Insights

Budget 2018: No saving grace for savers

The budget provided little for Britain’s disgruntled savers to get excited about. While the Chancellor released tens of billions in public spending to address fatigue with austerity, there was little on offer to offset the pain still being felt by those looking to save for retirement or for a rainy day.

If you had you set aside cash in 2008 in an instant-access savings account you could have enjoyed a relatively healthy 3% annual interest rate, with inflation then running at around 2%, putting money aside meant 1% growth in real terms. This mattered to many people with a cautious outlook. In short, it paid to save. However, today the same investment will get you a measly 0.4% a year, meaning that after inflation savers are losing 2% in the value of their savings each year. While better rates have recently become available through some banks, none come close to beating the current UK inflation rate of 2.4%.

Rightly or wrongly, there is therefore a perception that since the financial crisis prudence has been punished while profligacy has prospered. As austerity has become the rallying cry for populism, for many people it is the penalty for careful household budgeting that has seemed the most unfair legacy of the bank bailouts.

To be fair to the government, a range of policies have been tried in an attempt to offset the obvious disincentive to saving. These include the Lifetime ISA, the Help to Buy ISA and flexible pensions drawdown from age 55, as well as large increases to the savings allowance and the annual ISA allowance. There has even been talk of a minimum interest rate for savers, enforced by regulation. Yesterday’s lack of action at the budget therefore represented an element of government fatigue with attempts to use scarce public resources to subsidise the returns available to savers. To some extent this reflects the fact that most of these policies have failed. The current savings ratio – the proportion of income that Britons choose to save rather than spend – is hovering around its lowest level in 60 years, at only 4.4%.

This leads to the conclusion that the best thing the Chancellor can do for savers is to provide a growth-friendly environment that would enable the Bank of England to raise its own interest rate, and with it the rates that high street banks offer to savers.

In this regard the budget has to be viewed as a sobering reminder that economic growth remains tepid. The Office for Budget Responsibility (OBR) expect economic growth to average just 1.5% over the next five years. Should this come to pass, there is little likelihood that the Bank of England will find conditions favourable to sustained increases in UK interest rates. Savers will likely have to hunker down for a while to come.

Of course interest rates are not solely determined by what happens in the UK – events in Washington and Beijing affect the returns that savers can expect. But here the news is little better. The OBR downgraded its estimates for global growth by 0.2% both for this year and next as trade conflicts begin to escalate. This means that the Bank of England is unlikely to be alone in its slow pace of returning interest rates to anything like pre-crisis norms.

From the moment the Prime Minister announced that austerity was coming to an end earlier in the month, the budget was always going to be judged through that lens. While the Chancellor did as much as he could to address these concerns, he may find that saver fatigue looms larger, and for longer. The longer the crisis in saving continues, the more shrill will be calls for a remedy.

A version of this piece was published in The Times.

Simon French

Economics & Strategy