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Saving Not Easing
Amidst all the talk of austerity, it is sobering to think that the Government still plans to spend £91 billion more this year than it will receive in income. The Treasury forecasts expenditure for 2012-13 to total £683 billion with total income at £592 billion.
This means the Government must continue to borrow; at the end of February public sector net debt stood at £955 billion. The Office of Budget Responsibility (OBR) forecast that public sector net debt will reach £1.04 Trillion by April 2013 and will continue to increase until 2016-17 when it will stand at £1.48 Trillion. This – the equivalent of £22,500 for every man, woman and child in the UK– is the point at which it expects the Government will finally balance its budget.
Skewing the economy in pursuit of low interest rates
The one thing a Government with such a high level of public debt wants above all else is a low interest rate. George Osborne repeatedly claims our current low interest rate is a vote of confidence by the international financial markets. But, in reality, it is the direct and desired result of the Bank of England’s foray into Quantitative Easing (QE).
Artificially creating £325 billion and using it to buy Government bonds drives up the price of those bonds and depresses the yield, hence reducing the cost of borrowing for the Government.
It also has the peculiar result that the Government owes 34% of its current £955 billion debt to itself.
As the MP Steve Baker rather neatly summarised during a parliamentary speech:
“…A housing bubble became a banking crisis… which became a sovereign debt crisis, which has now been turned into an asset bubble in the bond market. The Bank of England has deliberately inflated bond prices in order to suppress long-term interest rates.”
We are lurching from one disaster to another.
Quantitative Easing is the economic equivalent of Viagra, an artificial boost to a flagging economy and, like many drugs, it comes with unwelcome side effects and a risk of dependency.
The immediate side effects manifested themselves as a bonus to bankers, who received commission from the Government as it bought its own debt, and massive losses to pensioners who rely on the returns from Government bonds to pay their pensions. The most major effect, however, is upon inflation with the Bank of England estimating that it has increased CPI by anything up to 2.6%.
Mervyn King has strongly denied that the programme of QE is sending out a message that saving is not worthwhile.
But what incentive is there to save any money you put aside is worth less a year later? It is hardly a productive form of saving. And pensioners having difficulty making ends meet because their real incomes are falling are hardly likely to inspire a new generation of savers.
We live in a country where people are expected to live off their savings in retirement; that is why we have a pension system. The biggest generation ever is now starting to retire yet we have not saved enough to pay for it. Those who have tried to make their own arrangements for retirement are being penalised for it.
The Government has, through its monetary policy, broken the unwritten contract with savers to the detriment of the whole economy. This is a major political issue and George Osborne needs to stop hiding behind Mervyn King’s coattails on the issue of QE and low interest rates.
There are no quick fixes. The one economic policy this country needs above all others is more saving; saving provides investment and investment leads to economic growth. Saving is the way out of the morass, not a luxury to return to at some distant time in the future.