Debt costs 'reach record levels'

Higher interest rates are set to squeeze spending further Send us your comments

The burden of paying off household debts has reached record levels, a leading firm of accountants has said.

PricewaterhouseCoopers says repaying money borrowed, and the interest on it, now takes up 19% of the average UK household's disposable income.

That is more than the previous peak of the domestic debt burden, which was 18% of household income in late 1990.

With the Bank of England expected to raise interest rates this week, PwC says consumer spending will slow down.

"Many households have faced a squeeze on their finances due to a combination of modest earnings growth, rising utility bills, higher petrol prices and increased debt repayment costs," said John Hawksworth, head of macroeconomics at PwC.

"Looking ahead, we expect rising debt service costs to contribute to slower consumer spending growth over the next 2-3 years," he warned.

Economic slowdown

PwC calculates that the income of households that was left after paying off debts and household bills, rose by just 3.1% a year between 2004 and 2006,

But that was less than the rise in their gross incomes of 5.2% per annum.

Partly as a result of this process, PwC predicts that the UK's economic growth rate will fall slightly in the coming year, falling from 2.75% this year to 2.5% in 2008.

With the accountancy firm predicting that interest rates will rise to 6% by the end of this year, it suggests there will be no let up in the squeeze on personal spending.

"The relatively rapid growth of debt service costs throughout the whole period and of utility bills during the past three years are major factors tending to squeeze household discretionary spending power," said Mr Hawksworth.