The Bank of England’s deputy governor, Charles Bean, has been roundly criticised after he told Britain’s beleaguered savers they should be spending their cash rather than squirreling it away.
Bean was responding to the considerable number of people who had written to his boss, Mervyn King, to complain that low interest rates had resulted in their incomes being slashed.
Anyone who relies on their savings interest to help meet living expenses – pensioners in particular – has suffered greatly since the base rate was cut to 0.5 per cent 18 months ago.
Accounts which in 2008 paid 5 per cent a year are now paying less than 1 per cent and on savings of £10,000, that means a £400 drop in income earned from interest.
So Bean’s comments – characterised in much of the press as “Savers told to stop moaning and spend” – were viewed as insensitive, to say the least. But what message was he really trying to get across?
Why the economy needs us to spend
Bean said that the Bank’s decision to cut interest rates was necessary to encourage more economic activity – such as manufacturing and spending – in order to get the UK economy back on track.
The theory is that when interest rates are low, businesses can afford to borrow more to expand their operations, and consumers have less incentive to save so they buy the extra goods and services made available by businesses.
This should help kick-start the economy, and speed up the exit from recession: businesses grow, employ more people and raise wages. Workers become better off and spend more – a virtuous circle.
But, although Britain may now be technically out of recession, the policy hasn’t quite worked as planned.
What’s gone wrong?
For a start, the banks which are supposed to cut loan rates and increase the flow of finance to businesses have been severely damaged by the credit crisis. As a result, they have been reluctant to lend to anyone, and many firms have been unable to get the finance they need.
And although consumers have started to save less, they have instead tended to use their spare cash to clear mortgage, credit-card, and loan debts.
This seems like a sensible option given the high levels of consumer debt in the UK, but it doesn’t do much to boost the economy – hence Bean’s statement this week.
The deputy governor pointed out that, the sooner people start spending again, the sooner business conditions will improve, and the sooner the Bank will put rates back up.
But a general lack of confidence means consumers are reluctant to spend, especially while they have significant debts – so a bit of a Catch-22 situation has developed.
If the economy is going to take years to recover, the logic goes, consumers would be foolish to spend all their spare cash now.
What should you do?
So if you’re fed up with paltry returns on your savings and you want to do your bit to get the economy back on track, what are your options?
You may be considering other forms of investment – putting cash into the stock market, for example, or dabbling in alternative assets such as art, fine wine or antiques.
These may well offer healthier returns than deposit accounts – albeit with greater risk to your capital – but such investments will not necessarily result in your money being used to help inflate the economy. After all, this sort of spending can hardly lead to a surge in the production of fine wine or antiques.
The type of spending Bean had in mind is on the high street, on consumer goods such as new cars or TVs, for example – the kind of thing that can translate directly into business expansion and increases in employment.
But individuals can not make a real difference on their own – and with a rise in VAT looming at the start of next year, the Bank of England has a real job on its hands encouraging the British public to loosen its purse-strings.
