Will Paying Off Your Debts Affect the Economy?

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The UK Prime Minister, David Cameron embarrassed himself recently by suggesting in a speech that individuals in his country could boost the economy by focussing on paying off their personal debts. This advice, as any economist will tell you, is misleading at best and potentially suicidal as part of any concerted effort to drag the country out of a recession. Also, for many people, throwing money at debts without solid debt management plans can cause real problems.

Personal debt levels in the UK are staggeringly high. The country’s entire personal debt figure stands at £1.4 trillion – more than the entire national output of the UK economy –with each household averaging debts of £8,064 ($12,887) excluding mortgage repayments.

With the cost of living in the UK increasing year-on-year, just as it is here in the US, people are cutting back on the amount of money they are spending on food, transport, luxury goods and utilities wherever possible. While most people are being increasingly careful not to rack up additional debt, few have been able to devote an increased amount of resource towards paying off what they owe to credit card companies and the like.

Mr Cameron’s call for people to focus on clearing their own debts while the banks, businesses and global corporations clear theirs was written into a speech to be given at his political party conference in early October. Notably, the speech was altered before it was made, with the call for increased debt repayments removed. Perhaps Mr Cameron received a polite tap on the shoulder from an economist in the run up to the speech being made?

It is simple economic fact that during a period of recession, the only thing that is going to get an economy moving again is spending. So, it is clear that if people shift their disposable income en masse towards paying off their debts, the economy will not grow – it will shrink.

So, while Mr Cameron’s advice was doubtless well intentioned before he struck it from his speech, it would have been potentially damaging had anyone taken it on board.

Not only would the UK economy have been threatened by the possibility of the public taking their money away from the high street, but people themselves could have faced the risk of trying to pay off their debts too quickly. Attempting to pay off debts too fast, instead of using a manageable debt consolidation plan, can leave families without enough money for essentials and needing to borrow more money to cover the cost.

Managing debt repayments is rarely easy, and politicians would be well advised to think carefully about how they advise the public on what to do about it.

This has been a guest post. I hope you enjoyed it!

Money

AUTHOR Derek

My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.

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