Public borrowing bad, household borrowing good?

Following on from yesterday’s post¬†about the unspoken assumptions needed to get us to a budget surplus by 2019, here’s another chart from the OBR’s report on the Autumn Statement:

It shows the ratio of household debt to GDP. This peaked just prior to the crash in 2008 at around 170% of GDP after which time, households started to ‘deleverage’ and the ratio fell to around 145% today. For the reasons I gave in yesterday’s post, in order for the government’s deficit to disappear¬†and then go into surplus, household borrowing will have to rise. The OBR forecast it will rise to over 180% of GDP by 2020. Remember that the crash coincided with a ratio of just under 170%, but it is now assumed we can go way beyond that seemingly without any problems.

I have hardly seen this mentioned in the commentary surrounding the Autumn Statement, but it’s a huge elephant in the room. If public debt is such an evil, burdening our grandkids for years to come, why is household debt (where the interest rates will be much higher) not similarly bad? I would suggest that rising household debt presents a much greater systemic risk to the economy than government debt, and no Chancellor with a serious #longtermeconomicplan would put rising household debt at it’s centre. It’s seriously unwise and is setting a timebomb waiting to go off. I reckon Osborne realises the chances of a Tory Government next May are pretty slim, so doesn’t really care what problems he is creating if it means he can retain his reputation for ‘fiscal responsibility’ and someone who can take ‘tough decisions in the national interest’.

All the media comment has been around marginal changes like on stamp duty or on the nightmare of cuts still to come, but to me this issue of household debt is one journalists should be hammering away at hard. We need to be asking if replacing government deficits with household deficits is another other than a recipe for disaster.

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