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Will Banning Payday Lenders Really Prevent Debt?

10/04/2013 12:16 BST | Updated 09/06/2013 10:12 BST

This week Labour leader Ed Miliband launched a war against payday lenders and betting shops - why? He claims they're taking over our High Streets, and in turn, causing working class people to become engulfed in debt. 'By allowing these money-lending shops to take over our High Streets, the British people are falling victim to fiscal catastrophes', he says. This train of thought completely overlooks the bigger picture.

Times are tough. 20 High Street stores go out of business every day across the UK, and the only businesses that appear able to replace them are payday lenders and pawn brokers. In fact, the number of payday lenders operating on British High Streets increased by a sizeable 20% last year alone. Many say this marginalises the aesthetic value of Britain's shopping districts; however, nothing can really be done to prevent more of said shops from popping up. Cue a half-baked legislative solution.

Under Ed Miliband's new proposal, local council authorities would have the power to prevent any stores they don't like from appearing in their shopping districts. On the one hand, it's not hard to see where Labour's coming from - these shady shops manipulate families who are already down on their luck, and definitely don't do much to 'class up' the High Street. Accordingly, this new power would definitely help local councils to keep their High Streets safe from an infestation of pawn brokers. That's all well and good, but it's pretty hard to see how Ed Miliband thinks this solution could possibly affect high levels of debt amongst Britain's low-income households.

Although it may not have yet occurred to the Labour Party, blaming money lending shops for causing debt in low-income areas is the equivalent of blaming McDonald's for your great uncle's heart attack. Yes, it may have been a factor, but it's merely indicative of a far greater issue at hand.

Last week, the Welfare Reform Act that MPs passed in 2012 swooped in and left 2.6 million households in financial turmoil. 440,000 British families are facing cuts of £16.90 per household per week, and over 50,000 families have had their weekly welfare payments sliced by a gut-wrenching £93. Families were depending upon those funds - and now that this source of income has disappeared into thin air, where will parents go to ensure they've got enough money to feed their kids? High Street loan sharks. MPs helped to create the problem, and now they're trying to do away with one of few (albeit extremely ill-advised) solutions.

So, Mr Miliband is absolutely correct in his assumption that the payday lenders and betting shops that have inundated our High Streets are putting low-income families in debt. Yet banning those shops from our city centres won't help hard-working families to get out of that debt - it just means that they'll now have to get a bus 20 minutes down the road in order to find extortionate loans. Easier still, they can use one of thousands of payday loan websites - all of which charge up to a whopping 4000% APR. Any respectable banker would shudder at the thought.

In the long-term, there really aren't many benefits where payday lenders are concerned, and the government should indeed do more to regulate their shady practices; however, the fact of the matter is that payday lenders are all some people have to get by right now.

All in all, it doesn't take an economist to figure out that chasing Britain's money lenders away from the High Street won't keep financially desperate parents from pursuing high-risk loans (interestingly enough, Mr Miliband is an economist). Bearing this in mind, Labour would be better suited giving credit where credit is due - after all, so long as MPs continue to vote in favour of making crippling cuts to the incomes of working class households, they will only push more and more vulnerable families into the hands of unscrupulous creditors. Proposing to hide the face of this industry is merely a quick fix to a complicated, but self-inflicted, fiscal disaster - and Ed Miliband should know better than to bring this half-baked policy to the forefront of Labour's platform. For his own sake, perhaps he'll reconsider.