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Trends in the Saving Ratio

 


 


For most of the post-war period the trend in the savings ratio was upward. Rising real incomes and living standards gave people the basic resources to save. High inflation and high interest rates in the 1970s also acted as an incentive to save – not least be-cause high-interest bearing accounts offered a hedge against the damaging impact of inflation on the real value of savings.

 

From 1985-88 there was a dramatic fall in the savings ratio and the underlying reasons were not hard to find. This period coincided with the infamous Lawson Economic Boom – with highly expansionary policies being pursued that encouraged fast growth of consumer demand. Lower interest rates, much easier access to consumer credit and a booming housing market caused a surge in borrowing.

 

This allowed millions of households to in-crease their spending way in excess of the growth of current come. Borrowing counted as dis-saving and the result was a high level of domestic demand which ultimately brought about inflation and recession.

 

In contrast the 1990s was the decade of thrift with the savings ratio remaining high for seven years. Many consumers needed to save to repay accumulated debts and rebuild their own “balance sheets”. Other factors have encouraged a higher level of saving – notably the need to finance living standards in retirement at a time when the relative value of the state pension is falling.

 

The latter years of the decade saw a fall in the household savings ratio - in part because consumer confidence picked up and people were prepared to spend more than their current income in a bid to improve their short term living standards.

 

 

E-mail Steve Margetts