In Euroland, the crisis has centred on banking and sovereign debt. In Britain, we have already given our banks plenty of capital. Remember the part-nationalisation of RBS and Lloyds TSB? It was in late 2008. Because we avoided the death trap of the euro, our government can still borrow in sterling. Our ten-year yields are the lowest since 1703. Over here, a much bigger problem is the issue of consumer debt, and the consequent disappearance of consumer demand.
In Britain, household debt in 2011 was equivalent to 98 per cent of GDP, the highest in the G7. In Italy, the equivalent figure was only 45 per cent. In Greece, you may be surprised to learn, the figure was a modest 62 per cent. Even in America, where consumers gorged on credit for more than a decade, the proportion of household debt to GDP was only 87 per cent.
The British consumer is under an enormous debt burden. With higher inflation, no wage increases, and the persistent overhang of debt, the average Briton has had very little money to spend in the last few years.
Britain’s slump is largely due to the collapse of consumer demand. The solution to the problem must therefore involve some attempt to boost that demand.
There are two ways you can do this. You can either cut the price of goods for sale, making them more attractive, or, you can put more money directly into consumers’ pockets. The first route involves a cut in VAT, making the goods cheaper. The second route gives the consumer more choice. By putting more money into the consumer’s pocket, you are allowing him or her to spend that money on whatever he or she wishes. The consumer may well pay down debt. But that is also a good outcome, allowing more future spending.
And, of course, the way to put more money into consumers pockets is to cut their costs. Tax cuts. We could raise the 40 per cent threshold from £34,370 back to £37,000. We can do this without even changing the tax rates. There has been talk of the “squeezed middle”. This is precisely our problem. The middle classes have stopped buying things because they have so little disposable income. The average family is hard pressed. Yes, it is true that their mortgage rates have not risen. But the interest on the credit card still needs to be paid; the weekly shop, in cash terms, is more expensive than it has ever been. Travel, the cost of getting into work every day, is still very expensive. The double income family hasn’t had a pay rise in four years. Taxes have increased.
Yet it was middle class consumption which, for good or ill, was driving the economy in the decade before 2007. Our country feasted on credit, which in turn powered our economy. We can regret that this happened, but it’s a fact of our history. A child of ten can understand that if economic growth has occurred because of credit expansion, economic growth will stall once the credit stops. But the consumer still needs money to spend. Without this, our consumer-driven economy will stagnate.
It’s difficult to see how consumer demand can be stimulated by giving banks more billions. We have been pumping billions into the banks since 2008 and the results of this have not been particularly impressive. The extra money has been used simply to bolster banks’ reserves. It’s not immediately apparent why the banks, having received all this extra money, should then lend it out to companies. They haven’t been doing this. Why should they change? But even if they did lend the money, it wouldn’t make much difference without a restoration of consumer confidence.
Without consumer demand, you could give the banks £1 trillion and it still would not stimulate the economy.
People who object to this focus on consumer demand talk about deficit reduction. Yet the one lesson of the last two years has been that, without growth, deficit reduction is an almost impossible task. The latest figures showed that we borrowed £17.9bn in May, £3bn more than the year before. The lack of growth is making deficit reduction very difficult.
Our economy is different to others in the Eurozone. By identifying our particular consumer debt problem, we can focus on finding suitable solutions to boost consumer demand.
Kwasi Kwarteng is Conservative MP for Spelthorne.