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George Osborne gave us a saver’s budget. Should he have bothered?

21 March 2014

‘If you’re a saver, this budget is for you’, George Osborne said on Wednesday as he unveiled measures to let people keep more of what they save – such as combining cash and stocks-and-shares ISAs and whacking the subscription limit up to £15,000 from the 1st of July this year.

But will people put their money away in savings accounts? The OBR’s latest forecasts show that the savings ratio – the percentage of households’ disposable income that they save – will fall by almost a fifth this year, and households will put away significant less than the OBR thought they would last March.

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Households aren’t just not saving – they’re spending what they’ve already saved. In December, Sky New’s Ed Conway reported that households are turning their savings into ready money at the fastest rate ever recorded – £900 for every household over the previous year. This splurge is largely responsible for the recovery. The OBR’s most recent forecasts for the economy said:-

‘Consumer spending, supported by a falling saving ratio, has been the biggest driver of recent growth… It remains the case that the increase in consumption in 2013 was financed mainly by lower saving, rather than stronger income growth.’

Why has the savings ratio fallen, and why are people spending what they’ve put away? As Ed Miliband never tires of pointing out, there’s a cost-of-living crisis: in real terms, wages haven’t been going up. So, people might have been dipping into their savings to maintain their lifestyle. They might also expect wage growth and inflation in the future, and shift some of their future spending to now. And of course, dismally low rates of interest don’t encourage people to lock their money away in a bank account.


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  • BarkingAtTreehuggers

    So the savers budget comprises of (a) putting away yet more cash in ISAs that yield no interest and (b) allow pensioners to ‘dig in big time’?
    I am beginning to think the Shapps Bingo ad was less hilarious…

  • swatnan

    Yes! Save for that rainy day; and fix the roof while the sun shines; and dredge.

  • Denis_Cooper

    I wonder whether George Osborne has been taking advice from John Major, because

    “This is saver’s Budget”

    is exactly what the latter said at the end of his Budget statement on March 20th 1990, and of course the Tories went on to win the 1992 general election.

    I only know this because I came across his speech here:

    while looking up about Composite Rate Tax on savings, recalling that at one time that tax was being levied at a single rate between the basic rate and the higher rate and that the tax deducted could not be reclaimed by non-taxpayers.

    He said:

    “Composite rate tax was introduced originally in 1894, and put on the statute book in 1951. It currently stands at just under 22 per cent. It is deducted at source. It cannot be reclaimed in any circumstances. This means that basic rate taxpayers gain by about 3 per cent. — the difference between the composite rate and the basic rate of income tax, which is what they should pay. And it means that non-taxpayers are worse off by 22 per cent.”

    He went on to announce the abolition of composite rate tax and the introduction of the scheme we still have today whereby non-taxpayers can get interest paid gross, and then continued to announce the TESSA scheme.

    The general point I wish to make is that while the improvements in Osborne’s budget are obviously welcome they are just the latest stages in a painfully, frustratingly, slow process of the government gradually, reluctantly removing counter-productive deterrent penalties on savers but often with the introduction of unnecessarily complex and restrictive special schemes, when one obvious and much simpler alternative solution would be to end the illogical historical aggregation of earned and unearned income for tax purposes and introduce separate income tax allowances for income earned by current work and income from savings and investments accumulated over many past years.

    I suppose that if I live long enough I might see the government getting there in the end, but probably it will take a few more decades for them to gradually come round to that very obvious idea.

  • Chris Morriss

    Of course people aren’t saving. With the current derisory returns, why should they bother? If interest rates were at the level expected for an economy at the state ours is at (around 2.5% to 3%), it might be a different matter.
    In the future, I think it is very likely that pundits will look back at this extended period of ludicrously low interest rates and say that it was the second most foolish thing that the government did (with QE being the most foolish).
    Economists are not good at modelling the effect of fiscal and monetary settings. Perhaps they should employ some engineers skilled in control theory to provide a proper PID model of the economy. Yes, I know the time-constants for the economy are very long, that the transfer functions are non-linear, and that there are high amplitude noise inputs, but it might be time to bring in those who understand how to deal with systems having these parameters.

    • HookesLaw

      We have had a massive recession. Low rates follow. They help people pay off debt. Have you seen the Eurozone rates?
      As jobs rise and inflation rises then rates will rise. But inflation has been declining, there is still slack in the economy. Banks are not lending (although industry is sitting on a cash pile). So rates are where they are. Indeed low rates should encourage industry to spend (ie invest) its cash pile as the best way to get a return.

      BTW – ‘Time’ pointed out 2 days ago…
      ‘ The Federal Reserve said it would keep interest rates low until at least early next year in order to encourage more borrowing and spur economic growth amid persistent unemployment and low inflation plaguing the economy.
      The Federal Reserve signaled Wednesday that it would look to keep interest rates low until at least early next year, as it abandoned its traditional target of a 6.5 percent unemployment rate as a trigger for higher rates.’
      ‘The Fed is currently holding that rate at below 0.25 percent.’

      So the entire world disagrees with you.

      • Mike

        But will it work ? People have got very savvy after the bankers shafted all of us and although the rates are low now, how many prudent people will take on loans for any reason if the rates could rocket in a couple of years.

        Pensioners wont take out loans as they haven’t any income to pay for them. Small business’s will use whatever spare cash they have to feather bed themselves in case the economy gets worse or just have a very slow expansion plan.

        In all these things its confidence that matters and few people feel confident the economy can surge ahead without another collapse shortly afterwards. Basically we don’t trust bakers and we don’t trust governments of any persuasion.

        Its time governments cut their cloth according to realistic taxation just as families have cut back and accept that it will be a much longer than a term in office before economies might grow again and debt is reduced. If we can see this, why can’t they ?

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