Households due to take on more debt in the long term as finances squeezed, Budget indicates

The final March budget didn’t spring any surprises.  While the Chancellor presented a more optimistic picture for short-term growth,  predictions from the Office for Budget Responsibility’s (OBR)  forecasts indicate that the improvement will likely not last long. The level of GDP will be slightly lower in five years’ time than predicted last November, but on a more positive note, the forecast implies there will be  a small improvement in the level of government debt as recent receipts have been stronger than expected.

The ‘B’ word, Brexit, which hangs over these forecasts, received scant mention. Not only will the way Brexit unfolds create huge uncertainty around any current predictions and likely dictate the future of the UK economy for the next few years, but the potential divorce bill – £50bn on some estimates – was not mentioned.

So, what does the OBR make of the prospects for UK households?  First, despite the rise in the National Living Wage to £7.50 in April, the exchange rate driven increase in inflation will keep household finances under continued pressure this year, with stagnation of real personal disposable income. Average earnings growth adjusted for inflation – after a period of rising living standards – fell sharply in December offering an indication of what is to come.

OBR’s earnings growth forecast, which was revised down significantly last November and has been nudged down further as the OBR becomes even more pessimistic about productivity. OBR’s more negative outlook is also true of household incomes. In the new forecast, income grows only modestly and are estimated to be 1.7% lower in 2022 than previously expected, increasing the effective burden of debt on households. The forecasts continue to paint a more gloomy outlook than  before due to households recently taking on more debt and expectations this will continue to increase above earlier predictions in the next five years.

The overall picture is likely sustainable while interest rates remain low. However, debt of 153% of household income is a figure which begins to creep towards the unsustainable level seen in the run up to the last recession in 2008.