Total UK public - and private-sector debt has risen slightly, reaching 507 percent of GDP in mid-2011, compared with 487 percent at the end of 2008 and 310 percent in 2000, before the bubble ...

While the largest component of US debt is household borrowing and the largest share of Japanese debt is government debt, the financial sector accounts for the largest share of debt in the United Kingdom.

Although UK banks have significantly improved their capital ratios, nonbank financial companies have increased debt issuance since the crisis.

British financial institutions also have significant exposure to troubled eurozone borrowers, mainly in the private sector.

Nonfinancial companies in the United Kingdom have reduced their debt since 2008.

UK household debt, in absolute terms, has increased slightly since 2008 ...

At the recent pace of debt reduction, we calculate that the ratio of UK household debt to disposable income would not return to its pre-bubble trend for up to a decade.

Overall, the United Kingdom needs to steer a difficult course: reduce government deficits and encourage household debt reduction — without limiting GDP growth.

The United Kingdom will need renewed investment by nonfinancial businesses to achieve this ...

The UK financial sector is heavily exposed to the euro crisis, with $359 billion in loans to private and sovereign borrowers in troubled eurozone countries ...

Is there a credible plan for long-term fiscal sustainability?

The UK program to limit government spending is credited with keeping government borrowing rates very low, but the impact of austerity on the strength of the recovery remains a subject of debate ...

Are structural reforms in place?

UK planning and zoning rules can be reviewed to enable expansion of successful high-growth cities and to accelerate home building.

Infrastructure improvement and continuing to allow immigration of skilled labor can help ensure that the United Kingdom remains attractive to multinational companies ...

Are exports rising?

In larger economies, such as ... the United Kingdom, exports alone do not have the same potential to drive GDP growth.

However, they are important contributors to rebalancing growth away from consumer spending.

Service exports, including the “hidden” ones generated by tourism, are a potential source of further export growth ...

Is private investment rising?

Since the end of the crisis, growth in business investment has remained weak in all three economies, and companies in ... the United Kingdom have been adding to cash reserves.

As long as the business sector continues to save rather than invest, the strong economic growth that was the biggest factor in reducing government deficits in Sweden and Finland will not materialize ...

Has the housing market stabilized?

While the United States has a glut of unsold houses, the United Kingdom is in need of new homes, thanks to low investment in housing before the crisis (just 3.5 percent of GDP, compared with 6 percent in France and Germany ...

Land use rules that prevent many tracts from being developed should be reviewed to address the housing shortage ...

Debt and deleveraging: Uneven progress on the path to growth

... an economy is ready to resume sustained growth after private-sector deleveraging when certain conditions are in place: the financial sector is stabilized and lending volumes are rising; structural reforms are in place to boost productivity and enable GDP growth; credible medium-term public deficit reduction plans have been adopted and restore confidence; exports are growing; private investment resumes; and the housing market is stabilized and residential construction is reviving ...

Deleveraging in the United Kingdom and Spain is proceeding at a slower pace.

The United Kingdom has made controlling the government deficit a top priority, but its private sector has made little progress in debt reduction.

Overall, the United Kingdom maintains a ratio of total debt to GDP that is far higher than the average in mature economies.

The UK financial sector accounts for the largest share of UK debt and remains vulnerable to potential losses from lending in the eurozone-crisis countries ...

Slower household deleveraging in the United Kingdom can be attributed in part to the relatively small number of troubled mortgages that have progressed to foreclosure.

That picture could change: the Bank of England estimates that up to 12 percent of all UK mortgages are in some state of forbearance; an additional 2 percent are delinquent.

This implies that the United Kingdom may have about the same proportion of loans that are in some degree of difficulty as the United States has—14 percent of mortgages outstanding.

The problem could deepen in the years to come, particularly if economic growth remains weak or interest rates rise sharply.

Two-thirds of UK mortgages have floating interest rates, and monthly debt payments of UK households as a share of income are already one-third higher than those in the United States.

On top of this, 23 percent of UK households report that they are “somewhat” or “heavily” burdened in paying off unsecured debt ...

The United Kingdom diverges from the Swedish path not only in its slow rate of household debt reduction relative to GDP, but also in its decision to make reducing public debt a high priority early in the deleveraging process.

However, like the United States, the United Kingdom entered the financial crisis with a deficit and growing government debt ...

Today, the UK government appears to have little if any fiscal headroom—although this remains a matter of debate among economists.

How the current UK approach affects the economy’s ability to move on to the second, growth-led phase of deleveraging remains to be seen.

Another question hanging over the UK recovery is how evenly growth is spread.

The London region generated half of GDP growth in the decade leading up to the crisis and continues to grow more quickly than the rest of the nation.

To contain and then reduce government debt over many years, the United Kingdom will need more broad-based growth ...

Examining the net saving position of different sectors of the UK economy helps explain the need to restore UK private-sector investment and contain government debt ...

Households switched from being large borrowers to becoming net lenders to the rest of the economy and, in the process, reduced consumption.

At the same time, public-sector borrowing has grown rapidly because of falling tax revenue, rising automatic payments, and the bailout of troubled banks.

If the government is to meet its goal of eliminating the structural deficit, either the current account balance must improve dramatically (to levels not seen in the past decade) or the private sector must spend more.

This could be achieved through higher investment by private firms, since nonfinancial businesses have the largest saving surplus of any UK sector.

Or consumers could start borrowing even more as the government reduces its deficits—but that would be risky, given the continuing high levels of consumer debt ...

Conditions for growth in a time of deleveraging

Reviving GDP growth is essential for starting the second phase of deleveraging, in which public-sector deleveraging begins ...

Marker 1. Is the banking system stable?

UK banks, meanwhile, are heavily exposed to debt of eurozone-crisis countries, with $359 billion in loans to public and private borrowers in those nations.

Inaddition, UK loan officers surveyed by the Bank of England say they are worried about lending to the corporate sector because of economic uncertainty and tight wholesale funding conditions.

In contrast to the United States, net new lending to the UK corporate sector has remained negative since the start of the crisis, and continuing weakness in lending is likely to remain a drag on economic growth ...

Marker 2. Is there a credible plan for long-term fiscal sustainability?

The United Kingdom’s coalition government came to power in 2010 and embarked on a wide-ranging deficit reduction plan.

The aggressiveness of the program is credited with keeping government borrowing rates very low.

Yet austerity has been blamed for slowing the United Kingdom’s economic recovery ...

Marker 3. Are structural reforms in place to unleash private-sector growth?

The United Kingdom should make revising its planning and zoning rules a priority, which would accelerate home building and enable successful high-growth cities to expand.

MGI has argued previously that, given the urgent need to spread growth across the United Kingdom, it is time to experiment with shifting more financial and development responsibility back to cities.

This could include the option to negotiate public-sector pay locally.

To promote productivity and keep the United Kingdom attractive to multinational companies, the nation should also invest in infrastructure and ensure that immigration policy does not limit the ability of companies to attract the skills that they need to remain internationally competitive.

Marker 4. Are the conditions set for strong export growth?

Given the rise of exports from developing economies and the state of global demand, increasing exports will be more challenging for today’s deleveraging economies.

It will require a rebalancing of global consumption, with countries such as China and Germany that run surpluses now increasing consumption.

In the United States, exports fell sharply during the crisis but have rebounded strongly: exports have contributed more each year to US GDP growth over the past two years than they did in the seven years leading up to the crisis.

In the United Kingdom, exports were 30 percent of GDP in 2010, up three percentage points from their pre-crisis level ...

Another way these economies can boost net exports is through greater efficiency in their use of imported resources. The United Kingdom recently became a net importer of energy; oil now accounts for 8 percent of imports.

Marker 5. Is private investment rising?

Today, annual private investment in the United States and the United Kingdom is equal to roughly 12 percent of GDP, approximately 5 percentage points below pre-crisis peaks.

Both business investment and residential real estate investment declined sharply during the credit crisis and the ensuing recession.

While private business investment has been rising in recent quarters, total investment remains low because of slow housing starts ...

Marker 6. Has the housing market stabilized?

The housing sector helped create excessive debt in the United States, the United Kingdom, and Spain, and it will play an important role in repairing the damage, too.

As John Maynard Keynes advised President Franklin Roosevelt after the “second depression” of 1937, “Housing is by far the best aid to recovery because of the large and continuing scale of demand.” ...

During the Swedish and Finnish deleveraging episodes, housing markets stabilized and began to expand as the economy rebounded.

The housing revival, in turn, drove demand for durable goods, and the “wealth effect” of rebounding real estate values encouraged additional consumer spending ...

The United Kingdom is in a very different—and more fortunate—position. It has too few houses, particularly in the Southeast, which has experienced the strongest economic growth.

For decades, UK housing investment has lagged far behind rates in other developed countries, at just 3.5 percent of GDP, compared with 6 percent in France and Germany and as much as 12 percent in Spain.

Increasing housing construction will require changes to urban planning and zoning regulations that prevent many tracts from being developed.

Such a change in policy requires a change in public attitudes and understanding; while more than 50 percent of UK residents believe that half or more of England’s land is already built upon, the reality is that only 13.5 percent is developed.

A largescale house-building program could address the shortage of homes and support economic growth ...

January 2012

The full .pdf can be download here

Government debt rises to a record of £1tn

UK family debts almost double in a year