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

    Comment number 7.

    Looks like we are in a 'lost decade'....As long as the vast proportion of people who have debt, remain in employment, we should come out ok, in about 5 - 10 years time.

  • rate this

    Comment number 6.

    RP: "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. "

    And that's the way to go. And not only for the UK.

    BTW. Almost all leading economists predict that the growth within EU and US will be slow (2-3% p/y max) in the next 3-4 years.

    If not longer.

  • rate this

    Comment number 5.


    Your question is ridiculous

    Paying off debt is important because if household debts get out of control - if household incomes drop - then these are the conditions for great personal difficulty

    Sound advice from Mr Cameron - prioritise paying off debt & also helps re-capitalise the banks

    DC does not abdicate responsibility - he gives best advice to people - it is called leadership

  • rate this

    Comment number 4.

    Cameron is right. Shame he spent the last year pretending that decent growth was coming back soon. It isn't, it can't, because - as he now correctly realises - there is TOO MUCH DEBT. Most recent growth was borrowed from the future.

    If we pay off debts and balance our budget, in 5 years we'll be in a strong position but meanwhile growth will be minimal.

    At least Balls is not in charge...

  • rate this

    Comment number 3.

    If you are paying 25% interest rates on your credit / store card, surely the wise thing to do is pay off the balance ASAP, in the medium term you will have more money to spend. Ditto with mortgages, if you over pay, the interest you save will be tens of thousands of pounds. It was obvious 3 YEARS ago that this would take a decade to resolve and I still think we have a long way to go..

  • rate this

    Comment number 2.

    It may not sound very nice but it is the only medicine which will provide a long term cure. There is simply too much private and public debt and I for one am not willing to leave the probklem to my children and grandchildren. The issue has to be addressed now. Our generation caused the problem and its up to us to solve it.

  • rate this

    Comment number 1.

    UK personal debt stands at about £1,450bn of which £1,250 bn (approx) is secured on homes - ie mortgage lending. That means there is £200 bn of consumer debt which works out at about £8000 per household (mortgage is about £45,000 per household).

    This means that on average it is easily affordable problem is that debt is not spread evenly - too much is owed by the poor.


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