Osborne’s raid on UK households

Matthew Pitt reports on the latest economic blunder from chancellor George Osborne.

Osborne

Shortly before becoming the country’s chancellor, George Osborne declared in a speech themed: ‘A new economic model’ that private debt, both in the banking and household sector, was “the cause of this crisis” and pledged that under his watch it will become sustainable.

Enter last week’s independent Office for Budget Responsibility’s (OBR) disturbing and worrying economic forecasts that many other independent bodies still found overly optimistic.

However, move beyond the headline figures and you will find the OBR’s household debt forecast buried beneath a horde of economic and fiscal information – and it is in stark contradiction to the chancellor’s promise of private debt sustainability (to view table, click on the first link under ‘Supplementary Data’ and view tab 1.8).

In short, the OBR expects the household debt to rise from £1.56 trillion in 2010 to a staggering £2.13tr in 2015, marking a 36.3 per cent rise in the matter of five years.

In other words, instead of debt representing 160 per cent of household income last year, the debt-to-income ratio (typically used by economists to measure the extent of the debt burden) will eventually reach 175 per cent.

If we look at other examples in which countries cut back on public spending, the Canadian fiscal cuts in the 1990s for example show how household debt has an inverse relationship with government borrowing. Meaning that if a government cuts back on its spending, households typically have to borrow more to make up for the shortfall in income caused by the drop in benefits and a rise in taxes.

It is therefore to be expected that under Labour, household debt would have although risen, albeit by far less due to far less severe spending withdrawals. This is signified by the OBR predicting prior to the conservatives’ “too far, too fast” cuts that household debt would increase to £1.72tr in 2014. Fast forward to last week and the OBR now predicts that this figure has risen by £245bn to a total of £1.96tr.

Due to the Tory-led government’s overzealous cuts, UK households will now suffer an additional debt burden of almost a quarter of a trillion pounds.

Asked by Chuka Umunna in the Treasury Select Committee last week on whether he is transferring public debt to private debt, Osborne dodged the question by stating that it is “all our debt”. The out-of-touch chancellor is put in a more awkward position if one considers at what cost the rise in household debt comes: after considering the policies of the chancellor in both, last and this year, the OBR expected public sector net debt to fall only by £43bn in 2013/14 as a result.

Osborne’s tactic of moving the debt burden from the public sector to households is unsustainable and its extent utterly unfair. Households have no other choice than to borrow with such deep changes in benefits and taxes, but the government does and it therefore needs to consider that whilst it is expected to reduce public debt by £43bn, household debt is estimated to rise by £245bn – more than five times as much.

Sustainability of private debt, which was the cause of the economic and financial crisis, looks different – unless the Oxford dictionary has changed its definition since the last time I looked.

20 Responses to “Osborne’s raid on UK households”

  1. Adrian Hollister

    RT @leftfootfwd: Osborne’s raid on UK households: //bit.ly/eoHOwL

  2. Saggydaddy

    RT @leftfootfwd: Osborne’s raid on UK households: //bit.ly/eoHOwL

  3. Rich E- Evora Const

    RT @leftfootfwd: Osborne’s raid on UK households: //bit.ly/eoHOwL

  4. Francis Cox

    RT @leftfootfwd: Osborne’s raid on UK households: //bit.ly/eoHOwL

  5. andygale

    It's 9:24 and it's get annoyed at the Tories time… Osborne’s raid on UK households – //bit.ly/e0SWyt

  6. DisabledPeople

    RT @leftfootfwd: Osborne’s raid on UK households: //bit.ly/eoHOwL

  7. UniteYou

    RT @leftfootfwd: Osborne’s raid on UK households: //bit.ly/eoHOwL

  8. Guido Fawkes

    Even if this were true, public debt is merely deferred taxation. The difference is people have the ability to discriminate in their private spending / borrowing, they don’t have any choice with tax.

  9. StephenHenderson

    @Guido
    …or its an investment.

    In any case the main thing is that public debt costs about 3% interest is long term and has no chance of default– whereas this private debt is probably being paid at anything between 7-14% and may cause many people to bankrupt and default.

    ps I love the phrase “even if this were true”: well either it is true or the OBR growth forecasts are way too high. You choose.

  10. Matthew Pitt

    The IFS and many other independent think tanks have noted that cuts in spending (which includes benefits) are less damaging to long-term growth than a raise in taxes. The Tory-led government has indeed cut more in spending than it has raised taxes, meaning however that you’re argument Guido stands on more shaky ground since people certainly don’t have a choice when it comes to direct taxes and benefit cuts and have to therefore turn to increased borrowing to overcome the difference in disposable income. Osborne does have a choice in reducing the burden upon households and according to the IFS Green paper (ch. 2), Labour’s deficit cutting would have been sufficient to reach its target and, according to the OBR, would not have caused such a hike in household debt. P.S. Peppa Pig…really?

  11. jeremy akers

    RT @leftfootfwd: Osborne’s raid on UK households: //bit.ly/eoHOwL

  12. Matthew

    Osborne’s raid on UK households | Left Foot Forward //bit.ly/eoHOwL

  13. William Bain

    RT @leftfootfwd: Osborne’s raid on UK households //bit.ly/eL9SNU >> Great piece by Matthew Pitt on Osborne's debt policies

  14. David Dickson

    RT @leftfootfwd: Osborne’s raid on UK households //bit.ly/eL9SNU The Tory debt burden.Will this be reduced?

  15. Sue Hoyle

    RT @leftfootfwd: Osborne’s raid on UK households: //bit.ly/eoHOwL

  16. FatBloke on Tour

    MP

    Bad though the headline figures, it is actually worse than you suggest.

    From memory, household debt is 90% mortgages and 10% loans and credit cards, so we are currently looking at £150bill of personal debt. Fast forward 5 years and £565bill of extra debt has accrued, you have to ask what we have spent it on?

    Is going to be used to fund another chapter to the housing bubble, 30%+ increase in house prices and mortgage debt over 5 years? Probably not as house costs and public attitudes to housing debt suggest it will be pretty quiet on the house price front for a long time yet.

    That would suggest that personal debt is going to go through the roof with people borrowing to pay for food and their credit card bills. Consequently something to watch, the consequences if personal debt doubles or trebles would be something to scare even the most poliically committed dog boiler.

    Finally where is all this money going to come from? The state is still borrowing and hopefully the corporate sector will be borrowing to invest so where is all this money going to come from? Surely not another round of short term, high interest, wholesale money from abroad?

    Finally, finally what is going to happen to interest rates, they can only go up so debt financing costs are going to go up even more than the bald 36% increase and how will that affect a households spending power?

    Definately something to watch.
    Fag packet economics and slash and burn politics.

  17. fleshisgrass

    If Tories try to blame private debt for the financial crisis, just point out that debt is forecast to rise under Tories //bit.ly/h7gRAo

  18. OVERTAXED MIKE

    Thank god for George, if Balls was in we would now be paying zillions more in interest and half of British households would be bankrupt as they would be unable to pay the interest on their debts. Get real, if people are struggling at present interest rates they have had it the minute they go up! Our present government talks tough but ha not cut anything yet. Cut taxes and let me spend my money, especially when you read of Somali immigrants in houses costing £2000 per week. Yes £2000 per week, more thsan I will earn in 3 years before tax. All part of Labour’s happy legacy!

  19. Oxford Kevin

    For more on the Office of Budget Responsibility increase in personal debt go here: //t.co/C5zLWI2Z

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