McDonnell's ideas welcome as Bank of England frets about debt mountain

Labour is proposing a cap on credit card repayments as the Bank warns lenders could rack up £30bn of lending losses in a downturn

John McDonnell has proposed limiting credit card repayments to twice what someone has borrowed (PA)

John McDonnell’s intervention on the subject of credit card debt was well timed.

His promise that Labour would introduce a cap, such that a borrower would never pay more than double what they had borrowed, came as the Bank of England issued a stark warning over the UK’s ballooning consumer debt.

It fears that banks’ potential losses could hit £30bn in the midst of an economic nasty, and says they are underestimating the hit they could take from consumers defaulting in such a downturn by basing their assessments on their experience during benign conditions.

These two; the Bank’s chilly pronouncement, and Mr McDonnell’s promised intervention, to ensure persistent debtors enjoy more protection, are both reactions to Britain’s borrowing binge.

It is something that needs to be addressed.

At a macro level we know how not doing so might play out, because we have seen it happen. The unchecked spread of bad credit was the main cause of the financial crisis, as dodgy mortgages flogged to people without the means to repay them, spread like a virus throughout the world's financial system.

Today’s banks are rather smaller and quite a bit poorer than they were then. They are required to hold more capital, and to temper their ambitions. The regulatory screw has been tightened.

But that £30bn figure speaks volumes. It would be naive to think that something awful couldn’t happen again. It might not be so bad the next time the bubble bursts. Lessons have been learned. That doesn’t mean to say that it couldn’t get ugly.

On a more personal level, debt brings with it misery, trailing alongside like an unloved sibling. According to the Financial Conduct Authority (FCA), there are more than 3m trapped in what is known as “persistent debt” with an average £3464 on their credit cards outstanding for a grand total of £14bn.

They pay around £2.50 for every £1 they borrow. Mr McDonnell thinks nigh on half a million people taking out cards since 2010 will already have paid out in excess of 100 per cent of what they borrowed.

Once you are trapped in debt it is very hard to get out of it. The view has been expressed that banks are happy to have people like that sitting on their books because they make money out of them.

The FCA has promised measures to deal with that. Labour goes too far, is what Liz Truss, the Chief Secretary to the Treasury said in response to the cap proposal. Leave it to the watchdog.

Others have complained that it would be very difficult for the banks to do the relevant calculations. The poor dears!

That problem could surely be solved if they had to put their minds to it.

As for going too far? Mr McDonnell’s idea is based on one of the FCA’s own, which was applied to payday lenders. The results have been encouraging.

There are often complaints that regulating like this will serve to make credit less available. Isn’t that the point? The McDonnell plan would not only help people in persistent credit card debt. It might also serve to make banks more reluctant to lend to people they really shouldn’t have advanced money to in the first place.

Credit does need to be made available. But even though the results of a TUC survey finding millions of Britons wouldn’t know what to do if they were hit with a big bill demands attention, the figures suggest that it is currently too easily available and that it is used an unstable crutch by too many people.

Given all this, the fact that the Bank, other regulators, and the potential next Chancellor, are thinking about the issue, can only be welcome.

Radical solutions might be what is required to put a dangerous situation right.