UK's debts 'biggest in the world'

A house auction sign Household debt in the US and elsewhere surged in the boom years, with dire consequences

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).

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 20.

    Comment No. 3: You have hit the nail on the head - I do exactly the same, unless someone offers me 0% finance, which I only accept if I have the cash to clear it should I need to.

    Comment no. 2: If only I lived in as simple a world as you - we weren't in a bad economic position until the world's economies hit recession. Comment no. 4 sums it up, & why we've not quite got our back against the wall

  • rate this

    Comment number 19.

    For the last 30 years we have lived beyond our means both as a nation and individuals. We need to tackle the cause of excessive personal debt - home ownership, greed and materialism - and once we realise that we can do without each, we will solve this crisis that affects us all. We will soon be facing the first generation who leave an inheritance of debt to our children, rather than wealth.

  • rate this

    Comment number 18.

    Its hardly a shock that this is rising when the government decides to push up student loans and doesn't even question why banks are lending at a much higher rate than the base rate or the libor.

  • rate this

    Comment number 17.

    . . . so what this man is saying is that economies are fuelled by desire not need. If we don't all go out and buy stuff for the sake of it then the economy grinds to a halt . . . and we can see it everywhere . . . why do we suddenly need laminate floors? who needs a new 3 piece suite every 2 or 3 years . . . and Primark?

  • rate this

    Comment number 16.

    Totally agree with comments by BorgNumberOne.
    The younger generation have forgotten (and the government have failed to encourage) how to save money.
    They want everything now without being willing to wait, save and enjoy the fruits of their efforts.
    A start would be to stop encouraging the selfish borrowing and overspending of Brown and Blair's era.

  • rate this

    Comment number 15.

    with such low interest rates, the incentive for reducing indebtedness is reduced. If raising rates is not going to be possible, then other incentives need to be applied. Credit limits is one. How about going back to the old 3 times your salary for a mortgage. This would force house prices down as well - which will help all those currently priced out.

  • rate this

    Comment number 14.

    How much did the debt jump in 2008 when we bailed out the rich idiots at the Crock and elsewhere and took all their lunatic bets/obligations onto our books?

    Not the deficit - the debt

    How many current and former ministers work in the financial services industry? Who made all the money arranging the loans? Who is going to snap up the assets when they collapse at last?

    And - who is on the hook?

  • rate this

    Comment number 13.

    Do credit rating agencies mind if economies print their way out of debt. If so why weren't Zimbabwe AAA Star rated?

  • rate this

    Comment number 12.

    As usual along with debts we also need to look at assets. Obviously these can fluctuate in value and are generally less liquid than the debts but as Robert points out with long term borrowing in place this is less of a risk.

    A second point, all sums are quoted relative to GDP thus if GDP has fallen even if debt has been paid down the ratio may be no better.

  • rate this

    Comment number 11.

    I read that UK's corporate debt (indebted banks in particular) is less concerning because it is offset by the value of assets owned - is this the case? How does asset ownership feature in the overall picture?

  • rate this

    Comment number 10.

    Jeff is absolutely right. You could add up the total indebtdness of any organisation and think that it was unreasonable. Five years of GDP spread over future payments for up to 20 years would be less frightening. That, of course, isn't what journalists want to tell us.

  • rate this

    Comment number 9.

    Yep, tell me about it. I think my personal debt accounts for about 30% of UK's. Sorry about that folks.

  • rate this

    Comment number 8.

    That the percentage to GDP has inceased to 492% is not surprising given that Thatcher decreed that production of goods was to be secondary to services of banking and insurance - so the blindingly obvious impact of a recession is that the ratio of debt to GDP will increase.

    We have to start producing goods again.


  • rate this

    Comment number 7.

    Is this any great surprise? We're always left in huge debt after a period of Labour government. It's just been covered up by other, bigger issues this time around. The fact remains, we entered a tough time in a very weak position - never should have happened.

  • rate this

    Comment number 6.

    We are all responsible, as a nation we have tried to keep up with the Joneses. We have all be suckered into wanting more, of living beyond our means and we were given cheap credit to live our dreams. The way we fell for this was almost subliminal. from watching adverts on the Box to seeing the latest gadget our friends had we wanted it. We sowed the wind and now the Whirlwind has arrived.

  • rate this

    Comment number 5.

    How are we still AAA?
    Good question.
    Also how much of the Govt debt is held by ...... the Govt?

  • rate this

    Comment number 4.

    The size of the debt is of no real importance, the key factor is the ability to service the debt, hence our retention of AAA

  • rate this

    Comment number 3.

    There's a rule of thumb I've always applied. With the exception of a house, never buy anything unless you can afford to pay for it in cash. That way you can pay your cards off every month and only have a mortgage left to service, which attracts a lower interest rate anyway. Simples.

  • rate this

    Comment number 2.

    Thank you for explaining what a precarious economic position Gordon Brown had got the country into by 2008.

  • rate this

    Comment number 1.

    How are we still AAA?
    When other economies are spiralling into the pit, with less debt than us, why aren't we?

    Is it the City of London? Don;t wanna bite the hand that feeds ya?


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