A PricewaterhouseCoopers (PwC) analysis shows that the total burden of debt in the UK rose from around twice the national income in 1987 to just over three times national income in 2000, but then accelerated much more rapidly to around 5.4 times national income by 2009.
This persistent rise in total UK debt has been driven by property-related borrowing by both households and non-financial companies and sharply rising lending between financial institutions, according to the report.
John Hawksworth, chief economist at PwC, said: “The UK’s addiction to debt has reached alarming levels during the past decade.
“The rise in debt of the financial sector from 46% of GDP in 1987 to 245% in 2009 is particularly striking as banks lent large amounts to the shadow banking sector and most financial institutions geared up in search of higher returns on equity. For the household sector, this was focused on mortgage lending fuelled by pre-2007 rises in house prices.”
PwC predicts that UK GDP growth will be around 2% in 2011 and average around 2.5% over the following four years to 2015.
If the economy does not perform as well as expected, then the alternative scenario could see UK debt in 2015 anywhere between 500% and 580% of GDP, depending on both the health of the economy and the appetite of both lenders and borrowers.
Hawksworth said: “Our projected figure of £10 trillion by 2015 is a very heavy burden of debt for the economy to continue to bear.
“The severe fiscal squeeze planned by the coalition government should allow interest rates to remain lower for longer and so should delay the point at which any such debt service squeeze on spending power would take effect. It should also cap the rise in public sector debt.”
He added: “Nonetheless, it is worrying that private sector debt levels in the UK have reached historically unprecedented levels. Sooner or later, this will have to be addressed either through debt being run down sharply, which would risk triggering another recession, or more likely through a persistently heavy debt service burden that could dampen economic growth for decades to come.”
