Save more to avoid straining the economy: report |
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Tue, 26 Apr 2005 01:00
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UK consumers must start saving more and shop less otherwise the economy might come under undue strain, according to a report by forecasting group Ernst & Young Item Club.
The influential group which uses Treasury data in its research, said the country’s low savings rate was affecting the balance of the economy. The situation called for urgent steps by the government in order to revive the people’s savings habit.
| However, the group’s forecast for spring said the economy was in good shape in the short term. Economic growth was in line with expectations: 2.7% predicted for this year, followed by 2.4% for 2006. Consumer confidence too was correspondingly high.
The flipside of picture was that there were fewer incentives for people to keep aside some money either to save for retirement or to meet some contingency. In the longer term, issues such as savings and the country’s pension deficit would put a strain on the balance of the economy.
A spokesman of the group said “The problem needs to be addressed forthwith and resolved with speed.” Currently, the savings gap is between 2 and 5 per cent of Britain’s GDP. The Item Club said this gap needed to be reduced as "a matter of urgency".
Peter Spencer, chief economic advisor to the research group, rued that “We are simply saving too little as a nation.” An increase in savings, he said “would help rebalance the economy in the short term, besides lightening the tax burden in the medium term.”
Otherwise, it was very likely that weak trade performance added with public and pension deficits would make it difficult for the economy to rebalance.
Treasury data had confirmed that household savings rate has collapsed since 1998 and the occupational pension system was seriously degraded.
The Item Club report warned also of a budget deficit of £12bn for 2005-06 against the Chancellor's prediction of £6bn, giving him very little room to maneuver on policy. Professor Spencer said that tax rises would be necessary at the next budget. The next government must address these issues on a priority basis.
The report also said that the housing market would show no more than a modest fall in house prices and no major downturn was expected, although the market is cooling down. Mortgage borrowings had dropped which had some relation on consumer spending.
The borrowing rates had been steady for the eighth consecutive month yet mortgage borrowings registered a decline.
The best way to improve savings and pensions would be with compulsion and tax relief focused at the lower end of the income scale. Using the ‘carrot and stick’ approach to stimulate savings and pensions may prove to be the most effective means to this end. As the costs are shared by the employees, employers and the government, the move would certainly encourage savings.
Others felt making pension contributions compulsory would cost the government £4bn a year in tax relief and add to the shortfall in public finances.
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