It is time to promote saving not just spending
The economists at the Bank of England know very well that it was encouraging people to spend what they couldn’t afford that got us into this mess, yet in its recent Inflation Report the Bank made it quite clear that they are relying on a reduction in household saving to help boost demand in the economy.
To them, saving is a behaviour that detracts from demand; their remit simply does not extend to ensuring that the UK economy is supported by the right level of savings. We need a much broader and long term view that recognises the importance of the level and distribution of saving in the economy.
It is not even the case that the level of saving has bounced out of control. Over the past twelve months the savings ratio (the proportion of our disposable income that we don’t spend) averaged 7.5%. Although a big leap in comparison to the previous decade’s average of 4.2%, it is still lower than the overall average for the 70s, 80s or 90s.
It is also quietly acknowledged that much of the increase in the ratio reflects the paying down of mortgages and other debt. Considering the general level of over-indebtedness of much of the population this must be a necessary, if demand damaging, step to recovery.
Common sense tells you if you’re in a hole, stop digging; in this case it means stop spending what you can’t afford. But the reality is that most of us cannot afford not to save for our future. Saving is not a luxury and neither is it just a balancing figure on an economic model; it is a necessary fact of life and despite what some economists may tell you, it is constructive and necessary for long term economic prosperity.
Saving, like borrowing, enables you to buy those big ticket items; it means that people have money in their pocket and can spend. But unlike over-borrowing it does not result in huge costs to society. Credit Action reported that in the first quarter of 2010, banks and building societies wrote off bad debts totalling £2.13billion – just over half of which was credit card debt. These are massive figures that represent misery in many people’s lives and a bill that we will all end up contributing towards one way or another.
George Osborne has made it clear that the Government cannot spend its way out of the recession instead it must live within its means and pay back its debts. However, no action has been taken to encourage its citizens to do the same. Even though it was excessive spending and borrowing that caused our problems, they now want consumers to spend more and save less, to make up for the reduction in public spending.
The long term consequences of this are dire, however. For example, as life expectancy continues to increase the Office for National Statistics estimates that the proportion of the population over 65 will increase from 16 % now to 23 % by 2034. As we live longer the need to have adequate savings to cover our old age becomes more important. Surely a big retired population with savings to spend is a much better long term prospect for the economy than one reliant on their state pensions?
Jason Riddle is a co-founder of Save Our Savers
Click here for other articles on how the Government treats savers
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Savings Accounts: Past, present and future
Mervyn King misleads on household debt
The dangers of prolonged low interest rates
Why we need sound money and a restoration of savings
Are low interest rates the answer – or the problem?
Why the MPC has failed
Carols at the bank
P2P Lending – Cutting out the banks
Prime Minister is wrong: Credit card debt is still rising
Saving does not reduce consumer demand if the money is deposited in a bank as it is then lent out for someone else to spend.But it is hoped that it is lent out to buy assets that usually will rise in value(e.g. houses) rather than frittered away on consumables e.g. holidays abroad.
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Oh dear Oh dear L Austin
“rise in value eg. houses”?! Watch over the next couple of years. Houses are currently approximately 30% overpriced (if not more) and even with a base rate of 0.5% they are still hardly shifting and seem to be right on the edge of a cliff. If Gormless Clown had left the market alone back in early 2009 rather than trying to bribe the electorate for re-election I would have thought the natural market floor would have been reached by now. Yes, some people would have felt financial pain but that's life.
I hope that my savings are being used to invest in a company that actually “produces” something and gives employment to “somebody(s)”, not to be used as a capital store such as a house via a BTL and price out a young couple trying to get on with their lives.
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The article is correct that we, as a nation, have overborrowed. Too much credit was available, the extra being generally from abroad. It helped to fuel excess, particularly the overpricing of houses. That is a bubble that still has not been deflated. Compare house prices with earnings and houses are still overvalued, as danleee74 says.
Governments try to shield us from pain, if only because voters in pain tend not to re-elect governments, but the economy cannot move forward sustainably until past bubbles and excesses have been dealt with.
In the long run we cannot consume more than we produce. Our consumption in recent years has far exceeded production. It is inevitable that consumption must be restrained for a period. This is not comfortable, but it is as unavoidable as gravity.
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I said assets that USUALLY rise in value.Houses,like many other investments, have gone through and will continue to go through periods of price falls,but as they USUALLY rise they will probably at least retain their value if held for the long term.
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