On the surface, one of the few bright spots of the second quarter of this year was a sharp rise in the UK’s savings ratio. But though an increase of 29% sounds like good news, in reality it’s quite the opposite.
More than anything, the surge in saving signals an economy in deadlock. Rather than a welcome form of organic growth, lockdown has resulted in ‘forced’ savings, where discretionary spending (for both individuals and households) has been restricted by compulsion, not choice.
The truth is that for many the financial outlook remains bleak. The UK’s economy contracted by 19.8% in the second quarter of 2020 and one third of UK employers are expected to make redundancies over winter. This means 3 million people could be unemployed by spring 2021 – three times the pre-lockdown levels of 2019.
Even with the furlough extension until March 2021, we are unlikely to see much economic improvement for industries that have been the hardest hit by Covid restrictions. Companies simply cannot afford to keep employees on the payroll, despite the Treasury covering up to 80% of many employees’ wages. Then there’s the hit to the public finances, which even conservative estimates place at around £370bn – not including the latest £150bn round of quantitative easing. The Government will have no choice but to raise taxes, increase borrowing, cut spending or some combination of the three.
Yet beyond the headline costs we face another uncomfortable reality – not everyone is in the same boat. There is a stark difference in savings between those who have been able to maintain a steady stream of income throughout lockdown and those who have not. The latter will unfortunately have to bear the economic brunt.
The Bank of England estimates that even if they have maintained their income, households earning less than £35,000 a year will have seen their savings fall, while those earning above that level will likely see them increase.
People are also more reluctant to spend and more likely to save during times of economic uncertainty. This is particularly true when multiple sectors of the economy are unable to plan weeks ahead, let alone months. We saw this in the aftermath of the 2007-08 financial crisis when the savings ratio increased from 6.5% to 12.2%.
An environment that rewards saving
Even the deepest crisis has a silver lining, and this could be an opportune moment to build a different kind of post-Covid economy – one where a significant proportion of households are able to prudently save and spend from a healthier financial position.
Granted, this is unlikely to be popular with those in government, who tend to be more focused on getting people spending, rather than savings, especially in the short term. It’s quite likely we will see schemes like Eat Out To Help Out all over again in the new year to get people back to the high street. There has even been speculation about negative interest rates should the economic outlook worsen, and Brexit talks fail. This would be terrible news for savers.
So how do we re-start the economy and promote an environment that rewards saving? The solution to a complex problem like this begins with economics but ends with culture and society.
On the one hand, we need an economic environment where it pays to have savings and where the activity of saving is rewarded. This of course requires higher interest rates, increased homeownership, increased productivity, and real wage growth.
On the other hand, we need a change of culture and attitude towards savings. We need to foster a culture where saving is not just an economic choice, but a commendable virtue. A virtue where individual morality and prudent behaviour is manifested in the stewardship of household finances.
Britain has done this is the past: The National Savings Movement that operated for most of the 20th century is an intriguing case of mass mobilisation to promote savings across the country. Now, we are not seeking to re-establish the Savings Movement in a historical sense, but to re-establish the ethos behind it.
What could a Savings Movement for today look like? A starting point could be to re-evaluate the efficacy of current savings initiatives (e.g. ISAs, Help To Buy, and Help to Save). The Government should outline a positive strategy for the medium term to encourage greater saving.
Ultimately, we must grasp the notion that principle and the practice of saving is essential to the country’s wellbeing With a shift in our savings culture, future generations will not only have greater financial security, but the whole of British society will be on a surer footing.
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