If Wonga’s collapse gives you a nice warm glow, then you’re missing the point
Many people will be celebrating this morning’s news that Wonga have tipped into administration - including Grant Thornton who are selflessly stepping in to manage the company’s affairs.
(That’s Grant Thornton, “one of the world’s largest professional services networks of independent accounting and consulting member firms”, reported yesterday as being subject to a record £4m fine for “ethics failures”).
I imagine that the Archbishop of Canterbury will be particularly pleased about Wonga’s demise. He had described them (quite generously, I think) as “morally wrong” and, in the very English spirit of Christian free market capitalism, stated his intention to “compete (them) out of existence” - like Jesus and the money-lenders in the temple, in a way.
Something similar was tried in Oldham where “Our House” was set up by FRC Group as part of the End Furniture Poverty campaign, supported by a range of partners including the local council, and in direct competition to the disgracefully exploitative rent-to-own chain, Bright House. It soon became apparent that sticking to responsible lending practices meant that “Our House” had to turn down 70% of applications, making the business unsustainable.
As it turned out, it wasn’t competition that did for Wonga, it was legislation.
No longer allowed to charge an APR of 5000%, they have had to struggle along at 1000%, and - combined with paying out numerous compensation claims - have found that they are now unable to operate a viable business.
It’s worth clarifying what 1000% APR means in practice. If I had to find £200 from somewhere to pay off my Council Tax and keep the bailiffs at bay, that £200 borrowed from Wonga would become £2200 in 12 months time. (At 5000%, it would be over £10,000). Or if my boiler breaks down and needs replacing at a cost of about £1000, and I have no spare cash or access to cheaper credit, and if I can’t make any repayments to Wonga for 12 months, that original £1000 will have become £11,000 - and will continue to rise exponentially. Where money is already very tight, that rate of increase is impossible to keep on top of.
And for most households, money is very tight and getting tighter.
Just over a week ago the Child Poverty Action Group (CPAG) published a report obtusely titled “The Cost of a Child in 2018”. Obtuse, because what a careful reading really brings out is not so much the cost of a child but the way in which the benefit and minimum wage system, as presently constructed and funded and operated, drives working and non-working households with children into poverty and debt.
The four first indicators they report on tell us little on their own:
- the additional basic cost of a child over an 18-year period is £75k for a couple, £102k for a lone-parent
- the additional “full” cost of a child over an 18-year period is £151k for a couple, £183k for a lone parent
- for a couple, 21% of the basic costs are covered by child benefit, and 16% for a lone parent
- for a couple, 94% of the basic costs are covered by child benefit plus maximum child tax credit, and 70% for a lone parent
(Here “basic costs” don’t include rent, childcare or council tax - which are clearly very significant costs that can also vary widely by circumstance and geography.)
The striking and important messages are in the second set of indicators where net household income (i.e. after rent, childcare and council tax) is compared with “minimum family costs” (again, ignoring rent, childcare and council tax). These calculations are based on households with two children, aged 3 and 7, and either one or two parents, and show that:
- where the adults aren’t in work, net household income meets only 58% of the family costs for a couple, and only 60% of the family costs for a lone parent;
- for adults who are in work and paid at the national “living” (i.e. minimum) wage rate, the figures are 89% and 80% respectively;
- for adults who are in work and paid at the national median wage, the figures are 110% and 85%.
Since, by definition, 50% of households have an income that’s less than the median, this suggests (unless my logic and calculations are off) that approximately 50% of households don’t have enough income to meet their “minimum family costs”.
Maybe “minimum family costs” have been defined too generously?
Well, the definitions used in the CPAG report are derived from the “minimum income standard” (MIS) produced from thorough research by the Joseph Rowntree Foundation and the Centre for Research in Social Policy at the University of Loughborough.
This research involves “detailed deliberations by groups of members of the public, informed by expert knowledge where needed”. Agreement in the group is then checked and rechecked by subsequent groups, all working to agree what’s necessary as a minimum standard of living — not just food, clothes and shelter but also what’s judged necessary for people to “participate in society”, like a telly, a phone, and a one week annual break in the UK.
Subjectively, you may choose to agree or disagree with the MIS definition, but according to CPAG it represents a “considered, settled agreement on the minimum, rather than just a collection of subjective opinions”.
Which brings us back to the point that close to 50% of households in the UK have less income than the minimum thought necessary to participate in society.
And that’s why there is so much debt.
And why it’s big business.
I’m not denying individual agency or personal responsibility for choices and decisions, but we have allowed a system to develop (including zero-hours contracts, Universal Credit and benefit sanctions, inadequate levels of benefits, precarious employment) that consigns large numbers of people to the misery and stress and depression and self-harm associated with hopeless poverty.
The obscene practices of Wonga and BrightHouse and their high-cost credit competitors should definitely be outlawed, and there will always be people whose choices rather than circumstances lead them into debt, but the central and predominant problem is simply that people don’t have enough money to live on.
And there must be an easy solution to that.
