From the TUC

Cameron’s very strange call

05 Oct 2011, by Guest in Politics

According to the advance briefings Cameron’s conference speech today will feature a call for households to ‘pay off their credit cards’. This seems an odd call to be making at a time when we now know that the economy hasn’t grown for 3 quarters and  household consumption has fallen for four consecutive quarters. Indeed Q2 of this year saw the largest fall in household spending since the dark days of the recession.

I can’t think of a time that a major political leader has ever stood up and essentially argued – ‘we face a renewed risk of recession – therefore you should probably spent less’,  if an opposition figure made the same case they would undoubtedly be accused of talking the economy down’.

But what makes this call doubly odd is that the Office of Budget Responsibility’s forecasts are premised on a large rise in personal debt. They forecast household borrowings to rise from £1,560bn in 2010 to £2,126bn by 2015, an increase of 36.3%.

Whilst the government is keen to talk of ‘rebalancing’ and ‘export and investment’ being the drivers of growth, there is no getting away from the fact that household consumption is still the largest part of the UK economy and a vital component of growth.

Indeed over this Parliament the OBR expects consumption to be a major driver of growth.  The table below shows they forecast that consumption will contribute around one quarter of growth this year, one third next year and half of all growth by 2015.

The problem of course is that real wages are falling and household income is going through its largest squeeze since the 1920s. It is a simple fact that if incomes are falling then the only way household spending can grow is by increased borrowing.

The OBR is very open about this, as they wrote in their last economic forecast:

“This subdued consumption outlook requires households to dip into their savings again in 2011, so the saving ratio continues to fall back from its post recession peak. Thereafter, the saving ratio stabilises at around 3½ per cent in our forecast (much the same as forecast in November), which is around half its average over the last 50 years.”

In other words they expect the savings ratio (the amount of their income that households save) to fall this year and then stay low.

Yesterday the OBR released details of its forecasting methodology. It includes the following, rather illuminating, note on how they go about forecasting consumption:

“large but temporary shocks to the economy (such as a fiscal consolidation) may be consistent with households reducing their saving for an extended period, until incomes recover.”

Basically they believe that if household income is squeezed by a combination of government spending cuts and tax rises (as now) then households will increase their borrowings to maintain their spending.

Cameron apparently doesn’t want this happen, in fact he seems to be going further and calling for households to not only to not increase their borrowings but to actually pay them off.

According to the Bank of England credit card debt in the UK currently stands at £66bn (the total of all types of unsecured lending is much higher). Even if households were to repay just half of this that would a £33bn fall in demand in the UK economy, easily enough to push the UK back into recession.

Nobody wants to see households get into too much debt or a resumption of reckless pre-crisis lending but calling for households to focus on paying down debt whilst their incomes are being squeezed and the economy suffers from a lack of demand just isn’t serious policy making, it’s a sound bite and a dangerous one at that.

Maybe after today’s awful GDP figures the prime Minister will think again before making such a dangerous call?

4 Responses to Cameron’s very strange call

  1. Martin Tillier
    Oct 5th 2011, 11:38 am

    More evidence , if any were needed , that Cameron doesn’t have a clue about economics , and is just engaging in glib remarks that he thinks will make him sound ” sensible and responsible” He is talking out of his hat , as they say , and will continue to do so unless coached better by truly knowledgeable people on what to say and when to say it. Essentially he doesn’t know what he’s talking about and cant engage in spontaneous conversation with politically aware people , he is a mouthpiece for people who are less photogenic ,people who may be known to the public already as untrustworthy or suspect, he is the shiny new face of UK politics , a face that sits in front of a more-or-less empty skull. His PR rhetoric is impressive to those who find such babble impressive, but not to any discerning politicos.

  2. Alastair
    Oct 5th 2011, 1:57 pm

    There are two separate arguments here:

    1. lower (expected) consumer borrowing leads to lower (expected) household consumption demand
    2. lower (expected) household consumption demand leads to lower (expected) aggregate demand

    (1) is a reasonable argument with which I would not necessarily disagree. I would also say that it is perfectly reasonable for Cameron to say this if he wants to “rebalance” demand away from consumption.

    (2) is not a reasonable argument to make, nor was it the argument Cameron planned to make as far as I can tell.

    If you assume (2) is true, the argument is effectively a tautology. But it is not the reality. If the Bank of England thought expected AD was much lower, then the inflation forecast would be much lower, and they should hence actively boost demand. For example, looser monetary policy could lead to Sterling devaluation, and higher external demand, which would offset the lower consumption demand.

  3. Public & Private Debt | ToUChstone blog: A public policy blog from the TUC
    Nov 18th 2011, 3:39 pm

    [...] As I argued at the time: I can’t think of a time that a major political leader has ever stood up and essentially argued – ‘we face a renewed risk of recession – therefore you should probably spent less’, if an opposition figure made the same case they would undoubtedly be accused of talking the economy down’. [...]

  4. The squeeze in living standards & the risks to the growth forecasts | ToUChstone blog: A public policy blog from the TUC
    Nov 29th 2011, 3:21 pm

    [...] the past year a squeeze in real incomes has led to a fall in consumer spending and a collapse in domestic demand – the real reason why our [...]

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