More debt, less saving, more strain. Five worrying new charts from the OBR

Though it tends to get rather overlooked on Budget day, the Office for Budget Responsibility’s Economic and Fiscal Outlook report really is a mine of excellent data. All the more interesting because it represents the official “in-house view” that informs the Treasury’s actions in the coming years.

Here is a by-no-means-exhaustive selection of some of its more interesting insights about the picture for the UK economy in the coming years (I’m focusing here more on the economics than the fiscal picture, the latter of which was largely unchanged).

1. Britons are going back to their indebted ways



The OBR is forecasting a steady increase in household gearing – the amount of debt people owe in comparison with their income. This chart would look even more powerful if one compared it with previous historical periods of deleveraging, or indeed the equivalent chart for the US. In both cases, the level of indebtedness fell more sharply than it has done in Britain’s recent crisis. At the same time…

2. Savers are pulling money out of long-term savings at an unprecedented rate



The notion that savers are pulling their money of long-term deposit accounts isn’t a new one. We broke this story back on Sky News late last year. But this chart from the OBR report underlines how dramatic the trend has been. It’s one of the best explanations for the recent boost to consumer spending: it’s not merely that people are borrowing more; they are raiding their long-term savings in order to have cash  at hand in their instant access accounts. After all, what’s the point in leaving your cash in savings accounts when…

3. “Real” interest rates are currently -3%. And won’t hit zero until late 2017


This chart helps explain why indebtedness is on the rise. When you adjust for the impact of quantitative easing, interest rates are actually a lot lower than the 0.5% headline rate the Bank of England has them at. Take into account the £375bn of cash it has pumped into the economic system, and the actual cost of borrowing is comfortably into negative territory. This also means that even as Bank rate rises gradually in the coming years, the actual rate of borrowing won’t push through zero for almost four years.

4. But it’s taken time for lower rates to feed through to most people



It won’t have escaped your notice that the interest rates the Bank of England quotes, or indeed those negative ones the OBR talks about, haven’t exactly manifested themselves as rock-bottom borrowing costs on most of our loans. That, as most of us know, is a consequence of the financial crisis, during which the gap between official rates and actual borrowing rates widened as commercial banks attempted to repair their balance sheets. You can see this in the chart above, which compares official Bank rate with the actual so-called swap rates that affect actual loans rates.

5. Almost a quarter of households may soon face debt repayment problems



The problem for those households taking advantage of low interest rates is that they may soon face problems when interest rates do eventually rise. And though the Bank of England isn’t expected to start raising borrowing costs until next year, and though any increases will be slow (see chart 3), even a relatively small increase could affect households seriously. In fact, the OBR thinks that if rates go up 2.5%, as the market expects, almost a quarter of households will have to “react” to higher debt costs (meaning cutting back their spending or working more). That said, the OBR reckons that most borrowers won’t actually see that full 2.5% increase as – just as the commercial banks didn’t cut actual borrowing rates the full amount when Bank rate came down in 2009 – banks won’t lift actual borrowing rates as fast as the Bank of England in the coming years. We shall see.