UK’s enormous debt could slow growth for decades, says report

£10 trillion deficit could burden businesses if interest rates increase

Carys Matthews 9 November 2010 11:27

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Britain’s total debt could hit £10 trillion by 2015, which could slow economic growth for decades, a new report has warned.

According to the latest research by accountancy group PricewaterhouseCoopers (PwC), the UK is sitting on a debt “time-bomb” spread across all sectors of the economy, which could harm the market for the considerable future as interest rates eventually rise.

The total UK deficit is projected to reach £10 trillion at a time when gross domestic product (GDP) will remain below £2 trillion, says PwC, as the total debt to GDP ratio continued to rise even during the recession of 2008-9.

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.”

The Economic Outlook report found that total UK debt was around 540% of GDP at the end of 2009, up from around 200% in 1987. Furthermore, this large and persistent rise in total UK debt has been driven by property-related borrowing by both households and non-financial companies, and by an increase in lending between financial institutions.

Low interest rates have been accredited with helping Britain cope with much higher debt levels on a temporary basis, but as rates increase the economy will slow according to PwC data.

Hawksworth added: “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.”