Tory conference: Is Cameron calling for low growth?

 
David Cameron The PM was in the audience for Chancellor George Osborne's conference speech

In calling for consumers to cut their big debts, should David Cameron be careful what he wishes for?

With even the UK's biggest and most fearsome retailer, Tesco, reporting lacklustre performance in Britain today, many consumer-facing businesses won't thank him for urging thrift on the nation.

That said, those without vested interests would argue Mr Cameron is right to be anxious that the indebtedness of UK households remains at near-record levels, equivalent in aggregate to around 160% of disposable incomes.

By all historic standards, that level of indebtedness is high, although the debt/income ratio is down from the absolute record of 180% hit in 2008.

So many would argue that there can't be a sustainable long-term recovery in the British economy until, to quote Mr Cameron, British consumers get "their books in order".

But the British economy is disproportionately dependent on consumer spending: it represents not far off two-thirds of British GDP.

Here's the thing: when the Office for Budget Responsibility forecast in March that GDP growth would return to 2.5% in 2012 and would then rise to almost 3% in the three subsequent years, that was predicated on a revival in consumer spending that would see British households take on a staggering £570bn of additional debts by 2015 - which would lift the ratio of household debts to disposable income back up to 175%.

Mr Cameron is today publicly announcing that he doesn't want UK households to borrow more in that way.

He thinks they should repay what they already owe. But if they do that, they won't be spending any more in Tesco, Marks & Spencer, on the internet or in corner shops.

Long road

That may well be perfectly sensible - in that perhaps the only way to put the UK economy on a sustainable footing is for it to be reconstructed, or rebalanced (in the jargon), so that it's less reliant on debt-funded consumer spending and is powered instead by exports of goods and services.

But that kind of economic reconfiguration can't happen overnight.

Remember that manufacturers, for example, represent just 12% of the economy.

So if households do what Mr Cameron wants, and continue to pay back their debts, it is very difficult to see how the economy can grow at much more than 1% or so per year for many years to come.

Mr Cameron's thrifty economy would be a low-growth economy for many years to come - as the significant price of ultimately putting the economy on stronger foundations.

 
Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this
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    Comment number 447.

    The Government should immediately cut VAT on petrol.Cut duties on petrol.This would put money in peoples pockets . They could then spend or pay down their credit card bills , or a bit of both.
    It would reduce inflation. Probably increase the Governments tax yield from the extra spending and hopefully reduce the countries debt.

  • rate this
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    Comment number 446.

    Contrary to the views expressed in many of the earlier posts, the truth is that Mr. Cameron has mis-diagnosed the problem. They appear to believe that the UK has a debt crisis. This is not true; the UK's debt is, on average, of a longer maturity than that of other industrialised nations and the interest rate paid on new rolled over debt is very low. We have a growth crisis, not a debt crises.

  • rate this
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    Comment number 445.

    Everything so skewed, Tesco made so much profit last year, yet they pay majority of staff around the minimum wage. most will be claiming one or more benefits which is large drain on taxpayers. So basically the tax payer is subsidizing Tesco! As well as the banks As well as Govt overspend...Cant Tesco afford to pay wage to take staff out of benefit and thereby save the taxpayer funding the profit

  • rate this
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    Comment number 444.

    The PM maybe on to something. Is he suggesting we should save before we spend How do you when the Big Society only values your hard work at £6.08 an hour. An increase of 15p an hour! A millionaire has had there mansions council tax frozen for another year. Is this an imbalance.
    Why can we not increase wages at the bottom, sure profits maybe hit
    in the short term, but recover in the long

  • rate this
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    Comment number 443.

    441.WOTW_IBAAA
    "Now how do we explain to the country this is all an experiment - which the very author dismissed as too simplistic?"

    Maybe if the majority of economists weren't paid by banks and had some backbone we wouldn't need to. Otherwise it's about posting on sites like this and hoping Peston, Flanders, Mason et al do their job correctly. I am holding my breath...

 

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