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AS Economics
PowerPoint Briefings 2006
Savings
Factors that Affect Household
Saving in the UK
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Saving
Saving is “deferred spending”
A preference to consume tomorrow
rather than today
Saving is not investment!
But savings flow into the financial
system ………
………and help to provide the funds
for investment spending by firms
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AS Economics
Savings Options
Bank Accounts
Cash Hoarding
Building Societies
ISA’s
Private Pensions
Equities
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AS Economics
Introduction
Around 46% of UK households
engage in ‘active’ saving (e.g. into
a savings account or contributions
to a personal pension scheme
Average amount of monthly saving
for those households that save is
£180; across all households (savers
and non-savers), the average is £83
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AS Economics
Introduction
The household savings ratio
is measured as the percentage
of real disposable income that
is saved rather than spent
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AS Economics
Introduction
The savings ratio is income
minus expenditure expressed
as a proportion of total income
– (S = Yd – C) / Yd
– Where Yd = Disposable Income
(i.e. income after tax and
benefits)
– The savings ratio has been quite
volatile in recent years
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AS Economics
Motivations for Saving
Precautionary saving
– Fear of unemployment e.g.
during a slowdown or a recession
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AS Economics
Motivations for Saving
Building up potential “future”
spending power
– Finance for major items of
spending – such as a new car,
tuition fees, school fees or a
family wedding
– Deposits for mortgages
– Saving to pay university tuition
charges and school fees!
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AS Economics
Motivations for Saving
Incentives to save from
higher/rising interest rates
A desire to leave bequests to
future generations
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AS Economics
UK Household Savings Ratio
Household Savings Ratio
Percentage of disposable income that is saved, quarterly data
14
13
12
11
10
9
Percent
8
7
6
5
4
3
2
1
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
Source: Reuters EcoWin
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AS Economics
Savings and unemployment
Household Saving Ratio and Unemployment
Percentage of household disposable income, 2006 forecast from the OECD
14
13
Savings Ratio (per cent of disposable income)
12
11
10
9
8
7
6
Unemployment (% of labour force)
5
4
3
2
1
0
91
92
93
94
Household saving ratio
95
96
97
98
99
00
01
02
03
04
05
06
Unemployment, Rate, Claimant count, SA
Source: Reuters EcoWin
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AS Economics
Trends in the Savings Ratio (1)
 The savings ratio is the percentage of
disposable income that is saved rather
than spent
 Savings provide a financial safety net for
households
 A fall in the savings ratio means that
households are choosing spending
today rather than tomorrow
 This may be accompanied by a build up of
consumer debt which will have to be
repaid at some point in the future
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AS Economics
Trends in the Savings Ratio (2)
 Recent fall in the savings ratio has
coincided with a period of high spending
by consumers
 In the long run households must judge
what is an appropriate level of saving to
maintain their living standards
 The danger of a sustained fall in saving
that people are borrowing too much and
running into the risk of becoming overgeared (i.e. they have too much debt)
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AS Economics
Trends in the Savings Ratio (3)
 A fall in house prices, a rise in
unemployment or a rise in interest
rates might catch out millions of people
who have borrowed heavily on their credit
cards
 If the savings ratio increases sharply, the
total level of consumer spending may fall
in the short term
 This will have a direct effect on demand
and incomes in the circular flow for the
economy
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AS Economics
Income and spending
Real Disposable Income and Consumer Spending
Real income and spending at constant 2001 prices, £ billion per year
800
750
Constant 2001 prices (billions)
700
650
600
550
500
450
400
350
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
Real households disposable income
Household Expenditure
Source: Reuters EcoWin
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AS Economics
Borrowing and debt
 Borrowing money is effectively dis-saving
 This is because it allows people to consume in
excess of their current incomes
 Borrowing must eventually be repaid
 Consumer borrowing has been strong in the UK
 The debt mountain for consumers is over £1 trillion
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AS Economics