Ministers admit family debt burden is set to soar
Families will be hit by a spiralling debt crisis over the next four years that will see average British households plunge further into the red as the government austerity programme bites, official figures reveal.
The Office for Budget Responsibility has raised its prediction of total household debt in 2015 by a staggering £303bn since late last year, in the belief that families and individuals will respond to straitened times by extra borrowing. Average household debt based on the OBR
figures is forecast to rise to £77,309 by 2015, rather than the £66,291 under previous projections.Economists say the figures show that George Osborne's drive to slash the public deficit and his predictions on growth are based on assumptions that debt will switch from the government's books to private households – undermining his claims to be a debt-slashing chancellor.
Labour accused the government of piling agony on to hard-pressed families and storing up long-term problems of personal indebtedness.
At last year's budget the official forecast from Osborne was that household debt – which includes mortgages and credit card debt – would be £1,823bn. But in a recent adjustment not highlighted in last month's budget, the OBR has raised the figure to £2,126bn.
A Treasury spokesman said Osborne put the adjustment down to "higher-than-expected inflation driven by higher than expected rises in commodity prices". The Treasury also attempted to head off criticism by saying the OBR had also produced figures showing that the level of household savings was "holding up".
But experts expressed alarm. The Nobel prize-winning economist Paul Krugman, writing on his blog, said: "People have been digging into the details of the government forecast and finding that it relies on the assumption that household debt will rise to new heights relative to income.
"Why? Because the only way the economy can avoid taking a hit from government cuts is if private spending rises to fill the gap – and although you rarely hear the austerians admitting this, the only way that can happen is if people take on more debt."
Ed Balls, the shadow chancellor, said: "George Osborne says the only thing that matters is getting government borrowing down. But while he is cutting further and faster than any other major country in the world, borrowing by hard-pressed families is now forecast to rise every year.
"And to make things harder still, George Osborne's VAT rise is looking like an own goal as it pushes up inflation which threatens higher interest rates for mortgages and household borrowing."
In the Commons, Labour MP Chuka Umunna raised the issue of the hidden household debt figures with Osborne, accusing him of transferring debt to the overdrafts and credit cards of ordinary families.
Last June, OBR forecasts showed that household debt would rise from an average of £58,000 in 2010 to £66,291 by 2015. Now its projections show it expects it to rise to £77,309. For the country's 27.5 million households this means an average increase of £11,018.
Tony Dolphin, senior economist at the IPPR thinktank said: "This is the downside of the chancellor's deficit reduction plan. As tax increases and public spending cuts squeeze households' disposable incomes, they will be forced to take on more and more debt in an attempt to maintain their living standards.
"George Osborne talks of rebalancing the economy away from debt-fuelled government and household spending and towards exports and investment but the OBR's figures show his austerity programme will force households to take on ever more debt just to make ends meet. The future growth in the economy that is needed to bring unemployment down will only come about if we choose to live beyond our means."
The OBR now expects debt as a percentage of household income to increase from 160% in 2010 to 175% in 2015, where last June it was forecasting a small decline. Real personal disposable incomes are forecast to increase by 1.3% over the next four years.
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