Warning of ‘serious flaws’ in economy as debt rises again

Think-tank says recovery based on borrowing risks being unsustainable

The new year will bring a “bittersweet” recovery for millions of households as a debt bubble threatens to inflate again, a leading economic think-tank warned today.

The Institute for Public Policy Research (IPPR) said “there is still plenty of cause for alarm” as household debt begins to climb again after falling for five years. Households have cut debt as a share of their income to around 140 per cent since 2008, but the independent Office for Budget Responsibility (OBR) forecasts that this will increase again to 160 per cent of income by 2018.

The IPPR’s pessimism – and warnings over the Government’s support scheme for the housing market, Help to Buy – contrasts with recent much better news on the economy. This has prompted hefty growth upgrades from the OBR as well as the Bank of England and International Monetary Fund. Inflation has also fallen to a four-year low of 2.1 per cent, easing the pressure on household budgets for now, despite record low wage growth.

But the IPPR’s chief economist, Tony Dolphin, said “serious structural flaws” including high unemployment, low rates of investment and a poor export performance were masked by the better news and still pervade the economy – meaning the current recovery could be unsustainable.

Mr Dolphin said: “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 eurozone, but poor numbers are nothing new: 2013 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. 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.”

The IPPR is calling on the Government to adopt an economic strategy based on improving the UK’s long-term economic performance, “rather than creating short-term gains through ever-rising household debt”.

“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,” Mr Dolphin said.

He added: “The Chancellor risks pumping up a fresh housing bubble with the Help to Buy scheme. House prices are now increasing faster than at any time since July 2010. Across the UK as a whole they rose by 6.5 per cent over the last year, and in London growth reached double digits.

“Even with Help to Buy, for many young people finding a set of house keys under the Christmas tree is a far-off dream, as concerns about large deposits are replaced with ones about unaffordable monthly repayments and unprecedented levels of debt.”