Friday, November 20, 2015

Brown's Poison Pills part 3: Savings

This is the UK's national household savings ratio - the proportion of disposable income which is saved - since 1997.

Modern economies suffer from something called the "paradox of thrift" in that significant saving is necessary if households are to prepare adequately for retirement and for the economy to provide a source of funds for investment, but if everyone saves too much at once it can lead to a collapse in demand and cause a recession.

Alternatively everyone saving too much at once an make it much worse if the economy is already a recession, which is often associated with a massive increase in saving and as you can see from the chart above, that is exactly what happened in Britain in 2008.

However, Britain was not in a recession from the period of 1997 to 2007 during which Gordon Brown was chancellor. This period continued more than a decade of steady non-inflationary growth which had begun under Ken Clarke. But between 1997 and 2007 the savings ratio halved from over 12% to 6% with what was then an all-time low of 4.8% in late 2007.

Generally since WWII the savings ratio in Britain had been on an upward trend but clearly something happened to Britain as a country with a culture of saving and investment - and it coincided with Gordon Brown's time as chancellor.

If would be facile to suggest that any one person or any one policy did this. But I believe the single biggest reason was the catastrophic failure of pensions policy to encourage saving for retirement as a result of Gordon Brown's mistakes which I described in yesterday's post.

I also suspect that the taxation of savings during Gordon Brown's time as chancellor was far too complex and incomprehensible to many potential savers, and the simple fact is that forms of saving accessible to ordinary citizens produced little or no reward.

That the culture of saving has now gone can be seen from the fact that as Britain has emerged from the 2008 recession and a temporary high level of savings we are back at the 4-5% level. This needs to increase. The government has found imaginative means to encourage people to make more flexible use of pensions. But more will need to be done to recreate a culture of savings and, not for the first time, governments which do this will have to work to reverse a toxic Gordon Brown legacy.

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