Debt dependency a threat to economic stability - says Skeoch

The UK's recovery from the recession should take hold in 2010

but changes must be made to the structural nature of the nation's debt dependency if increasingly volatile boom and bust cycles are to be avoided, according to Keith Skeoch, Chief Executive, of the global fund manager Standard Life Investments.

Speaking today in Edinburgh at a business breakfast attended by nearly 200 delegates, Keith Skeoch said: "The UK's long-term love affair with debt and its continued dependency on consumption to drive economic activity puts it in a precarious position relative to its major competitors.

While much of the recent focus has been on the credit worthiness of the UK Government, private sector debt has risen from 65% of GDP in 1980 to 427% now.

This makes the UK's private sector the most indebted of the world's top ten economies.

"While this dependency on debt finance should not prevent economic recovery taking hold in 2010, it is likely to make the pace and activity in the coming cycle both anaemic and fragile.

The structural nature of this debt dependency will create severe headwinds for economic recovery and needs to be a major focal point for policymakers as the next economic cycle gets underway.

"The medium term focus for policy must be to reduce the dependency of economic activity on both consumption and debt if increasingly volatile boom-bust cycles are to be avoided.

"Two critical areas of policy need both attention and radical overhaul: First, the deep incentives embedded in the current financial and accounting system that incentivises banks to create product that not only encourages excessive leverage in the rest of the private sector but also causes banks to take on investment and liquidity risk.

We need to move policy beyond its current macro-prudential orientation of ensuring the system can cope with a bust to looking to reduce the risk of a bubble being created in the first place.

"Second, stability needs to be brought to the shifting sands that currently represent the savings landscape.

Other options need to be looked at and one, that I personally think merits serious consideration, is a switch to an expenditure tax.

Spending rather than income would be taxed and such a system can be made every bit as progressive as the current income tax system, with appropriate protection for those on low incomes.

It would simplify at a stroke the excessively complicated and shifting landscape surrounding savings and allow savers to focus on the quality of their return and product.

"The best way of avoiding the next big bust is to help shape the quality of the upswing and that must involve reducing its increased dependency on debt-financed consumption.

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