•  Total UK debt was around 540% of GDP at the end of 2009, up from around 200% of GDP in 1987.
• This large and persistent rise in total UK debt has been driven by property-related borrowing by both households and non-financial companies and (most dramatically since 2000) by sharply rising lending between financial institutions.
• By comparison, UK government debt was relatively low and stable as a share of GDP from 1987 to 2007 and, despite rising sharply due to the recession, was still less than a sixth of total private sector debt in 2009.
• Total UK debt is projected to top £10 trillion by 2015 at a time when GDP will still be below £2 trillion, according to the main scenario outlined in PwC’s latest UK Economic Outlook report.
•  
  High debt levels are affordable at present due to exceptionally low interest rates, but this may not remain the case as rates gradually rise back to more normal levels over the next five years.

PwC analysis of official national accounts data (see Figure 1 and Table 1 below) shows that the total burden of debt on the UK economy rose from around twice national income in 1987 to just over three times national income in 2000, but then accelerated much more rapidly to around 5.4 times national income by 2009.  This total UK debt to GDP ratio continued to rise even during the recession of 2008-9 as GDP fell back and government debt rose markedly.


 

Table 1– Trends in gross UK debt by sector

Source: PwC analysis of data from ONS Blue Book (July 2010). Gross debt is defined here to exclude financial derivatives since these largely net out across the financial corporations sector. Columns may not add up exactly due to rounding.

John Hawksworth, chief economist at PwC, said:

“The UK’s addiction to debt has reached alarming levels during the past decade. The rise in debt of the financial sector from 46% of GDP in 1987 to 245% in 2009 is particularly striking as banks lent large amounts to the shadow banking sector and most financial institutions geared up in search of higher returns on equity. 

Even excluding the financial sector, however, gross UK debt almost doubled relative to GDP from just over 1.5 times national income in 1987 to around 3 times in 2009, with most of this increase coming in private sector debt. For the household sector, this was focused on mortgage lending fuelled by pre-2007 rises in house prices, while for non-financial companies more than half of all debt is now related to commercial property. Other parts of corporate balance sheets remain healthier.

“On the face of it, such rapid increases in debt to income ratios may not seem sustainable, but both real and nominal interest rates (in the UK and globally) fell markedly after the early 199os and then dropped even further during the recession. This has made it possible to service a larger debt stock relative to income levels, but current exceptionally low interest rates will not last forever and a large part of household and corporate lending remains exposed to possible future falls in residential and commercial property prices.”

PwC’s main scenario is that UK GDP growth will be around 2% in 2011 and average around 2.5% over the following four years to 2015. In this scenario, as shown in Table 2 below, rising government debt as a share of GDP is narrowly outweighed by more constrained growth in private sector debt over this period, so that the ratio of total UK debt to GDP declines slightly from 543% in 2009 to 536% in 2015.  But this is a very marginal change that would still leave total debt near to historic record highs.  Plausible alternative scenarios could see UK debt in 2015 anywhere between 500% and 580% of GDP, depending on both the health of the economy and the appetite of both lenders and borrowers. But in all scenarios the total debt to GDP ratio in 2015 remains very high by historic standards.

Table 2 – Main scenario projections for UK debt stock in 2015 

Source: PwC estimates and projections based on ONS Blue Book data for 2009

John Hawksworth, chief economist at PwC, concluded:

“Total debt in our main scenario is projected to top the symbolic figure of £10 trillion by 2015 at a time when GDP will still be less than £2 trillion.  This is a very heavy burden of debt for the economy to continue to bear, particularly with interest rates likely to rise significantly at some point over the next five years or so.

“The severe fiscal squeeze planned by the coalition government should allow interest rates to remain lower for longer and so should delay the point at which any such debt service squeeze on spending power would take effect. It should also cap the rise in public sector debt.

“Nonetheless, it is worrying that private sector debt levels in the UK have reached historically unprecedented levels. Sooner or later, this will have to be addressed either through debt being run down sharply, which would risk triggering another recession, or more likely through a persistently heavy debt service burden that could dampen economic growth for decades to come. Either way, deleveraging will be a painful process for the UK that goes well beyond the immediate challenge of getting the public finances under control.”

ENDS

Contacts:

Katherine Howbrook, media relations, PwC

Tel: 020 7212 2711, Mobile: 07515 119 096, Email: Katherine.j.howbrook@uk.pwc.com

PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 163,000 people in 151 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See pwc.co.uk for more information.

2010 PricewaterhouseCoopers. All rights reserved.