Analysis: Why consumerism has become a problem

What goes up must come down, in economics as in physics. Britons' seemingly unquenchable appetite for consumption helped keep the economy afloat during the roughest economic waters since the recession of the 1990s.

But eventually the music had to stop. The rise in personal insolvencies and mortgage repossessions indicates that the chickens are coming home to roost.

The increase in repossessions is, as the industry says, the third lowest since they began collating data in 1983. But the 50 per cent jump in actions entered - the first stage in this process - shows there is more pain in store. The 57 per cent increase in personal insolvencies means that three households in every thousand will be affected by a bankruptcy, up from one in 1,000 a couple of years ago, according to JP Morgan bank.

Households piled on debt as the Bank of England slashed interest rates to a 50-year low in 2003. British debt now stands at £1.58trillion.

Since then, borrowing costs have risen by about 40 per cent, exposing those who took on debt only because the interest payments were so low. The Bank has repeatedly acknowledged that a small number of people would be badly affected. But they do not see it becoming a large enough problem to rock the economy.

Unemployment is starting to rise but, as long as inflationary pressures remain subdued, the Bank will be able to cut rates again if the combination of redundancies, repossessions and bankruptcies slam the brakes on consumer spending. And as long as unemployment does not show any signs of returning to the levels seen during the 1980s, then consumers should be able to ride out the storm.

The official figures already show that households are taking pre- emptive action - non-mortgage borrowing has fallen from £2.45bn in January last year to just £834m in December.

But the tougher questions will have to be answered at the Treasury. Last December's pre-Budget report predicted that the growth rate in consumer spending would rise from 1.75 per cent last year to 2.0 per cent. But as households either succumb to debt burden or cut spending to make ends meet, the Treasury could see growth and tax revenues fall short of its forecasts.