Academic journal article National Institute Economic Review

Are We Saving Enough? the Macroeconomics of the Savings Gap

Academic journal article National Institute Economic Review

Are We Saving Enough? the Macroeconomics of the Savings Gap

Article excerpt

We assess the adequacy of saving in the United Kingdom from a macroeconomic perspective. We present conditions needed for wealth to grow in line with income and discuss the circumstances in which capital gains can represent a substitute for saving. We show that reference to balance sheets can be misleading because they fail to identify the cost of future consumption. A savings gap of between 16.5 bn [pounds sterling] and 66 bn [pounds sterling] is identified before taking account of the effects of demographic change. The outcome depends on whether one regards rising house prices as a consequence of fixed supplies of land or as the outcome of failing to invest enough in housing with the upper figure arising in the latter case. Policy measures to reduce the savings gap are discussed. These include appropriate use of fiscal policy and taxation of credit.

Keywords: Savings rate; equilibrium growth; fiscal deficit and national saving; capital gains.

JEL classification: E21, E60, E62, H6, O40.

I. Introduction

How much do people need to save for their retirement? Why have holes appeared in pension funds? These questions have been approached in a microeconomic vacuum. The related but broader macroeconomic question, whether the country is saving enough, receives more or less no attention at all.

This is nevertheless of overriding importance for a number of reasons. Perhaps the most important is that national saving can be split into two components, private saving and public saving. If the level of national saving is too low, then policymakers need to consider whether increasing the rate of public saving might be an appropriate means of making up for the refusal of the private sector to save adequately, (1) or at the least whether a raised level of public saving has a role to play along with measures designed to promote private sector saving.

This in turn relates to the debate about fiscal targeting. Wyplosz (2005) argues that public sector finances need to be directed to achieving long-run fiscal solvency. The UK Government has adopted the 'Golden Rule' which says that, over the cycle, it should borrow only what is needed to finance public investment; in effect it is saying that public saving should be zero and that the private sector should therefore live with the consequences of its own savings decisions.

But the United Kingdom has a low rate of net national saving (Weale, 2004) compared to other European countries. In the EU-14 (the old EU excluding Luxemburg) only Portugal saves less than the United Kingdom. Does it therefore make sense for the United Kingdom to adopt a 'Platinum Rule' for its public sector finances, that over the cycle the current account of the budget should be in substantial surplus over the cycle to make up for the low level of private saving. More generally, should a revised Growth and Stability Pact adopt country-specific fiscal targets which reflect their rates of national saving? Weale et al. (1989) set out a framework for monetary and fiscal management in which fiscal policy was focused on ensuring the adequacy of national saving. In this article we present a more general analysis of the UK's savings gap and consider what might be done about it.

2. What is saving?

The starting point for our analysis is the figure for net national saving produced in the national accounts. It is the sum of saving net of depreciation by households, the corporate sector and the government sector. National saving is identically equivalent to net national investment. The latter is defined as the sum of domestic fixed investment (net of depreciation), additions to inventories and net foreign investment, or the surplus on the current account of the balance of payments.

The logic of focusing on national saving rather than the household saving ratio is that both companies and the Government in some sense belong to households. Or to put the point another way, if the Government ran a large surplus, then it would start to earn investment income, so that future needs for taxes would be lower (or spending, which is assumed to benefit households, would be higher). …

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