Consumers must rein in their borrowing levels if a downturn in the UK economy is to be avoided, a report has warned.
The Ernst & Young Item Club’s latest report says that the strong UK economy rests upon shaky foundations, with excessive levels of household debt posing a serious threat.
It states that through mortgages, credit cards and other loans, borrowers have racked up £1.3 trillion in debts, putting the long-term stability of the UK economy in jeopardy.
“The problem is that we are now becoming a little bit too confident and the lenders are relaxing their criteria and we’re all gearing up appropriately,” the Item Club’s chief economic adviser, Peter Spencer, told BBC Radio Five Live.
“Of course that’s great in the short term but for the longer term it does pose risks.
“We are borrowing to finance our consumption and of course we’re doing that at a time when the economy and everything else, our personal finances, are looking pretty sweet. The worry is what happens to our own finances when things turn sour.”
Gordon Brown ran into criticism today after new figures showed the public finances suffered their biggest September shortfall on record, confounding his attempts to shrink the deficit.
The main culprit for the worsening deficit was a more rapid increase in spending than planned in the budget. Central government spending is running 7.6% higher than last year, compared to a budget forecast in March of just 4.7%.
The current budget, which excludes investment spending and which the chancellor uses to calculate his “golden rule”, swung to a deficit of £5bn last month, £1.8bn worse than September last year.