FINANCIAL regulators should introduce caps on how much households can borrow to stem the consumer credit boom, economists have claimed.
The latest economic outlook from the Organisation for Economic Cooperation and Development (OECD) warned on Tuesday that high household debt can be detrimental even if it does not lead to a downturn as it impedes consumption.
The think tank said that the UK is among countries whose boom in household debt should be watched and suggested the introduction of debt-to-income caps that limit borrowing in relation to earnings.
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“High household debt-to-income ratios can be detrimental for the economy, even if they do not lead to a crisis,” the OECD said.
“For instance, high indebtedness can impede consumption smoothing during downturns, or amplify the negative effects on aggregate demand of economic shocks, even if they are small.
“Also, for given levels of borrowing costs, higher debt can reduce household disposable income and consumption.
“Some evidence also suggests that large run-ups in household debt, as occurred prior to the global financial crisis, appear to be followed by deleveraging phases characterised by prolonged contractions in economic activity.”
Within the new report, the OECD ranked the UK the joint slowest growing G7 economy with Japan for 2017 and 2018, with forecasts for economic performance at 1.5 per cent this year and 1.2 per cent next year.