Brown aide urges vigilance over rising mortage debt

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The Independent Online

The Government must be "vigilant" about the risk that Britain's mortgage debt mountain will trigger a financial crisis, a senior Treasury official warned yesterday.

Ed Balls, Gordon Brown's chief economic adviser, said only the size of the recent surge in house prices had prevented household finances from tumbling into deficit as they did after the late 1980s' property crash. "UK policymakers have to be continually vigilant about balance sheet risks," he told an audience of financiers, investors and economists. Despite the resilience of the financial sector in this downturn, we have to be vigilant to potential financial sector vulnerabilities."

He said the Treasury was holding monthly meetings with the Financial Services Authority and the Bank of England to provide an "early warning system to deal with potential systemic threats".

However, he pointed out that household interest payments as a percentage of disposable income were still very low by historical standards.

His warnings echoed remarks made earlier this week by Mervyn King, the Bank's governor, who warned of a "risk that there could be a sharp correction to the level of consumer spending... exacerbated by the continued strength of the housing market".

Mr Balls was speaking at an investment conference organised by HSBC, whose economists described hopes of a UK recovery as "mirage rather than miracle". There was further embarrassment for Mr Balls as HSBC's forecasts show the Treasury missing its predictions for economic growth and public borrowing. It said the economy would grow 1.8 per cent this year, 2.0 per cent in 2004 and 2.7 per cent in 2005. This compares with the Treasury's ranges of 2.0-2.5 per cent for this year and 3.0-3.5 per cent for each of the following two years. It said borrowing would exceed £40bn in 2005 when the Treasury had pencilled in a deficit of £24bn.

Mr Balls used his speech to criticise the failure of eurozone policymakers to tackle the downturn with higher spending and cuts in interest rates. In remarks that will be seen a sign of continued euroscepticism at the Treasury, he said: "Growth in the eurozone has continued to be weak. This is partly due to structural problems. But the inability of macroeconomic frameworks to allow monetary and fiscal policy to operate fully has... played a part."