Surely the snow was to blame?

“But let’s remind ourselves – back in June they forecast that household debt/income would fall every year until 2015, now they expect it to rise every year.”

They do not:

http://budgetresponsibility.independent.gov.uk/d/obr_household_borrowing_and_debt_forecast_correction.pdf

2009 163%
2010 160%
2011 159%
2012 162%
2013 164%
2014 168%
2015 173%

So its only in the final two years that it is forecast to pick up (as a proportion of income, which isn’t great and I would prefer it to stay at least flat as 2009-13). Yesterday’s very positive HEW figures add to the savings story (as ever public is ahead of politicians):

http://www.bankofengland.co.uk/statistics/hew/2010/dec/index.htm

This analysis has caused such distress to Matthew Sinclair, chief non-job holder at the so-called Taxpayers’ Alliance, that he has called for the article to be withdrawn. So I’m glad to see that not only has his advice been disregarded, but the piece has been posted on LC as well.

Duncan, as the TPA rightly point out, you’ve not exactly been honest in your false economy article. You even provide the evidence for them to proce you wrong;

((From the TPA article))

http://www.taxpayersalliance.com/economics/2011/04/false-economy-economical-economics.html

When I wrote this post I thought you just couldn’t tell how much of the increase in the household debt forecast was down to inflation and how much down to fiscal policy. We’ve been having a bit of a debate on Twitter and, in the course of looking into this issue a bit, I’ve found that you can get a decent idea and my case is stronger than I thought. Look at this document, linked by Duncan Weldon. It sets out the OBR forecast from shortly before and shortly after Budget 2010 (the one at which all this Government’s major fiscal announcements were made).

It shows that the increase in household debt resulting from the Government’s changes to fiscal policy is £17 billion. That’s wildly different from the £245 billion increase in debt False Economy were claiming.

There may have been some policy changes that have increased the household debt forecast since then a bit, but overall fiscal policy hasn’t changed much. What has changed is the inflation forecast and a correction for an error in the original OBR figures. In other words, fiscal policy isn’t responsible for a big increase in personal debt as claimed. False Economy should retract that article.

From the TPA article;

When I wrote this post I thought you just couldn’t tell how much of the increase in the household debt forecast was down to inflation and how much down to fiscal policy. We’ve been having a bit of a debate on Twitter and, in the course of looking into this issue a bit, I’ve found that you can get a decent idea and my case is stronger than I thought. Look at this document, linked by Duncan Weldon. It sets out the OBR forecast from shortly before and shortly after Budget 2010 (the one at which all this Government’s major fiscal announcements were made).

It shows that the increase in household debt resulting from the Government’s changes to fiscal policy is £17 billion. That’s wildly different from the £245 billion increase in debt False Economy were claiming.

There may have been some policy changes that have increased the household debt forecast since then a bit, but overall fiscal policy hasn’t changed much. What has changed is the inflation forecast and a correction for an error in the original OBR figures. In other words, fiscal policy isn’t responsible for a big increase in personal debt as claimed. False Economy should retract that article.

Seems like you yourself provide the evidence to disprove your claim Duncan.

No time today for lots of argument but:

@2 That isn’t the most recent forecast – try tab 1.8 of the supplementary economic forecast spreadsheet available on OBR website.

@4Tyler – I am comparing the June pre-Budget forecast to the current forecast. They made a revision to their post budget forecast numbers in February, but not their pre-Budget forecast. (I’ve actually emailed them for more details on this).

That note above does not refer to their most recent forecast.

The TPA’s major claim is that this is all down to inflation. I don’t think that stands up. Do you?

@astateofdenmark – You’re drawing on the wrong figures, the OBR correction you have linked is dated November, Duncan’s post refers to the OBR figures published in June 2010 and those published after the budget (
link).

Although from the figures you post I’m still not sure how you can reject Duncan’s claim.

One more thought – if my analysis was so very, very wrong – don’t you think the Treasury might have pointed that out to the Observer this weekend? Rather than just saying ‘higher inflation’, like the TPA?

(Published on behalf of Matt Sinclair)

Duncan,

I am stunned you are posting this after our discussion yesterday.

Here is you admitting that comparing figures before and after a revision of the statistics by the OBR explains a lot of what you attributed to policy:
http://twitter.com/#!/DuncanWeldon/status/54879339753381888

Here is you acknowledging that the better comparison would be the pre and post-Budget OBR estimates (but getting your sums wrong by looking at the wrong rows):
http://twitter.com/#!/DuncanWeldon/status/54875263112187904
http://twitter.com/#!/DuncanWeldon/status/54878339898417152

That source actually shows that Budget 2010 (and fiscal policy hasn’t changed course significantly since then) increased the OBR estimate of household debt not by £245 billion but by £9 billion in 2013 and £17 billion in 2014:
http://budgetresponsibility.independent.gov.uk/d/household_borrowing_debt_forecasts_190810.pdf

It may be that the estimate of the impact has changed to some extent but your original claim has been completely blown out of the water. Of course inflation can make that kind of difference. A very substantial revision (a “key economic development” according to the OBR) has been made to a key variable you would expect to affect household debt.

Whether or not I should have called you a hack, you are certainly behaving like one. You just can’t write an article like this and ignore the effect of inflation. Yes it’s only two years revised, but you were writing about “the next three years”!

Best,
Matt

@7 Duncan

Guessing the treasury don’t really know/care who you are or if they do, it’s well known you are a left wing blogger and if they humour you they have to humour everyone who spouts rubbish, but…

…as I have pointed out before you are attacking a straw man – by using gross debt not net debt. The net lending to individuals, data supplied by the BoE, is at 15y lows.

If you include GROSS debt, you have to include secured lending on mortgages etc. Which will naturally increase as population does, and as more housing stock is created. That gross debt will also naturally increase by a significant amount with inflatin as mortgages still to a great extent are floating rate….as to be fair are most of the contributors to the NET debt numbers (credit cards etc).

….so, if the OBR increase their inflation forecasts, it’s not surprising in the least that both net and gross public debt increase, compounded by inflation/interest rates. Looks like the TPA have a point, doesn’t it?

The updates are hardly different.

Will/Matt @8,

The comparison is between the pre-budget forecast, June 2010 (unrevised) and the most recent (march 2011) – heavily revised up. And I just don’t think a change to inflation in 2011/12 can explain big revisions to 2013/14/15. Guess we have to disagree.

Tyler @9, of course HMT don’t care about me, be worried if they did! I rather suspect they care a front page story in a national newspaper though – and they didn’t dispute numbers.

Again, small change in inflation forecast – huge change in debt forecast.

“Leaving aside the sniping (I’m a ‘hack’ apparently),”

I know the technical details of what the OBR said are important, but I can’t get past the sheer entertainment factor of the Taxpayer’s Alliance accusing other people of being “hacks”.

Taxpayers Alliance in Tory front shock. Film at 11.

@ 11 Duncan

“Again, small change in inflation forecast – huge change in debt forecast.”

That “small change” in the inflation forecast has a 55bn effect (compounding household debt by inflation), just making the assumption real rates will stay unchanged….which is unlikely. In reality the effect of the inflation forecast hike will send real rates much higher, increasing people’s interest payments further still.

Do some maths next time, ok?

@ 14,

Tyler,

Thanks for that. Inflation adds £55bn. They’ve revised up nearly £250bn.

Interest rates – In June pre-Budget report they expected short term rates at 3.4% in 2013/14 and at 4.0% in 2014/15.

Chart 2.9 of current report suggest little change since then. (They revised down after Osborne’s budget and then back up again).

Also see the Telegragh today – (lefty rag obviously):

http://www.telegraph.co.uk/finance/comment/jeremy-warner/8427688/Households-sink-under-a-sea-of-debt.html

“To arrive at its conclusion that household consumption will by then be rising fairly robustly, the OBR makes a couple of very questionable assumptions – that to maintain spending and living standards, UK households will both reduce their savings rate and increase their borrowings.

Given that UK households are already the most indebted in the world, that’s quite an ask. Dig down into the detail of the OBR forecasts and things look pretty frightening. Overall household debt rises from £1.62 trillion last year to £2.13 trillion in 2015, or from 160pc of income to an astonishing 175pc. In other words, consumption growth, a key part of the OBR’s overall forecast for growth, is only maintained by taking on more debt. History seems to be repeating itself, for that’s what happened in the run up to the crisis. Far from being cured, the underlying problem is being made worse still.

The OBR’s forecasts should perhaps be taken with the same sack full of salt as everyone else’s, yet though plainly undesirable and potentially dangerous, this further rise in indebtedness is not quite as incredible as it first appears. Relative to income, household debts have been here before. Just ahead of the crisis, they were at roughly the same level.

The erosion since is caused largely by the effect of rising wages on the same quantity of nominal debt. Well those wage rises have now largely ceased, so if they can, households may feel inclined to borrow the difference. Is it not precisely this sort of psychology that caused the crisis – borrowing, rather than earning, the money to spend?

Policymakers say they want to achieve a rebalancing of the UK economy away from consumption to investment and trade, but here’s the OBR relying for its forecasts of continued growth on consumers going back to dangerously high levels of leverage.

Whether desirable or not, the OBR views it as a matter of economic determinism. If benefits are slashed and taxes are raised, then households will compensate for the loss by borrowing to spend so that in aggregate demand remains the same. This is only the mirror image of what happened in the downturn, when a collapse in private demand was partially offset by fiscal expansionism, thereby leading to a precipitous increase in public indebtedness. Now, according to the OBR, the scales will be tipping back the other way again.

That’s the theory, but practice is frequently different. And in any case, it’s not really what anyone wants to happen. The nub of the economic problem is surely not just the fiscal deficit, but overall indebtedness, both public and private. If the crisis was at root caused by an excess of debt, merely swapping one form of it for the other doesn’t seem much of a solution. “

@15 Duncan

I ONLY accounted for the effect of increased inflation forecasts. NOT the compounding effect of interest rates on outstanding debt.

If i do that, using the OBRs own Gilt forecasts (and remember, most debt trades well above Gilts in interest rates, so my figure will be a lowball estimate) I get an answer of 165bn for the increase in household debt by 2014/15.

That makes the basic assumption that no debt is net paid down, and the only new debt is from interest payments (which is unlikely – people are taking on new debt even if at a reduced rate, again making my estimate a low one).

165bn compared to the OBRs number of 221bn (1956bn -1735bn, OBR feb correction, not sure where you get 245bn from) is hardly a huge amount of new debt (55bn), and that makes the bold assumption that my figures aren’t too low.

What does this tell me? You should do more maths, and the idea that households are going to be taking on huge new debts and dipping into their savings is demonstrably false, at least as far as the OBR forecasts are telling me. Most of the increase in household debt seems to be coming from compund interest and inflation.

QED.

Tyler the point is to compare the June pre-budget forecast to the current one. Not just inflation adjust numbers…

The OBR have marginally revised up inflation and not changed interest rate assumptions in that period. Yet household debt has been hugely revised up. The question is – what has driven that increase? The answer doesn’t seem to be inflation.

I’m seriously bored of this argument.

As I understand it now – on one size we have the Observer, the Telegraph, one Nobel prize winner, one current MPC member & one former MPC member. On the other side with ‘Tyler’ and the TPA.

£245bn is the change in their forecast for 2014 between June pre-budget report and most recent.

Plus (final point!) the OBR say the housesold savings ratio will fall from around 6% to 3.4%. They actually forecast (in both tables and text!) that households will increase borrowing.

@ Duncan

I’m tired of this too – mostly because you haven’t bothered to open up excel and crunch some simple numbers. Not rocket science.

My 165bn number is caused by the effect of increased inflation on the compound interest of outstanding household debt.

If I take the OBRs numbers for their rate and inflation forecasts I get very close to their numbers for the forecast of household debt.

The ONLY thing I change between my two simply calculations is the inflation forecast for year 1 and 2. I’m sure they use a more complex calculation than I, but ONLY using the NEW inflation forecasts, household debt is set to rise 165bn due to the compounded efect of inflation on interest rates.

What you call a small increase in inflation actually compounds up to a 3.5% difference in household debt over 5 years….and that is BEFORE you get the extra effect of nominal rates (interest on the interest).

One one side we have a bunch of Keynesian economists, Krugman, Blanchflower and Posen, who all believe that printing money/debt/consumption is the only way to GDP growth. At least the first two have been widely criticised on many fronts, and have offered little solution to a debt fuelled crisis other than more debt. They also routinely ignore the “saving” part of Keynesian economics. Tat they right for heavily left-wing journals should give you a hint about their politics as well.

@18

You are selectively picking numbers – the OBR revise up the number post budget in the very same pdf you pick it from….

@19

OBR could be right, but all I am saying is that a great portion of the increase in household debt is due to nothing more complicated than interest payments and the effect of inflation.

I wouldn’t even be surprised if the savings rate does decrease, but all that tells me is that wages are likely to be increasing slower than inflation, and the cost of household debt servicing is going to eat into the savings rate.

What doesn’t immediately follow is your assertion that households are suddenly going to be taking on huge amounts of “new” debt…..as most of the increase comes from the added costs, thanks to inflation, of servicing the old debt.

And there I was thinking you were a trained economist…

@13 yep…truly shocking. Who would of thought this ‘ independent pressure’ group was actually a thatcherite front for those on the Tory right. I’m speechless.

Joking aside, could they rename themselves the Tory Taxpayers Alliance please,

@22

Joking aside, could they rename themselves the Tory Taxpayers Alliance please,

I’m not sure that’s entirely accurate either. At least some of them work very hard at not paying-tax.

AFZ

Good point Duncan, though we can’t ignore the inflation that there has been – particularly in food and fuel prices. This has, surely, been significantly exaggerated by speculation – quite a lot of which, I’d imagine, is done by UK based groups. And, surely, because of the government’s insistence that they stick to an economic strategy based on financial sector growth, they are refusing to regulate this speculation. So, even if it is inflation, it is still a massive failure of government policy that they are not doing anything about it.

Tyler is approaching this from the wrong direction.

Instead of fruitlessly crunching numbers, Tyler ought to extricate himself from that foxhole and look at the broader picture.

The economic data is heading south. This will leave the deficit (as it has in Ireland) stubbornly high. This would certainly have been reflected in the OBR forecast in this budget, and that would have been political suicide.

So what do you do? Like any company accountant worth his salt, you fudge the numbers using the most innocuous but plausible sounding metrics and assumptions possible – in this case personal debt forecasts.

That way you can bump up consumption and hold GDP growth artifically high.

The problem is, your (Osborne’s) rhetoric has been so overblown since the credit crunch that many of those debt metrics have suddenly become politically sensitive. Not just that, but the assumption itself is easily questioned given prevailing economic circumstances.

And that is what Mr Weldon has exposed here.

“My 165bn number is caused by the effect of increased inflation on the compound interest of outstanding household debt.”

I’m not a mathematician, but I’m confused here. Do many UK households have index-linked debt?

“I’m not a mathematician, but I’m confused here. Do many UK households have index-linked debt?”

That’s not the point. The point is that inflation raises the gross amount of debt.

It (probably) raised the rate at which new debt is accrued. It doesn’t raise the value of outstanding debt, which is what was being claimed – indeed it reduces it in real terms. It may indirectly affect the path of interest rates, but that’s a fairly tenuous claim in the short-run, given the experience of the last few years.