Cameron wants to reduce private debt - but when and how?

A rapid repayment of debt is a recipe for recession, not recovery.

According to reports this morning, David Cameron will use his conference speech this afternoon to call on Britain's households to pay down their debts. He will say that dealing with debt means not just paying down public debt but also "households - all of us - paying off the credit card and store card bills." Such comments would go beyond the government's existing argument about the importance of dealing with the public deficit to an argument that about reducing the UK's levels of personal debt.

What are we to make of this new message? In one sense it fits with the government's wider narrative of Britain having maxed out the nation's credit card. In this respect, Cameron's comments are a statement of the obvious, albeit an important one. The UK's household debt levels remain crushingly high both by historical and international standards. Sooner or later it's vital that they come down. The Prime Minister is also right to say that this was no ordinary recession, and that this will be no ordinary recovery.

But in another sense the comments are a dramatic and risky escalation of the government's argument on debt. That's because, although they fit the government's story, they run counter to the economic logic that underlies the current forecasts for UK recovery. As we pointed out earlier this year, the most recent forecasts from the Office Budget of Responsibility, published in March, say that the UK's stock of personal debt will rise, not fall, in the coming years - and not by a little but by a lot. The OBR projects that household debt will grow from £1.6 trillion in 2011 to £2.1 trillion in 2015, a rise from 160 percent of household disposable income to 175 percent. That growth is expected to sit alongside low savings, with the ratio of household saving to disposable income falling to roughly 3.5 percent - half its average over the past 50 years.

In the current economic climate, it's hard to overstate the importance of this difference of opinion over what will - or what should - happen to household debt. Put simply, the OBR's projections for growth rest on their forecasts for household consumption, which rest on their forecasts for household debt. If the OBR were to be proved wrong on debt - if it were to fall rather than rise - then their forecasts for consumption would presumably need to be downgraded, as would their forecasts for growth.

The following chart puts this is all into stark perspective. In all recent recessions in the UK, consumption growth had returned at this point, airlifting the economy to recovery. By contrast, today's trends in household consumption are a millstone around the neck of the economy.

Household consumption following the onset of recession
% fall in real total household consumption

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As well as running against OBR forecasts, the Prime Minister's message doesn't chime with the current reality of the household behaviour. Savings are currently falling not rising. The most recent data revealed that the household savings ratio had dipped from 5.1 to 4.6 percent. A recent poll carried out for the Resolution Foundation by ipsos MORI helped to explain why: almost half of all people on low-to-middle incomes now say they are running out of cash every month, and more than one in four say they're unable to make regular savings. People aren't overspending - they are reducing their savings just to stay afloat.

Of course, none of this is to deny that private debt must fall. The question is: when and how? Reducing the UK's stock of personal debt is likely to be a slow process. It needs to take place via a careful paying down of bills on the back of a recovery of real earnings, enabling families to save a bit more without immediate and dramatic reductions in consumption. The alternative option - a rapid repayment of debt at a time of falling incomes, fragile consumption, rapidly weakening export markets, and sharp public sector cuts - is a recipe for recession, not recovery. The Prime Minister should be careful what he wishes for.

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Can Philip Hammond save the Conservatives from public anger at their DUP deal?

The Chancellor has the wriggle room to get close to the DUP's spending increase – but emotion matters more than facts in politics.

The magic money tree exists, and it is growing in Northern Ireland. That’s the attack line that Labour will throw at Theresa May in the wake of her £1bn deal with the DUP to keep her party in office.

It’s worth noting that while £1bn is a big deal in terms of Northern Ireland’s budget – just a touch under £10bn in 2016/17 – as far as the total expenditure of the British government goes, it’s peanuts.

The British government spent £778bn last year – we’re talking about spending an amount of money in Northern Ireland over the course of two years that the NHS loses in pen theft over the course of one in England. To match the increase in relative terms, you’d be looking at a £35bn increase in spending.

But, of course, political arguments are about gut instinct rather than actual numbers. The perception that the streets of Antrim are being paved by gold while the public realm in England, Scotland and Wales falls into disrepair is a real danger to the Conservatives.

But the good news for them is that last year Philip Hammond tweaked his targets to give himself greater headroom in case of a Brexit shock. Now the Tories have experienced a shock of a different kind – a Corbyn shock. That shock was partly due to the Labour leader’s good campaign and May’s bad campaign, but it was also powered by anger at cuts to schools and anger among NHS workers at Jeremy Hunt’s stewardship of the NHS. Conservative MPs have already made it clear to May that the party must not go to the country again while defending cuts to school spending.

Hammond can get to slightly under that £35bn and still stick to his targets. That will mean that the DUP still get to rave about their higher-than-average increase, while avoiding another election in which cuts to schools are front-and-centre. But whether that deprives Labour of their “cuts for you, but not for them” attack line is another question entirely. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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