UK plunges into debt danger zone after Labour's 10-year borrowing binge, says finance watchdog

Debt in Britain grew faster than any other major economy
The country must 'get to grips' with future spending on health and pensions

By Hugo Duncan

31st August 2011

Britain’s debt levels are dangerously high and are damaging the economy, according to one of the world’s leading financial watchdogs.

Debt in the UK grew faster than in any other major economy in the last decade to £180,000 per household.

It means the country is in the danger zone following a ten-year borrowing binge under the last Labour government, a hard-hitting report from the Bank for International Settlements has revealed.

Dangerously high debt: The British economy has flat-lined for the last nine months

Its chief economist, Steve Cecchetti, said: ‘Beyond a certain level, debt is bad for growth. At low levels, debt is good. It is a source of economic growth and stability. But at high levels, private and public debt is bad, increasing volatility and retarding growth.’

The BIS said government, corporate and household debt in Britain jumped from 223 per cent of gross domestic product in 2000, or £2.18trillion, to 322 per cent, or £4.68trillion, in 2010. That is the equivalent of £180,000 per household.

The 99 percentage point increase was the biggest of any leading economy and left Britain deeper in the red than any country in the Group of Seven industrialised nations except Japan.

The watchdog warned that debt levels in Britain ‘will explode’ unless it gets to grips with future spending on health and pensions as the population gets older.

‘The debt problems facing advanced economies are even worse than we thought,’ said Mr Cecchetti, who is based at the BIS headquarters in Basel, Switzerland.

‘As public debt rises and populations age, growth will fall. As growth falls, debt rises even more, reinforcing the downward impact on an already low growth rate.

Hard-hitting: The report came from the Bank of International Settlements in Switzerland

‘The only possible conclusion is that those with high debt must act quickly and decisively to address their looming fiscal positions.

'The longer they wait, the bigger the negative impact will be on growth, and the harder it will be adjust.’

The Treasury welcomed the report – called The Real Effects of Debt – which was presented to central bankers and economists at the Jackson Hole summit in Wyoming last week.

‘This underlines the need for us to get a grip on our debt levels,’ said a spokesman.

‘Part of the reason the recovery is a challenging one is because all parts of the economy are having to adjust – and the numbers will continue to get bigger unless we get them under control.’

The watchdog said the danger limit for government debt is 80 to 100 per cent of a country’s GDP.

The threshold for corporate debt is 90 per cent of GDP and for household debt it is 85 per cent, it said.

Once these levels are reached, debt starts to hold back growth, the report found.
In 2010, Britain had government debt of nearly 90 per cent of GDP, corporate debt of 126 per cent and household debt of 106 per cent.

Of the G7 economies, only Britain and Canada were in the danger zone for all three types of debt.

The British economy has flat-lined for the last nine months, growing by just 0.2 per cent in the second quarter of the year following six months of stagnation.

The subdued recovery at home has been weakened further by a slowdown overseas, particularly in the U.S. and the eurozone, Britain’s two biggest trade partners.