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UKT: Personal debt could sink the good ship Great Britain

By Damian Reece, City Editor
Last Updated: 12:35am BST 24/10/2007

It's been plain sailing for the UK economy thanks to a constant reach of low interest rates. But things have got too easy, and we've steered ourselves into some choppy waters, with many on the good ship Great Britain starting to feel queasy and out of their depth. I refer to the swell of debt.

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Personal-sector debt at more than £1,000bn has been greater than the country's entire annual economic output for some time, while government debt continues to ratchet up. Alistair Darling added another £4bn during his Pre-Budget Report.

The economy now struggles with a bloated public sector without enjoying benefits such as improved infrastructure, better healthcare or higher standards of education – all crucial to an efficient and modern economy.

The Policy Exchange think-tank describes our economy as "more mirage than miracle". It describes an under-achieving country with a lot of growth based on rising house prices fuelled by cheap debt. But there are many more things about the UK economy that are unreal on closer inspection.

Unemployment, widely considered low, is in reality much higher. Look no further than the 2.5m people on incapacity benefit, half of whom have been apparently unfit to work for five years. Despite the billions we've pumped into the National Health Service, employers (and hard-working colleagues) are being fobbed off with the longest sick note in Europe.

Much of our economic "miracle" has come from London. But the success of Britain's first city has been built mainly on financial services. We've already seen job cuts in the Square Mile. If our first city sees a slow-down, will our second city be in a position to pick up the baton?

Not if it's Birmingham, where unemployment is 7.4pc and 20pc of the working population have no qualifications. There are some Brummy beacons in manufacturing, but the city is more hollowed-out shell than vibrant centre.

The truth is the good ship Great Britain is highly unstable. To the port side is a vast public sector only just countered by a private sector on starboard over-reliant on financial markets that look ready to go overboard any moment.

Looking nervously at the lifeboats are millions of consumers who have been on a spending binge on the back of a housing market now cooling. By the way, that shape looming in the darkness is an iceberg. It's called debt.

Spend state money here for a halo effect

Dedicated Pre-Budget Report page
One way to improve the economy is to diversify it. But Britain is alone among successful nations in having no industrial policy designed to prioritise and encourage certain sectors. This is partly political fear because it smacks too much of the incomes and prices policies of the 1960s and 1970s.

There is also an orthodoxy in post-Thatcherite Britain that governments should not be seen to choose champions and that pure market solutions are the best. But we are competing in a global market where governments are making these decisions which are benefiting their economies and damaging ours.

I don't mean anything as cretinous as subsidies or protectionism, still favoured in Europe, but instead sending out signals to the market through procurement. If Britain wants nuclear energy, surely it's fair that British tax pounds are spent on UK private-sector providers of that technology (if they exist) rather than our Government importing the kit from abroad?

Buying British when it comes to large-scale government spending has the added benefit of creating halo effects in the economy. Companies spring up supporting and servicing new industries, and encourage skills and attract recruits, adding to the country's skills base which is transferable company to company, industry to industry.

However, many of these would be new, small companies and the climate for creating such enterprises has recently taken a big step backwards thanks to Alistair Darling's 80pc increase in capital gains tax (CGT) for entrepreneurs.

It's not hard to see how an unbalanced economy, reliant on one or two major industries and a bloated state sector, will suffer if a major plank of encouraging new business development is kicked away. That's why it's crucial as many people as possible join our campaign to say 'No thanks, Darling' to the Government's CGT plans.

Alexander's great Orange challenge

Alexander named Orange's UK chief
Tom Alexander looked like he'd disconnected from mobile phones when he hung up on Virgin Mobile last summer, £20m richer. But he's been lured back by Orange to sort out its UK business. Of course, Orange is more than mobiles. It offers broadband too through Wanadoo, the former Freeserve (remember that?). But the dead hand of France's former state monopoly has lain heavy over its attempts at selling the two technologies.

In March, a BBC Watchdog survey found Orange provided the worst broadband service. In contrast, Alexander's Virgin Mobile consistently won customer plaudits. Refreshing Orange's brand will be hard, but he stands a decent chance if he gets the space, time and flexibility.

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