Osborne will deliver his surplus with rising household debt – alittleecon

Here’s Alex Little‘s take on the Autumn Statement:

It’s not really possible to discuss the government’s deficit in isolation, because there is an accounting identity which means the government’s deficit (or surplus) is equal to the non-government’s surplus (or deficit). You can disaggregate ‘non-government’ in a number of ways, but the OBR break it down into ‘households’, the ‘corporate’ sector and ‘rest of world’ (which to simplify, we can think of as the trade balance).

Here are the figures the OBR put out today put into a chart. The bars up to 2013/14 are actual data, and the bars beyond are their forecasts for the next 6 years. The green bar is the government’s budget balance. You can see that in 2009/10, the deficit was over 10% of GDP, and the OBR forecast it will be eliminated by 2018/19 when there will be a small surplus.

Financial Balances

The blue bar on the chart is increasing quite significantly out to 2019/20. This is the household balance, and it is forecast to be in deficit going forward. That means the OBR expect households to spend more than they earn (in aggregate) year on year. How likely is this to come about?

To give some context, we can look at what the household sector’s balance was in previous years to see how feasible an outcome of a 3% household deficit might be. The figures going back to 1997 are contained in this post on Neil Wilson’s blog. Neil’s second chart shows that in the run up to the financial crisis (from about 2004 onwards), households ran a small deficit of between 0% and 2%. This contributed (partly) to the biggest crash in over half a century, but for the OBR’s forecasts to work out households would have to run deficits about double (or more) this level year after year.

Is this even possible without causing another recession before we get to 2020? I don’t see how it is. This chart from the OBR’s full report also shows the full picture since 2000 clearly.

The required rise in household debt is unprecedented in recent times.

This is only an excerpt – read the rest on alittleecon.

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9 thoughts on “Osborne will deliver his surplus with rising household debt – alittleecon

  1. hstorm

    There is not the slightest chance with the current general wage-decline that the OBR’s predictions will be anywhere close to accurate. (Are they ever?) Too many people are going to have to borrow in the short term just to keep their lives ticking over, and then they will never have enough income to pay the sums back in full. That is the fruit of Gidiot’s decision to open the gates on companies underpaying new workers, and can only lead to another crash, barring a big boost to the Minimum Wage.

    1. Mike Sivier Post author

      Agreed. OBR has never been accurate and should really be disbanded as a waste of money.

      1. hstorm

        Absolutely. It’s just a mouthpiece relaying what the IMF says. Even if the IMF weren’t completely detached from reality, it would still be less expense, time and effort for Gidiot just to phone them directly.

      2. Joan Edington

        Any organisation dealing with forecasts and statistics created by the Tories, aka Osborne, was probably never designed to be accurate. It is simply a new tool for Gideon to fool the public into believing his Massaged figures (lies).

  2. itsalllies994

    Does this include the private debt which is has ballooned further since 2008 Mike? Economist Steve Keen has mentioned that the private bank debt is what we should be focused on. http://www.youtube.com/watch?v=CLplU4WdX9A

    If you haven’t seen this, sites in the USA were reporting on this after the G20.
    Apparently the countries will put into place bail ins in preparation for the next crisis.
    This will place the derivatives above bank deposits. The catch however is that the global derivatives is many times the global GDP.

  3. itsalllies994

    Does this include the private debt Mike? The private banking debt has ballooned since the financial crisis and economist Steve Keen has said we should be focusing on that, rather than the deficit. http://www.youtube.com/watch?v=CLplU4WdX9A

    I don’t know if you noticed this either Mike, but USA sites were picking this up straight after the G20. Apparently the countries have agreed to implement legislation to put bail ins ready for the next financial crisis. This would place derivatives above customer bank deposits.
    The catch? The global derivatives exceed global GDP many times. Many banks exceed their assets many times with them.
    Deutsche bank have €55 trillion of them with only €522 billion to back it.

    1. Mike Sivier Post author

      I’m not an economics expert but wouldn’t private debt appear on the graph as household debt?

  4. itsalllies994

    Sorry I’m not an expert either! I found this quickly:
    It’s a few years old but it says that private debt is broken down into Financial, Household and Non Financial Companies.
    One graph shows Financial debt was over 200% of GDP in 2011. I don’t know if that even includes the derivatives market.
    Either way the banks have access to cheap money. Corporations have access to cheap labour. We have access to..?

    From what Positive Money have been saying the Quantitative Easing programme has been a prime cause of the sky-rocketing prices for goods and house prices in the past few years, and only 8p (ish) of every £1 from QE trickles down to us in the real economy. Madness.
    On an interview for Going Underground, an economist from the People’s Assembly said that Osbournomics appears to mirror the banking sector’s ideal policies.. Coincidence I’m sure..
    He also mentions that the deficit figure can changed with accounting tricks.

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