The Chancellor must act to get us saving again, says former pensions secretary IAIN DUNCAN SMITH
The incentive to save should be at the heart of any stable economy. It is vital for careful budgeting, preparing for old age and ensuring that you don’t fall into debt.
Yet, alarmingly, the UK household savings ratio stood at just 5 per cent in 2019.
By contrast, the average savings ratio in the past 54 years has been 9.2 per cent of disposable income.
Saving crisis: The UK household savings ratio stood at just 5 per cent in 2019. By contrast, the average savings ratio in the past 54 years has been 9.2 per cent of disposable income
This collapse in the savings ratio alone should worry the Government.
Yet, now comes the news that the Government’s own savings vehicle, National Savings and Investments (NS&I), is slashing rates on a number of savings accounts and bonds by up to 0.45 per cent.
As a further savings disincentive, the prize pot for Premium Bonds will also be cut and the odds of winning a prize reduced.
It is a particularly brutal blow for pensioners, who rely on getting a good return from their savings.
The Government needs to intervene. Most economists believe that, in the longer term, private savings are ultimately a good thing for the economy because they help private investment, which is more often better targeted than public spending.
This upcoming Budget is vital and will set out the priorities for the Government over the next five years.
In it, Chancellor Rishi Sunak should recognise that a sustainable economy cannot be built on such high levels of personal debt, and his priority must be to get people saving again.
A few carrots could go a long way. When I was five, I received sixpence a week as pocket money, which I was encouraged to save, but invariably spent on comics and sweets.
Then, one year, my mother promised me an extra amount if I saved enough to buy Christmas presents for everyone.
I saved ten shillings and was able to buy my parents and my four brothers and sisters small gifts that year.
Not only was I proud that I had been able to pay for these presents myself, I also earned a couple of shillings as promised from my mother for my trouble.
However, there is another reason for low levels of saving, even beyond the low returns: a fall in trust.
Mis-selling and other aggressive practices have damaged the financial industry’s reputation, and firms still have some way to go to increase confidence among investors.
The Government should also do more to get interest rates back up to normal levels, where monetary policy is effective again.
This can be done by having a more aggressive yet controlled fiscal policy, and borrowing more while rates are so cheap.
One policy suggestion for Rishi Sunak is to incentivise pension saving much more.
Pension saving should be the most attractive way to put money aside because it is so tax-efficient.
And it has the added benefit that the more successful this type of saving is, the smaller the burden on the younger generation to fork out for their parents in future.