When interest rates begin to rise, we're told they will top out at 3%. Don't worry, homeowners, say the rate-setters, crippling monthly payments are a thing of the past.
Charlie Bean, the former deputy governor of the Bank of England and one of the rate-setters until last month, made it clear that the scale of household debts made it impossible to return to something like normal within the next 10 years.
Almost casually, this picture painted by Bean has become generally accepted: that monetary policy will be determined largely by how long it takes to nurse homeowners back to health. Not just this year and next, when the recovery is sustainable, but for much longer, by which he means until their finances are considerably more robust.
There are several critics of this view, including Boris Johnson's economic adviser Gerard Lyons, who said last week that rates should canter towards 6%. Lyons, a former City analyst, is among a minority in the Square Mile who subscribe to a more optimistic outlook for the nation's economic health and the consumer's ability to shop and pay their debts at the same time.
Yet this possibly London-centric view underestimates the sheer scale of debts already accumulated and, after a brief period of repayment, the need to feed consumption with debt. There is also the government balance sheet to consider. With increasing burdens on its spending, the ability of governments to support consumer spending – as they have done in recent years with a constant diet of tax credits and tax cuts – will become limited.
A report published this month by the independent Office for Budget Responsibility (OBR) mapped out how Whitehall faces a massive squeeze on its finances over the next 45 years just to cope with an ageing society. The report said this would amount to 4.8% of GDP, or £79bn a year in today's terms.
It's a guesstimate, yet it is only a partial view of the total mismatch between income and expenditure.
In recent months, anti-poverty campaigners have grown agitated about the broader legacy of debt.
Since its inception, private finance initiatives have created about £239bn of liabilities for the taxpayer, with costs being carried forward over the next 20 to 30 years.
The university tuition-fee reforms, which allowed the government to transfer almost the entire cost to undergraduates, also kicked the repayments well into the future. Earlier this year, the House of Commons public accounts committee reported current outstanding student debt of £46bn on the government's books, a figure set to rise to £200bn by 2042 with an estimate attached that shows more than £70bn will never be repaid.
Costs for the National Health Service are also growing rapidly and a £30bn shortfall on current spending is predicted by health chiefs as early as 2020.
The pension protection fund (PPF), which looks after the pensions of 6,150 schemes of crashed companies, has a shortfall of about £110bn. Despite the firepower that comes with managing more than £1.1tn of assets, the PPF is dependent on strong growth from the corporate sector in the UK and beyond. At the moment that gap is growing.
As we are on the subject of pensions, there is also the collective deficit of the UK's solvent private-sector schemes, which according to the pension provider JLT currently stands at £177bn. Technically, it is shareholders that are on the hook for the PPF's deficit. History, and the banking crash in particular, tells us that there could come a time when the shortfall looks permanent and the taxpayer is called in for another bailout.
Next in line are the UK's public-sector pensions. Some are partly funded, some not. All are on the taxpayers' mounting bill, which is officially estimated to be £600bn over the next 60 to 80 years and £1tn by more conservative pension experts.
Of course, governments, businesses and households will continue to enjoy incomes and on current projections, they will be able to afford debt payments. The point is that they won't be able to afford much else.
The funding gap is growing and with deficits on so many fronts, it is hard to see how promises to pensioners and health service users can be met without a dash for growth that is unsustainable, a switch to dramatic cost-cutting in other areas or higher taxes on those who came through the recession relatively unscathed.
George Osborne, by common consent, has been more lenient with cutting the deficit than his rhetoric would lead most people to believe, mostly because he is complicit in dodging many politically unpalatable decisions. To close the widening public-sector funding gap that he has forecast up to 2020 will take severe cuts in spending, such that even Ed Miliband talked on Saturday about how to run a government when budgets get smaller every year.
To some extent the answer will be to dodge many of the debts steadily piling up. Look at how consumers react. To keep spending on the high street, households are returning to a form of hire purchase popular during the inter-war years. Just like the people who pay for interest-only mortgages, finance plans for car purchases mean that they are in effect leasing the vehicle rather than buying it. In 2013, all the growth in car sales hail from the manufacturer's low-interest offers. Soon we'll begin to hear that young middle-income families are marrying their newfound love of Aldi and Lidl to renting their fridge and washing machine to avoid upfront costs. Many are turning to self-employment, and as a study published last week by the Pensions Policy Institute showed, are not saving for a pension at all. More than one million of the 10 million employed people without a pension have joined the government's new scheme, but are paying such pitifully low contributions that it will not add up to much when they retire.
The Intergenerational Foundation, which aims to highlight the shift in incomes and wealth to favour the older generation, recently published research showing the struggle that graduates will face in gaining a masters degree or PhD under the new funding scheme [PDF].
The foundation's report shows how hard the next few years will be for anyone without well-off parents or a trust fund to enter the higher reaches of academia. Not only must they take out a loan to pay the fees and living costs, their first higher education teaching job will be on a zero-hours contract. When they are more experienced, they may become staff, but on a pension worth a fraction of the current scheme after the shocking £13bn deficit forced managers to cut longstanding benefits.
Britain has become expert at putting off decisions and hoping for something to turn up. Without a return to ultra-cheap commodities, another technological/productivity revolution, or a return to more modest living and delayed gratification, it's a plan that is running out of time.(source guardian)
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