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.
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