Corporate and household debt hugely elevated on a (new) longer view on history
The financial and economic crisis is now widely understood as a consequence of excessive private sector debts. A more sustainable economic model into the future has been understood to involve a certain amount of so-called ‘deleveraging’, so that debts are reduced as a share of income.
Today the ONS issued new reconstructed historical estimates of the financial position of the UK economy (here), the product of a collaboration with the Bank of England and other consultants. An article by Ryland Thomas (of the Bank) and Louisa Nolan (ONS) sets out (fascinating) background to the sources and technical details of the construction of the figures, and also shows some illustrative analyses of household wealth.
The dataset also permits a more detailed assessment of private indebtedness, and the extent of any deleveraging, in a longer-run historical context. The results are not encouraging, though not unexpected. The charts below show the new measures of indebtedness spliced onto the existing figures (for years from 1987) for both the corporate and household sector. (An annex gives a little methodological detail.)
For both the household and corporate sector, the story is similar. The new figures confirm that debts as a share of income were lower and more stable from the late 1950s through to the early 1980s. From this point on debt rose rapidly to peak: around the turn of the millennium for the corporate sector, and towards the end of the 2000s for the household sector. Corporate debts may have recently stopped expanding as a share of income, but have not started to shrink. Household debts as a share of income have fallen a little.
But in both cases debts remain very high relative to the longer run history.
- Over the past decade (2003-2014) corporate debts average 132% of GDP, this is nearly 2¼ times as much as the average debt to income ratio of around 60% over 1957-1980.
- Over the past decade (2003-2014) household debts have averaged 101% of GDP, 2¾ times as much as the average debt income ratio of 36% over 1957-1980.
The analysis also reminds us that while the majority of commentary tends to focus on household debts, the position of the corporate sector may be no less important.
As Thomas and Preston point out:
“The current post-1987 dataset roughly covers a 30-year period when the UK financial sector was largely liberalised and free of direct financial controls following various reforms in the 1970s and 1980s. But the recent introduction of macroprudential policy in the UK and the need to understand how its instruments work has rekindled interest in how the more controlled financial environment of the 1950s and 1960s worked. During this period the authorities operated various policies that, at least superficially, bear some resemblance to the tools at the disposal of today’s macroprudential policy makers. The Bank of England’s One Bank Research Agenda, suggests there are benefits from understanding the financial system of the 1950s and 1960s as it may shed light on how macroprudential tools might operate. Historical data on financial accounts and balance sheets is a key part of developing that understanding.”
Absolutely. From my point of view the key point is that the environment ahead of financial liberalisation was very successful in containing private indebtedness (and I see this as the result of favourable interactions between financial policies and the more positive environment for employment and income growth). Liberalisation led to a very rapid inflation of debts, ultimately to the unsustainable level that meant financial and economic collapse. (Longer run figures for the United States show a longer cycle, with a similar build-up private debt in the 1920s ahead of the great depression at the start of the 1930s.) Many continue to worry that the ongoing high level of debts mean that the crisis is not yet resolved. (Nor is the issue exclusive to the UK – far from it.)
The household debt figures are based on total liabilities, but as is conventional the corporate figures exclude equity from total liabilities. The ONS work includes a number of different historical sources, which have been labelled source A, B and C here and are explained in more detail in background ONS material on the spreadsheet:
The first spreadsheet [i.e. here series A] derives from an Economic Trends article in 1980 that compared initial official estimates of balance sheet data with the earlier work of Revell and Roe. The next three [the first two of these are B and C] worksheets take snapshots of balance sheet data as published in later Economic Trends and Financial statistics publications.
Note there appears to be a fair sized discontinuity between the historic data and the latest ONS figures for corporate debt into 1987.