Duncan’s Economic Blog

Household Debt (Again)

Posted in Uncategorized by duncanseconomicblog on April 26, 2011

On Thursday the OBR put on a detailed note on their Household Debt forecasts. Something I welcome.

I planned to blog about this over the weekend, but given the excellent weather, a weekend of variously sitting about in Alexandria and Finsbury Parks seeing friends, getting a much needed hair cut and generally relaxing seemed a lot more pressing.

Matt Sinclair has blogged about these numbers today – claiming that they vindicate him and prove me wrong.

I wasn’t planning on writing this today and don’t really want to get into another argument (although I’m happy to if needed!), so here’s a very quick response – written with one hand whilst I enjoy my Tesco prawn sandwich lunch.

 –         I will accept that writing on False Economy in a way that suggested the entire £245bn increase in household debt was due to Osborne was ill advised. I should have  noted the increase in household debt and noted how Osborne was driving up it up, but not claimed he was entirely responsible. Hands up, sorry – poor wording on my part. But…

–         Osborne’s policies clearly have driven up household debt forecasts. In his post today, Matt only attributes direct policy changes to Osborne (and that still comes to £17bn). The effects of his policies in pushing up unemployment have also driven down wages. And falling earnings forecasts are a significant part of the reasons that the OBR has revised debt up. In table A.3 for example the earnings forecast change puts £40bn on household debt.

–         Matt’s original attack on my False Economy post was based on the idea that higher inflation has increased the debt forecast. Something we now know is not really the case.

–         Leaving aside how much Osborne is responsible for the forecast increase in household debt, the fact remains that it is forecast to soar to new record highs – something he regarded as unsustainable before he was Chancellor, but which he downplays now.

–         The OBR have also now told us that net household worth is forecast to fall in the next few years (i.e. this is a net not just a gross issue).

–         Finally I’d again say, that I think the OBR numbers will turn out to be wrong. I don’t see the household savings ratio falling and staying low until 2015. Which is a problem given consumer spending is forecast to account for about 40% of growth over the next 4 years.


6 Responses

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  1. Matthew Sinclair said, on April 26, 2011 at 1:54 pm


    I’m glad you accept that statement was incorrect, or at least ill-advised. Hopefully others like Sunny Hundal and False Economy will at least stop repeating it. This is the risk with the social networking echo chamber. Mistakes are amplified long before they are corrected and boosters like Sunny aren’t going to reflect a corrected analysis.

    On your other points:

    Table A3 shows a change in the forecast that the OBR say “mainly reflects the effect of higher-than-expected inflation on households’ real incomes.” The £17 billion which actually followed the fiscal adjustment is less than 1 per cent of the 2015 household debt forecast so it isn’t anything like the dramatic increase that the False Economy graph showed or the rhetoric suggested.

    Higher than expected inflation certainly has increased the borrowing forecast and was, as the quote above shows, the primary justification for the latest revision. That there was an earlier revision due to methodological changes doesn’t make anything I said inaccurate. Other possible explanations of the sharp change in forecasts, which you’re right do seem to be more important than inflation, were why I also suggested more basic reasons to suspect that initial figure like: “Is Duncan Weldon seriously suggesting that people will borrow five times as much as has been taken away, to cover their losses from spending cuts?”


    • duncanseconomicblog said, on April 26, 2011 at 2:01 pm

      Thanks for the reply.

      A lot does depend on how one views the effects on increasing unemployment on earnings.

      But I still think the two key points for me are –

      (i) That household debt is forecast to soar and the consumption forecasts rely on falling savings ratios. Which I assumed Osborne was against (given prior statments).

      (ii) That I doubt this forecast is correct and so we don’t have a household debt problem, but we do have a growth problem.

      If nothing else I’m glad that these forecasts have recieved more publicity and I’m glad that the OBR has clarified.

  2. jomiku said, on April 26, 2011 at 3:24 pm

    Whilst you argue about wording, I took the point as being that projections show a large increase in private debt as public debt decreases. I never thought the argument was about cause, just that this shows in the numbers and thusly that the program depends on this outcome. Or the projections fall short. The outcome is projected to be a very large increase in private debt. How is that good?

    As to cause, I’m not sure one can easily pull things apart. Much of the increase is projected borrowing to buy assets, specifically noted as housing. That depends, as OBR notes, on availability of credit but it also obviously depends on confidence. How does one not say policy is projected to create conditions of confidence that would then encourage the acquisition of record levels of private debt? If one forecasts low confidence, surely less debt would be assumed.

  3. Dave Holden said, on April 26, 2011 at 5:28 pm

    Given the coming hit to European bank’s balances (via defaults) I wonder who will be lending money to the private sector.

  4. Paul Newman said, on April 27, 2011 at 5:42 am

    Yummy I shall keep this one in my private collection ..

  5. Dear David Cameron, « Left Outside said, on October 5, 2011 at 9:23 pm

    […] predicts the exact opposite to happen to that which you personally want/expect. They predict household debt to increase rapidly because this is the only way for your deficit reduction plan – and I use the term plan […]

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