UK’s debt burden is falling – but the crisis is merely postponed

 
Allister Heath

BRITAIN’S debt burden is falling. Yes, you’ve read that right: the UK is finally deleveraging. But there is a catch: debt hasn’t fallen enough even though we are already nearing the end of the deleveraging cycle. Over the next few years, we are likely to go on another borrowing binge. The end result could be an even greater accumulation of debt relative to national income than we saw during the previous bubble.

First, the good news. Citigroup’s excellent Michael Saunders has crunched the numbers. He calculates that private sector debt (defined as the gross unconsolidated debts of households and private non-financial firms) has fallen to 187.5 per cent of GDP in the fourth quarter, down noticeably from a peak of 218.3 per cent of GDP in the first quarter of 2009. That is certainly a positive development.

Ditto household debt as a proportion of income, a good measure of the leverage of families and individuals: this is down to 140 per cent, and is now at the lowest level since the start of 2004.

One issue here is that homeownership and the number of mortgages have fallen; so this is not necessarily entirely good news. Another problem with the figures is that they camouflage a shift in distribution of the debt, with households that do buy property having to stretch themselves in a ridiculous way.

The final piece of the jigsaw puzzle comes from the national debt, which has soared in a horrendous manner since the recession. But despite that, the combination of total private sector debt (again, excluding financial firms) and public sector debt (defined as the government’s net debt) has fallen from 266 per cent of GDP in the third quarter to 263 per cent of GDP in the fourth quarter. The combined debt ratio dropped six percentage points over the past year, the largest decline since records began in 1987, according to the Citigroup research.

Unfortunately, this remains much higher than the 203 per cent seen a decade ago or the 174 per cent enjoyed 15 years ago – a big problem, given that the private sector will soon start to borrow properly again. The crisis has merely been postponed.

FREEDOM TO PRICE
David Cameron can be remarkably inconsistent. He rightly believes that Waitrose should be allowed to give away free tea and coffee to holders of its loyalty card. Some coffee shops have protested, as have some Labour politicians, but Cameron rightly sees it as a perfectly legitimate practice in a free, competitive market.

But the PM has also slammed the pricing of replica England football shirts, which can cost up to £90. As it happens, I agree that this is very expensive, but that’s not the point. In a free market, companies have the right to charge whatever they want. Cameron needs to be consistent: either he believes in capitalism, or he doesn’t.

REGULATORY EXPLOSION
Here is a fun fact. If the number of financial regulators and the number of private sector financial services industry jobs both continue to expand at the rate they have for the past 30 years, the number of regulators will overtake the number of financiers by 2060. The statistic was produced by Philip Booth of the Institute of Economic Affairs, who himself was inspired by Andrew Haldane of the Bank of England.

What makes this even more shocking is that the numbers don’t even include compliance roles in the private sector, the number of which have exploded since the crisis. At some point, we will need to rethink the entire way that we govern and regulate financial services, focusing on simplicity, transparency, responsibility and competition. But we are not even remotely close to that stage yet, so expect regulators to be awarded ever larger budgets, the rules to become ever more complex, and for there to be little discernible effect on the system’s overall performance.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath