MONEY COMMENT
Oops, We Owe Over £1,000,000,000,000!

By Cliff D'Arcy
July 29, 2004

This morning, the Bank of England released its latest Lending to Individuals figures, which show that UK borrowers owed a massive £1,004,290,000,000 as at the end of June. For the record, we now owe £827 billion on mortgages, plus a further £177 billion in unsecured debts (credit and store cards, personal loans, overdrafts, etc.).

Welcome to the Trillion Club!

Just how big is a trillion pounds?

• It's a million million quid, or £1,000 billion.
• It's equal to the entire Gross Domestic Product of the UK (our total national income) last year.
• It's about 77% of the value of the entire UK stock market, which is worth roughly £1.3 trillion.
• It's the combined gross annual salary of forty million workers on £25,000 a year (but the UK workforce is only 28.3 million people).

Anyway, I've just returned from being a guest on Julian Worricker's show on Radio Five Live earlier this morning. (You can listen to the show here.) During an hour-long phone-in, many listeners called in with their views on debt - both sensible and crazy! (Don't imagine that you can escape your debts by fleeing the country, because banks have private investigators in every country in the world who are eager to track you down!)

The UK economy has enjoyed its longest period of expansion for over two hundred years, but this growth has come at a price. In May 1997, when this government came to power, we owed £500 billion. It took three hundred years of banking history to build up this burden, but we've managed to double it in just seven years!

What's more, debt as a percentage of disposable income is at an all-time peak: it's currently over 130%. Indeed, debt repayments (interest and capital repayments on mortgages and other personal debts) now swallow almost a fifth of our disposable incomes, just below the peak of 22% set in 1990.

However, many people claim that we don't have a problem, thanks to historically low interest rates. But the interest we pay is only half of the picture: remember, we have to pay back the capital some day!

Of course, our mortgage debt isn't too much of a worry, because our £827 billion of home-loan debt is backed by an estimated £3 trillion of property wealth. However, house prices will not keep rising by 20% a year, and have already begun to soften. Nevertheless, unless there is a major reversal in house prices and a big hike in mortgage rates, mortgage repossessions and arrears should remain close to the very low levels currently being experienced.

Then again, our total credit-card debt has exploded from £10 billion in April 1993 to a record £55 billion as at the end of June. This is a clear symptom of our reckless spending. Indeed, the Financial Services Authority (FSA) reckons that, as a nation, we are spending £100 for every £90 we earn. Furthermore, the FSA also estimates that one in four households - six million families - is already having problems meeting debt repayments.

However you feel about personal debt, remember this: we are out of pocket to the tune of roughly £70 billion a year thanks to the annual interest bill for our trillion-pound debt mountain. By spending tomorrow's money today, we are squandering our future and making ourselves poorer in the long term. Continually spending more than we earn is a recipe for financial disaster.

More: Visit our Get Out Of Debt centre | 25 Money-Saving Tips.