Household debt in the UK — credit cards, car leases, and student loans — will reach 3% of GDP and stay there for an extended period, according to the Office for Budget Responsibility, which called the phenomenon “unprecedented.”
You can see from this chart that as Chancellor George Osborne’s budget plan drives government debt back into a surplus by 2020 (the red line), households will make up for the loss of government benefits by taking on more debt (the blue line):
British consumers have seen only weak gains in pay over the last few years but low interest rates have allowed them to extend their spending via credit. The problem is that if a recession hits — and incomes decline or interest rates rise — consumers will be in trouble. The prospect of a vast swathe of the UK population being suddenly unable to service or pay back its debt could trigger a new economic crisis. (Lord Adair Turner has written a whole book about this problem.) The 2008 credit crisis came from the same phenom, although it originated from mortgage loans.
The OBR used some alarming language to describe the situation. Usually, household debt stays in a surplus and only briefly dips into debt during times of extreme economic circumstances, such as the 2008 boom-bust. This extended period added “very significant uncertainty” to the ability to predict what would happen in the future, the OBR said:
We forecast little change in the household deficit, which is expected to remain around 3 per cent of GDP through the forecast period. The persistence of a household deficit of this size would be unprecedented in the latest available historical data, which extend back to 1987. Other datasets extending back to 1963 also suggest little evidence of a large, persistent household deficit, with the household surplus moving into negative territory in only one year between 1963 and 1987. A household deficit of the size and persistence we expect over the forecast period might be considered consistent with the unprecedented scale of the fiscal consolidation and the extremely accommodative monetary policy upon which our forecast is conditioned. It nevertheless demonstrates that the adjustment to the fiscal consolidation is subject to very significant uncertainty, and alternative adjustment paths are quite possible
Household gross debt to income is up:
Our savings rates are down:
Barclays recently published this chart of UK consumer savings. We haven’t got any:
The obvious worry here is that if and when the next recession hits, that debt might go bad very quickly.