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?