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AS Economics PowerPoint Briefings 2006 Savings Factors that Affect Household Saving in the UK tutor2u 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 tutor2u AS Economics Savings Options Bank Accounts Cash Hoarding Building Societies ISA’s Private Pensions Equities tutor2u 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 tutor2u AS Economics Introduction The household savings ratio is measured as the percentage of real disposable income that is saved rather than spent tutor2u 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 tutor2u AS Economics Motivations for Saving Precautionary saving – Fear of unemployment e.g. during a slowdown or a recession tutor2u 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! tutor2u AS Economics Motivations for Saving Incentives to save from higher/rising interest rates A desire to leave bequests to future generations tutor2u 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 tutor2u 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 tutor2u 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 tutor2u 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) tutor2u 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 tutor2u 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 tutor2u 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 tutor2u AS Economics