Household Debt is Soaring

The Indepedent is today reporting figures from the Office for Budget Responsibility.

The OBR statistics showed households spent £68.9bn less than they earned in 2009-10. The figure fell to £67bn in 2010-11, £35.7bn in 2011-12 and £27bn in 2012-13. The following year Britain’s families went into the red to the tune of £12.4bn, rising to £29.4bn in 2014-15.

The OBR projects that households will spend £40bn more than they earn this year (2015-16), increasing to £40.4bn in 2016-17, £43.9bn in 2017-18, £48.6bn in 2018-19 and £49.5bn in 2019-20. Total household borrowing is set to reach £222bn over the lifetime of this parliament.

And what this tells us is that present level of GDP growth is unsustainable. We are heading for another balance sheet recession as explained so eloquently by Richard Koo (see video below). What will happen is that at some point consumer spending is going to slow drastically as households switch from spending borrowed money to focussing on paying down debt.

When consumers stop spending then retail will slow drastically. The dominoes will begin to fall. The government is committed to not preventing this. In fact by helping to inflate asset prices, particularly housing, they are contributing to the problem.