By Andrew Haldenby, Director, Reform
Saving has become the basic fault line of the economic policy debate. Some (e.g. Paul Krugman and David Blanchflower) argue fiercely against saving and in favour of borrowing. But the balance of economic opinion (and Reform's own work) follows classical economic thought arguing in favour of a rebalancing away from debt. Derek Scott has written powerfully on this, as has John Taylor in the US. Mervyn King nailed his colours to the mast in an important speech last week, stating: "The proportion of our domestic output that we save has fallen by around a third over the past decade, as the share of consumption, especially public consumption, has risen sharply. Looking ahead, monetary and fiscal policy together must help to bring about a switch of demand from private and public consumption to net exports and business investment as the recovery takes hold."
Yesterday's Reform event on saving set out the ideas that will do much determine policy in this area. The speakers - David Gauke, Frank Field and representatives of SOS Savers, a new independent campaign group - agreed on the need to encourage saving but differed violently (if politely) on how to achieve this. David Gauke and the SOS Savers campaign argued in favour of tax incentives, with much praise of ISAs. David Gauke said that the state of the public finances meant that any idea to reduce taxes (including reversing the Lamomt and Brown raid on pension funds) could only be an aspiration. Frank Field took a different view, in favour of compulsion. He argued that such a policy would provide huge gains to the exchequer by (over time) removing the cost of both means-tested benefits and tax incentives for pensions. SOS Savers raised a third idea, to guarantee savings income at a certain rate.
The audience broadly favoured the second and third ideas. A tax expert worried that low taxes on saving were a distortion (although Nick Bosanquet argued that taxes on saving were a double tax on income, and inheritance tax a triple tax). There was disquiet about the current levels of savings rates offered by many institutions, which were seen as unjustifiably low.
One important part of the discussion concerned the new personal accounts - Adair Turner's near-compulsory personal pensions - to be launched in the next Parliament. David Gauke said that his Party was formally committed to them. Frank Field called for them to be abolished since they could result in a colossal mis-selling scandal. He also warned that they would leave nearly half of the pensioner population in receipt of means-tested benefits.
After the event, Patrick Nolan, Reform's Chief Economist, added his voice to the criticism of low taxes on savings. He suggesed that a reduction in tax revenue would simply substitute public savings for private savings, and much of the increase in private savings would simply be people changing how they save (this switching has been estimated to be in the order of 30 to 50 per cent). Add in the deadweight costs of taxation to this and there’s little evidence that these tax policies work.
He said that, in the end, the only way to increase savings is to increase national incomes and lower the cost of living (lower inflation). Saving is what is left over after consumption. In the longer term increasing the rate of growth of incomes has a powerful effect on increasing the levels of households’ savings. Inflation is also particularly damaging to saving as it encourages consuming now rather than consuming in the future.
Whether and how to encourage saving will be a central preoccupation of the next Parliament. Yesterday’s event will feed into Reform’s research on how to shift responsibility for funding health and welfare from government to society.
