Cicero Policy Briefer

Issue 23, April 2008

Budget 2008 and the strange death of Britain’s savings culture

By Mark Twigg

Chancellor Darling has come through his ‘safety first’ Budget seemingly unscathed. He delivered what most people had forecast: a fairly neutral fiscal package where government borrowing would absorb the short-term pain, with tax rises to come later on. However, it seems like a universal human quality to look for the bad news in the small print. And for those of us who care about Britain ’s savings culture—admittedly, we’re few in number—the small print doesn’t look too good. It’s one of those numerous items which fell short of the Chancellor’s 2007 forecasts, though this one didn’t raise too many headlines.

Two general comments can be made about the UK ’s savings rate. First, it appears low by international comparison. And second, it seems to be in terminal decline. Yes, there are periods when that trend is checked—but such reverses prove temporary in nature, prompted by short-term concerns about the wider economic prospects and a sudden realisation among consumers that they could be dangerously over-exposed to consumer credit. This was the case in 2005 when the savings ratio rose—from 4.5 per cent in 2004 to around 5.25 per cent in 2005—with the Treasury commenting that “alongside a rise in unemployment in recent months, households have continued to adjust to high levels of personal debt by exercising more caution over their finances.” In other words, saddled with debts and faced with uncertainty we save more.

Since 2005 the economy has bounced back and the savings ratio has gone back into its long-term decline. Figures from the Treasury’s Red Book in 2007 show that in 2006 the household saving ratio is estimated to have declined slightly to 5 per cent.  However, the Treasury estimated that savings were “expected to rise over the forecast period”, pointing to the GfK consumer confidence survey which showed that households’ saving intentions remain at high levels.

In reality such intentions came to nothing. The Red Book in 2008 now claims that the household saving ratio is estimated to have averaged just 3¼ per cent in the first half of 2007. It gets slightly worse as the Treasury states “the saving ratio is expected to average 3 per cent in 2007 as a whole”. Rather than rising in line with Treasury expectations, the household savings ratio actually fell steeply by 2%.

Even though previous savings forecasts failed to materialise, the Chancellor still remains upbeat about future savings forecasts. Yet again, the Treasury is confident that household savings will bounce back, given the likely effect of tighter credit conditions on households’ willingness and ability to borrow in the short term, and an expected ‘rebuilding of balance sheets’ in the medium term.  While that may be partially true, the question remains as to whether we can be as confident as the Treasury. There is also a question as to how much all this matters.

The answer to the first question is probably not. Real household incomes have been falling for years—what with increasing levels of debt to service, increasing tax bills, increasing energy bills etc—all of which means the propensity to save and the ability to save are both being fundamentally undermined.

As for the second question, it matters greatly. On a macro level, economies need savers—they provide much needed access to capital for businesses. Meanwhile on a micro-level, households need assets such as savings—particularly at a time when liabilities, in the form of consumer credit, have been rising rapidly. The UK needs a proper strategy, thrashed out by the Government, to sort this out. Any Government with a truly long-term vision needs to get Britons saving more and borrowing less.

Mark Twigg can be contacted on +44 (0)20 7665 9537 or click here to email.

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