The Savings Slump – too much credit, too little saving

The credit boom that accompanied the housing boom also gave rise to another major, yet less well reported economic event: the savings slump.

From the late nineties through to 2008, inflation was low and there were plenty of savings accounts paying reasonably good rates of interest. However, during this period the overall amount the UK was saving went into sharp decline. It reached its lowest point in the first three months of 2008, when for the first time since 1955 the Office of National Statistics (ONS) reported a negative savings ratio (i.e. that as a nation, we had spent more than our disposable income for that quarter). However, if employer pension contributions, which people can’t choose to spend, are excluded we had sustained a negative saving ratio since 2003.

The average savings ratio for the 30 years prior to this was about 9%. So why was there such a drop in the amount being saved?

Buying votes through easy credit

On the whole, politicians like people to be able to borrow money, especially to buy houses. More people become home owners and house prices increase making current home owners feel wealthier. It also provides a welcome boost to the economy, especially in the construction and finance sectors. … Continue Reading

UK – 5th lowest level of saving in Europe

According to the World Bank the UK has the fifth lowest level of gross savings as a percentage of Gross Domestic Product (GDP) in Europe.

With gross savings at 12% of GDP the UK is only ahead of Iceland at 11%, Portugal at 10%, Ireland at 9% and Greece at 3%. Even Spain at 20% and Italy at 16% are ahead of us. The list is topped by Norway and Switzerland which both have 32%.

How much are we saving?

The household savings ratio – which is basically the percentage of disposable income that people save or use to repay loans – for Q4 2010 has come in at 5.4%. To put this into perspective the average savings ratio for the last decade is 4.3%. But compare this to the 90’s, which averaged 9.2%, and the 80’s which averaged 8.7% and it is easy to understand how the UK has come to have one of the lowest levels of saving in Europe.

On the face of it we are starting to save more. The Bank of England’s Housing Equity Withdrawal report for the same period reported that £7 billion of mortgage debt had been repaid in the same period. Also there was an increase of £11 billion in household cash deposits for the quarter, which grew to a total of £1.096 trillion at the end of December 2010. … Continue Reading

The budget for growth must be built on a stable foundation of savings

This week’s budget has been labelled a budget for growth. Cuts and tax rises have been ruled out; tax breaks for industry, enterprise zones and vocational training are in. But you don’t get economic growth without investment and the money for investment comes from savings. If this is to be a budget for lasting growth it must also address the issue of the UK’s troubled savings culture.

In decline

Saving in the UK has been in decline for years; in fact if you exclude employer pension contributions then overall we have had negative saving since 2003.  The result is that the level of gross national savings has fallen to 12.2% of GDP. This is 6% less than the European Union average and as Mervyn King has pointed out, is the lowest it has been since the Second World War. … Continue Reading

Making it pay to save

Last week, speaking on the future of the state pension, Secretary of State for Work and Pensions, Iain Duncan Smith, said “We have to fundamentally simplify the system. And we have to make it crystal clear to young savers that it pays to save.”

Mr Duncan Smith has already succeeded in putting forward welfare reforms that make sure you are better off working than not working.  Now he is preparing the ground for reforms that will ensure that you are better off saving than not.

Proposed State Pension Reforms

The proposed reform to the state pension will mean that those who have saved will receive the same support from the state as those who haven’t. The proposed £140 week basic state pension may not be enough to sustain your desired lifestyle, but this is obviously not the point. Beyond that it is your responsibility to save for a pension and under this scheme you will at last have a fair basis to save from. Your savings will no longer be a substitute for Government benefits that you would otherwise have been entitled to, had you not saved.

Making it pay to save has been Save Our Saver’s message from the start. These proposed changes to the state pension would be a major step forward, but the reforms must not stop there. … Continue Reading

Bank of England admits that its policy is to penalise savers

In an interview for Channel 4 news Charlie Bean, the Deputy Governor of the Bank of England, has made it clear that the Bank’s policy is that people should spend, not save and that the Bank has no intention to act to encourage saving maybe for as long as the next decade.

However he admits in the interview that preceding the financial crisis the UK was not saving enough. According to Mr Bean the Bank of England had been saying for years that more saving was needed in order to rebalance the economy. It is certainly true, in the years preceding September 2008 the UK savings ratio averaged 3.2%, by far its lowest levels since the 1950’s.  But it begs the question: why did they not act to encourage saving rather than wait until it was too late? The answer is probably because the Bank of England is not responsible for managing the level of saving in the economy and as far as I know there is no government target in place for the savings ratio and it is not actively managed at all. … Continue Reading

Greece represents the triumph of spend and borrow over save and invest – only saving will save us

Now that we have learned all over again that we don’t know much in finance, we may as well come back to the little we do know and we have known for a long time with plenty of evidence to prove it. No individual, family, town, community or country can live for ever and get rich, or stay rich, on borrowing alone. Saving can only be postponed, but not avoided. Borrowing eventually needs to be repaid – call it enforced saving. The choice is not whether we save or not, but who ends up doing the extra saving. Because in the ultimate analysis, excessive borrowing only results in some people, the borrowers, getting a free ride when they get partially or totally bailed out and the rest of the people, the savers, losing part of their hard-earned savings to pay for the extra debt used for fleeting gratification through unaffordable consumption.

Every country needs to decide, democratically, what growth rate and consumption level are both affordable and sustainable for the long term. Because growth and consumption can only happen if there is effective and sufficient investment. The next decision is who is going to save to finance the necessary investment? Is it going to be the British people or the foreigners from whom the British people will subsequently borrow? We have already tried the foreign route and we have already seen what that has done to the Pound. If the Pound ais to remain as a store of value and future purchasing power we may want to try another route.

… Continue Reading

A call to action

Confused.com very kindly invited us to tell their members why the  Save Our Savers action group is essential to protect the interests of savers, this is how we replied;

Is it time for savers to take a stand?

It is time for savers to fight back. There are over 24 million savers in the UK; our savings provide the working capital for the economy, yet time and again successive governments have removed the incentives to save, promoting a culture of borrowing and consumerism over that of saving and responsible spending. The prudent are now being punished for the excesses of the few. Save our Savers is the first organisation to bring savers together into a union to defend themselves.

… Continue Reading

Government target for savers

Save Our Savers wants the Government to set a critical long-term savings target for all – at minimum a 6% savings ratio nurtured by a fresh mesh of policies and incentives.

Yet a key part of that aim must be crystal-clear communication: ask any soul – family, friend, colleague, passer-by – what they know about the savings ratio and I’ll wager a fiver you get a vacant stare in return.

The UK’s household savings ratio – whose official name is charmingly redolent of five-year economic plans, pig-iron targets and Orwell’s Big Brother – is sadly shrouded in mystery.

One reason this vital economic signpost is under-publicised is that hardly anybody can grasp what it is, and no wonder.

Here’s how the Office for National Statistics (ONS), the body that calculates and tracks the ratio, lovingly describes it on its website;

“The household saving ratio is household saving expressed as a percentage of total resources which is the sum of gross household disposable income and the adjustment for the change in net equity of households in pension funds.”

Blimey. Got that? … Continue Reading