For all their promises of a new economic model, Britain’s politicians on both sides remain stuck on the old debt-fuelled system
When the Great Collapse began in 2007, the men now in charge of our government knew exactly what to blame: debt. Britain was an “economy built on debt”, thundered George Osborne, as Northern Rock went belly-up. And Vince Cable could point to a whole string of warnings from way back: “An almighty crash is on the cards. Debt is soaring far above income.” This being Britain, such dire predictions pivoted him into a whole new career as a ballroom-dancing Cassandra.
Cable’s target wasn’t primarily borrowing by governments, but by families. Through splashing out on newly built homes, German cars and foreign holidays, the British had landed themselves deeply, dangerously in the red.
Nor did the obsession with personal finances fade in government. Last October, David Cameron was all set to tell the Tory party conference: “The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off their credit card and store card bills.” The script was prepared, the lobby journalists fully squared – until advisers had second thoughts about an Old Etonian lecturing recession-hit voters on how to tackle their Debenhams accounts.
You can expect much palaver about debt on Wednesday , as Osborne delivers his autumn statement – but of a different kind. MPs and economists will argue about government overspend, public debt, the structural deficit, and by what glaring margin will the chancellor miss his targets. Barely a breath will be wasted on household borrowing. That is a worrying omission, because the coalition’s economic strategy is now so far off track that one of its best bets for growth between now and the general election is for Britons to spend more, and get themselves further into the red.
Let me reiterate: the most plausible scenario for economic growth rests on families doing what helped land Britain in this financial nightmare in the first place – saddling themselves with more debt.
This was exactly what the coalition parties rightly inveighed against at the last election. Yet it is precisely what’s forecast by the tax-and-spend watchdog, the Office for Budget Responsibility (OBR). In its tables produced this March(Look at tab 1.8 here), the household sector is predicted to move from being net savers to net borrowers by the spring of 2014. And in a note published last April, the OBR forecast that household debt would soar from 160% of disposable income in 2011 to 175% by 2015. Last year, the total owed by every man, woman and child in Britain amounted to £1.6tn; by the time of the next election that will have risen to £2.1tn.
And one thing is certain: it won’t be rising wages or bubbling house prices justifying this new round of indebtedness.
According to economists’ predictions and ministerial promises, we should be amid a Great Deleveraging, as banks, businesses and families across the indebted west pay off their loans and get on to a sounder financial footing, before embarking on a stable economic recovery. But Britain is getting more lopsided, not less. When McKinsey compared earlier this year how different countries were faring on the path to financial stability, it found that the American private sector – everything from Wall Street banks to married couples in Cleveland, Ohio – had almost finished getting debts back to their historic average; by next summer, predicted the management consultancy, the job would be done.
But the UK had “made less progress and could be a decade away from reducing … private-sector debt to the pre-bubble trend”. Part of the difference lies in the fact that Americans had a period of brutal reckoning: families were foreclosed, businesses went bust and unemployment went spiralling. The British have not had such carnage.
But the other major reason, as McKinsey points out, is that the US followed the example of Sweden and Finland in the 90s: Washington racked up more debt, allowing the economy to grow and the private sector to sort out its balance sheet. Cameron and Osborne have attempted the opposite: to cut public sector debt first. For the economy to keep expanding, demand has had to come from elsewhere.
According to the coalition’s plan, exports and business investment were going to fill the gap. But Europe, our number one export market, is in turmoil, and companies are too scared to invest. So the government that came to power moralising on the evils of debt is now relying on British families digging themselves deeper into a hole.
New Labour’s bubble was pumped up by families splurging on luxuries they desired but couldn’t afford; in Cameron’s dead-cat bounce economy, many households will be borrowing to buy necessities. High earners may be able to take advantage of those cheap loans now splashed over the weekend newspapers (the mortgages that require a 40% deposit); those at the bottom of the income scale will have no such comfort. As Aviva reports in its regular family finances surveys, borrowers are turning to relatives or neighbours, or resorting to credit cards and payday lenders.
Meanwhile, for all their promises of a new economic model, Britain’s politicians – of right and left – remain stuck on the old debt-fuelled system.
In 2003, Vince Cable warned of a looming crisis: “The growth of the British economy is sustained by consumer spending pinned against levels of personal debt secured, if at all, against house prices …” A decade on, not much has changed – possibly not even the sticky ending.