Wednesday 21 February 2018

Recession brings a conflict between squirreling and spending

Sarah McCabe

Sarah McCabe

THE GOVERNMENT has a peculiar relationship with our savings.

On the one hand, it knows saving is a good thing. Private pensions and money set aside for a rainy day means fewer people will ultimately rely on the State.

On the other hand, spending drives economic growth. And squirreling money away every month prevents us from spending.

This conflict becomes particularly true when the economy falters. Though it may seem counterintuitive, our bank accounts tend to swell when times are tight. This is because difficult economic conditions drive people to save, even though their paycheques may be smaller.

Unfortunately, it is when times are tight that the Government needs us to spend the most. This means the State is unafraid to introduce measures that actively discourage saving, like increasing taxes on deposits, even when disposable incomes are falling. The first Budget of the new coalition Government in December 2011 increased the tax on interest earned from savings to 30pc, from 27pc.

The result of this was a clear fall-off in the number of people who said they were saving regularly, even though people still expressed a desire to save any spare funds available. People were simply unable to save during 2012.

The number saving regularly fell even further this year. Again, this can be partly be blamed on the Budget introduced at the end of 2012, which included a property tax as well as a further increase in DIRT tax to 33pc. Consumer responses to these policy measures have been more negative than in previous years. In April, more than 63pc of people said government policy was discouraging saving while only 6pc said policy encouraged saving, according to data from Nationwide.

In more positive news for consumers, the fall-off in regular saving that was apparent throughout 2012 and early 2013 has now stopped. Some positive momentum was noticeable in July and August. However, it's that time of year again – the Budget is looming.

Equally welcome is the news that debt is also falling. Restrictions on bank lending have resulted in less household debt than at the start of the crisis, down from around €200bn in 2008 to €170bn this year.

Debt as a percentage of household disposable income has also declined. At the same time, the value of property has stabilised and even increased in some areas.

This means that consumers now have a stronger basis for believing that their financial position is improving than in previous years.

This trend is reflected in a study of how consumers would choose to spend spare funds. The preference to pay down debt has reduced in the past few months while the preference to save has increased.

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