The Elephant in the Room

Household debt is a massive problem in the UK. According to the TUC it is coming close to £13,000 per household and the situation is getting worse as people rely on credit cards to try and dig themselves out of the hole that they are so clearly in.

So, why do no major political parties actually talk about this issue? Of course, we here plenty about the government’s deficit and we have been through a period of austerity – something that has non-to-subtly now actually been sidelined. Proponents of fiscal austerity actually often compared the government to a household, something that is incidentally facile – how many households do you know that can raise taxes, print money, are responsible for an army and a police force? However, they have said or done little to alleviate the actual problems being faced by millions upon millions across the country and in all likelihood the governments belt-tightening binge probably had an adverse effect on household debt.

Labour had a brief and badly aimed stab at dealing with this when it talked about a ‘cost of living’ crisis. Unquestionably, one of the principal pressures driving up the ‘cost of living’ is servicing growing debt levels. But in general the political class avoid the topic like the proverbial plague. Why? Well quite simply because big finance is quite happy with an economy based on a credit bubble.

However, it is ultimately bad economics because it is unsustainable in the long term. We could be on the cusp of a real crunch – if inflation continues to rise then many are going to be caught in the vice-like grip of rising prices and of raising interest rates as monetary policy shifts gear to meet the threat of rising inflation. It is not hard to see large swathes of debtor households start to default on their debt and the burden simply becoming  too much and reaching that tipping point and, if things continue as they are, this may not be a case of IF but WHEN.

So, this really is a ticking timebomb set right under the British economy and while debt boosts consumption in the short-term, the long-term trade off is, unsurprisingly, a decline in GDP growth:

Using data on 54 economies over 1990‒2015, we show that household debt boosts consumption and GDP growth in the short run, mostly within one year. By contrast, a 1 percentage point increase in the household debt-to-GDP ratio tends to lower growth in the long run by 0.1 percentage point.

Brexit gives us an opportunity to totally redefine our nation. It also gives us an opportunity to radically restructure our economy and we should take that opportunity. We need to pursue policies that will enable our households to gradually restructure and eventually pay off their debt and then we need to move away from the consumerist bubble economy which is entirely fuelled by growing debt, cheap and easy credit towards one where growth is based on actual production and it may be slower growth but more sustainable in the long-term.

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