In 1997 household debt stood at £500bn...now it's £1,158bn
By Edmund Conway, Economics Editor (Filed: 15/02/2006)
Ask City experts to list what he will leave behind as Chancellor and the answers are likely to be the same.
His greatest achievement? The decision in 1997 to grant the Bank of England independence to set interest rates. This radical move meant the Government could no longer use monetary policy to its political advantage, and laid the foundation for low inflation and interest rates.
His worst legacy? The massive debt mountain threatening economic growth.
This comes in two flavours: the huge government deficits generated since 1997 and - more worrying still - the record levels of personal debt facing families.
It emerged this week that the amount families have borrowed has now overtaken the size of the country's entire economic output. At £1,158billion, the debt mountain was £30billion bigger than Britain's gross domestic product and, unlike the economy, shows little sign of slowing.
The simple truth is that this decade of debt has, in part, been caused by the Bank of England's very independence. By keeping interest rates so low, the monetary policy committee fuelled this debt explosion, and caused a massive house price boom.
But whereas previous house price bubbles were burst when the Government lifted rates, the independent MPC managed to keep borrowing costs low, convincing families that their debt-servicing costs would remain small forever.
And as house prices rose, more and more homeowners used mortgage equity withdrawal to borrow against the value of their homes.
But can we survive such a massive debt burden, or will it cause a severe slump during Mr Brown's likely reign at Number 10?
Many economists are sanguine, claiming low interest rates are here to stay. They argue that inflation targeting in the UK and Europe - and possibly soon the US - has closed the door on the days of high borrowing costs.
Others are less certain. They fear a global economic catastrophe, such as a collapse in the dollar, could re-ignite inflationary pressures.
John Butler, UK economist at HSBC, says: "I think the debt issue is a problem. It makes the consumer and the economy much more sensitive to shocks."
Lib-Dem Treasury spokesman Vincent Cable argues that one of the chief problems with the way the MPC is arranged is that it does not explicitly target asset prices.
"The Government and the Bank of England have become seriously complacent about the potential problems created by very high levels of debt, which are increasingly being translated into higher levels of debt services in relation to family income," he says.
"Underlying this problem is the fact that under the current monetary policy regime, interest rates aren't being used to manage just domestic inflation but are also being used to manage asset markets and actual levels of debt.
"If British levels of household debt in relation to people's income continue to rise, we could end up with debt deflation of the kind which caused so much damage in Japan."
A land tax is one theoretical solution. But the idea of taxing people based on the value of their home is, to put it lightly, a difficult political sell.
Instead, it seems likely that future governments will have to re-examine the role of the MPC, and ensure that in the future it cannot allow such massive asset bubbles to build up. It is increasingly clear, then, that even Mr Brown's greatest achievement could be discredited in the not too distant future.