Public and private debt is expected to hit £10 trillion by 2015, according to a new report - but the economy will continue to grow.
The analysis by PwC found that the total burden of debt on the UK economy rose from around twice national income in 1987 to just over three times national income in 2000, but then accelerated much more rapidly to around 5.4 times national income by 2009.
This total UK debt to GDP ratio continued to rise even during the recession of 2008-9 as GDP fell back and government debt rose markedly.
Mark Smith, regional chairman at PwC in the Midlands, said: “Such rapid increases in debt may not seems sustainable but both real and nominal interest rates - in the UK and globally - fell markedly after the early 1990s and then dropped even further after the recession. This has made it possible to service a larger stock relative to income levels, but current exceptionally low interest rates will not last forever and a large part of household and corporate lending is exposed to possible future falls in residential and commercial property prices.”
PwC is forecasting growth of 2 per cent for the UK economy in 2011 and average growth of 2.5 per cent over the following four years to 2015. Over this period, the ratio of total UK debt to GDP should decline slightly from 543 per cent in 2009 to 536 per cent in 2015. Plausible alternative scenarios could see UKdebt in 2015 anywhere between 500 per cent and 580 per cent of GDP, depending on the health of the economy and the appetite of both lenders and borrowers. But in all scenarios the total debt to GDP ratio remains very high by historic standards.
In the West Midlands, GDP growth is forecast to slightly trail that of the UK as a whole, with growth of 1.8 per cent in 2010 and 1.9 per cent in 2011.
Mr Smith added: “The key fact to take from this forecast is that the Midlandseconomy is expected to grow and this is positive for businesses in the region. However, it would be foolish to ignore the longer term impact of the extremely high levels of debt in our economy – which are set to top the symbolic figure of £10 trillion by 2015, at a time when GDP will still be less than £2 trillion. This is a very heavy burden of debt for the economy, particularly with interest rates likely to rise at some point over the next five years or so.
“Sooner or later, the high level of debt will have to be addressed either through debt being run down sharply, which could risk triggering another recession, or more likely through a persistently heavy debt service burden that could dampen economic growth for decades to come. Either way, this will be a painful process for the UKthat goes well beyond the immediate challenge of getting public finances under control.”