Osborne’s recovery depends on consumers getting further into debt. But they’re not.
This week’s GDP data (pdf) brought some modest good news and some very bad news.
The release confirmed that the economy has stagnated for the past six months and gave more detail on how different sectors are performing. Consumer spending (which represents the bulk of the economy) is falling at the fastest rate since the recession of 2008-09. In the last quarter alone it fell by 0.6%, coming after a drop of 0.3% at the end of 2010. In other words Britain is now facing a consumer recession.
A few weeks ago False Economy highlighted the Office for Budget Responsibility’s forecasts of soaring household debt. Well, the good news – the silver lining on a very dark cloud – is that the early indications are that the OBR projection now looks incorrect. Households do not seem to be borrowing at an increasing rate.
As purchasing power is squeezed by a deadly combination of slow wage growth and higher prices, people do not seem to be resorting to loans to maintain their lifestyles. Instead, as demonstrated by the numbers above, they are cutting back on spending. In economic terms the ‘household savings ratio’ (the percentage of their income that households save) is not falling – and may even be rising.
Which is of course really bad news for both the government and the UK economy. Despite Chancellor George Osborne’s previous talk of the dangers of high personal debt, his economic plans were based on consumers getting further and further into debt. If they don’t, growth will lower than anticipated – and hence unemployment higher and tax revenues lower. In other words, without more consumer debt Osborne’s plans to get rid of the government debt fall apart.
City economist Tim Morgan believes that households will not increase their borrowing. He writes:
"The mathematical implausibility of growth poses major problems given that the government’s fiscal rebalancing plan is entirely dependant upon growth reaching at least 2.8% in less than two years from now.
"If this doesn’t happen – and we are convinced that it can’t – the deficit reduction plan will come apart at the seams."
April’s record public debt suggest that the plan is already ‘coming apart at the seams’.
Duncan Weldon is senior policy officer at the TUC and blogs at Touchstone.
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