Do we really want a “save save save” culture?

David Cameron has announced plans to abolish tax on savings for lower rate tax payers and to build a culture of “save save save”.The first question that comes to mind is whether or not this is a good idea. The idea of increasing saving during a recession brings up the paradox of thrift; if everyone increases saving during a recession, it will decrease aggregate demand and potentially cause the recession to deepen. This would be compunded by how the Tories are planning to pay for the cut – by lowering public spending, which would also remove money from the economy at a critical time. At the very least it is out of step with the Keynesian attitudes of the times. The second question is – would it be effective in increasing savings? There are already reasonably significant vehicles for tax free savings through ISAs, however savings rates remain low and most people as far as I am aware come nowhere near hitting their tax free limit. This measure will not help a lot of people who have little money to save.

But it raises a wider question, I think. Is a society based on the idea of thrift really what we want? It is undoubtedly true that it would probably be better for everyone in the long run if there was a little less spending and a little more saving. But the idea of a return to a time when it was quite difficult to get credit seems like a huge rowing back. I tend to avoid debt, but if I chose I could certainly handle a few moderate loans; I have a relatively stable job and I know I will be able to afford the repayments. Is it really better that I save six months to buy a washing machine than to take it on credit and pay it back over the same period. And the hair shirt has never really been a compelling sell, even with the difficulty of the times.

What do you think?

Further Reading

BBC Report on Tory Announcement
The paradox of thrift
Polly Toynbee is scathing
Daniel Hannan is happier

  • missfitz

    Kensei
    I accept the arguments you are making, but I think you are omitting another part of the Cameron argument, and it is the really scary and unknowable element of what we are facing economically.

    He says that we should be looking at a society that is not based on debt and I think that anyone looking at his position should focus carefully on that part of the debate. Since the 1970’s period of deregulation and availability of credit, we have created a debt society. Houses became investment vehicles and we lived fairly collectively on money that we did not own.

    The tide will have to turn, as we now see that this was an unsustainable method of living. The jury is out as to how this will work, as we are facing an unprecedented change in our style of economic survival.

    However one thing is clear, at least Cameron is introducing this most uncomfortable of ideas and recognising that we are past the point of spending our way out of a recession

  • Kensei

    Miss Fitz

    If you take a look at the Toybee article, she points out that even with the projected deficits, the UK would still sit in the middle of the table. Now that might not include some debt shifted off due to accounting rules. But it is perfectly possible for the UK to carry higher debts relative to GDP if not desirable. Check out Japan’s debt to GDP ratio. The budget needs to balance and the debt come down eventually, probably. But it doesn’t have to balance every year, and it can be done over the long term. The US did this quite successfully with tis high debt after WW2.

    On a personal level, yes some of the the excesses were unsustainable. But that does not imply that a hair shirt and a dramatic reversal si the answer. Take houses. Suppose that the debt climate gave 10% more people the opportunity to buy a home. Suppose, because of the crisis, 5% default. We want policy that will allow the good 5% to access credit, not wipe out the entire 10%.

  • gram

    Cameron is an idiot. He’s really just playing to his base supporters here.

  • Rory Carr

    I am taken with your arguments, Kensei but I think we might be foolish to be so lightly dismissive of that “some debt shifted off due to accounting rules”.

    Such ‘shifted debt’ is represented in the main by PFI ventures which Brown had shifted “off balance sheet” really in breach of accounting rules in a crude attempt to disguise his own failure to meet his own set criteria on budget balance. I am afraid that I don’t have the figures to hand but it seemed as if almost every other week yet another pile associated with the disastrous PFI initiative was being slyly redefined in order that the appearance at least of ‘Prudence’ would remain elegantly unblemished to her devoted admirers.

    I have no argument with your conclusions on the extremely limited effect of savings tax incentives for lower tax payers and I see the – what is it, £2,000? – proposed increased allowance against tax on interest for pensioners (is it just interest or will dividend income be included?) as a crude attempt at blindsiding the public as to its true intent which I cannot believe is as claimed an incentive for pensioners to save more. Pensioners savings days are past and, for those who have any savings, where they are not miserably depleting the capital for bodily comfort they are certainly treating the interest as a revenue adjunct to their pensions.

    The very wealthy, such as those in Cameron’s own circle, will of course have no such need and will be able to reinvest any tax savings to pass on to their heirs, praying all the time that Boy David will be in a position to ‘do the right thing’ and seriously prune death duty liabilities when the time comes.

    He will then use the claim that, by relieving the tax burden he has given people more choice on what to spend their money on and that therefore the elderly can now themselves choose (and pay for) for better health care and that consequently the state can now reduce spending in that area because the need has been alleviated.

    Quite apart from the disastrous consequences on the health of the nation’s elderly the whole bloody plan actually contradicts the stated intention of encouraging savings.

    As Horseman might say (if I may be so bold, Horseman), “John Andrews will be well happy with this but his butler will be bloody pissed off!”

    It would be juvenile and disastrously untimely to raise the cry, “To the barricades!” among the great unwashed but quietly advising the occasional oiling of the musket in one’s rafters might be prudent.

  • Mack

    Financial commentator Bill Bonner describes this as a balance sheet recession, and thus believes it is going to be extremely nasty. What he means by that is that in the US, UK and other countries the savings rate plummeted to near zero, while the level of debt exploded. Consumers and business are maxed out – they can’t take more debt on – the only choice is to pay down debt, and begin to save to rebuild the household or company balance sheets. This kind of saving means much less spending and hence a hellish recession.

    A country needs a large pool of savings, it’s what banks use to lend out to businesses to enable them to grow. Without it, you need to borrow money from foreigners – or worse print it.

    Proper Keynesianism requires saving surpluses in good times, so that stimuli can be applied in bad times. The poor old British consumer maxed himself out in the good times, as did the Labour government (I think).

    Higher interest rates would be more effective at achieving what he wants. Also, Broon’s Keynesian adventure and Quantative Easing may unleash the inflation genie – which would, I imagine put Brit’s off saving for life (and may reduce the wealthy – I presume – Mr. Andrews above to a pauper).

  • Kensei, your expressed concerns about Cameron’s proposals are valid. Modern finance is based on credit (debt), and it’s a nonsense to think that either individual households (mortgages) or entire states (national bonds) are going to flourish without credit.

    As I like to say, careful what you wish for. If everyone saved all their disposable income, this recession would get far worse.

    But an important distinction between households and states is the latter’s ability to print money. While households can’t really outspend what they earn (home owners have at least their house as capital), states can print money (issue bonds) as much as global finance will bare.

    This has been America’s ability to live in such debt for so long. But unlike other countries, really only the holder of the global currency of choice, the US dollar, can get away with this. With so many countries holding so many dollars, there’s no much these countries can do about it.

    The UK, however, does not enjoy such a position. Sure, it can print money, but foreign buyers of UK bonds can be more demanding (read, interest rate returns). There’s only so many bonds it can flood the market with until buyers get suspicious of ability to pay (read, Argentina!).

    Nevertheless, no one with any modest understanding of the Great Depression would today advocate restraining either loose money (0% interest rates) or increased public spending (on valued added items like infrastructure, not higher salaries or non wealth creating jobs).

    But alas Cameron’s Tories have lately repeated espoused regressive proposals. What’s next, their version of an updated Smoot-Hawley tariff?

  • Kensei

    Mack

    High interest rates would also cripple several parts of the economy, and the real fear at the moment is a risk of deflation. I should also note that several moetarists suggest it was a tightening of monetary policy that turned 1929 from a severe recession to a depression. There aren’t a lot of good choices here.

    In terms of the recession, it is likely correct that this one is going to be tough. And as I said, some more savings and less debt is quite desirable. But the question is do we enviage a thrift based economy, and a less amterialistic society. This strikes me as neither something people particularly want nor something that is particularly desirable — see coment above. Second, the questionover what time scale balances are restored matters. What we really want is a policy that grows our out of the problem, and encourages a gradual fix over the medium to ling term. Perhaps cutting taxes on savings will help do that, but it isn’t how the Tories are presenting it.

    Inflation might well be unleashed, but it is much easier to deal with inflation than it is to deal with deflation and an extreme credit crunch. Better the devil you know.

  • Mack

    Kensei – Fair points. I’m not actually arguing his corner.
    On higher interest rates – yeah there’d be a lot of negative effects – and again I don’t think they suit the current situation. But 20% tax on a 10% rate leaves you with an 8% return, no tax on a 2% interest rate leaves you with 2%, on 0 it’s 0%. The former would encourage saving among those who have jobs and aren’t hung out to dry by their debts, the latter is King Canute futility.

  • Rory Carr,

    … As Horseman might say (if I may be so bold, Horseman) …

    Feel free. Not quite out of the horse’s mouth, but accepable in tone and content!

  • Kensei

    Mack

    True. But for real returns you would also have to take into account inflation.

  • Glencoppagagh

    Cameron is following Brown’s bad example by fiddling around with the tax system and creating unnecessary complexity. Removing tax on savings income isn’t going to materially affect the propensity to save. Anyone can already save up to £3,500 a year free of tax.
    The Tories would do better to concentrate on removing the absurd position where a person on the minimum wage is still liable to tax on more than a third of their income.

  • mnob

    Isn’t part of Cameron’s theory that he is helping out people who have already saved and are relying on interest returns on their savings to live ?

    Reducing the tax on that interest would directly result in the money going back into the economy (i.e. being spent) because this is money people live on.

  • Rory Carr

    Indeed, Mnob, that would be the most likely outcome which is why I say that Cameron’s claim that his measures are to encourage savings are merely a temporary hoodwink as the real game play is, as has ever been, to promote a big lie that will allow the health service to be destroyed that private health provision profiteering might flourish and that income tax on higher income might be reduced to allow the rich even greater access to even greater resources for speculation in that most vile of all ventures.

    In a great sense it is a nonsense to be even discussing his proposals as some sort of serious plan to rescue “the nation” from economic peril when it really is only the “hoola, hoola, hoola” call of a huxter politician prior to flashing his shoddy, tinselled goods while dazzling us with words of warmth and hope. His dream of “a nation of all citizens living in roomy houses, healthy children gambolling on the green” spiel (or some such misty-eyed nonsense) might have been knocked off from some 19th century romantic socialist (Robert Owen perhaps or even de Valera, come to that. Not that Dev was ever a romantic socialist).

    The heart of this is not the nuts and bolts of political economy but rather the fascination of watching a great bamboozler at work, which being as he is a most ambitious politician, is the highest compliment that might be paid to such as Mr Cameron. He aspires to the heights of Blairite greatness. God help us all.

    But, please, let us not continue to be bamboozled and continue to treat his economic prognostications as though they are deserving of serious reflection.

  • The Raven

    “But, please, let us not continue to be bamboozled and continue to treat his economic prognostications as though they are deserving of serious reflection.”

    Found any of the current crop whose are worthy of serious reflection? Frankly after all the to-and-fro-ing, head down and hope for the best is looking pretty valid right about now…