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.

How Jim Murphy's mistake cost Labour - and helped make Ruth Davidson

Scottish Labour's former leader's great mistake was to run away from Labour's Scottish referendum, not on it.

The strange revival of Conservative Scotland? Another poll from north of the border, this time from the Times and YouGov, shows the Tories experiencing a revival in Scotland, up to 28 per cent of the vote, enough to net seven extra seats from the SNP.

Adding to the Nationalists’ misery, according to the same poll, they would lose East Dunbartonshire to the Liberal Democrats, reducing their strength in the Commons to a still-formidable 47 seats.

It could be worse than the polls suggest, however. In the elections to the Scottish Parliament last year, parties which backed a No vote in the referendum did better in the first-past-the-post seats than the polls would have suggested – thanks to tactical voting by No voters, who backed whichever party had the best chance of beating the SNP.

The strategic insight of Ruth Davidson, the Conservative leader in Scotland, was to to recast her party as the loudest defender of the Union between Scotland and the rest of the United Kingdom. She has absorbed large chunks of that vote from the Liberal Democrats and Labour, but, paradoxically, at the Holyrood elections at least, the “Unionist coalition” she assembled helped those parties even though it cost the vote share.

The big thing to watch is not just where the parties of the Union make gains, but where they successfully form strong second-places against whoever the strongest pro-Union party is.

Davidson’s popularity and eye for a good photo opportunity – which came first is an interesting question – mean that the natural benefactor in most places will likely be the Tories.

But it could have been very different. The first politician to hit successfully upon the “last defender of the Union” routine was Ian Murray, the last Labour MP in Scotland, who squeezed both the  Liberal Democrat and Conservative vote in his seat of Edinburgh South.

His then-leader in Scotland, Jim Murphy, had a different idea. He fought the election in 2015 to the SNP’s left, with the slogan of “Whether you’re Yes, or No, the Tories have got to go”.  There were a couple of problems with that approach, as one  former staffer put it: “Firstly, the SNP weren’t going to put the Tories in, and everyone knew it. Secondly, no-one but us wanted to move on [from the referendum]”.

Then again under different leadership, this time under Kezia Dugdale, Scottish Labour once again fought a campaign explicitly to the left of the SNP, promising to increase taxation to blunt cuts devolved from Westminster, and an agnostic position on the referendum. Dugdale said she’d be open to voting to leave the United Kingdom if Britain left the European Union. Senior Scottish Labour figures flirted with the idea that the party might be neutral in a forthcoming election. Once again, the party tried to move on – but no-one else wanted to move on.

How different things might be if instead of running away from their referendum campaign, Jim Murphy had run towards it in 2015. 

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

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