In the boom years, consumer spending contributed around 1.5% of GDP. As we now know, much of that was financed by borrowing at historically low levels by people who in reality couldnt afford to borrow as much as they did.
For those who say the banks are blameless, this is the main flaw in that belief. Banks borrowed money cheaply on wholesale markets and as a result had much more to lend. Rather than holding onto the cash, they lowered the bar for getting access to credit and et voila, 125% mortgages and unsecured personal loans running into the tens of thousands for (just about) anyone.
This clearly inflated the housing market and pumped billions into the economy through increased consumer spending. The problem is, debt isnt wealth. When the credit dried up, and the economy began to slow down, people lost their jobs. Only unlike most other recessions, people didnt just have mortgages to pay - they had finance agreements for cars, several credit cards and other unsecured loans.
This situation was exacerbated by the appalingly low interest rates on offer for savers.
This is the international comparison that matters - when the crunch hit, Britain had a higher level of personal unsecured debt and lower savings than nearly every other global economy. Not only could we not use savings to sustain consumer spending, it was a double-whammy as no longer could we access cheap loans or huge mortgages.
Labour did nothing to stem this problem, preferring to take the credit for the sense of wellbeing that came with moving into a bigger house or splashing out on a holiday. People felt better off, whether or not they were infact any wealthier.
The Government watched us borrow and spend with glee, while at the same time claiming to have abolished ‘boom and bust’ and talking of record-low interest rates, without any regard for the timebomb being created.
This brings me to the PBR. One of the most startling in the growth projections is that in 2011 messrs Brown and Darling expect consumer spending to contribute 2% of GDP. Thats 0.5% higher than when Dogs were being offered credit cards and mortgages were easy to come by without a desposit.
This is against a wider economic situation when taxes - be it national insurance, VAT, stamp duty or income tax- are all going up, while wages are remaining static (if not depressed) and credit is no longer cheap (if indeed you can access it at all).
Debt is not the route to sustainable growth. It got us into the mess, and it cannot get us out of it. Rely on it and fears of a second ‘double-dip’ recession becomes very, very real.