Saving the nation from a crisis
In the late 1970s when I was taught economics as an undergraduate, we were told that savings equalled investment (S = I).
Of course, there were caveats, mainly that we were dealing with a closed economic system without international trade and finance — in other words, not an economy which actually exists in the real world.
But you can see why such an assumption sinking into the psyche would encourage saving (or the propensity to save, to use the economists’ phraseology). Savings would be the source of industrial and business investment. Encourage the nation to save, incentivise the process, and — lo and behold — we increase investment.
Over the years, access to debt and capital markets to finance investment, coupled with a shift to an expenditure and consumption-based economy, has destroyed this saving principle. Now it is time to turn that around.
This is the topic of a new report by the Centre for Enterprise, Markets and Ethics, entitled The UK Savings Crisis: Rediscovering the Principle and Practice.
The report highlights how the wealth gap between the rich and the poor has widened dramatically under the impact of the coronavirus pandemic and the ensuing lockdowns. White-collar, predominantly middle-class workers have significantly strengthened their financial positions by ploughing far more of their income into savings as working from home reduces their financial outgoings. In fact, the savings ratio among these workers has leapt from five per cent in 2019 to nearly 30 per cent this year.
But the same is not true of working-class employees who have seen their earnings slump as they have been furloughed on 80 per cent of normal pay or been sacked altogether — with 314,000 losing their jobs in the three months to September. The report warns that 15 per cent of Brits have no savings at all, and a third have less than £1,500 squirrelled away.
Something needs to change. We need to shift the mindset surrounding saving — and the coronavirus pandemic offers Britain the perfect chance to do just that.
Why the sudden importance? First, the saving principle encourages prudence. We will need a great deal of prudence as we emerge from the Covid-19 crisis. Saving does not mean no spending; it is more about learning the difference between the two. We will need that skill not only on an individual level, but also nationally as we tackle the enormous levels of sovereign debt being incurred.
Second, the saving principle can help restore the vision of home ownership. The long patient wait, the steady build-up of balances, learning the value of asset building, the joy of owning a share in the land, the responsibility that is then encouraged — these are lessons that will underpin our nation’s economic security and prosperity.
Third, the saving principle encourages responsibility to provide for the future. We have come to rely too much on the state to bail us out from everything from short-term crises to long-term liabilities — for example, for pensions and care costs. The saving principle builds civic responsibility and ensures we have something to pass on to our children other than endless debts.
What about the interest rates, I hear you say? Surely with low levels of interest rates, and, indeed even the looming possibility of negative rates, it makes more sense to borrow, spend and not to save?
But saving helps us learn what is affordable, how to balance borrowing responsibly, and the difference between funding an asset and funding consumption. Low interest rates also reduce our other costs like mortgages, perhaps leaving us with more discretionary income we can set aside.
Low interest rates are certainly not an encouragement to saving, but they do not negate its importance.
Saving transforms an individual’s outlook, shapes a person’s character. It teaches prudence and responsibility. Such attitudes will be crucial to the government’s levelling up agenda. Incentivisation — through the tax system, pensions, savings allowances and so on — all play a part and should perhaps be extended.
Given the state of the nation’s finances as we emerge from Covid-19, the principle and the habit of saving will be needed in abundance. And so will the character that such saving develops. Saving is not only a good idea; it might save the nation.
Main image credit: Getty