Borrowing milestone a leap in dark

Sep 3 2009 by Peter Jackson, The Journal

A SIGNIFICANT milestone was passed this week. I’m not sure what road this particular milestone is on, but I’m certain it’s significant.

It was announced by the Bank of England that the total amount of personal debt in the UK has fallen for the first time since records began in 1993.

Personal borrowing fell by £600m in July, which – while it sounds a lot – should not make us get too carried away, because it still leaves the total owed by individuals at £1.457 trillion.

However, it may be small in the greater scheme of things but it is significant.

For the first time in this country, people have paid back more than they have borrowed. Reduced mortgage repayments have given people more money and, as current interest rates give no incentive to save, paying off debt makes sense. There is also, of course, a very real fear of redundancy, which strengthens the trend.

Companies have also been paying off debt, with private non-financial corporations paying back £8.4bn of loans in July, nearly 2% of their total debt.

At first sight, this is not unalloyed good news. People and businesses borrow money in order to spend it and, in the short term, what would boost economic activity would be people spending money.

But, as I have argued before – and indeed, have been arguing for the past two or three years – what got us into our current economic mess was people, corporations and governments spending money they did not have. The boom years were an illusion, fuelled by consumer credit debt and unsustainable house price inflation.

Between 1997 and 2001 alone in the US, there was US$4.80 of credit and debt created for every US$1 of gross domestic product. Up until now, total personal debt in the UK was growing at 10% a year, making average household debt nearly £9,000.

If we go back to this situation, if might bring some temporary relief, the temporary relief a recovering alcoholic first feels when he goes back on the bottle. It would, however, only mean a postponement of the day of reckoning, a reckoning that would be much more severe than if we faced it now. But, despite the milestone, we are in unchartered territory.

Peter Jackson is a writer and former business editor of The Journal – p.jackson77@btinternet.com