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Speaking earlier this month, David Cameron launched this year’s election campaign with a speech about debt. He posed the following question “To every mother, father, grandparent, uncle, aunt – I would ask this question. When you look at the children you love, do you want to land them with a legacy of huge debts?” [No sense of irony was detected in the position of university students who are saddled with enormous debts as a direct and deliberate result of Government policy].
He was speaking about the public sector debt which continues to rise relentlessly and according to figures recently released by the Office for National Statistics (ONS) now stands at 1.483 trillion pounds with the noughts that is £1,483,000,000,000. This is a huge amount of money and represents 81% of our annual Gross Domestic Product (GDP).
We all know that debt isn’t free that not only does it have to be repaid but interest and other charges are also added to the sum. Those costs currently stand at £36bn per year and like the debt are rising year on year and will continue to.
With numbers like these who can’t argue that reducing this debt has to be a priority for our public finances. How could we pass this onto future generations, after all they might not pay our pensions if we’ve spent all the money.
However public sector debt is not the only debt we have I this country. Each month I get a cheery little email from the daily cost of raising a child, rates of insolvency and bankruptcy and how many homes have been repossessed.
It also published figures on personal debt. When the credit crunch came debt actually rose dramatically by more than 10%. Then people did what they do in a recession, hunker down, cut spending and also reduce debt. People save a bit more because the rainy day seems closer but also they start to rest the credit card and are less likely to buy a new home. Peoples’ economic confidence can probably be measured just as effectively from their propensity to borrow (because borrowing reflects an expectation that there will be future income to pay for the borrowing) than any survey.
Tracking the emails from the Money Charity I started to notice that personal debt began to rise again in 2013. That personal debt now stands at £1.463tn only fractionally less than the public sector debt, almost £29,000 for every adult in the UK. So in answer to David Cameron’s question one could say “Yes we do.” However most of this debt is essential, 80% of it is mortgage debt to buy homes. Without the ability to raise debt very few people would be able to own a home. Some of the Government housing programmes are aimed at helping people to get into debt.
The private sector has around another £7tn of debt. Debt is the foundation of capitalism and banks are the mechanism to move inactive money (savings) into productive use by lending them to people and corporations who can make use of them and increase its value. Without debt there is no progress because investment is just another word for debt.
Of course debt is only productive if it can be repaid otherwise the economic system collapses under its own weight. This is what happened during the credit crunch as banks sold and resold and repackaged and resold debt to each other. The debt was over-valued and often uncollectable. We have learned from that and have put in measures to stop it happening again. I’m not so sure.
The Office for National Statistics has also shown (I spend a lot of time reading their reports) that national incomes have fallen and people have less money to spend. However personal debt is now almost £200bn higher than when the credit crunch hit. So we have higher debts and lower incomes. Private sector debts are also rising and this time if it all goes wrong the public sector is too weak to bail them out and whatever David Cameron may think we are all in hooked on debt and that is what we will be passing from generation to generation even if the public finances ever move into surplus.