George Osborne’s Deficit Reduction Plan Requires Unprecedented Binge in Personal Borrowing

Courtesy of Andy Grice @ The Independent:

The public will have to go on a £360bn borrowing binge to make George Osborne’s deficit reduction plans add up, an analysis by The Independent has found.

According to the small print in the latest report from the Office for Budget Responsibility (OBR), the public is forecast to add to its pile of unsecured lending, which includes credit card debt and bank overdrafts, by £360bn over the next five years.

If the public fails to spend, then growth would collapse and the Government’s deficit would be likely to start increasing again.

The £360bn figure represents a £41bn increase on the OBR’s forecasts just nine months ago and would take households’ unsecured lending, as a share of total household incomes, to a record 55 per cent by 2020. That would be well above even the pre-financial crisis unsecured debt ratio of 44 per cent.

The revelation came as the head of the Institute for Fiscal Studies (IFS) think-tank branded the spending cuts that Mr Osborne has pencilled in to take place in the 2015-20 parliament as “colossal” and suggested they could involve “a fundamental reimagining of the role of the state”.

However, the Chancellor defended his economic plans in a round of media interviews, attacking the BBC for what he called its “totally hyperbolic” coverage.

The household debt projections unearthed by The Independent reveal just how reliant the Chancellor’s economic plan is on households increasing their borrowing over the coming years.

The projections are likely to prove embarrassing for the Government given the emphasis ministers have repeatedly placed on debt reduction.

In 2011, David Cameron was forced to rewrite his speech to the Tory party conference after an early draft showed the Prime Minister was about to urge households to pay off their credit card and store card bills. Today, economists warned of the implications of the OBR’s household borrowing projections.

“The idea that households are either willing or able to take on so much new debt at such a rapid pace is questionable at best and highlights significant imbalances in the shape of the economic recovery” said Matthew Whittaker, of the Resolution Foundation think-tank. “The apparent reliance of economic growth in the coming years on another surge in private debt should worry economists and politicians alike.”

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The Chancellor defended his economic plans (PA)

Britons have been reducing the level of their unsecured debt relative to their incomes over the past six years and the ratio currently stands at 37 per cent. But the recent official figures from the Bank of England point to turnaround, with unsecured consumer credit growth rising at its fastest pace since July 2006.

The OBR’s figures also show a vast increase in household mortgage borrowing over the next half decade. This form of secured borrowing is set to rise by around £580bn between now and 2020. Combined, the new borrowing will take total household debt to £2.6 trillion by the end of the decade, up from £1.7trn today. That’s a total rise in borrowing of £935bn.

However, the OBR thinks total household incomes over this period will rise by only £266bn. This means the ratio of total household debt to household incomes will rise from 169 per cent to 184 per cent by the end of the decade – a new record high.

If the projected rise in household debt – both mortgage and credit card borrowing – materialises, it will also create a headache for the Bank of England, which is charged with safeguarding financial stability.

Economic research by the Bank and a host of other respected academics has shown that rapid rises in household debt, relative to household incomes, are potentially dangerous for economies as they often result in sudden cutbacks in spending by the public as people attempt to improve their financial balance sheets all at once.

It was just such a rapid cutback in spending by indebted households that contributed to the 2008-09 recession, which was the deepest on modern record. The UK economy only regained its pre-crisis level of output last year and average wages are still around 8 per cent below where they were in 2008 as a result. According to the Bank of England, Britons had £60bn of credit card debt in October, 5 per cent higher than a year earlier.

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There has been rapid rises in household debt, relative to household incomes, according to research from the Bank of England (Getty Images)

A Treasury spokesman said: “We are adamant that we will not repeat the mistakes of the past, which is why we have created the independent Financial Policy Committee within the Bank of England, to ensure emerging risks and vulnerabilities across the financial system as a whole are identified, monitored and effectively addressed.”

The IFS said that, under Mr Osborne’s plan, the deficit reduction effort is less than 40 per cent complete. Paul Johnson, the organisation’s director, said the Conservatives’ plan to run a budget surplus in 2018-19 would mean £55bn more public spending cuts, following the £35bn that have been implemented to date.

Mr Osborne was accused by Labour of “bullying” the BBC after his criticism of its coverage about the huge scale of the spending cuts needed to balance the nation’s books.

The Chancellor claimed the BBC was conjuring up images from George Orwell’s 1937 book The Road to Wigan Pier, which described the poverty and mass unemployment of working-class Northerners. But he was accused of “shooting the messenger” because the OBR said the cuts planned by the Tories would reduce public spending as a share of national income to levels not seen since the 1930s.

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George Osborn was accused of “bullying” the BBC after his criticism of its coverage about the huge scale of the spending cuts needed (Getty Images)

Today, the Chancellor attacked an early-morning broadcast by Norman Smith, the BBC’s assistant political editor, who told Radio 4’s Today programme: “When you sit down and read the OBR report, it read, frankly, like a book of doom. It is utterly terrifying.

“It is suggesting that spending will have to be hacked back to the levels of the 1930s as a proportion of GDP. And that is an extraordinary concept. You’re back to the land of Road to Wigan Pier.”

Two hours later, Mr Osborne told the same programme: “That is just such nonsense and I would have thought the BBC would have learnt from the last few years that its totally hyperbolic coverage of spending cuts has not been matched by what’s actually happened… Has the world fallen in? No, it hasn’t.”

He insisted the cuts he set out were achievable, and that the IFS calculations did not include welfare savings. He cited his plan to reduce the cap a family can draw in benefits from the current £26,000 to £23,000 a year.

Downing Street aides insisted the Government did not mind tough questions about the cuts but said it was “ludicrous” to compare the conditions of the 1930s with today’s growing economy.

But a Labour source said: “This is an attempt to bully the BBC. It should not back down in the face of a George Osborne temper tantrum.”

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Ed Balls responds to the Chancellor’s Autumn Statement (BBC)

Ed Balls, the shadow Chancellor, said Labour would not commit to reducing the share of GDP going on public spending to 35 per cent by 2020, in line with the OBR’s forecast of Tory plans.

Mr Balls accepted that cuts would be needed after next May’s general election and said Labour would make “different choices” to clear the deficit “as soon as possible” before 2020. He accused Mr Osborne of promising £7.2bn of “fantasy tax cuts” and trying to “dupe the electorate.”

Mr Balls said the IFS report showed that the Chancellor’s sums do not add up. He added: “The continuing squeeze on living standards is the reason why George Osborne has failed to get the revenues in to balance the books. As the IFS says tax receipts have been revised down by £25bn by 2018-19, largely because of weak wage growth.”

Nick Herbert, a former Tory minister, said the state should be scaled back even if there was no need to clear the deficit. “You can’t as a state go on living beyond your means.”

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