Debt warning for UK over economic recovery

The economic recovery will falter if the British Government fails to deal with the rising level of household debt, a leading think-tank has warned.

Tony Dolphin, chief economist at the centre-left think tank the Institute for Public Policy Research, said there was danger better economic news could lead to “complacency” as he warned 2014 will mark the start of the next debt bubble.

He also criticised ministers for not doing enough to boost industry – instead opting for policies such as Help to Buy, aimed at first-time buyers wanting to secure a home with as little as a 5% deposit, which only lead to greater debt.

With the next UK debt bubble expected to reach 160% of household income by 2018, the recovery could prove “unsustainable and bittersweet” for millions of voters, Mr Dolphin said.

Recent good news on the economy, including unemployment falling to 7.4%, its lowest level since early 2009, could be undermined if the Government does not do more to help boost industry, the economist added.

And he warned that despite external factors such as the eurozone crisis, the country was still living beyond its means following the “Great Recession”, which started in the wake of the financial crisis in 2008.

Mr Dolphin said: “There is a danger that a stronger economic recovery and good news on the jobs front will lead to complacency. Instead, we should be alarmed that growth is being driven by exactly the same mix of factors that contributed to the depth of the last recession.

“The Government has introduced Help to Buy which generates more debt, rather than focusing its efforts on boosting investment spending in the manufacturing sector.

“While there are external factors that have held back exports, the Government has in a sense run out of ideas for the economy and gone for the easy option of boosting the housing market.”

He added: “In the global economy we are truly living beyond our means, and have been doing so for three decades. The UK’s trade performance has been hindered in recent years by developments in the euro-zone.

“But poor numbers are nothing new. This year will be the 30th straight year in which the UK has recorded a deficit on its current account balance. This is a sign that there is a fundamental flaw in the UK’s economic model.

“A relatively low rate of investment is another key structural weakness of the UK, and it is a reflection of the persistent short-termism of business in the UK.

“The dominance of finance capitalists has led senior managements to focus ever more on quarterly results and on the need to stave off a potential acquisition or merger. For the economy as a whole, this is disastrous. A low rate of investment means a less productive economy, lower living standards and a lack of competitiveness.

“Strong growth in the short-term does not mean that structural weaknesses in the UK economy that became more evident during the ’Great Recession’ have been eliminated. Unless we move to adopt a new economic model, the recovery will prove unsustainable and bittersweet for those who do not benefit from it before it is extinguished.”

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