Household Debt and Spending in the United Kingdom
37 Pages Posted: 7 Oct 2015 Last revised: 9 Oct 2015
Date Written: October 2, 2015
Household debt rose sharply in the United Kingdom in the decade before the financial crisis. This paper uses household level microdata to investigate the relationship between mortgage debt and consumption. We find evidence that more highly indebted groups of households made larger cuts in spending following the financial crisis: spending cuts associated with debt may have reduced the level of aggregate private consumption by up to 2% after 2007. Survey data suggest that large cuts in spending by indebted households after 2007 may reflect a combination of tighter credit conditions and increased concerns about ability to make future debt repayments. The potential for household indebtedness to lead to large adverse impacts on aggregate demand was an important reason why the Bank of England’s Financial Policy Committee took policy action at its June 2014 meeting.
Keywords: Household spending, debt
JEL Classification: D10, D11, D14, E21
Suggested Citation: Suggested Citation