The glaring problem of the “household budget” borrowing meme


You may have heard that it is Budget Day in the UK.

We are not here to comment on the use of the ritual, nor on what will be contained in the budget of the Chancellor and political public relations, Rishi Sunak. We will leave that to the good and the good of the economic and political team of the FT.

But one thing we want to make a point on is a popular meme in British political discourse. Most recently voiced by this BBC tweet a few moments ago (and update: just deleted):

You may have seen variations on this over the past decade. Popular versions include “fix the roof while the sun is shining”, the government “maxxer your credit card”, and the national debt being a “Burden on future generations”. During these discussions, the dreaded measure of the debt-to-GDP ratio is sometimes abandoned, some demystified around 90 percent upper limit at which the UK is expected to go bankrupt often cited.

All the notions that arise from the idea that public finances are assimilated to household finances. You, the consumer, don’t borrow too much, or you risk delinquency. So why should the government be able to evade the rules of good breeding?

The problems with this meme are endless and were covered in depth during the time of austerity. They can be summed up in two words: the debt markets. Or, for those of you with particularly short attention spans, two letters: QE.

Even as a simple metaphor, this is also just plain wrong.

Households regularly borrow well in excess of their income. In the UK for example, if you have good credit, you can get a mortgage at 4 to 4.5 times your salary. In the household budget metaphor, this would represent a debt-to-GDP ratio of 400-450%. While the current government likes to talk about the benefits of tightening its belts, it is all too keen to encourage citizens to move up the housing ladder.

The current debt-to-GDP ratio UK? 106 percent. It’s time to take it easy.


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