Britain’s economy is being kept afloat by an “unsustainable” spending binge last seen just before the crash, the Treasury watchdog has warned.
The independent Office of Budget Responsibility (OBR) highlighted the danger of the ‘savings ratio’ going “negative for the first time since the middle of 2008”.
It means people are spending beyond their means on credit cards and by dipping into their savings, to cope with an incomes squeeze.
The last time there was a negative ratio was in the early part of 2008 – which was followed by the financial crisis and the deepest recession since the Second World War.
At a post-Budget briefing, the OBR also highlighted the economic pain ahead with disposable income per person forecast to fall by 0.7 per cent in 2017.
That meant households were poised to go further into debt – a total set to reach 153 per cent of disposable income by 2022, up from 149 per cent on the OBR’s forecast in November.
Meanwhile, the Resolution Foundation think-tank said the average person would have £900 less in their pocket or purse in 2021 than was forecast a year ago.
On the plunging savings ratio, Sir Charles Bean, a member of the OBR’s budget responsibility committee, said: “The important thing is that that is not sustainable.”
He added: “The savings ratio has fallen very substantially, back to the sort of level that we saw very early on in the financial crisis.
“The financing of that has been partly by some consumers taking out more debt - we have seen credit relatively strong recently.
“Equally, there have been some households which have been running down their savings.”
Only higher productivity and wage growth – neither of which are anticipated – could allow the spending binge to be sustained, Sir Charles said.
The OBR also dismissed Theresa May’s lingering promise to reduce net migration to “tens of thousands” in the next five years, despite Brexit.
Around 525,000 foreign workers would account for the vast majority of the 700,000 predicted rise in employment to 2021-22, as “inward migrants are disproportionately of working age”.
And the watchdog warned the Government was “not on course” to meet its flagship target to balance the books as early as possible after 2020.
The Budget deficit was likely to be as high as one per cent in 2021-22, even before the impact of an ageing population and rising healthcare costs.
Although borrowing this year would be £16.7bn lower than originally forecast, at £51.7bn, this was largely due to one-off factors rather than an improved economic performance.
With no change in “long-term growth potential”, higher than expected growth in 2017 – at two per cent - simply meant lower growth in the years to follow, as “spare capacity is used up”.
On Brexit, the OBR said there was still no “meaningful basis” on which to judge the impact – despite the Prime Minister vowing to pull out of the EU’s single market and customs union.
But it did forecast “a lower trade intensity of UK economic activity” for the next decade, as Britain strove to negotiate new trading arrangements after withdrawal.Reuse content