I highlighted issues concerning household debt forecasts made by the Office for Budget Responsibility recently. Now Chuka Umunna has raised them in parliament. And in response Dencan Weldon has written the following blog for False Economy which I think important enough to reproduce in full:
Early last year George Osborne described private debt as the ‘cause’ of the financial crisis and pledged to make it more ‘sustainable’ in future:
'Our banks became more leveraged than American banks, and our households became more indebted than any other major economy in history. And in the aftermath of the crisis our public debt has risen more rapidly than any other major economy. So while private sector debt was the cause of this crisis, public sector debt is likely to be the cause of the next one…
'So this is the new economic framework for monetary and fiscal policy that we need to ensure that private and public debt are sustainable in the future.'
Fast forward to last week's forecasts from the Office for Budget Responsibility. Buried in the small print (actually found in tab 1.8 of the ‘Supplementary Economy Tables’ spreadsheet) was a forecast that the UK’s personal indebtedness is set to worsen considerably.
As Labour MP Chuka Umunna highlighted at the Treasury Select Committeeearlier today, it shows that household debt is set to rise from £1,560bn in 2010 (160% of household income) to £2,126bn in 2015 (175% of income) — an increase of 36.3%. By 2015 UK households will have amassed over two trillion pounds worth of debt.
The household debt-to-income ratio (the best measure of how manageable the debt burden is) fell from 2007 until 2010. It is now forecast to start rising again. Osborne described pre-crisis household debt-to-income ratios as unsustainable — and yet the ratio is forecast to hit a new all-time high in 2015.
More damagingly for Osborne, the OBR forecast for June 2010 (pdf) — before his first budget — predicted that household debt in 2014 would stand at £1,718bn. But following two Osborne budgets that number has now been revised up to £1,963bn — an increase of £245bn. In other words as a result of Osborne’s policies the direct debt burden on UK households is set to increase by nearly a quarter of a trillion pounds in the next three years.
Back in June last year, before Osborne’s policy changes, the OBR forecast (pdf) that public sector net debt (government debt) would be £1,294bn in 2013/14. After two budgets and a spending review they have revised that (pdf) to £1,251bn — a reduction of only £43bn.
Here we can clearly see the impact of Osborne’s changes over the next three years: public debt down by £43bn BUT private household debt up by £245bn — five times as much.
This shouldn’t come as a huge surprise. In today’s Financial Timesone city economist notes that:
'With real household disposable income set to fall this year through a combination of flat employment, negative real wages, tax rises and benefit payment cuts, the only way we are going to see spending grow in 2011 is if the savings ratio falls.'
Given the tax and benefit changes Osborne is presiding over, households have little choice but to borrow more to make ends meet. And that is how Osborne plans to drive down public debt: by increasing the household debt that helped cause the crisis in the first place.
Duncan Weldon is an economist and blogger.
Household net incomes are now falling.
Stores are having a torrid time.
Holidays aren't being sold.
But still people won't be able to make ends meet. That't the result of deliberately trashing the economy. Which is exactly what George Osborne is doing. He clearly learned a lot at the Bullingdon, and from his banker friends.
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Chuka U future Prime Minister?
>>So while private sector debt was the cause of this crisis
I presume by this that he means toxic loans rather than the balance on my credit card that I can (currently)afford to pay?
Boyd,
http://www.hm-treasury.gov.uk/speech_chx_280111.htm
“A model in which investment and exports replace debt-fuelled consumption in the public and private sectors as the drivers of growth.”
I’m all for a positive outlook, but the figures seem to border on wishful thinking.
Looking at table 1.1, the gdp is projected to smoothly rise at a healthy 2.7% pa 2011 to 2016,table 1.3 showing unemployment dropping 2% over that period, and table 1.6 lending up by 32%, so all the trends we are currently experiencing are about to disappear next quarter.
The secret to this success:
Get governments to pretend they are households
Get households to act like governments (the bad old borrow and spend ones, that is)
What can possibly go wrong?
Surely much simpler to get BoE to introduce new capital, free of interest for Government purposes and stop handing over interest to the usurers for almost all the new capital which is currently conjured up as computer entries by the banks. Will Cameron and Osborne be able to rise to this challenge?
Most of our economics professors and financial analysts are well aware that this is the most satisfactory solution – unless we are going to start manufacturing and exporting goods again that attract worldwide demand, at acceptable prices.
While we do successfully export IT and financial services, this does not raise enough to cover our interest payments and we are left with having to sell the family silver – ie. privatise everything that Con-Dem can cast their gaze upon.
We are now getting to the point with this pyramid system where implosion is inevitable and surely it would be better to climb out carefully, rather than wait until it collapses.
Can anyone explain to me in real life terms how private individuals over the new few years are going to borrow all this money and from whom? I thought the bulk of us were becoming decreasingly credit worthy. What is it going to look like from ordinary peoples’ viewpoint rather than that of broad economic forecasting, and if we cannot borrow, what then?