaviour that leads to indebtedness in the first place, or to support the work of credit unions.

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Britain, Economic, Financial Markets, Government, Politics

UK economy: Growth is returning and the signs are promising…

SPENDING REVIEW

The Chancellor, George Osborne, is determined to stick to his guns, with yet another £11.5 billion of budget cuts to be delivered in an election year. Some may say this is a massive gamble for a Conservative Chancellor who will wish to see his party elected at the next general election.

But the Chancellor has to retain the confidence of the financial markets by showing he is willing to tackle the legacy of deficit and vast levels of debt left by Labour.

If the markets no longer have confidence in the economy, Britain’s low interest rates, which are so vital a component to recovery and growth, will come to a shuddering-halt. If that was to happen, many would face financial disaster.

The first fruits of Mr Osborne’s determined approach is seen in the latest publication from the Office of National Statistics which has presented its revisions of gross domestic product (GDP), the key measure of the total output of the economy.

After a dreadful couple of years, the economy appears to be genuinely on the mend. In the first three months of this year it recovered healthily, despite some poor weather which usually slows down performance, but this trend is confirmed by all the major economic indicators and surveys.

The influential National Institute of Economic and Social Research, an often stringent critic of the government, says that output expanded by 0.6 per cent in the last three full calendar months.

This means that the ‘modest recovery’, often referred to by the retiring Bank of England Governor Mervyn King, is well and truly underway.

Earlier estimates of GDP underplayed the actual health of the economy. Early estimates of construction activity, for example, fell short of the true picture. Building programmes ranging from shopping centres in Leeds, to new office towers in the City of London, as well as new homes being built across the land is evidence of that.

The building industry certainly looks to be doing much better than was previously thought. It is this improvement – together with a formidable robust service sector, sharply better production from the North Sea, and higher export levels (especially to America) – that is turning the economy round.

According to fund managers Henderson of the City of London there has been a strong pick-up in the amount of money circulating in the economy. They suggest that, on current trends, the UK could be among the fastest-growing leading Western nations this year, expanding by a remarkable 2 per cent.

In his House of Commons address, Mr Osborne hinted at the underlying strength of the economy. He pointed out that for every one public sector job that has been lost as a result of austerity and cost cutting, another five have been created in the private sector.

Essential to the delivery of continuing growth, however, will be the discovery of new markets for Britain’s goods and services – not least because of the appalling health of the economies of our major trading partners in the European Union.

The Chancellor said that one of the keys to this will be a ‘strengthening of trade and investment links with China’. As a spending priority, the Government is planning to work with Britain’s exporters to set up a series of centres to promote British goods and services in China’s fastest-growing cities. Switching the focus from Europe to the new wealth-creating economies of Asia is going to be critical for our continuing recovery.

In the meantime, however, it is Britain’s close trading and financial relationship with the United States and its recovering economy that is proving most important to export-led growth. Exports of both goods and services to the U.S. have been climbing strongly in recent months.

Amid the intense interest with what is going on in Brussels and the eurozone, it is often forgotten that America is by far our most important single marketplace. The UK exports to the U.S. everything from Rolls-Royce engines to defence equipment as well as music made by British iconic figures in our pop industry.

No one, though, should underestimate the task of what the government is faced with in building up the economy to the peak it reached before the 2008 financial crisis.

The UK’s debt is continuing to climb despite the cuts and will not reach its height until 2016, when it will be the equivalent of an alarming 93.2 per cent of the nation’s output according to the latest IMF forecast.

If items such as public sector pension liabilities, which are hidden from the country’s balance sheet, are included, our debts will actually exceed national output in 2016. The Chancellor’s latest reductions in spending, in fact, represent less than 0.1 per cent of the national debt as projected in the year 2015-16.

The Chancellor’s trimming of the national budget, despite the hysteria of hard-hitting cuts, is no more than a holding operation designed to stabilise market confidence between now and the election.

The arrival nest week of the new Bank of England Governor, Mark Carney, poached from the Bank of Canada, has the task of not just keeping inflation close to the Government’s 2 per cent target but also to support growth.

Now that the housing market finally appears to be recovering from the shock of the financial crisis, and more small and medium-sized businesses are taking out bank loans to expand, any increase in interest rates by Mr Carney would be the last thing the Treasury needs. Mr Carney will chair his first meeting of the interest-rate-setting Monetary Policy Committee next week and will set in place the new mandate for the Bank of England as outlined in the budget.

Mervyn King has warned of the dangers this would pose in terms of homeowners struggling to pay mortgages and the loss of confidence in business circles.

The financial markets, it should be remembered, are still extremely jittery. The mere suggestion last week that the United States might curb its huge amounts of quantitative easing (Q.E.) – or printing money – sent share prices crashing across the globe. Mr Carney will want to prevent that happening at all costs, as will the Chancellor.

State spending reductions, while necessary and essential to calm the markets, can only make a small dent in Britain’s deficit and debt. It is higher-than-expected growth that could radically alter the picture.

The greater the output of the economy, the more taxes are paid – and the less money is paid out in welfare benefits because so many more people are employed.

If Mr Osborne can deliver sustained growth by the election, he would then be in a strong position to be even more radical, by taking a long-overdue axe to Britain’s mammoth social security bill – by removing, for example, many generous benefits to wealthy pensioners – and put the economy on a path to true prosperity.

 

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Britain, Economic, Government, Politics

UK Government Spending Plans 2015-16…

SECOND SPENDING REVIEW

The Chancellor, George Osborne MP, will unveil his second spending review tomorrow when he will set out spending plans for 2015-16.

Mr Osborne’s problem is that this is the review he never wanted to deliver. The original plan was that the deficit would be under control in time for the election with no more cuts needed. Weak growth and lower tax receipts have blown that plan out of the water.

The result is that Mr Osborne will be announcing more deep cuts to public services. That is a given. And to put the scale of those cuts into perspective they will be, if anything, a little deeper than the average cuts experienced each year during this parliament.

For a number of key areas of public spending, including the Home Office, Ministry of Justice and the Department for the Environment, this will mean cuts of more than 30 per cent since 2010.

By any standards those are large budgetary chunks to be dispensing with. The question that many will be asking is why the cuts needed are so big? The scale of these cuts cannot be explained by deficit cutting alone. For the remarkable fact is that total government spending is not falling at all.

Some bits of spending are continuing to rise, while others are not falling – due to debt interest payments rising as debt levels continue their upward trend. Public service pensions are also rising, with state pensions, the NHS and schools ‘ring-fenced’.

In effect, this means that all of the strain is being taken by a limited range of areas. That is why cuts in defence, police, justice, local government, and welfare have been so deep already. And it is for this reason that further deep cuts will be a priority for a Chancellor anxious to balance the books.

We have already been told that this pattern will continue. Health and pensions will again be protected. The longer these two budgets are left untouched the greater the pain that others will feel.

Unless the Government can deliver some truly surprising plans for health, pensions or social security, most other government departments can expect cuts averaging around 8 per cent in 2015-16 – a big cut in any year but all the more so in being layered on top of what has already happened.

There are some in Whitehall, though, feeling rather emboldened by their success so far. Not only have all of the planned cuts actually happened, but in many areas there has been over delivery.

Government budgets were significantly under-spent last year even in the face of extremely tight plans. And so far at least the budget cuts have not provoked visible crises or the sort of public demonstrations and backlashes seen in some other countries.

Equally, it is not surprising that gaining agreement with all Cabinet ministers for a further tightening of the screw in their departments has not been easy. We have been told that all departments have settled, and know that the small ones, on average, have settled for the required 8 per cent cut.

But we are yet to get the details of some big and very difficult departments – education, local government and business among them. Decisions here will make big differences.

Within education it is only schools that are protected. Other services for children and young people could lose out.

The business department – which pays for skills, training, universities and research – has made the case that its spending is uniquely important for growth.

Local government spending has been squeezed hard already and ministers have expressed concern about the effects of a further squeeze on vital social care services.

But even after all that, tomorrow’s spending review will only raise the curtain on at least another two years of tough choices. For much more extensive cuts will be needed if the deficit is to be dealt with in the planned time horizon.

Unless, of course, the next government chooses to raise taxes, or gets fortuitous with an unexpectedly-strong economic upturn.

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