Monday, April 23, 2007

Record UK Debt levels Threaten Economy

Ernst & Young ITEM Club, a leading economics Think tank, has suggested that the UK economy is close to full capacity and is "skating on this ice, due to the high levels of debt in the economy.

There are a couple of structural problems within the economy.

Firstly the UK current account deficit continues to grow. It now stands at 3.5% of GDP which is getting to the level where it could be unsustainable. It has not been helped by a strong pound. see Balance of Payments

Secondly the level of consumer debt is reaching an all time high. Recent rises in interest rates have not succeeded in reducing demand. Total consumer debt now stands at £1.3 trillion. There are fears that if interest rates rise to 6% (as is likely given recent inflation figures) then some consumers will struggle to finance their debt interest payments.

Thirdly the government debt continues to rise, despite strong economic growth. The government is forecast to borrow £34 billion in the financial year 07-08. This suggests a structural deficit because of the strength of cyclical tax revenues. If the economy was to slow down the government debt would further increase, leaving little room for expansionary fiscal policy.

UK Economy

UK economy skating on thin ice

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