Dec 03 2008
S.O.S Save our savers
A year ago I called for much lower rates of interest to ward off mass redundancies and bankruptcies. The Monetary Policy Committee decided to keep rates high, leading unavoidably to recession.
Now we are getting the bankruptcies and job losses that were the inevitable consequence of their decision, they strangely panic and slash interest rates. This would usually be the right course of action, but in the meantime the government has decided to increase the amount of borrowing it needs to do by a huge amount.
This means the government needs people to save more to send the money to the government through National Savings, direct bond purchases and investment in bonds through unit trusts and pension funds. The governemnt also wants foreigners to buy its bonds, which means it needs to worry about the continuous fall in sterling which will put off foreign investors.
The government seems to believe borrowing an extra £16 billion to make up for lost VAT receipts is reflationary. If that money is saved by other UK people, they will spend less, so it has less reflationary effect than they think. In the meantime, if they are serious about borrowing such large sums, they need to offer the saver a reasonable deal. If the MPC carries on slashing rates from here without a thought for the huge deficit the government has foolishly decided to run, there could be trouble ahead. It’s even worse now we own RBS, as the deficit will swell if they lose more money. If they lose just 1% on their assets that’s another £20 billion the state needs to borrow.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
You explain it very succinctly but much of it is just common sense.
How can the Govt not understand? Or do they just not care?
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Why invest money with the government when their solution is going to be inflation?
Nick
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Secondly, where is the money for saving going to come from when the government is taking it in higher taxes, and running up huge debts on ‘our behalf’?
Nick
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Savings should be free of standard rate tax - a good manifesto pledge in 2001, which should be repeated. The world has really been turned on its head, when the solution to excessive debt is more debt. Encouraging saving will see a quicker return to financial sanity with reliable funds being available for homes and business.
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APL Reply:
December 3rd, 2008 at 1:24 pm
A Sedgwick: “Savings should be free of standard rate tax - a good manifesto pledge in 2001, which should be repeated.”
Yes, but why not free of tax [full stop]?
But I agree with Nick too, Why save when government policy is to destroy the value of your savings with, in the first instance inflation, and in the second instance tax.
We need to encourage savers, because it is through savings that we might stand a hope of turning the economy around. Debt has its place, but it should not be the first call when a body wants to buy a thing.
We know where that road leads .. [ or are shortly to find out. ]
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We are fighting an entire culture of borrowing and need to encourage saving. I remember that my parents would always start saving for Christmas or for a holiday long before the event and I well remember the joy on my mothers face when she could afford to put a little extra away some weeks. Does anyone do that anymore?
The monumental growth of the service sector with mindboggling choice has created the demand for more disposible income and the inevitable need for for credit. I’ve been guilty of that myself, many an evening I’ve returned home too tired and lazy to cook anything and have ended up picking up the phone to the local pizzeria and ordering a meal that I could easily have made myself. The fantastic choices on sale at the likes of ASDA and Tesco make us spend far more than we probably need to, we’ve all been guilty of throwing out food that we bought but didn’t get around to eating because we already had a fridge full to begin with. How many of us buy a Dvd that we never get around to watching, or buy clothes that we rarely wear ?
All these little habits have grown out of the service sector culture and our own need to buy for gratification. Easy-credit fuels these little addictions and therein lies the problem, consumer culture and credit.
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It would be interesting to know where their source(s)of income comes from ie where do they work? If indeed they do work. All these people who are so keen on privatising everything, slashing jobs, cutting spending, abolishing tax credits and so on, because it does not sound like any of them will feel the cold.
The rich are rich in real terms as they do not owe any money and so do not have to service debts. They own their house/car outright. No you can’t afford that car/kitchen/house! You do not have the money! House price inflation is not income and credit is a bad thing in general, as if you are in large debt you right where everyone wants you. It’s about time some politician came out with that line. The problem is and always has been accommodation though. With this in mind the only real way to save now is to overpay the mortgage in which you will get about 5% tax free and a reduction in the number of payments saving a large amount again in terms of percentage with the bonus of keeping a roof over your head. When that is paid move to National savings. Roulette is only for the fearless and banks and bookies are for chancers.
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Very good points…i would further like to ask whether the govt has provided a likely loss estimate for the bank assets the taxpayer has taken on their books. I understand it is common practice in the financial industry to undergo risk assessments (not that they worked) and some sort of collateral be held as position risk requirement. Banks have to do this by way of capital adequacy requirements of course. The taxpayer being the ultimate owner of these bank assets must have some idea of likely losses over the current cycle. For RBS alone, if what you say is correct - each 1% decline in assets leads to a £20 Bill loss (requirement for new funding). There is a common view that house prices have yet a long way to fall. What sort of erosion in % assets is expected and shouldn’t the govt be preparing contingency for such an outcome. Indeed shouldn’t this be taken into account in the governments potential borrowing requirement. Remember this is just one bank…what about Northern Rock et al. These figures seem essential to me and of course question the validity of any further spending by govt. Maybe i’m misunderstanding the situation. If i am right, the govt is acting rather like the reckless hedge funds they now despise. Reckless borrowing is as dangerous as reckless lending.
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Why move to national savings when its pretty clear that they are going to print money and cause inflation?
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On a related issue:
It appears that at least one European leader DOESN’T agree with Brown that the way to deal with the current economic crisis is thru a fiscal stimulus reliant upon excessive levels of public sector debt. Angela Merkel seems to be having reservations, speaking out against tax cuts and a spending splurge.
In the words of the Wall Street journal:
“The root of the global financial and economic crisis is known to every Swabian housewife, Ms. Merkel said: “You can’t keep on living beyond your means.” A lack of thrift in advanced economies caused the crisis and can’t be its cure, she said.”
The link is here if anyone wants to read further:
http://online.wsj.com/article/SB122816734631570097.html
Maybe I am thick but I don’t see how this squares with Mandy’s/the BBC’s portrayal of Brown as the political superhero/Moses figure who is leading the way for the rest of the world in how to deal with this crisis: Brown acts and the awe struck millions follow in his wake - much like lemmings as they follow each other over the edge of a cliff. Mandy’s euloly of Brown I understand - he’s a party hack and is economically illierate. But the BBC’s? Surely some measure of objectivity is called for here?
I appreciate my comment about Merkel is a mere debating point but surely this is worth throwing back in Mr Brown’s face the next time he ridicules David, George and the Conservative party for being the only voice in the world counselling caution in the wake of Brown’s stimulus package …? As with climate change Labour are seeking to claim that there is no disagreement on the policy strategy they are attempting to follow. And in both instances they being a tad economical with the truth.
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Irwin Seltzer in the Telegraph wrote an interesting piece today.
How do we repay the trillion pound debt?
1. Raise taxes. But on whom? The rich? the Poor? Inadequate returns. Middle Class? Too many votes to be lost there.
2. Cut back on the client state? No chance. It votes. And there are a LOT of people/voters dependent on government hand-outs besides criminals in jail.
3. Get someone else - by losing the election or by going to the IMF - to do the dirty work and then get re elected.
4. Inflation will cut the debt: we will pay back in debauched pounds. (Does this work, though? We pay the EU in Euros, for instance).
I very much regret that I think I know where we are heading. Don’t you? And it is not towards a strong pound dependent upon our savings.
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They could have a go a recapitalising the banks with a debt for equity swap.
Bonds (as in fixed interest securities) are a mugs game now, unless they are very short dated and have an excellent yield. Perhaps the Government needs to issue 5 year Gilts at, what, 6% to get them away. OK for domestic investors perhaps, but would they be attractive to non-Sterling investors? No, I don’t think so either.
Personally I’d want 7% to 8% and a three year term as I trust this Government as far as I can spit a rat.
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I agree - but I assume the drop in VAT will lower the inflation rate - strengthening the case for further interest rate cuts.
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not an economist Reply:
December 3rd, 2008 at 9:00 pm
Is the drop in VAT reqally relevant? Firstly are companies passing it on? Secondly, even if it is I would suggest it is being swamped by the deep discounts retailers are implementing anyway.
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If Govt Borrows £100, through 5% Gilts, that means in five yrs we have to pay back, £120 billion in our taxes to the International Moneylenders.
That means in 5 yrs time we must borrow more, and five yrs after that we must borrow more. this is how we have given our children a £1Trillion debt.
When you Borrow, you ALWAYS have to pay back more than you borrowed because of the attached interest.
That is why, ultimately, fiat currencies always fail.
We should print our money free of charge, not Borrow it.
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Ending taxation on savings would be a fair move. Investments and savings are made from after tax income, money that has been taxed once already.
Ending this double taxation would really encourage saving and give those of us saving for pensions a better range of options.
In the short term though any government will have to plan tax rise, spending cuts or more likely both.
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John,
Interesting piece. I have a question which may appear miserly. It concerns The PM’splan ( details still to be worked out,typical Nu Labour, but gets headlines) for offering a two year interest holiday on mortgages.
I was brought up to live within my means and put money aside for a rainy day.
Why should those of us who have lived within our means end up paying for this. For, it is our taxes /government borrowings supported by our taxes, which will pay for this. It seems that in the fantasy world of Nu Labour everyone has rights but no responsibilities.
Am I being too scrooge-like?
Gordon Brown has proved to be the worst Chancellor in living memory. He denies any acceptance for the utter mess of the UK’s finances but struts the stage as the saviour of the economy.
Angela Merkel and her finance minister are spot on. David Cameron and the Tories are not alone in saying that showering the economy “a la Brown” is not the correct approach.
An election cannot come quickly enough to rid the country of this disastrous government!
Reply: I am still trying to get hold of the details of this mortgage scheme to find out whether it is good or bad and how much it will cost. I spent yesterday in the Commons chamber, so naturally that is the last place to find out what the government is planning!
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