Marcus Evans Group | Worldwide Headquarters | American Offices | Latin America | European Offices | African / Asian Offices

National debt soars as UK adjusts to ‘new equilibrium’

As Bank of England governor Mervyn King points out, a rapid increase in public borrowing is inevitable when boom turns to bust

Britain has passed plenty of mind-boggling landmarks since 2007 when the credit crisis struck, but news that the government now owes £1 trillion – yes, that’s twelve noughts – underlines just how long it will take for the economy to adjust to what Sir Mervyn King, in a speech on Tuesday night, called a “new equilibrium”.

As the Bank of England governor pointed out, a rapid increase in public borrowing is inevitable when boom turns to bust. Surging corporation and income tax receipts are replaced by the rising costs of unemployment and social distress (though note that the £1tn is the measure not including the cost of bailing out the banks).

“The government’s fiscal deficit inevitably increased sharply during the downturn. Private borrowing was replaced by public borrowing. So the United Kingdom is still borrowing from the rest of the world,” King said.

At just short of 65% of the size of the economy, the UK’s national debt is dwarfed by that of crisis-hit eurozone countries such as Italy and Greece.

But it’s not just governments, including ours, that are having to learn that you can’t live on borrowed time forever.

When combined with the borrowing accumulated by our bloated banking sector and spendthrift consumers before the bubble burst, the UK’s debt burden is world-beating.

Recent research by McKinsey showed that once the financial sector and households are included, debt in the UK is now worth more than 500% of GDP. It’s on a par with Japan’s and well above that of the US, Germany, France or Spain, and has barely shifted since the crisis began.

McKinsey’s analysts argued that while the US has begun the painful job of working through its debt burden, with borrowers defaulting on unaffordable mortgages, and job creation helping consumers to pay down more of their debts, the UK has barely scratched the surface.

The impact of the government’s spending cuts are clear for everyone to see, with the battle over benefits caps in the Lords, and the health select committee’s warning over the effects of NHS “efficiency savings” just the latest examples of the pain inflicted by Osborne’s deficit-cutting spree.

But the UK’s consumers have also suffered a painful reality check since the days when Gordon Brown hoped he had abolished boom and bust.

Households are starting to put (slightly) more away for a rainy day. But consumers have suffered the most prolonged squeeze on their incomes since the 1920s, and have been forced to wake up to a world in which the price of their home is no longer rocketing.

And the much-needed “rebalancing” of the economy, away from debt-fuelled consumer spending and towards more sustainable, export-rich growth, will hardly be helped by a banking sector that is still retrenching violently, a European economy hurtling towards recession, and Osborne’s determination to wrestle with the £1tn legacy of the crisis, sooner rather than later.

King may be right to argue that once the Great Deleveraging, as economists call it, has worked its way through the economy, the UK could be on a more sustainable footing than for many years; but there’s a very long way to go. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds