Credit fever must be cooled

IF Gordon Brown really wants to lock in his fabled stability when he delivers his eighth Budget today he should think seriously of finding ways of curbing the nation's love affair with credit. Britain has got into the habit of buying on tick and in doing so is storing up trouble.

A Mintel survey shows that in 2003 some £165bn was spent on Visa and Mastercard plastic across the 15 countries of the European Union - a 76% rise on 1998. But what is really stunning about this figure is that three-quarters of it, some £120bn, is accounted for by Britain alone.

As Mintel makes plain, this is largely because our financial system is different from the overregulated Continental model. The British consumer is bombarded by direct mail offers of credit cards and loans. We have become a nation of plastic addicts, using credit cards to pay for anything, even a lunchtime sandwich.

At the behest of the Treasury Select Committee the government is making an effort to tackle some of the sharp practice which is giving the card industry a bad name. It is supporting the use of a 'summary box' on card firms' statements, outlining the effective rate of interest charged.

The authorities are also promising to provide more debt counselling assistance to overstretched consumers.

None of this addresses the economics of borrowing. Household debt as a percentage of after-tax income stands at 134%, against the 1999 peak of 112%.

The Bank of England is seeking to curb this enthusiasm for credit by ratcheting up interest rates. The new Consumer Prices Index fell over the last month to 1.3% from 1.4%. Fears of any immediate jump in inflation have been a secondary factor in the Monetary Policy Committee's policy actions.

But the famous 'one club' tool of interest rates so far shows no sign of curbing credit. Moreover, there is a risk that if interest rates are pushed up too far there will be an almighty collapse in house prices and consumer spending, driving the economy into slump.

Vicky Redwood of Capital Economics looked at other ways to curb the lending boom. As far as home loans are concerned, direct intervention through a capital gains tax on first homes might end the speculative boom.

But it would be a political vote loser and could lead to a hard landing. Imposing tighter controls on lenders might work but would be cumbersome to administer. It might well drive mortgage business offshore.

If the goal were to curb credit card lending, direct controls might be effective. One idea floated by the Treasury Select Committee is that the minimum monthly repayment should always cover the interest charge. The authorities could go further than this by forcing a 5% to 10% repayment of principal, so that the total accumulated debt comes down.

Borrowers might seek to avoid the curbs initially by taking out new cards, which could push up their debt again. Indeed, the credit monster that has been unleashed may be too flexible to control.

What is certain is that credit has become a ticking time bomb which could yet explode the Chancellor's famed stability.

Britain's breach

IF the Pre-Budget Report offers any guidance, we can expect the Chancellor to wax lyrical in his speech today about how much better we are doing than our European partners.

But this may no longer be strictly correct. Britain is, in fact, joining Germany and France in the EU doghouse.

The European Commission estimates that Britain racked up a budget deficit of 3.2% of national wealth in 2003. This is above the Maastricht criterion of 3% and places the UK in the sin bin alongside Germany and France.

Even though Britain has broken the EU rules, there is no immediate indication that the Commission is planning any disciplinary action.

Indeed, having let Germany and France off the hook, to the anger of the smaller countries, the EC could hardly turn its guns in Brown.

But all eyes will, be focused on whether Brown has broken his own fiscal rules. It has been argued recently that it does not really matter if he does breach his 'golden rule' not to borrow for current spending over the economic cycle, since it is no more than a self-imposed guideline.

Maybe. But it would nevertheless be embarrassing for Brown, who is so pleased with his fiscal rules that he has been busy selling them to the rest of the world as chairman of the International Monetary Fund's main decision-making group.