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Household debt set to increase, according to OBR


The Office for Budget Responsibility (OBR) has said that it expects household debt to carry on growing in size until at least the end of the decade.

Official forecasts indicate that weak pay growth coupled with low interest rates is likely to provide households with a means to continue to live beyond their financial comfort zone, and the fiscal watchdog said such a long period of this would be “unprecedented”.

In total, it’s expected that household debt will rise to £58bn this year, while this figure is expected to increase to £68bn by the end of the decade. These figures are up from forecasts in November for the same periods, which suggested debt would stand at £41bn and £49.2bn respectively.

It’s expected that consumption growth will be fuelled by consumers raiding their savings, while borrowing over the next five years will be accommodated by the Bank of England’s “extremely accommodative monetary policy”.

The OBR said in it’s latest UK health check that a sustained household deficit of this level is something that has not yet been witnessed: “The persistence of a household deficit of this size would be unprecedented in the latest historical data, which extend back to 1987”. Data from the watchdog between 1963 and 1987 “showed the household surplus moving into negative territory in only one year”, according to the OBR.

However, since the economic recession, rising consumer confidence has boosted consumption leading to spending outpacing pay growth for a sustained period. In order to fuel the increased consumption, consumers have borrowed more or sold assets, and the OBR expects net unsecured borrowing on credit cards and loans to rise to £662bn by the end of the decade.

By 2020, the OBR says that the unsecured debt-to-income ratio could be as high as 46 per cent.

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