Leave aside the economics for now, David Cameron’s call for households to clear their debts is terrible politics. In his speech at the Conservative conference today, he will say:
“The only way out of a debt crisis is to deal with your debts. That means households – all of us – paying off the credit card and store card bills.”
At a time when voters are facing the biggest fall in living standards since the 1920s (owing to a combination of rising prices, falling wages, lower benefits and higher taxes), Cameron’s demand is hideously patronising. It is a perfect example of what the novelist Joyce Carey once described as a “tumbril remark” – the sort of statement seemingly designed to ignite class war. Marie Antoinette’s infamous (and likely apocryphal) riposte to the news that the poor were suffering due to bread shortages (“let them eat cake”) is the most celebrated historical example.
Now, Cameron, a man who has had never had a money worry in his life, insists that the poor must repay their debts, as if, up to this point, they had merely chosen not to do so. I cannot recall a less sensitive or more thoughtless remark from a serving Prime Minister.
But worse, Cameron’s comments confirm that he has no grasp of basic economics. If we are to avoid an economic death spiral, we need people to spend, not save. Keynes’s paradox of thrift explains why. The more people save, the more they reduce aggregate demand, thus further reducing (and eventually destroying) economic growth. They will be individually wise but collectively foolish. If no one spends (because they’re paying off their debts) then businesses can’t grow and unemployment willl soar. The paradox is that if everyone saves then savings eventually become worthless.
The final and greatest irony is that Cameron is leading a government whose own policies are increasing household debt. The Office for Budget Responsibility forecasts that household debt will rise from £1,560bn in 2010 to £2,126bn in 2015 (or from an average of £58,000 to an average of £77,309. NB: the figures include mortgages), largely due to higher inflation (encouraged by Osborne’s VAT rise) but also due to “the reductions in social security payments announced in the October Spending Review, which act to reduce household disposable income”. In other words, George Osborne’s decision to take an axe to the welfare state is helping to fuel the household debt bubble.
No one denies that household debt is too high. Indeed, UK households are more indebted than those of any other major economy. But if Cameron wants to address this problem he should have said something about the fact that 11 million low-to-middle earners have seen no rise in their real income since 2003. People borrowed to maintain their living standards as wages stagnated. Cameron’s blunt demand for households to repay their debts suggests a man who not only can’t solve the problem but doesn’t even understand it. Today, we have seen the clearest indication yet that he is unfit to govern this country.