Wednesday, 30 March 2011

Osborne's personal debt time bomb

If you listened to Vince Cable at any time in the four or five years before be became a Coalition Minister, you would have heard him discussing the unsustainable level of personal debt in the UK - it's what earned him a reputation as an economic soothsayer.  Osborne said many of the same sorts of things - for example in his Mais Lecture in February 2010, listing high levels of personal borrowing as one of the causes of what he described as Britain's economic crisis.

Yet - as Duncan Weldon describes on the False Economy website, the OBR is forecasting that, as a direct result of Osborne's policies, household debt-to-income ratio - which had fallen steadily from 2007 to 2010 - is set to rise.  Between 2010 and 2015 household debt will increase by a third - from £1560bn in 2010 to £2126bn in 2015.  That represents a change from 160% to 175% of household income - in other words, the household debt burden will become substantially less sustainable.

Weldon draws a comparison with public debt:

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

In other words, the burden of debt will shift from the public sector to households.  And since much of that debt arises from the bankers' crisis and the bail-out that followed it - and the cause of the deficit is the fall in tax revenue that followed the crisis, we are left with the inescapable conclusion that Osborne is basically providing further subsidy for bankers, and doing so in a way that means that one of the causes of the UKs economy's vulnerability is made worse, not better.

It's not sustainable or rational.  And in my view it demostrates further that Osborne's project is political and ideological, and not based on economic rationality.

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