How reducing government spending is fueling household debt

Think back to July, the Tories cheered on economic results from the ONS, that revealed a budget surplus in July for the first time in 18 years. Those cheers do not reasonate with people around the British Isles, as all this Tory government has done is shift borrowing. From the public sector and onto the private.For the first time since the credit booms of the 80s British households now spent  more on average than they received in income.

In 2017 the Equality and Human Rights Commission published a report on the full impact that austerity will have by 2022, its findings are intrinsic to understanding why U.K. Household debt is rising. It confirmed that policies of austerity will affect the poorest in society, the most. Bluntly speaking by 2022, those earning the least will be 10% worse off, the richest just 1%. Even worse is that neoliberal policies discriminate, ‘Black Households’ as these will be 5% worse off than their white counter-parts.

These Conservative policies have further reinforced the barriers of upwards social mobility, allowing the introduction of zero-hour contracts in-order-to make the U.K. economy, ‘more flexible’, but is just an indirect means of introducing a hire-fire culture and eroding worker rights. The poorest in 2010 are even poorer now, because the Government has allowed companies to pay below a truly ‘living wage’, which forces low-income families to borrow, in-order-to meet their every-day needs. Which is where the problem lies, U.K. households now spend an average of £900 more than they receive and this problem will only worsen, as inflation rises, so do interest rates. The government has shifted the deficit from the treasury to our back pockets.

In March 2012, total household debt stood at £1,518.5bn in today’s prices compared with £1,630.1bn in 2017. This implies that U.K. households are having to borrow to fund spending, this is closely linked with the fact that real term wages rose just 0.7% over the same period. Before 2016, U.K. households were net savers, but now we are partnered only with Canada in the G7, as two countries that are net borrowers. More striking is the fact that Germany’s financial saving ratio is positive 35%.

Source: ONS: Household debt: statistics and impact on economy 

Samuel Tombs, UK Economist at Pantheon Macroeconomics, said: ‘Rapidly falling public borrowing continues to reflect sharp falls in spending, rather than a reviving economy.’ This is where government policy has failed us, GDP growth since 2010 has been fuelled by an expansion of consumer credit, rather than investment which our economy so desperately needs. As Philip Haynes, lecturer in Public Policy points out, ideas surrounding national investment strategies, come second to balancing the budget. The most recent OECD statistics on government spending are from 2016, and at that point they placed the U.K. in 20th, with government spending at around 41%, a figure that has been steadily decreasing. This is in comparison to the world’s happiest country, Finland, where spending is near 56%. Although a variety of factors contribute to why a nation’s economy grows, in 2016 Slovakia finished one place above the U.K. in terms of government spending and has steadily increased since, as we have gone the other way, their economy grew by 4.2% last year.

The obsession with eliminating the deficit and pursuing neoliberal policies, has cost us a decade of wage growth, squeezing living standards and plunged millions into poverty. The Conservatives have presided over negative real wage growth. In real terms we earn less now than we did in 2010.

A report in 2017 by The Joseph Rowntree foundation found that 14 million people in the U.K. now live in poverty, including 30% of Children. The effects on mental health are also startling, with nearly 25% of adults suffering from depression or anxiety in the poorest fifth of the population.

The problem that I have with our current economic situation is that it is completely reversable and is largely self-inflicted, this Tory government prioritises ideology over the people of Britain. The relentless rhetoric surrounding the deficit, is nonsense. The only thing saving the inept Conservative party is credit, we are running on fumes, this country desperately needs investment, basic economic theory tells you about the multiplier and what government spending can do in terms of increasing GDP, unsurprisingly this is neglected. Recollect your thoughts and think back to the circumstances in which the Tories were first elected, on the back of the worst economic crash in history, the people have been made to pay, for the failings of big banks. You, the people, paid for July’s budget surplus, and you the people will pay when this credit bubble bursts. Trust me when I say, the Government will be unforgiving in inflicting further neoliberal policies, when that happens.


Seb Chromiak

I was born 09.10.1997, I currently study Economics and Politics at the University of Manchester and have an interest in Neo-liberalism, Russian Politics and Current Affairs.

Seb Chromiak has 55 posts and counting. See all posts by Seb Chromiak

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