UK's debts 'biggest in the world'
- 21 November 2011
- From the section Business
At the beginning of 2010, I highlighted a fascinating analysis by the consultants McKinsey called Debt and Deleveraging, which showed quite how indebted the economies of the developed west had become.
McKinsey said that the UK had by 2008 become the most indebted of all the big, rich economies, more indebted even than debt-engulfed Japan.
It has now become widely recognised that perhaps the greatest economic policy failure in the UK, US and eurozone during the 16 boom years before the crash of 2008 was the explosion of borrowing by banks, households, businesses and governments - or, to use the jargon, the unprecedented and massive leveraging up of entire economies.
These giant debts triggered the crash of 2008 because creditors refused to roll over short-term loans to banks, and caused the simultaneous recession because banks stopped lending, and have brought about our current economic malaise because our ability to spend and invest is hobbled by the imperative of repaying what we owe.
That is why getting the debt down to prudent levels is the most important economic challenge of our time.
As it happens, how we became so indebted and what to do about it, is what I am examining in a two-part documentary, called The Party's Over, that will be broadcast on BBC Two at 1900 on 4 and 11 December.
But how have we done since 2008? Are we getting the debt down?
Well, McKinsey is updating its 2010 report and has shared its interim findings with me (some of which I wrote about on Friday in my note on why investors are as wary of lending to Spain as to Italy).
These findings are not comforting.
According to the consulting firm, by the end of March this year, the aggregate indebtedness of the UK - that's the sum of household debts, company debts, government debts and bank debts - had risen to 492% of GDP, or almost five times the value of everything we produce in a single year.
That compares with 481% at the end of 2008.
So the UK's total indebtedness has increased, and is still the biggest relative to GDP of any of the big economies. That said, Japanese indebtedness is pretty much the same size - at the end of 2010, as opposed to the end of March 2011, Mckinsey says Japan's debts were also 492% of GDP.
US indebtedness is less, at 282% of GDP by the middle of this year, down from 296% in December 2008.
In the case of America, government debt is on a steeply rising trend, jumping from 61% of GDP to 80% over the past two and a half years.
But household debts have fallen from 98% of GDP to 87% of GDP, as homeowners have handed back the keys of their houses to lenders and reneged on the debts (which is possible in much of the US, but almost impossible in the UK).
So what's going on? Why are UK debts still going up?
Well partly it's to do with a phenomenon I've discussed here many times, that debt has been shuffled from the private sector to the public sector.
When banks stopped lending, and private-sector spending and investing collapsed, governments continued to spend, even though tax revenues were falling. So public-sector borrowing exploded.
To be clear, if governments had not continued to spend, our recession might well have become something much worse, a 1930s-style depression.
But it is fair to say that a consequence of banks, households and businesses trying to repay their debts has been a big increase in government borrowing.
Here are the numbers. From the end of 2008 to the spring of this year - so during the course of a bit more than two years - the debt of British companies fell from 122% of GDP to 109%, and the debt of households fell rather less, from 102% of GDP to 97% of GDP.
Most would say those are positive trends, although the pace of debt repayment by households is pretty sluggish and our personal debts (at close to 100% of GDP) remain substantial (and a worrying burden) by historical standards.
By contrast, government debt has risen from 52% of GDP, which at the time was pretty low by international standards, to 76% of GDP, which is more or less standard for the rich west.
But as you'll know, UK government debt remains on a fairly sharply rising path (the government's deficit is some distance from being closed).
One other slightly surprising and - perhaps - disturbing trend is that the debt of financial institutions has risen, from 205% of GDP to 210% of GDP.
In McKinsey's definition, this financial institution debt excludes bank lending to households and non-financial businesses, to avoid double counting. Its substantial size is a reflection of the size of the UK's financial services industry, the City of London.
McKinsey believes, however, that this increase in financial institutions' debt disguises a positive trend: much of the debt is now of a longer-term nature, so poses less of threat to the stability of the economy (it can't be called in at a moment's notice, to the potential ruin of the borrower).
The point is that if excessive debt is the disease, what we've had since the end of 2008 is analgesic and sticking plaster, rather than cure.
Record low interest rates and the creation of £275bn of new money through the quantitative easing programme have made it possible for us to live with our debts - cheap money has made the debts bearable.
But we haven't as yet found a way to get the debts down so that we can be confident that our economy's foundations are solid and sound again.
What it means is that we must brace ourselves for many years of relatively low growth, perhaps 1% versus the 3% of the 16 boom years before the crash, because we no longer have the fuel of borrowing more and more every year.
How we reconstruct our economy to generate sustainable growth, and how - in the meantime - we cope with flat or declining living standards, are the themes of those films that I mentioned earlier (in case you've forgotten, 4 December and 11 December on BBC Two).