George Osborne's deficit reduction plans and Britain's economic growth rely on the public going on a £360 billion borrowing spree, new analysis has found.
Economists and Labour MPs have reacted with alarm to the findings by the Office for Budget Responsibility, which forecast that Britons will need to add £360bn over the five years to its levels of unsecured lending, which includes credit card debt, payday loans, and bank overdrafts.
The £360bn figure represents a £41bn increase on the OBR’s forecasts just nine months ago and would take households’ unsecured lending, as a share of total household incomes, to a record 55% cent by 2020. This would be well above the pre-financial crisis unsecured debt ratio of 44%.
The OBR's conclusions, as reported by the Independent, would be politically embarrassing as the chancellor has boasted of his efforts to reduce Britain's debt.
Delivering his Autumn Statement on Wednesday, Osborne told MPs: "I could have eased up on our determination to deal with our debts. I do not."
However, Labour's Yvonne Fovargue, head of the all-party parliamentary group (APPG) on debt and personal finance, told the Huffington Post UK: “Osborne economics shows just how out of touch he is with the realities of life. To base his economic plan on individual unsecured debt and rising levels of secured debt is to risk people losing their homes and being faced with unaffordable debt, with all the problems of stress, depression and family breakdown that can result from this.
“He says he wants more people to save but his economic plan relies on them borrowing - surely a classic example of saying one thing whilst meaning another.
“The payday lenders and credit card companies may be celebrating but ordinary people who are struggling to get by already will rightfully be alarmed by this plan.”
Fellow APPG member Willie Bain, member of the Commons business committee, told HuffPostUK: “The OBR’s forecast of a rising share of future economic growth coming from private consumption, fuelled by record levels of consumer debt is deeply worrying.
"The chancellor promised in 2011 that the government would lead an export-led recovery, yet this week the share of growth coming from net trade was predicted to fall further in each of the next five years. As the Bank of England said recently, recovery needs to be based on policies which boost wage growth, raise productivity and create more higher skilled jobs. Growth based on soaring levels of personal debt is no recovery at all on living standards for millions of working people in Britain.”
If Britons fail to go on a borrowing binge, economic growth would collapse and the government's budget deficit would likely start increasing again, the OBR's analysis suggests.
“The idea that households are either willing or able to take on so much new debt at such a rapid pace is questionable at best and highlights significant imbalances in the shape of the economic recovery” warned Matthew Whittaker, of the Resolution Foundation think-tank. “The apparent reliance of economic growth in the coming years on another surge in private debt should worry economists and politicians alike.”
Soaring household debt would worry the Bank of England, which is tasked with ensuring financial stability, as households could be forced to cut back on their spending as they sort out their finances, as happened before the last financial crash.
A Treasury spokesman said: “We are adamant that we will not repeat the mistakes of the past, which is why we have created the independent Financial Policy Committee within the Bank of England, to ensure emerging risks and vulnerabilities across the financial system as a whole are identified, monitored and effectively addressed.”
Meanwhile, Britons are already preparing to take on lots more debt as they borrow to get themselves through the festive season.
According to price comparison site uSwitch.com, an estimated 15 million consumers will be forced to borrow money to afford Christmas this year, with one in five of those surveyed (20%) doing so because they feel it is ‘expected’.
Nicolas Frankcom, money expert at uSwitch.com, said: “The happiest time of the year is getting more and more stressful as families struggle to provide the Christmas fairytale that they want to give their children."
This comes after the Institute for Fiscal Studies warned that Osborne has "colossal cuts" left to make in order to meet his deficit reduction plans that would leave the size of the state "changed beyond recognition".
The chancellor had also accused the BBC of being "hyperbolic" in its coverage of his deficit reduction plans. However, IFS head Paul Johnson told HuffPost UK: "There is no getting away from the fact that what is to come is really big cuts going forward."
Asked by HuffPost UK if Osborne was right berate the BBC for its "hyperbolic" coverage of his planned cuts, Johnson said the Chancellor's planned cuts were "genuinely significant changes".
Despite ministers' indications that the bulk of the austerity agenda is over, the economic thinktank said that just £35 billion of the cuts in spending by Whitehall departments have already happened, with £55 billion yet to come.
In a tetchy interview with John Humphrys on the BBC Radio 4 Today programme, Osborne complained that the corporation's coverage was like "listening to a rewind of 2010".
"You had BBC correspondents saying Britain is returning to a George Orwell world of the Road To Wigan Pier. It is just such nonsense. I thought the BBC would have learnt over the past four years that its totally hyperbolic coverage of spending cuts has not been matched by what has actually happened," he said.
He added: "What I reject is the totally hyperbolic BBC coverage of spending reductions. I had all that when you were interviewing me four years ago and has the world fallen in? No, it hasn't."
Complaining of "unfair" treatment, Osborne said that, although growth was expected to be 3% this year, tax revenues were still struggling, partly due to the "massive" 2008 credit crunch.
The government was irritated at the BBC's assistant political editor's Norman Smith's description of the Office for Budget Responsibility (OBR) report into what the next government may have to cut as a "book of doom". The BBC has defended itself, insisting it had been "fair and balanced" in its reporting.