Should we be saving or spending more? It seems counter-intuitive that we should splash out on a spending spree as coronavirus restrictions are lifted. But economists say that this is exactly what we should do. Yet faced with the sharpest plunge into recession in living memory and uncertainty over our future income, we curb our spending and build our household savings.a
It’s a great paradox or trap of saving – and not the only one – that while we strive to save for a rainy day when that rainy day comes, caution also comes to the fore. The household savings ratio – the percentage of disposable income that is saved – spikes upward. Last year the UK household savings ratio was five per cent – way below the average over the past 54 years of 9.2 per cent of disposable income. But even before the coronavirus emergency erupted, January saw an uptick to 6.2 per cent, a likely reflection of a slowing economy and Brexit uncertainties.
But the nationwide lockdown in the UK may bring about long-lasting behavioural change – less spending on inessential or impulse purchases.
The main paradox of thrift is that if everyone saves at once, it can cause macro-economic problems – like a recession. From an individual perspective, it makes sense to save and pay off debts in a recession. But, if everyone pursues the same course of higher saving, it causes a fall in aggregate demand. This is the trap.
And it would be compounded if, as seems likely, any return to ‘normality’ in the economy would be offset by consumer fears of higher taxes to pay back the explosive rise in government debt. As well as higher income, there are already calls for a one-off tax on capital.
So the economic gurus are saying we should bear down on our “inner squirrel”, stop storing those nuts and instead help the economy by spending.
But I’m with the squirrels on this. A store of nuts helps give some protection from future crises and helps rebuild confidence after this epochal shock.
As the Covid-19 pandemic has dramatically shown, we were unprepared for “future shock”. And the reverberations from this one are set to last a long while.
A message from the Editor:
Thank you for reading this article on our website. While I have your attention, I also have an important request to make of you.
With the coronavirus lockdown having a major impact on many of our advertisers - and consequently the revenue we receive - we are more reliant than ever on you taking out a digital subscription.
Subscribe to scotsman.com and enjoy unlimited access to Scottish news and information online and on our app. With a digital subscription, you can read more than 5 articles, see fewer ads, enjoy faster load times, and get access to exclusive newsletters and content. Visit www.scotsman.com/subscriptions now to sign up.
Our journalism costs money and we rely on advertising, print and digital revenues to help to support them. By supporting us, we are able to support you in providing trusted, fact-checked content for this website.