Low national savings rates stores up trouble ahead for Britain

Households, companies and government are all in deficit for the first time since the 1980s writes Chris Giles in The FT

The Scottish economist Adam Smith described Britain as a nation of shopkeepers in his book The Wealth of Nations, published in 1776.

Today, the UK is simply a country of shoppers. Rarely has Britain been consuming so much and saving so little.

As a nation — which statisticians break down into households, companies and the government — Britain spends far more than it earns. On this measure, the UK borrowed 5 per cent of national income in 2015, according to the OECD, the Paris-based international organisation.

This implies that UK households, companies and the government spent 5 per cent more than they earned in that year and financed the deficit by borrowing from overseas.

 Britain was still borrowing 5.1 per cent of gross domestic product from foreigners in the third quarter of 2018, according to latest data from the Office for National Statistics on so-called sector balances. Since the 2016 EU referendum, every large sector of the economy — classified as households, companies and the government — has been in deficit at the same time: a situation last recorded in the boom years of the late 1980s.

Senior UK policymakers have long worried that running an economy on such low levels of national savings would be storing up trouble for the future, but they have often been at a loss to find solutions.
Mervyn King, former governor of the Bank of England, regularly expressed concern over Britain’s adeptness at consuming but felt he had to pump it up further at the BoE by keeping interest rates low for fear of a slump.

He called this a “paradox of policy” and noted an irony in his 2016 book The End of Alchemy that “those countries most in need of this long-term adjustment [to higher national savings levels], the US and the UK, have been the most active in pursuing the short-term stimulus”.

Such is the alarm over the lack of national savings that the ONS issued a stern warning in its most recent release about Britain’s accounts. Rob Kent-Smith, head of GDP at the ONS, said last month that “households spent more than they received for an unprecedented nine quarters in a row”.

Martin Weale of King’s College London, a former external member of the BoE’s Monetary Policy Committee, expressed concern that low rates of national savings would lead to future disappointment with living standards.

“National savings is important because if you have a situation where people want to retire you have to ask how they can do it,” Professor Weale said, noting that savings can come from many places — for example, companies’ contributions into defined benefit pension schemes.

“You can save for retirement, you can hope young people will pay for your retirement, you can decide not to retire, or I suppose you could retire and starve,” said Prof Weale. Happy countries, he added, tended to be those with high national savings rates.

Many economists are, however, not nearly as worried. David Miles of Imperial College London and another former MPC member said that low national savings rates might be a flashing warning light, but “the more one delves, if there is a problem, you won’t find it in the aggregate [national savings rate] number” produced by the ONS.

Instead, people should estimate whether households are saving enough for their future needs, companies are investing sufficiently for their long-term prospects and government is maintaining the fabric of the nation, Prof Miles added. In each case there will be some parts of each sector that are fine and others where there are problems, he said.

These issues show up in the measurement of individual sectors by the ONS: government borrowing is now at its lowest level since the early years of the millennium, for example. 

In the households sector, the fact that spending is now higher than income relates partly to low savings. But much of the trend is due to sharply rising investment in new homes, which counts towards spending, and paints a much less concerning picture of households’ finances because the sector ends up with valuable assets. Recommended UK economic growth UK economic analysis creates Goldilocks dilemma

But as a nation, one thing has changed for the worse — and this used to be Britain’s get-out-of-jail-free card.

Throughout decades of heavy borrowing by the UK from overseas, policymakers could say British investments abroad were more valuable than equivalents made by foreigners here. So the country’s net investment position — the overseas assets owned by UK residents compared with British equivalents held by foreigners — was positive.

That changed substantially after the financial crisis, and the net investment position is now persistently negative.

Samuel Tombs of Pantheon Macroeconomics said this means “the UK’s dependence on external finance will continue to grow and its stock of external liabilities will increase”.

As any company will verify, in a future downturn a weak balance sheet signals vulnerability and spells trouble.