Time to save the savers
There is state support for borrowers and public-sector help for banks; it’s only fair that there should be government aid for savers too. It wasn’t savers who got us into this mess.
Saving has been out of fashion for the past decade. The gains of the boom went to borrowers who geared up on asset purchases or who enjoyed the short-term benefits of consumption rather than putting money away for rainy days. Economic growth came from remortgaging, equity withdrawal and high credit card balances.
Now the bubble has burst, billions are being poured into the banks that lent too much and too badly and support is being offered to households having difficulties repaying their mortgages (even though mortgage rates are falling). Vat has even been cut to help those who continue spending rather than saving.
But the biggest aid being offered by governments to borrowers is an unprecedented cut in interest rates. That is what makes this recession different to all others: normally rates rise during economic crises, this time they’ve fallen.
The official policy of borrow and spend our way out of recession means the savers who abstained from the boom are now being asked to finance the culprits. The people who accumulated nest eggs to avoid being a burden on the state now find themselves penalised for doing so as well as having to provide the tax to help the banks and borrowers.
Government must recognise the fundamental unfairness of hitting savers. Cutting their income may be an unfortunate side effect of a greater plan to save the economy but it must be addressed. If nothing else, savers are voters.
True, interest is there to compensate (apart from risk and loss of liquidity) for the effects of inflation and price rises are falling even if savers currently still see the high inflation of the past year. But while pensioners who saved sums hoping to live off the interest may appreciate low inflation, they cannot live on negligible income.
Tax-breaks are an easy answer but when savings rates are so low, the difference between net and gross is small. Simply raising tax thresholds is no good if it helps all earners rather than just the squeezed savers. ISA limits can be increased or people (or perhaps just pensioners) could be given a special “unearned income” allowance or higher tax limits or lower tax rates, but the effect is still only a gesture rather than real help when interest rates are so low.
Can government provide a special high savings rate, even if only for, say, pensioners? It could: through its National Savings agency it could revive the “Granny Bond” with limited issues of bonds at special rates for the chosen few. It could even devise high-paying accounts for first-timers saving to buy a home, clawing back the excess if the principal is not used for the specified purpose.
Government needs to do something rather than brand savers are saboteurs of its plan for boosting consumption. It needs to do something however if the good guys are not to be the ones that pay for the bad guys’ profligacies.
