Duncan’s Economic Blog

Osborne – Maxing out the nation’s credit card

Posted in Uncategorized by duncanseconomicblog on March 30, 2011

I have post up at False Economy on the outlook for household debt and how it is due to soar. An issue raised in Parliament yesterday by Chuka Umunna.

As I write there:

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.

The chart below compares the OBR’s household debt to income ratio forecasts pre and post Osborne’s two budgets. As can be vividly seen, it was originally forecast to continue decling – but is now set to soar.

 

This is direct consequence of the decling household income noted by the ONS yesterday.

Households, as Osborne acknowledged yesterday, are in for a very tough few years – high inflation, tax changes such as the VAT hike, benefit changes and low wage growth. The only way they will be able make ends meet is by borrowing.

Osborne likes to talk about paying off the ‘nation’s credit card’ – the chart above suggests he is about to max it out.

17 Responses

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  1. Dave Holden said, on March 30, 2011 at 11:14 am

    Out of curiosity other than cutting tax how can Osborne affect private debt levels?

  2. James Reade said, on March 30, 2011 at 11:49 am

    @Dave Holden – 1, by shifting funding to individuals, eg higher education, 2, via individuals becoming unemployed. As a general principle, govt saving = private dissaving so money markets clear, so if govt increases its savings (well, decreases dissaving), we have to dissave (spend, borrow) more.

  3. Dave Holden said, on March 30, 2011 at 2:26 pm

    @James Reade, thanks.

    But isn’t the problem that the Government can’t spend more without interest rates rising and hence making private debt even worse?

  4. Luis Enrique said, on March 30, 2011 at 2:39 pm

    do we know that the increase in debt is explained by people taking on debt because they have lost their jobs? I know, of course, that some people made redundant will get into debt and/or run down savings, I just don’t know the magnitudes … presumably the OBR has increased its unemployment forecast by some amount – is that amount consistent with the change in debt? If say an extra 1m people are expected to be unemployed, how much would they have to be borrowing each, on average? (can I just do £245bn/1m?)

    sometimes debt increases because people are doing well, and borrowing because they feel confident – I don’t mean to suggest that’s happening now, merely that the causation isn’t clear to me – whether ‘austerity’ is to blame.

  5. Dave Holden said, on March 30, 2011 at 2:44 pm

    I’m extra suspicious of this now Krugman has referenced it…

  6. Newmania said, on March 31, 2011 at 5:54 am

    Who do these households owe the money to then ?
    I am unable to see any line between these statements and any conclusion at all except that times are marginally tougher and we know why that is . You . I take it, are suggesting that, as a Nation we are under borrowed, insufficiently resourced with public sector services and that amending these obvious faults with set people straight ?No doubt the tribes of welfare thugs smashing London up, the well to do state drones, the TUC and their hired tribunes ( Eds in general), will be delighted that their continued leisure is in fact ” A good thing” according to ” Some Economists ”

    I am sure you have a brilliant plan for increasing Household income you are yet to tell us about…thats the 85% not paid by the state Duncan not just your lot .

    • duncanseconomicblog said, on March 31, 2011 at 9:26 am

      Higher minimum wage, incentives for living wage, stronger private sector trade unions, corporate governance reform, higher investment, higher employment…

      • Dave Holden said, on March 31, 2011 at 11:22 am

        Although I agree with much of that (minus the trade unions) the question is all paid for how?

  7. Newmania said, on March 31, 2011 at 9:57 am

    I will recommend your plan immediately Duncan . Unions , wage costs ,borrowing and over manning are precisely what our Company lacks , can`t see how I missed it.

    • duncanseconomicblog said, on March 31, 2011 at 11:22 am

      Not very rational for one firm to increase costs. But more rational for all to increase wages – more demand.

      • Dave Holden said, on March 31, 2011 at 11:54 am

        But won’t this hurt exports or are you talking about a global increase in wages?

        • duncanseconomicblog said, on March 31, 2011 at 11:56 am

          Four out of the five low wage sectors of the UK (especially retail) aren’t internationally traded.

          • Dave Holden said, on March 31, 2011 at 12:22 pm

            Well assuming there are no knock on effects to the other sectors (I’m not sure how that wouldn’t happen) are you talking about a reallocation of money or an increase in spending because if an increase aren’t we back to how to pay for it and effects on inflation and interest rates.

  8. Tyler said, on April 4, 2011 at 12:59 pm

    Ugh……this one has been doing the rounds. You’d think an economist or two would quickly check the data and terminology before they start spouting rubbish.

    There is a big difference to GROSS debt and NET household debt.

    NET consumer credit is pretty low at the moment, so it doesn’t look like consumers are being forced to borrow significantly to fund their lifestyles or maintain living standards.

    ((data source bloomberg:UKMSCRCA/bank of England))

    GROSS consumer lending might increase as much as the government envisages, but this does not seem to be for direct consumption, more for secured investment – my guess is in mortgages.

    Effectively, whilst the headline looks like it supports Keynesian economics, if you look at what is really going on it looks like household debt will NOT be stepping in to fill the gap.

    Nor indeed does it need to (except in the closed economy model) as Keynesians seem far too willing to avoid factoring in productivity increases in GDP, preferring only to look at naked consumption metrics.

    • duncanseconomicblog said, on April 4, 2011 at 1:10 pm

      I did quite a long post on productivity two weeks ago.

      OBR forecasts productivity growth of 2% per annum.

      Labour participation rate is argubaly a better guide to long run living standards anyway.

  9. Grant Shapps is an idiot | PatoBlog said, on April 18, 2011 at 11:20 am

    […] card” (a fallacious and facile remark on its own terms) when what is actually going on is a balance transfer  from the Treasury to individuals and Local […]


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