Is the UK in too much debt?

This week chancellor Alistair Darling revealed his budget to the British nation; it was billed as the "most important budget of a generation" due to the continuing recession.

The budget itself had the largest amount of public sector borrowing in history at 175 billion pounds and this does not even include the various amount of aid given to the banking sector. In other news this week 900,000 thousand people are now paying mortgages that are more expensive than the value of their houses and, therefore, in a position called "negative equity". With the public and private debt reaching historic highs this raises some serious questions about the UK ability to steer a safe passage out the recession.

With the chancellor having the problem of raising an additional 175 billion pounds to cover the shortfall between the amount of money raised in tax and the amount of money he has spent in the budget. Essentially, the government borrows money from the public by issuing various government bonds. The standard government bond is called a Gilted Edge Security and is a promise from the government to pay the holder a certain amount of money when redeemed, plus interest payments. There is rising concern in the government bond market since the UK's Debt Management Office will be issuing £220 billion in bonds this year. However, this is not likely to affect the UK's AAA credit rating - there is very little chance that the UK government will be unable to repay this debt or Default on the payments thus, GILTs still remain a safe investment. In addition it is widely felt that bold steps taken by the government are necessary to help bring the country out the recession.

On the other side of the debt issue is private debt with two main issues "negative equity" on property and vast amount of credit card debt (unsecured debt). House prices have dropped nationally, according to the Halifax by £42,474, which is equivalent to 17.5% off their August 2007 highs of £199,700. This has left 900,000 people in the position of negative equity. Nevertheless unlike the last housing crash in Britain (1991-1993) there seems to be less correlation between negative equity and the ability of homeowners to repay their mortgage and for that reason negative equity is only truly affecting those who wish to move.

The amount of unsecured personal debt has sky rocketed over the past 10 years, mainly as a result of easy credit and low interest rates. These unsecured personal debts, mainly consisting of personal loans, store cards and credit cards, has reached roughly 216 billion pounds - approximately £4750 for every UK adult. If you include mortgages, it rises to circa £31,000 each. In spite of this, the recession appears to be having a positive effect on both debt and saving rates. The recession is encouraging people to pay off debt. In 2008 the British public repaid a massive 38.6 billion pounds in unsecured debt. Another important factor is that people are starting to save a higher proportion of their income each month - this is the first increase since 2001. The combinations of these factors are going to strengthen the private credit position of UK, which will help to recapitalise the banking system therefore increasing the flow of credit.

It would be unwise to think that ten years of national exuberance can be fixed overnight, but the rebalancing processing is certainly underway.