Living Beyond Our Means

Those of you who are yet to be convinced that we as a nation are living beyond our means, should read the Spring forecast presented by the Ernst & Young ITEM Club.

The report starts out optimistically enough, predicting growth of 2.9 % GDP for 2007 and noting that a rapidly expanding business sector is now driving UK economic growth faster than household or government spending.

However, ITEM then goes on to note that as a nation we are far too relaxed about risk, inflating assets and the costs of borrowing (as a result of the "benign" economic conditions in which we are living).

Professor Peter Spencer, Chief Economic Advisor to the Ernst & Young ITEM Club, says:

"Many people are following the Chancellor's lead and are borrowing to finance consumption. The UK's current deficit has reached 3.5 % of GDP which suggests that as a country we are close to the edge. Ultimately, we are all skating - not to say wobbling - on thin ice. There's a danger that we are slithering into complacency."

Spencer warns of an increase in interest rates, which will squeeze homeowners and borrowers.

Quote:

"...it is clear that interest rates will be pushed up again to 5.5% after the May MPC meeting, putting them 1% above their level in early August."

He warns:

"Both as individuals and as a country we have borrowed a huge amount to support this growth. The bottom line is that we are all living beyond our means.

In the short term, Mr Brown has resorted to borrowing for consumption. If the Chancellor is forced to borrow so much when the economy's so sweet, what will happen when it turns sour?".

Economies work in cycles, we have been privileged to live in a time when the British economy has enjoyed a lengthy period of growth and prosperity. However, history teaches us that at some stage, there will be a downturn.