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.
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.
An economy cannot grow without investment. Back in 2007, the Bank of England reported that “For the past 20 years, national saving in the United Kingdom has generally been insufficient to finance domestic investment”. Aside from a small blip in 2009, the level of saving has remained consistently low.
The UK’s shortfall, however, has been more than made up by the surpluses in other countries; China, for example, saved over 50% of GDP in 2008. It was this surplus of savings from abroad that ultimately led to the reduction in saving levels in the UK. This money became a source of cheap credit. The affordability of credit is a major driver when it comes to saving; easy access to cheap credit means you no longer need to save. The result is that instead of developing a savings habit people developed a borrowing habit. Thus we had a consumer credit boom, a house price bubble and, for a while until it all collapsed, a booming economy.
Savings are an important national resource; they provide investment for the economy and reduce its exposure to the international money markets.
Just as personal savings provide financial security for the saver, likewise home grown UK savings provide a level of protection against fickle global investors. As Brian Lenihan, the Irish finance minister said when faced with a massive bailout package from the EU, “When you borrow, you lose a little bit of your sovereignty, no matter who you borrow from.”
Saving for the future
Growth without saving will only lead to further imbalance. We need to rebuild the economy with a foundation on the solid bedrock of savings and not unstable sands of debt.
Also as the Chancellor’s colleagues in the Department for Work and Pensions are very clear about, we also desperately need people to save more for their old age.
We have two major reasons to rebuild the UK’s savings. To start, the Chancellor should formally recognise the importance of saving by setting targets and, of course, plans to achieve them through gross national savings and the household savings ratio.
A nation of savers would have avoided the worst of the financial crisis and a nation of savers is what we must become if we are to prevent another.