Bill Jamieson: We're not going to dig ourselves out of a hole IT HAS always struck me as odd that our views about what is right and wrong about our personal financial behaviour should be suspended when we come to consider public or government behaviour. For example, we consider it only prudent and right that when the future is uncertain we should save more and borrow less. However, there is a powerful view to the contrary: that by saving more we are making the problem worse. Circumstances today are a good example. The economy is suffering from low household spending or lack of demand. If only households and businesses could be encouraged to spend more, the economy would start to motor, more goods would be manufactured, more people employed, and so on till the cycle had turned and we were back enjoying growth. Interest rates today are at rock-bottom levels to discourage savers, while borrowing rates have also seldom been lower, making it a great time to borrow - if you can get a bank to lend you money. Our worst course would be to save more, depressing demand and driving the econ-omy further into prolonged recession. This is indeed what most of us seem intent on doing. We are saving more and spending less. And we are certainly borrowing less. Borrowing levels fall, we feel less vulnerable to unexpected events, we pay more into our pension funds, we rebuild our financial resilience and, eventually, our confidence as consumers. In due course, there is a spending recovery, sustained out of income rather than through increasing debt - and, because of that, likely to prove all the more sustainable. This is what we are choosing to do. According to figures from the British Bankers Association (BBA), there was a notable net repayment of £310 million of unsecured consumer credit in August. This followed a net repayment of £344m in July - and was the 14th net repayment in the past 15 months. The BBA also reported that people are building up their deposits at banks. Reinforcing this view were figures showing a net mortgage repayment of £284m in August. Home owners are looking to take advantage of low mortgage interest rates to reduce their outstanding mortgage levels - and improve their balance sheets. And we look around and ask in all innocence: "What on earth causes such violent swings in the economy? Does this not prove the fundamental instability of capitalism? We need only look at what we collectively have been doing these past few years. Back at the height of the borrowing and spending boom, the private sector as a whole plunged into a financial deficit of 0.5 per cent of GDP, or £7 billion. Then, when asset prices began to fall and credit became hard to get, we slashed our spending and moved into a financial surplus of 9.8 per cent of GDP, or £138bn. This total swing of £145bn, equivalent to more than 10 per cent of GDP, was one of the biggest yet recorded - and the main cause of the deep recession. According to Michael Saunders, UK economist at Citigroup, the last few years have seen the highest sustained levels of private savings for at least 50 years. The household sector has swung from a financial deficit of 4.7 per cent of GDP (a record high) in 2007 to a surplus of 1 per cent of GDP in the second quarter of this year. The flip side of this is that real consumer spending per head is 8.4 per cent below its peak and the lowest since 2003. Now, all this might suggest that households have now largely cast off the yoke of debt. But progress here has been far slower - a measure in itself of the horrific debt dependency to which we succumbed - and debt levels still stand above historic averages. The ratio of household debt to GDP has only edged down a little - from 110.8 per cent of GDP in 2009 to 99.3 per cent in the second quarter of this year. At least we can reward ourselves a mild congratulation that our debt to GDP is no longer in triple figures. But comforting though this is, our debt levels are still way above historical norms. Fifteen years ago, in 1997 - well before the last boom-bust cycle - the household debt to GDP ratio was at 69 per cent. And as for the combined total of private and public debt, this has barely begun to fall back. It soared from 170 per cent of GDP back in mid 1997 to 276.6 per cent in the first quarter of this year - the peak so far. Only in the most recent April-June quarter has it edged down to 274.9 per cent. All this leaves me with three conclusions. First, our de-leveraging has only just begun. It will be many years before household debt as a percentage of GDP returns to levels we normally associate with stability. Second, banking reform has only just begun while the change in culture within the banks which fed the debt explosion may take a generation to work out. And third, recovery in the absence of a surge in inflation will of necessity be slow. Borrowing more to lift household spending would, of course, bring an economic upturn. But it would be followed by an even greater hangover than the one we are suffering now.