Growth of personal debt means it outstrips UK's total GDP

Published on Friday 22 August 2008 23:11

THE amount of money owed by individuals is higher than the income generated by the UK overall, figures published yesterday revealed.

Personal debt in the UK, in the form of money owed through mortgages, loans and credit cards, increased by 7.3 per cent to 1.444 trillion in the year to the end of June, according to research by accountants Grant Thornton.

In contrast, the UK's gross domestic product (GDP) rose by just 5.1 per cent to 1.41 trillion, making it the second year running in which personal debt has outstripped GDP.

As a result, the date at which the UK can cover its consumer debt is getting later. In 1997 and 1998 the point at which UK GDP covered UK personal debt was today's date – 23 August – but it would now take until 8 January next year to pay off the outstanding debt.

The data suggested that the credit crunch had yet to halt the UK's indulgence in relatively cheap borrowing, said Stephen Gifford, chief economist at Grant Thornton. "Despite the global downturn flattening the growth of personal debt and UK GDP over the past few quarters, debt levels continue to grow at a faster rate than the income the UK generates. "Although there is no cause for panic, as personal debt is well covered by the UK housing stock, the figures clearly illustrate the continuing problem," said Gifford. "If the property market and economy continue to weaken, the current levels of personal debt will become unsustainable and there will be a marked increase in personal insolvencies."

The number of individuals in Scotland declaring themselves bankrupt has soared to record levels in the past year. The Department of Trade & Industry recently reported a 35.6 per cent increase in personal insolvencies in the second quarter of this year, compared with the same period in 2007.

"Things are unlikely to get better in the short term. The credit crunch and people losing their jobs means the number of insolvencies will continue to rise," said Rob Caven, head of recovery and reorganisation at Grant Thornton Scotland.

High levels of personal debt have driven consumer spending in recent years, benefiting the economy, but that will inevitably change, added Caven.

"A good part of the economy has been fuelled by the ability to borrow against increasing house values, but that will become harder to do and consumer spending power will be more restricted."