Views from the 17th - Saving the nation
The Office for National Statistics (ONS) reported last week that the UK’s savings ratio had fallen to 3.3%. The ratio represents the gap between the aggregate spending and income in the household sector, and therefore measures the amount of money households have available to save as a percentage of their total disposable income.
This is the lowest ratio since they began recording this way back in 1963 and that means that never in my lifetime has the country been saving less than now. For comparison purposes I looked back at the figures in 1963 and we then saved just a little more at 4% but we did manage to tuck away over 15% of our income back in 1992/93.
Interest rates do, of course, have an impact here. Rates have been low for around 8 years and I do wonder whether the time will come when people simply get out of the habit of saving and maybe never get into the habit at all.
But it’s not just interest rates. The same set of data revealed that incomes were not keeping pace with inflation and therefore people are using savings to supplement. When savings are exhausted, it seems that this does not cause a halt to spending given the ease with which credit can be obtained.
It seems to me though that the government could do more to encourage saving through tax policy. It could be argued that this would require what Humphrey in the classic BBC sitcom“Yes Prime Minister” would describe as a “brave decision” to look longer term in order to boost saving at the expense of the spending which is fueling economic growth.
The litany of changes in pension taxation over the last ten years has done little to convince people that saving for the long term is worthwhile. The recent U-turn on NICs has left a £2 billion black hole to be filled and there is speculation that the Budget in the autumn that Philip Hammond will cut back on tax relief on pension contributions to fill it.
The Government has also announced a reduction in the amount of dividends that can be received tax-free from £5,000 to £2,000. Hardly an incentive to invest.
Yes, there is a tax-free Personal Savings Allowance but it’s not huge. Indeed only last week HMRC admitted that in certain circumstances, those with savings and dividends income come find themselves with an incorrect tax bill because HMRC’s “supercomputer” couldn’t work the tax bill out correctly. If HMRC can’t understand the tax incentives clearly enough to program their computer, then it doesn’t help to incentivise saving does it?
There is clearly a risk that as inflation rises, the savings ratio will fall even lower and consumer credit will rise. Levels of consumer credit are already above those in 2008. Will a government which needs to demonstrate the short-term economic success of Brexit take that brave decision?