Debt & Productivity – UK Economy Under Labour

Government and Personal Debt

Over the last 10 years, both the government and households have fallen into very high levels of debt. The government and individuals have spent their money heavily, and have been left with very heavy debts which will need to be paid off in the future.

Consumer spending has been very high over Labour’s time in power. This has led to high aggregate demand, continued rises in standards of living and falls in the Household Saving Ratio (Graph 29). With low levels of interest, which discourages saving, and a stable economic climate, people have been inclined to spend their disposable income, rather than save it.

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Source: http://www.statistics.gov.uk/pdfdir/qna0607.pdf & http://www.tutor2u.net/economics/presentations/aseconomics/macro/Saving/default.html
GRAPH 29: UK Household Savings Ratio

This problem has been compounded by inflated house prices, and the availability of mortgages which have been lending many times a household’s annual income. Personal debt in the UK is now in excess of £1 trillion, at roughly £16 000 for every person in the country. A report in 2004 found that about 15 million people would be vulnerable to external shocks such as oil prices rises – a situation which is now occurring and could be affecting thousands of households.

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Source: http://news.bbc.co.uk/1/shared/spl/hi/pop_ups/07/business_blair_and_the_uk_economy/html/6.stm
GRAPH 30: International Comparisons of personal debt

Internationally, our levels of personal debt are also large (Graph 30), and are increasing at a faster rate than many other rich, developed countries. As we continue to spend, our levels of debt continue to grow ever higher.

The high levels of debt have given us higher living standards, but the repayment of the debt is looking to be lengthy and far less enjoyable.

However, the government has also used the strong economic climate to spend. They have increased public spending dramatically, some would argue necessarily, but have not raised significantly more tax revenues.

In order to pay for this, government borrowing has increased year on year.


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Source: http://epp.eurostat.ec.europa.eu/pls/portal/docs/PAGE/PGP_PRD_CAT_PREREL/PGE_CAT_PREREL_YEAR_2007/PGE_CAT_PREREL_YEAR_2007_MONTH_08/2-17082007-EN-AP.PDF

To keep control of this, the government set itself rules, which meant that borrowing was not to exceed 40% of national GDP. However, this increasing level of borrowing without the ability to pay off the debts created year on year by Budget deficits, has led to this level being broken recently.

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Source: http://www.statistics.gov.uk/cci/nugget.asp?ID=277
GRAPH 31: Government debt as percentage of GDP

Cheap borrowing has allowed levels to spiral excessively for both the government and households under the Labour Party’s time. This has helped to fuel our economic growth, but will create a dangerous and problematic issue for future generations who will have to endure an expensive tax burden. The debt ridden society is also being hit especially severely by the Credit Crunch being experienced around the world as the price of lending and debt increases.

Productivity

This is another area of the economy which the Labour government has struggled to increase. Productivity is defined as average output per worker in the economy, and the UK’s is significantly below that of all but one of the other G7 countries.

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Source: http://www.statistics.gov.uk/cci/nugget.asp?id=160
GRAPH 32: Productivity of the G8 nations

As mentioned under unemployment, the workforce in this country, and the laws surrounding them, are very flexible and lenient. This has meant employing staff is a cost effective solution for businesses, which has helped our high levels of employment, but has stopped firms from investing in capital intensive production and machinery. When production is carried out by machines it requires less staff, and therefore more is produced per worker.

While high employment is beneficial, the UK may be losing out in terms of potential output and economic growth though its failure to adopt machinery and technology as much as it perhaps could.

The government has tried to increase productivity, by introducing more competition to markets, encouraging technology transfer from foreign investment and investment assistance from the UK government themselves, plus training and education improvements.

However, the government’s strategies have bore little fruit, with the UK maintaining a very low ranking in terms of productivity even though our levels have increased.

Please note that this was written during Summer 2008, before the worst of the economic problems of the following months