A Simple Answer To Britain's Debt Crisis

Cliff D'Arcy
by Lovemoney Staff Cliff D'Arcy on 29 August 2008  |  Comments 18 comments

The answer to our national credit crisis is both remarkably simple and intensely painful.

Last week saw the release of I.O.U.S.A. in American cinemas. Just as former Vice-President Al Gore's `An Inconvenient Truth' warned of the coming environmental catastrophe, so I.O.U.S.A. reveals that America faces a financial crisis of truly epic proportions.

The film warns that the US is buckling under the weight of its $9.5 trillion national debt, vast budget and trade deficits, and negative personal-savings ratio. (You can view the YouTube trailer for I.O.U.S.A. here.) Of course, our cousins across the Big Pond aren't the only society addicted to the `spend now, pay later' way of life. In fact, on some measures, British consumers are now deeper in debt than our friends across the Big Pond...

I Owe UK

At a national level, the UK faces similar problems to the US. Thanks to rising government spending and the nationalisation of Northern Rock, our national debt is set to exceed Chancellor-turned-Prime-Minister Gordon Brown's ceiling of 40% of gross domestic product (GDP, a measure of national income and output). Indeed, our national debt triples when you add in £200 billion of Enron-style, off-balance-sheet Private Finance Initiative (PFI) debt, plus a further £750 billion to fund guaranteed pensions for public-sector workers.

Just like the US, the UK continues to build up a sizeable annual budget deficit. Indeed, government spending is expected to exceed tax revenues by perhaps £50 billion in the 2008/09 financial year. In addition, thanks to the steady decline of British manufacturing, we now import far more goods than we export. Thus, like the US, we have a substantial trade deficit with the rest of the world, and are hooked on cheap imported goods.

We're slightly better at saving...

Then again, British adults are a little better off than their American counterparts when it comes to personal savings. In the US, the savings ratio (which measures the proportion of take-home pay which is saved) turned negative some time ago. In other words, American adults are draining their deposit accounts, rather than shoring up their savings.

Here in the UK, the savings ratio has remained positive since the late Fifties. Alas, as I revealed in Who Stole Our Savings Habit, it fell to a 49-year low of 1.1% in the first quarter of this year. In other words, we now save just £1 in every £90, which is nothing to write home about. However, I hope this ratio will begin to rise as we Brits rediscover the virtues of saving.

...but far worse at borrowing

When it comes to mortgages and other personal debt, we Brits are head and shoulders above our European neighbours. Indeed, during our seemingly never-ending housing boom, personal debt more than tripled, as the following data demonstrate:

(£bn)

Jun 95

Jun 08

Change

Change (%)

Mortgages

383

1,212

829

+216

Other debts

65

232

167

+257

Total

448

1,444

996

+222

Source: Bank of England

As you can see, we Brits have borrowed almost an extra trillion pounds in the past thirteen years. Around five-sixths (83%) of this extra borrowing is mortgage debt, which shot up as house prices rocketed. However, our non-mortgage debt (such as credit and store cards, car and personal loans, and overdrafts) has also exploded, and now averages roughly £9,000 per household.

What's more, according to money education charity Credit Action, our debt burden increased by around £98 billion in the past twelve months, or almost £1 million every five minutes. Today, our debt mountain is costing British borrowers nearly £95 billion a year in interest alone, or over £300 per household per month. Ouch!

The simple answer: better budgeting

In my view, our vast increase in personal debt is merely a symptom, not a disease in itself. Our underlying problem is blindingly obvious: we've become accustomed to spending more than we earn. Indeed, millions of households routinely spend £110+ for every £100 of take-home pay. Of course, constantly living beyond your means is the road to financial ruin.

Thus, the answer to our national credit crisis is both remarkably simple and intensely painful. The government and individuals must stop spending tomorrow's money today. In other words, we need to tighten our belts, cut back and live below our means. Otherwise, the scale of our problem will continue to increase, placing an intolerable burden on future generations.

In summary, my rallying cry is: Wake up, Britain and mend your spendthrift ways in order to avoid future financial meltdown!

More: Learn how to Get Out of Debt | Who Is To Blame For Debt Crisis? | Current Discounts And Deals #68

> Visit our Living Below Your Means and Dealing With Debt discussion boards

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Comments (18)

  • crazybucks1
    Love rating 0
    crazybucks1 said

    I'm from the US. We have our heads in the sand here. I live in a area where industry is pulling out left and right, houses are up for sale street after street, social programs are losing funding. And as of this writing, due to Hurricane Ike, we experienced a week long power outage, long gas lines and high food prices. Yet, my neighbors are are not adjusting. Not planning on what is next. Lehman Brothers, Merrill Lynch, AIG, Freddie and Fannie should be a wake up call for what will eventually be a down hill spiral.People simply need to cut back, stop using credit cards, stick to necessities until they can see a clear path. Then save and pay as you go. If you can't afford it, don't buy. Live simply and be happy.

    Report on 23 September 2008  |  Love thisLove  0 loves
  • dymafieto
    Love rating 0
    dymafieto said

    When it is stated in the article above that "millions of households routinely spend £110+ for every £100 of take-home pay" does "spend" here include their regular mortgage payments?

    Report on 31 October 2008  |  Love thisLove  0 loves

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