As a new report finds household debt reaching £1.5 trillion, is this a disaster waiting to happen?

Credit cards
Britons have been racking up the debt with interest rates at record lows (Source: Getty)

Baroness Altmann, former minister of state for pensions, says Yes.

This news makes for disturbing reading. Casting our minds back a few years to the events leading up to the 2008 crash invokes an apprehensive sense of deja vu. Was it not excessive borrowing that led to the crisis we are still struggling to overcome?

Policy-makers were far too relaxed about rising household debt levels and excessive mortgage borrowing in the years before 2008 and similar insouciance pervades policy thinking now. The stance of monetary policy and ultra low interest rates aim to encourage more debt, yet debt is already at extreme levels.

What we need now is to end over-reliance on household borrowing as a growth strategy and recognise that this merely brings forward growth from the future, while no plan is in place for repaying these debts while maintaining living standards.

We will not solve problems originally caused by excessive borrowing if we persist in pursuing policies that rely on further borrowing.

Vicky Pryce, board member of CEBR and co-author of It’s the Economy, Stupid – Economics for voters, says No.

While true that consumer debt levels are rising, with interest rates at record lows, servicing debt is manageable.

Households have been taking advantage of zero per cent credit cards and bargain interest-free finance deals, and even usual household borrowing is cheaper than it used to be. With very low returns on savings, it’s no surprise households have been borrowing. Expectations of higher inflation due to the fall in the pound may of course have brought borrowing and spending forward.

In any case, this debt is not surging at pre-crisis speeds and 87 per cent of the accumulated debt is on mortgages and secured by property. Moreover, given record high employment, this debt is sustainable.

And although inflation is meant to rise, few expect interest rates to follow as a result. With a fiscally reluctant government, the Bank of England having almost given its all, and exports slow to respond to a falling pound, consumer spending may be just what the economy needs to get by for now.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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