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10 July 2015

George Osborne’s latest budget leaves us all a prisoner of debt

Britain's resilience is lower than it was before the last crisis, and this budget has piled yet more debt onto households, warns Louise Haigh.

By louise haigh

The Chancellor rose to his feet on Wednesday to deliver a budget which was a lesson in hubris and misguided self-confidence.

We have an economy which is growing and that’s welcome, but it is an economy built on the same old mistakes of the past. Mistakes the Chancellor is unwilling or unable to face up to.

This Budget was the final act in a financial crisis which has seen debt move from the financial sector, to the public purse and now is piled onto individuals. And it is the final act in a financial crisis in which we have learnt next to nothing.

High debt, low pay, an economy based on a credit and housing bubble and a deregulated financial sector. It is back to ‘business as usual’ and what was wrong in 2007 remains wrong to this day.

The recently published Financial System Resilience Index ranked the UK lowest amongst all G7 countries. Household debt is rising to previously unseen; it now stands higher even that at the peak of the crisis. Last year alone it grew by 9 per cent – an increase of £20bn.

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And if we needed any further indication of the scale of the household debt crisis unfolding, it was there in black and white in the Treasury Red Book. Compared to the March outlook, over the next five years household ‘unsecured debt’ – which is loans and credit cards to you and me – is expected to rise by an additional £48bn!

Indeed, there were several OBR forecasts that the Chancellor forgot to mention yesterday, not least that household debt is expected to rise to 167 per cent of household income by 2020.

Adding to the problem is a growing housing bubble, with house prices projected to rise by 25 per cent in the next four years alone. 

There are those who see these warnings as merely those of ‘siren voices’ on the left. But Mark Carney, Governor of the Bank of England said back in 2014: “What happens if households borrow at high multiples? They economise on everything in order to pay their mortgages.

“If enough people are highly indebted it can have big macroeconomic impacts. There is [therefore] a possibility that current responsible lending standards become irresponsible to reckless”.

We have in effect a ‘phantom’ economy built on a house of cards and on the same old mistakes.The problem is that the government aren’t merely acting with intransigence – they are exacerbating the problems.

Many measures in yesterday’s budget such as the cuts to tax credits, for instance, may take debt off the government books but they heap it directly onto some of the most low-paid, the most vulnerable, those who can just about afford their mortgage if they have one at all. A lone parent cant afford to lose £1,400 a year but instead will take out credit cards to pay for their children’s school trip, for the clothes, for the rent and household debt will rise and rise. It is economic madness.

Turning maintenance grants into student loans another example – passing debt straight off the government’s books onto a generation of young people that will not simply be accustomed to personal debt, but reliant on it.

And the rise in the minimum wage will not go anywhere near far enough to offset his punitive raid on in-work support and it is those working long hours just to make ends meet who he has hit. As the Resolution Foundation has said, the Living Wage is calculated at a rate that takes into account in-work support and that if tax credits were cut as ‘night follows day the living wage will rise’.  So the Government’s ‘living wage’ will have next to no mitigation for the spiralling levels of personal debt this Budget has forced.

This budget is the last act in a financial crisis which began with private debt, was turned into public debt and is now heaped onto individuals. And the rotten circle begins again – the same mistakes of the past.

This wasn’t a budget that will go any way towards fixing the fundamental imbalances in our economy. Working people will be worse off, and average household income will remain stubbornly low – individual debt will therefore rise and the financial sector will continue to dance to its own tune. On the government benches, at least, it seems that the quicker we forget the causes behind the 2008 crash, the better but unless we fix these issues quickly, I fear we are closer to the next crash in the UK than we are the last.