Politicians and regulators are increasingly concerned about one phenomenon: buy-now-pay-later (BNPL). Nearly a year ago, the government agreed to regulate BNPL lenders, with an independent review chaired by City expert Christopher Woolard warning the sector represented a “significant potential consumer harm”.
A Treasury consultation on BNPL only closed at the end of last year. It is moving slowly but steadily towards more regulation, together with the Financial Conduct Authority.
Consumer groups such as Citizens Advice are showing great concern. For Labour, it is another stick with which to beat the government.
The temptation to buy now and pay later is irresistible to many. The buying part is pure pleasure. It is paying back which causes the pain.
Yet, we have recently been through a BNPL scheme of massive proportions.
For millions of people the late spring and early summer of 2020 seems to have been one of the best times of their lives.
True, they had the worry of the newly appeared virus, but they were being paid 80 per cent of their earnings not to work.
Many businesses were being stuffed with money from even more schemes to make sure the jobs would still be there when the restrictions were lifted.
In total, the government has picked up a bill of around £150bn in business support. This a raging inferno of debt. For some reason, the electorate do not seem keen on paying it back.
Even the proposed modest increase in National Insurance contributions in April has been met with enraged opposition across the political spectrum.
Could the huge increase in government debt be paid for by the proceeds of economic growth rather than by tax increases?
On the face of it, the idea has some plausibility. The government deficit in 2020/21 was £324bn. In the financial year 2021/22, the latest Office for Budget Responsibility projection is that this will fall to £183bn, in large part due to the increased tax revenues which GDP growth of 6.5 per cent will bring.
But it is nevertheless a dangerous idea to embrace.
Economic growth has been very rapid as the economy has bounced back from the massive hit caused by the initial impact of the pandemic. The spare capacity which was created is being put back into use.
The bounce back phase, however, will soon be over. We will have to rely on the much lower rates of growth which prevail in normal economic conditions. Over the 2010-2019 period this was just 2.0 per cent. Tax revenues will rise, but nowhere near as quickly as they have done over the past year.
The history of economic policy is littered with examples of governments relying on delusions of economic growth to fund their schemes or pay off their debts.
The incoming Labour government of Harold Wilson in 1964 had a National Plan which promised 4.5 per cent annual growth. This collapsed ignominiously and was followed by heavy defeat in the 1970 general election. The actual growth rate proved to be just over 2 per cent.
Buy Now Pay Later seems very attractive, but the “pay later” bit can never be avoided. All the handwringing in the world cannot alter this fundamental point. It is one which sooner or later the electorate will have to grasp.
