Why Britain is in deep doo-doo

There's a dozen reasons to fear the future!

In almost eight years as a financial journalist, I have acquired a reputation as something of a Cassandra, doom-monger and all-round pessimist.

This is probably because I was so bearish (negative) about the Noughties credit boom, which fuelled ever-higher house prices and unsustainable economic growth. Hence, I repeatedly warned readers about a coming ‘financial hurricane’ -- one which duly arrived in 2007.

It’s not over yet!

In the past three years, we Brits have withstood the credit crunch, the deepest and longest economic recession since the Thirties, and the near-collapse of the UK’s banking system.

Although we’re surely over the worst of these difficulties, I’m not convinced that our ‘golden years’ are set to return just yet. These 12 things trouble me:

1. Our national debt is soaring

In the 2009/10 financial year, government spending exceeded income by almost £160 billion. In 2010/11, this budget deficit is expected to be around £150 billion. In other words, HM Government is spending £3 billion a week more than it’s earning, which comes to £120 per householder per week.

Thanks to this over-spending, our national debt rose to £935 billion at the end of August, versus £803 billion a year earlier. Oops!

2. Our economic recovery is frail

The UK economy emerged from recession in the first quarter of 2010, growing by 0.4% since the final quarter of 2009. In the second quarter, the economy grew by a stronger-than-expected 1.2%, suggesting a firm recovery was underway. Alas, third-quarter growth is going to be much lower, perhaps under 0.6%, so our recovery remains fragile and feeble.

3. Unemployment remains elevated

In the three months to July, the UK unemployment rate was 7.8%, down 0.1% on the previous quarter, but still high by recent standards. Despite this slight fall, 2.47 million people remain unemployed and looking for work.

4. Inflation is stubbornly high

Inflation -- the rising cost of living -- can be a big problem, especially if it rises steeply. This is because inflation undermines our spending power, making our money go less far.

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In September, the Consumer Prices Index (CPI) measure of inflation stood at 3.1%, or 1.1% above the Bank of England’s target of 2%. However, the Retail Prices Index (RPI) -- which includes most housing costs -- was even higher, at 4.6%. This means that your income has to rise by at least 4.6% a year or you lose out.

5. We face a massive pensions crisis

Britain’s pensions system faces enormous challenges. While fat-cat directors amass huge pensions, private-sector workers have seen pension schemes closed, retirement ages increased, and steep cuts to payouts.

It’s looking grim for public-sector pensions, too, as the unfunded shortfall in this sector is around a trillion pounds, or £40,000 per UK household. Indeed, Lord Hutton’s independent report has proposed major cutbacks to curb the cost of public-sector pensions.

6. Higher taxes and lower benefits are coming

The coalition government has made it clear that every sector of society must do its bit to help tighten public spending. Hence, we’ve had announcements on the abolition of Child Benefit for higher-rate taxpayers, benefit cuts and caps for low-income households, and a 50% tax rate for the highest earners. These and other cutbacks will hit us where it hurts: in our wallets and purses.

7. Austerity cutbacks

What’s more, there are more curbs and curtailments to come. In the Comprehensive Spending Review (CSR) due on 20 October, the coalition will set out a wide-ranging programme to prune public spending. Few areas will be safe from these cuts, with some departments braced for a 25% cut to their budgets. One thing is sure: lower public spending will mean more job cuts.

8. Personal debt is still too high

Although our appetite for debt has waned dramatically since the onset of the credit crunch, our debt burden remains far too high. In total, we have £1,240 billion of mortgage debt and another £217 billion of consumer credit; a total debt of £1,457 billion.

Although this is lower than the all-time high of £1,462 billion recorded in January 2010, we’ve paid down under £6 billion of debt so far this year. Indeed, reducing this load to a sensible level will take years, perhaps even decades.

9. House prices are all set to fall

Since the onset of the credit crunch, mortgage lending has collapsed to levels not seen since the housing crash of the early Nineties. However, as I warned in Safer mortgages mean lower house prices, new lending rules will soon make it even harder to get a loan.

Starved of credit, there is only one way for the housing market to go: down. With over £4 trillion of our personal wealth tied up in domestic property, a double-dip in house prices is sure to hit consumer sentiment hard.

10. Wages are rising slowly, if at all

In the year to July 2010, wages (including bonus payments) grew at a sluggish rate of 1.5%. In the private sector, wages grew by 1.3%, but more generous awards saw public-sector pay rise by 2.8%.

Worryingly, this means that prices are rising at a much faster rate than wages are growing, so most British workers are losing out in the race against inflation. Until this situation improves, all we have to look forward to is lower living standards.

11.The savings ratio is falling

In tough times, the savings ratio (the proportion of our take-home pay which we save) tends to rise. After dipping to a tiny 2% in 2008, the savings ratio climbed to 7.7% in mid-2009. Alas, it’s starting to slip again, dropping to a mere 3.2% in the second quarter of this year.

Although some would read this as a signal that we Brits are becoming more confident about spending, I disagree. My take is that plunging savings ratio shows that things are so tight that millions simply cannot save, even if they want to!

12.Interest rates will go up

Lastly, the whole shaky economic edifice on which the UK stands is supported by one vital cornerstone: ultra-low interest rates. For the past 18 months, the Bank of England’s base rate has been stuck at a 316-year low of 0.5% a year. Unfortunately, when interest rates start to rise again, perhaps in the second half of 2011, things will get a lot tougher, particularly for over-stretched borrowers.

Finally, I’ve presented my ‘bear’ arguments, so how about countering these with your own ‘bull’ arguments? Please feel free to offset my doom and gloom by listing positive trends in the comments box below. Thanks for listening!

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