With the Conservative Party continuing to bang on relentlessly about Europe, Boris Johnson issued a timely reminder yesterday that ‘most of our problems are not caused by “Bwussels”’. (Something that should, of course, go without saying.) In the Telegraph today, Dominic Raab follows up the Mayor of London’s comments by outlining some of our ‘immediate, home-grown, failings’. At the top of the list: ‘the scale of our debts’.
Surprisingly, Raab quotes the discredited claim of Carmen Reinhart and Kenneth Rogoff that government debt crossing ‘the notorious tipping point’ of 90 per cent of GDP ‘leads to seriously stunted growth’. On top of a basic Excel error that missed out five countries, Reinhart & Rogoff’s 2010 study was undermined by fundamental methodological problems. They have since admitted to and corrected some of the mistakes, but still point to their more recent paper which also suggests that debt above 90 per cent of GDP is associated with lower growth — but which is still susceptible to some of the criticisms levelled at their previous one.
But Raab does produce some startling figures to show that Britian’s debt burden is by no means confined to government debt. He says:
‘Between 1997 and 2009, household debt as a share of GDP rose by a third. It has started to fall back since 2010, but remains at 98 per cent of GDP — leaving many families acutely vulnerable to any increase in interest rates. And government and household debt is dwarfed by the liabilities of the banking sector, which have reached a stunning 427 per cent of GDP. British banks are also massively exposed to the eurozone crisis, far more than most Continental ones. Add these three components together, and Britain’s liabilities are the largest in the EU’.
Raab’s figures — reproduced in graph form below — show that our banks’ £6.7 trillion in liabilities accounts for about 70 per cent of our total debt. When he claims that ‘Britain’s liabilities are the largest in the EU’, Raab is talking about debt in pounds rather than as a percentage of GDP — on the latter measure, Ireland outstrips us.
We also have historical figures from Citi Research, and though they don’t quite match Raab’s they tell a very similar story. Household debt rose from 69 per cent of GDP in 1997 to 100 per cent in 2006 — even before the recession hit — before peaking at 110 per cent in 2009 and falling back slightly to 99 per cent now. There was also an even more drastic rise in debt owed by non-financial companies — from 58 per cent of GDP in 1997 to 121 per cent at the end of 2008 and 109 per cent now.
As Raab said, banking sector debt dwarfs the rest, and so needs its own graph. As you can see, it doubled as a percentage of GDP between 1997 and 2007 — reaching 500 per cent before the banking crisis hit. It peaked at 586 per cent in early 2010 and has since dropped back to around 500 per cent.
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