The UK’s rising debt crisis – how can you protect yourself?
Written by Paul Dodd on December 02, 2014.
Despite some recent positive news coming out of the UK on the economic front – UK GDP growth will hit 3.1% in 2014, the economy is growing at its fastest rate since 2006 – in reality the UK is drowning in a sea of debt, public as well as private.
Many homeowners have benefitted from the historically low interest rates of the last few years to take out mortgages with fixed rates for a specified period, but what happens when interest rates start to rise? Most economists agree that rates will rise in the near future, but the detail of exactly when and by how much differs. Whilst homeowners will be keen to believe that rates will not rise above 3%, as suggested by one of the rate-setters, former deputy governor of the Bank of England , Charlie Bean, this may not be realistic, as argued by other experts including Gerard Lyons, economic advisor to Boris Johnson, who is calling for an increase up to ten times the current rate of 0.5% to 5 or even 6%.
The implications for homeowners are daunting and many would buckle under the strain especially the huge number of households who have accumulated debts other than mortgages on a massive scale, encouraged by low interest rates as well as government tax credits and tax cuts, used as a tool by the government to attempt to kickstart the economy by fuelling consumer spending. These credits and cuts are likely to dry up as government funds become increasingly squeezed.
The financial challenges faced by familes are myriad but those faced by the government are truly alarming in their size and reach, and will inevitably impact individuals as solutions are sought. Balancing expenditure against income will become an increasingly daunting task for the government, as outlined by a fiscal sustainability report published this spring by the Office for Budget Responsibility (OBR) who chillingly describe Britain’s fiscal situation as “unsustainable”.
The ageing population is one well-documented issue but there are others. In almost every area of public expenditure, the figures are frightening. Private finance initiatives have created a shocking £239bn of liabilities in the areas of education, health and pensions and it is the taxpayer who will have to stump up for these in the coming decades.
In the area of health, the NHS is a huge drain on resources for the government with no balancing of books in site. In fact some health experts are predicting a deficit of £30bn by 2020.
Another initiative which has created huge government debt is the recent reform of university tuition fees. Tuition fees were introduced in 2004 and have risen steadily since their introduction to the current maximum of £9000 per year. Undergraduates have taken out student loans to the tune of £46bn and this figure is predicted to rise to £200 by 2042. However, the government estimates that £70-80bn of this will never be repaid whilst others argue that this is a gross underestimate.
There are mind-boggling shortfalls in the area of pensions too. The Pension Protection Fund, which picks up the tab for pension schemes of bankrupt companies, of which there are 6,150 and counting, reports a shortfall of £110bn. Although they manage over £1.1tn of assets and wield a fair amount of financial clout, they are reliant on strong economic growth in the UK and abroad, and current investments are not performing well. Private-sector pension schemes are estimated to have a collective deficit of £177bn which ought to be paid for out of the pockets of shareholders although in reality, as history has shown, the taxpayer will more than likely have to bail them out. Public-sector pensions will cost the government and taxpayers anything from £600bn to £12tn over the next 60 to 80 years, depending on which estimates you believe.
It may be possible for both households and governments to cover their debt payments, but there won’t be much meat on the bones for anything else. With deficits in so many areas, it is difficult to see how the government will fulfil their commitments in the areas of pensions and healthcare without either performing a miracle to produce sustainable growth, increasing taxes or to dramatically cutting costs.
Just like the millions of households who are manipulating debt by taking out interest-free mortgages, purchasing cars on leasing deals and even renting electrical goods such as fridges and washing machines, habits which echo the post-war hire purchase model, the government has put off tackling its debt issues head on, avoiding making politically unpopular decisions such as raising taxes. However the issue of debt is not going away and sooner or later action will need to be taken.
All this doom and gloom only goes to prove just how critical it is to manage your own finances well because of one thing we can be sure: we can’t rely on the government for our financial wellbeing. It is easy to feel powerless faced with all these depressing figures but the fact is that we are all in charge of our own financial destiny and, while we cannot influence government decisions such as how much tax we might have to pay, we can take steps to improve our own situation and ensure that we are saving in the most effective and tax-efficient way possible. Perhaps it is time you had a financial MOT to ensure that you are on track to fulfil your financial goals and guarantee yourself a comfortable retirement?