Our £1 trillion debt time bomb

FEARS that Britain faces a ticking debt time bomb will escalate on Thursday when the Bank of England confirms that the country's household debt mountain has smashed through the £1 trillion mark - £1,000,000,000,000.

Official figures published last month showed consumer debt stood at £993bn in May, with mortgage lending accounting for £818bn and the remainder made up of money outstanding on credit cards, store cards, loans and overdrafts. Thursday's figures will show the £1 trillion barrier, equivalent to the entire economy's annual output, was broken in June.

Record employment, low interest rates and easy credit have led to a 'spend now, pay later' frenzy that is increasing personal debt at the equivalent of £1m every four minutes. The average household has debts of £40,000.

The figures indicate the four interest rate rises delivered by the Bank's monetary policy committee since last November have failed to dampen consumers' appetite for borrowing. They will also add to concerns that many are taking on debts they cannot afford, with rising interest rates expected to put the squeeze on thousandsof families. The number of people going bust in the final three months of last year surged to its highest in more than a decade.

Liberal Democrat Treasury spokesman Vince Cable said: 'The debt bubble facing the British public is truly awesome. Even the interest we pay on that debt is beyond comprehension, running at £6 billion every month. If interest rates continue to rise, as they are expected to do, if house prices fall, if oil prices continue to rise and inflation rises, many people could find themselves in difficulty.'

Laurence Baxter, senior policy adviser at the Consumers' Association, reckons credit cards create the biggest problems. He said many people use plastic like a personal loan, failing to clear their balance at the end of each month and getting stung by a relatively high rate of interest.

'People are spending their working life racking up debt when they should be paying into savings accounts and pensions. If the situation is bad now, it is going to be even worse in 10 to 15 years' time,' he said.

Research by Citizens Advice, which has seen an alarming 47% increase in the number of new consumer debt problems over the past five years, found that the amount owed by more than 9000 of its clients surveyed over a one-month period averaged nearly 14 times their monthly income. Almost half had found their creditors unhelpful and a quarter were receiving treatment for stress, depression and anxiety.

Citizens Advice chief executive David Harker said: 'The credit boom of recent years has brought great advantages to many individuals and families and helped raise standards of living generally, but it is also taking a huge toll on the lives of those who have found themselves on the wrong side of the very narrow dividing line between successfully managing credit commitments and plunging into serious debt.'

Even the Bank is getting twitchy. Alastair Clark, chief adviser to Governor Mervyn King, said recently that Britain could suffer a Japanese-style stagnation if household debt triggers a consumer slump.

True to form, City economists are divided on whether the borrowing binge will end in tears. Vicky Redwood at Capital Economics says that, on the face of it, households are having an easy time servicing their debt. Interest payments as a percentage of income are just 7.6%, half the 1990 peak of 15%.

Once repayments are taken into account, however, the situation is more worrying. Redwood has calculated that if interest rates rise to 5.25%, as markets expect, and debt continues to rise at its current rate, the ratio would reach 24.5%.

But David Hillier, chief UK economist at Barclays Capital, is sanguine. 'If the key question is 'Can we really afford this?', the answer is, in our view, a resounding Yes,' he said.