| 9.1°C Dublin

Dan White: Sure, we have more money in the bank, but we're not about to start spending it anytime soon. Here's why

IT seems we are putting more and more by for a rainy day.

Unfortunately, while all of this extra saving makes sense individually, we're told it's having catastrophic consequences for the economy as a whole.

As our report in today's paper shows, four out of 10 adults are now debt-free. Last year we saved 11pc, about one euro in every nine, of our after-tax incomes. This was up from just 3pc in 2007 and means that the Irish are now among the world's champion savers with a much higher savings rate than in most other developed countries.

But the rise in savings has meant a €780m budget deficit for January.

So, with money in the bank, is it safe to start spending again?

In short, no -- not until we feel a little more secure -- and we've a way to go. We're doing the safe and logical thing by holding on to our hard-earned cash.

So why the confusion? Why are we being made to feel that by not spending we're harming the economy? Are we?

Unfortunately, you can get too much of a good thing. That is the situation in which we now find ourselves. The problem with saving is that, what makes sense for an individual can have exactly the opposite effect at an economy-wide level.



PRISONERS

Think of the prisoners' dilemma. The police arrest two bank robbers and take them to separate interrogation rooms. There they offer each of them a deal.

The first prisoner to tell all will receive a five-year sentence, while the other prisoner will receive a 10-year sentence. Of course, if both prisoners say nothing neither of them will go to jail, but can you trust your fellow prisoner to stay silent?

That's the dilemma Irish people are now facing. If we all started spending again then the economy would start to recover. However, with all of us terrified of losing our jobs and homes, the logical thing for each individual is to save as much as we possibly can. This of course worsens the economic downturn, forcing us to save even more.

The January exchequer figures, which were published yesterday, reveal the extent of the problem. These showed that the government spent €780m more than it took in taxes in the first month of the year.

Revenues from VAT, the main spending tax, were down by almost a fifth and income tax receipts were down by 10pc, reflecting higher levels of joblessness and reduced incomes for those still in work.

So where do we go from here? How do we break the vicious circle of rising joblessness, lower spending and increased saving leading to a shrinking economy? The answer of course is confidence. If we feel confident about our future prospects then we will be more inclined to spend.

So how do we go about restoring confidence? Nothing undermines confidence as much as uncertainty. While we remain nervous about our jobs and homes we are going to keep our hands in our pockets. This is why it is so important that the Government stands up to the trade unions and sticks to its policy of restoring order to the public finances.

People may not like the harsh medicine being doled out by Brian Lenihan but they respect the work he has done to steer the State and the banking system away from bankruptcy. This has fed through into a growing feeling that, while things are still pretty awful, they have stopped getting worse.

Weighing against this is the rising tide of negative equity, with more than half of all mortgage-holders now at imminent risk of seeing the value of "their" home fall below the amount outstanding on their home loan.

So is it safe to start spending again? I know that it would be great for the economy if we all started to splurge.

Unfortunately until I and hundreds of thousands like me can be convinced that things are getting better, we will be keeping a firm grip on our wallets.


Privacy