Bank of England governor also says huge bonuses for bankers could undermine public support for free markets
The governor of the Bank of England has warned that the path to economic recovery would be "arduous, long and uneven" after official figures showed the UK national debt had hit £1tn for the first time.
Sir Mervyn King said the huge debt burden built up by consumers, banks and the government in the good years would weigh on the economy for years to come. "After the steepest downturn in output since the 1930s, the UK economy is in the process of rebalancing," he said. Given the size of the debts accumulated by consumers, banks and the government before the credit crisis in 2008, "the path of recovery is likely to be arduous, long and uneven".
News that the government now owes a total of £1tn underlines the scale of the task facing the Treasury in bringing the public finances under control, although the monthly public finance figures also showed that the chancellor, George Osborne, is making progress in tackling the deficit – which is the gap between the government's revenues and expenditure.
Official figures released on Tuesday showed total public sector net debt (excluding the impact of the 2008 banking bailouts) rose to £1.004tn in December, equivalent to 64.2% of GDP, up from 59.4% a year ago.
"[This] shows the unsustainable level of spending this country built up over the past few years, and shows why it is critical for our nation's future that we deal decisively with the deficit," a Treasury spokesman said.
But analysts pointed out that borrowing was lower than in the last financial year, helped by the VAT increase and the bank levy, putting the chancellor on track to meet the target he set in his autumn statement in November: cutting the deficit from £136bn last year to £127bn in 2011-12.
As the remuneration committee at Royal Bank of Scotland prepares to meet to decide whether to award a seven-figure bonus to chief executive, Stephen Hester, King also issued a warning that excessive remuneration for top executives – especially in the bailed-out banks – risks undermining public support for free markets.
"The legitimacy of a market economy will inevitably be challenged if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers," the governor said. His remarks will be interpreted as a direct criticism of the potential bonus payable to Hester.
The Office for National Statistics said public borrowing, excluding banking bailouts – the government's preferred measure – fell to £13.7bn last month from £15.9bn in December 2010. In the financial year so far, the government has borrowed £103.3bn, down from £114.6bn at this stage last year.
"Today's figures continue to suggest that public sector borrowing is on course slightly to undershoot the latest official forecast this year," said Gemma Tetlow, programme director at the Institute for Fiscal Studies.
But Rachel Reeves, Labour's shadow chief secretary to the Treasury, said Osborne's current targets showed the government borrowing £158bn more than he expected at the time of his first budget in 2010.
"Of course we need tough decisions on tax, spending and pay to get the deficit down but it's also vital we get people off the dole and into work. More people out of work on benefit just makes it harder to get the deficit down. It doesn't make economic sense".
With talks in Athens still deadlocked over a writedown for Greece's unsustainable debts, analysts warned that a sharp downturn in economic growth could still jeopardise the UK's progress on repairing its tattered balance sheet.
Official figures to be published on Wednesday will show whether the economy slipped into reverse in the final three months of 2011.
"The longer-term outlook remains very uncertain and the recent strong trends will be increasingly difficult to sustain," said Nida Ali, economic adviser to the Ernst & Young Item Club.
Vicky Redwood, senior UK economist at Capital Economics, said Tuesday's data showed the government borrowing for the current financial year was still coming in "comfortably" below last year's total. She warned, though, that the £1tn debt figure was a reminder of the size of the "challenge that still lies ahead to get the public finances back on a sustainable footing".
Including the cost of bailing out Lloyds Banking Group, Royal Bank of Scotland and Northern Rock, as well as some revenues from the banking sector, public borrowing came in at £10.8bn in December, down from £13.9bn a year earlier.
King said the Bank would need to keep interest rates low – and possibly extend its radical policy of quantitative easing – to prevent inflation slipping below its target of 2%. But he stressed that falling inflation should soon help to "relieve the squeeze" on cash-strapped households.
Speaking in Brighton, King said the entire world economy is having to adjust to lower debt levels. "After many years in which the stock of debt built up rapidly, there has been a reappraisal. A reappraisal by markets of the strength of banks, by consumers of their income prospects, by lenders of the likelihood that debts will be repaid, by investors of the value of assets, and by markets of the value of currencies. It became apparent that previous spending patterns and debt levels were unsustainable," he said.
He also used his speech to issue a fresh defence of the bank's policy of keeping borrowing costs low in the face of rapid increases in oil prices over the past year.
"Inflation could have been lower only with higher interest rates, lower wages, and even higher unemployment. Real take-home pay would probably have been weaker not stronger."