British consumers can no longer afford to consume. We need a new economic model

Consumption-driven growth is a recovery built on sand.

Consumption-driven growth is a recovery built on sand

Hidden deep in the Office for Budget Responsibility’s projections, published alongside the Autumn Statement last week, is a worrying figure that goes right to the heart of the concerns about the type of economic recovery the coalition is presiding over: 184 per cent.

This is the ratio of total household debt to household income that the OBR forecasts the UK will reach by 2020, taking household debt as a proportion of income to well above pre-crisis levels.

Osborne’s plan to run a surplus by 2018/19 is predicated on us spending lots more. More money than we can afford to spend, in fact.

Despite arguing for years that the country can’t go on living beyond its means, this is exactly what the chancellor requires us to do as individuals if the deficit is to be cleared by the end of the decade under his spending plans. If we fail to embark on this borrowing binge, growth will falter and Osborne’s deficit will grow.

This is a consequence of the government’s failure to rebalance the economy away from one reliant on consumer spending and debt to one where business investment and exports drive growth. Household spending is fuelling the current recovery, while investment and exports remain worryingly low (despite significant depreciation in the pound).

Growth is still being driven by the same things that left us so exposed when the global financial crisis reached our shores. For decades ours has been a consumer economy. But when real wages are stagnant and consumers can no longer afford to consume without becoming increasingly indebted, it’s clear the consumption model is no longer fit for purpose.

To achieve secure long-term prosperity, we need to rebalance the economy. This will take time. But there are concrete things the next government can do on taking office in May.

As Labour’s growth review led by Lord Adonis has recognised, we need a long-term industrial strategy to nurture a stronger manufacturing sector, create the conditions industry needs to innovate and support those parts of the economy with the potential to boost exports, for example green technology.

Investment in infrastructure can also play a key role in creating jobs and economic growth. Housing is a classic example. Because current levels of housebuilding are well short of what is needed to meet demand, house prices and rents continue to race ahead of wages. Consequently, home ownership is in decline and the housing benefit bill is ballooning.

A step change in housing supply would not only help to close the affordability gap (and reduce spending on housing benefit), it would also provide a welcome boost to the economy. Every pound invested in new housing generates £3.51 of economic output.

Unfortunately, the coalition government cut capital spending for new affordable housing by 60 per cent in its 2010 spending review and has gone on to oversee the lowest level of housebuilding since the Second World War (and a rising housing benefit bill).

Alongside an industrial strategy, targeted capital investment to upgrade our infrastructure would put the economy on more solid foundations and make us more competitive and resilient in an increasingly uncertain global economy.

We already knew that for most people this recovery is something most people hear about on the news rather than feel in their pockets. The OBR’s figures show that until we wean ourselves off of consumption driven growth, it’s also unsustainable – a recovery built on sand.

Matthew Whittley is a recent graduate, Labour party member and works as a researcher for a Midlands-based housing association

7 Responses to “British consumers can no longer afford to consume. We need a new economic model”

  1. madasafish

    Quite correct.

    So who is going to tell the masses, they can’t buy new Ipads, new phones, new cars and have summer holidays abroad, or use Sky?

  2. Dave Stewart

    If the masses as you put them were paid a larger proportion of GDP as was the case in the past they wouldn’t need to borrow to fund their consumption. The reason consumer debt has become such a problem is that the share of GDP which goes to wages/salaries has been steadily falling for nearly 40 years.

    The idea that a person wouldn’t be able to support themselves while in full time employment would have been laughed at in the 70s when it was typical for 1 wage earner to support a spouse and children even amongst the working classes.

    Of course I would suggest we need to move away from a consumption model of growth and in fact a growth model at all but that is a very different discussion.

  3. Peter Martin

    All growth is based on consumption of one sort or another. The last time the world got into an economic mess it took the wasteful consumption of vast amounts of resources, starting in 1939, to conduct an act of supreme folly and leading to the deaths of some 60 million people.

    So the trick this time is to use our available resources more wisely. But they still have to be consumed in the sense that if a worker is available for employment, that availability has to be used or it is lost for ever. All income comes from spending. Every time any of us gets a job someone has to spend – otherwise there’s no money to pay our wages or salaries.

    If unemployment is too high then someone has to spend more. That could be our overseas customers. They could spend more buying our exports. That would mean the pound would have to be a lot cheaper than it is on the exchange markets. The government would have to stop selling gilts to overseas buyers. That just raises the £’s value. It is a possibility but unlikely to happen given the state of the Eurozone. IMO.

    Alternatively there could be more spending in the local economy. So far that’s been the Tory government’s approach and it has encouraged excessive borrowing to enable that to happen. Interest rates are close to zero, private debt levels are way too high,( 184% of GDP according to this article) so that’s not an option any longer.

    So that leaves government. Government has to be more active in the economy and spend more to stimulate economic activity. It doesn’t mean that deficits have to be higher. Most of that spending comes back as taxes anyway. But it does mean we need to avoid 1930’s style thinking.

    Those are the options. The alternative is to get used to mass unemployment and that doesn’t make any economic sense whatsoever.

  4. Leon Wolfeson

    You are. Constantly.

    You don’t bother to notice they stopped having those ages ago are worried about food and shelter, now.

  5. Leon Wolfeson

    It absolutely makes sense to capitalists, who are looking at next quarter’s profits.

Comments are closed.