Britain’s economy is sitting on a time bomb of debt that could break through the £10-trillion barrier within the next five years, according to a report recently released, charting the country’s two-decade-long addiction to borrowing.
The study by consultancy group PwC found that property speculation by individuals and companies and an explosion of debt-financed City deals in the past decade had resulted in the ratio of debt to national income more than doubling since the late 1980s.
It warned that “alarming” levels of debt reached since the turn of the millennium would be hard to service if there was even a modest increase in interest rates from current emergency levels.
John Hawksworth, the chief economist at PwC, said: “There is a time-bomb effect from the huge amount of debt built up across all sectors of the economy.”
The PwC research showed that, in 1987, the United Kingdom’s total debt for households, the City, non-financial companies and the government stood at 200% of gross domestic product. By 2009 debt stood at £7,5-trillion and was 540% of GDP.
“The UK’s addiction to debt has reached alarming levels in the past decade,” Hawksworth said.
“The rise in debt of the financial sector from 46% of GDP in 1987 to 245% in 2009 is particularly striking as banks lent large amounts to the shadow banking sector and most financial institutions geared up in search of higher returns on equity.”
Debt burden
Even excluding the activities of banks and other financial institutions, gross UK debt almost doubled relative to GDP from just over 1,5 times annual national income in 1987 to about three times in 2009, with most of this increase coming from the private sector rather than the government.
Households borrowed more to buy houses, resulting in their debt burden rising from 63% of national output in 1987 to 110% of GDP by 2009. The non-financial corporate sector saw its debts rise from 45% to 122% of GDP in the same period.
“This is an addiction that it is going to be hard to get off,” Hawksworth said. “If we try to get off quickly in a ‘cold turkey’ way, the consequence will be another huge recession.”
He said low interest rates had helped Britain cope with much higher debt levels. Both nominal and real (inflation-adjusted) interest rates fell during the 1990s, and 2008-2009 had seen them drop still further.
“This has made it possible to service a larger debt stock relative to income levels, but current exceptionally low interest rates will not last forever and a large part of household and corporate lending remains exposed to possible future falls in property prices —
“Total debt in our main scenario is projected to top the symbolic figure of £10-trillion by 2015 at a time when GDP will still be less than £2-trillion. This is a very heavy burden of debt for the economy to bear.
“Private sector debt levels have reached historically unprecedented levels. Sooner or later, this will have to be addressed either through debt being run down sharply, [risking] another recession, or more likely through a persistently heavy debt service burden that could dampen economic growth for decades.” — Guardian News & Media 2010