John O'Neill

Why Osborne’s recovery might not be based on debt

Is George Osborne’s recovery a credit-driven illusion? Many of his critics says so, and ask – as this magazine did two weeks ago – why we still have emergency interest rates at a time when the economy seems to be booming.

One thing we learned from the crash is that cheap debt and housing bubbles can end in disaster, and with his interventions in the mortgage markets, it looks like Osborne could be blowing a bubble now.

But striking research suggesting otherwise was released today by Citi’s Michael Saunders, Coffee House’s favourite economist:-
Screen Shot 2014-01-31 at 14.51.45
Citi’s research found that the economy’s growth has happened while the private sector has been paying down its debt. The ratio of household debt to income is back to 2003 levels, and the ratio of companies’ bank deposits to debts is the highest for 50 years. Even first-time buyers, when they get on the ladder, are only spending 11 per cent of their income on mortgage repayments. And now that the economy – and nominal GDP – is growing, the incentives for companies to save is diminishing. They’ll start spending on wages, jobs and investment, fuelling the recovery.

Saunders’ graph above clearly shows the credit-driven growth in the Brown years. It may be obvious in retrospect, but nobody seemed to notice at the time. The crash has shown how little we know about the economy and how little the measurements we have provide clear, unambiguous signals that we’re in danger – or out of it.

Just as things went badly wrong under Brown, it’s possible they’ll go badly right under Osborne. With today’s figures from ONS showing that real wages have been falling since the general election, and another one coming up, he’ll be hoping so.

Already a subscriber? Log in

Keep reading with a free trial

Subscribe and get your first month of online and app access for free. After that it’s just £1 a week.

There’s no commitment, you can cancel any time.


Unlock more articles



Don't miss out

Join the conversation with other Spectator readers. Subscribe to leave a comment.

Already a subscriber? Log in