The Office for Budget Responsibility (OBR) have published new forecasts highlighting how severe the UK’s debt problems are becoming – and not those of the public sector. Instead, the OBR has found that it is debt in the UK’s household sector that has spiralled upwards, and the Labour Party has argued that it could be on the brink of crashing the economy again.
This is only to be expected, to some extent, during a period of austerity. Austerity means cutting public spending to the bone, and that will have an effect on many people’s behaviour.
The two possible effects of cuts
When public borrowing and spending are cut, two responses are possible. The first of these is that private spending will go up to compensate for the reduced services, and this will be at least partly fuelled by individuals and companies taking out loans.
The other possibility is that the services just cease outright and companies and individuals will simply do without them. The problem when that happens is that the private sector firms providing materials for those services lose sales, making it more difficult for them to keep employing their staff. If enough of them decide to lay off workers, then large numbers of lost workers will have to spend less, meaning more companies they used to buy from lose sales as well, and the cycle repeats.
At the moment, we are in the first of these stages, when loans are fuelling spending, but it cannot last much longer, because the borrowings taken out since 2013 have to be paid back. When people start paying off their loans, they cannot continue buying goods to the same extent as before, and the private sector firms who used to sell to them will lose revenue. If, as is widely feared, interest rates have to rise in the next twelve months, the task of paying loans off will become more prolonged and even more difficult.
So a reduced public deficit will lead to – in a sense actually is – a widened private deficit, and the pattern can only really be avoided with a large trade surplus, which is something the UK has lacked for a very long time. That will not change under Chancellor of the Exchequer, George Osborne, as he refuses to invest public money in any industry except banking, so it requires implausible luck for the country to produce more goods for export in future.
Two years of wasted opportunity and unlearned lessons
The household borrowing over the last two years or so is what has driven the so-called ‘economic recovery’. The growth in GDP has been useful, but also unremarkable and very unbalanced. It did, however, present Osborne with a couple of years of breathing space in which to revive the ailing sectors of industry that have still not really recovered since the economic crash of 2008. This was an opportunity he spurned, because he has remained pointlessly fixated on trying to cut the public sector deficit – something he cannot achieve by the methods he is using anyway, even if it were necessary, which it is not. So he cuts investment instead of increasing or re-directing it.
The response from opposition parties to the figures has been one of worry. Vince Cable, the former Business Secretary, was critical of unlearned past lessons of boom-and-bust.
We’re back on the treadmill of growth being sustained by personal borrowing. Much of it is against an inflating housing stock.
Taken together with other indicators like the very weak external deficit position, it suggests we’re getting back to the old and unhappily discredited forms of economic growth.
Seema Malhotra, the shadow chief secretary to the Treasury, singled out Osborne for more direct criticism.
George Osborne is relying on millions of British families going further into debt to hit his growth targets. This is risky behaviour from a chancellor whose policy decisions are hurting, not helping, British families. Alarm bells should be ringing. There is a real risk that millions of families will face serious hardship if interest rates start to rise.
Harry Leslie Smith took to Twitter to offer his own, rather resigned, thoughts.
The question shouldn't be will there be another crash but when….#GeorgeOsborne https://t.co/ULSJfxntPE
— John Smith (son of Harry Leslie Smith) (@Harryslaststand) December 22, 2015
My current estimate, unless there is a change of policy at the Treasury in the meantime, is it will happen early in 2017. With so much private debt now owed by so many, there are bound to be substantial defaults over the next year or so, and if too many happen in a short space of time, the banking sector will choke again. We may have already passed the point of no return; even if there is a change of policy, it will probably only delay the next crash by a few months, not avert it.
None of the lessons from ten years ago have been learned. That is not because the knowledge is not out there, it is because the Government is not willing to take it on board. It contradicts what they want to be fact, therefore it cannot be fact.
Unfortunately it is, but happily for the Government, they are not the ones who will feel the worst of the crash’s effects when it arrives. Sadly, they never are.
Featured image via altogetherfool on Flickr.
