UK debt could total £6.7 trillion by 2023, rising to nearly 260% of GDP

• UK debt as a % of GDP is predicted to rise to match the levels seen during the financial crisis by 2023, assuming a smooth Brexit transition
• Total debt repayments could rise in cash terms from a little above £150 billion in 2017 to around £250 billion by 2023 if interest rates rise to 2%
• Low income households will be most likely to suffer financial stress due to rising debt interest payments.  More needs to be done to raise awareness and prevent unsafe lending levels

The UK’s total debt stock is projected to reach £6.7 trillion by 2023, rising from £5.1 trillion in 2017, according to new analysis by PwC. While the government is likely to continue to reduce the size of its debt relative to GDP over the next five years, households and companies are both expected to borrow at a faster rate than economic growth. The net effect will be a gradual rise in the economy’s total debt-to-GDP ratio from 252% in 2017 to just under 260% in 2023.

Although the projected increase in the UK’s debt stock and the rise in debt repayments are relatively modest, they will come on top of already high levels of debt. Total UK debt stock grew steadily from below 200% of GDP at the turn of the millennium to around 260% by the time of the global financial crisis. By 2023, total debt could again be approaching this level.

John Hawksworth, chief economist at PwC, says:

“While the financial crisis led to the private sector deleveraging, we’ve seen a change in behaviour among households and non-financial companies since 2015, when they began to accumulate debt at a faster rate than nominal GDP growth.

“The unusual amount of uncertainty facing the UK economy in 2018-19 due to Brexit, London’s stumbling housing market and the likelihood of further interest rate increases, means a pause in debt accumulation relative to GDP is possible in the short term. But if a smooth Brexit transition is agreed with the EU and UK business and consumer confidence recovers, the private sector is likely to resume faster rates of borrowing that could cause the debt stock to rise further relative to GDP.”

In addition to considering potential movements of the debt stock, PwC has also analysed potential paths for debt interest payments.

In its main scenario, PwC assumes the Bank of England will raise its base rate to 2% by 2023, in line with the Bank’s estimate for the long-run neutral interest rate. An additional 125 basis points on the rate over the next five years would increase debt servicing costs for all three sectors of the economy, so that total debt repayments could rise in cash terms from a little above £150 billion in 2017 to around £250 billion by 2023. As a proportion of GDP, this represents an increase from 7.7% to 9.6%.

Taking a closer look at household debt, the Bank of England suggests banks loosened lending conditions in 2015 and this, along with the launch of the government’s Help to Buy initiative, appears to have triggered a modest acceleration in mortgage lending growth since 2015.

But the more significant increase came from unsecured debt. The first reason for this is the rise in the value of outstanding student loans, which have grown from around 10% of non-mortgage debt in mid-2010 to more than 23% by late 2017, thanks to the tripling of the upper limit for annual tuition fees to £9,000 in 2012. The second is the creation of new borrowing agreements to finance car purchases.

In the short term, the combination of slow growth in mortgage debt and a moderation in unsecured lending growth (other than student loans) means that the total debt to disposable income ratio is likely to remain at current levels, but a revival in the housing market from the start of the next decade could push it up again.

Mike Jakeman, senior economist at PwC, adds:

“Households with ‘problem debt’ are disproportionately concentrated among those with low incomes. These households are particularly vulnerable to rate increases, with around 60% of low-income households that face difficulties servicing their debts doing so because of higher repayment costs, rather than falling incomes. We’ve found that these households are more likely to use credit to purchase essential items, which suggests that they have little flexibility to reduce their dependency on debt as the cost of loans rises. This means that, for some, the UK economy’s appetite for debt remains a risk.

“There are ways in which rising debt levels can be mitigated, such as improving awareness around managing household finances and ensuring there are policies and regulations in place to prevent unsafe levels of lending.  Government and employers have an important role to play.”

Ends.