trends in the UK savings ratio
DEFINITIONS OF SAVING
- Saving is act of postponing consumption. Total savings (S) = Disposable Income (Yd) - Consumption (C)
- Gross Income (Y) can be spent (C), saved (S) or paid in tax (T)
- The average propensity to save (APS) is the proportion of disposable income that is saved rather than spent. This is also known as the household savings ratio
- The marginal propensity to save (MPS) is the change in saving resulting from a change in disposable income. For example if out of an increase of income of £2000, £1600 is spent and £400 is saved, the marginal propensity to save would be £400 / £2000 = 0.2.
The marginal propensity to consume + the marginal propensity to save = 1
THE SAVINGS FUNCTION ILLUSTRATED
According to the Keynesian consumption function, savings are positively related to the level of disposable income. At low levels of income, total spending may exceed income causing dis-saving. As income rises, total savings rise - the gradient of the savings function is given by the marginal propensity to save
TRENDS IN THE SAVINGS RATIO
For most of the post-war period the trend in the savings ratio was upward. Rising real incomes and living standards gave people the basic resources to save. High inflation and high interest rates in the 1970s also acted as an incentive to save – not least be-cause high-interest bearing accounts offered a hedge against the damaging impact of inflation on the real value of savings.
From 1985-88 there was a dramatic fall in the savings ratio and the underlying reasons were not hard to find. This period coincided with the infamous Lawson Economic Boom – with highly expansionary policies being pursued that encouraged fast growth of consumer demand. Lower interest rates, much easier access to consumer credit and a booming housing market caused a surge in borrowing.
This allowed millions of households to in-crease their spending way in excess of the growth of current come. Borrowing counted as dis-saving and the result was a high level of domestic demand which ultimately brought about inflation and recession.
In contrast the 1990s (thus far) has been the decade of thrift with the savings ratio remaining high for seven years. Many consumers needed to save to repay accumulated debts and rebuild their own “balance sheets”. Other factors have encouraged a higher level of saving – notably the need to finance living standards in retirement at a time when the relative value of the state pension is falling.
The latter years of the decade have seen a fall in the household savings ratio - in part because consumer confidence has picked up and people have been prepared to spend more than their current income in a bid to improve their short term living standards.
Teacher Subject Newsletters | Teacher Forums | Online Store | tutor2u News tutor2u on Twitter: Subject Blogs: About tutor2u | Copyright | Privacy | Terms of Use | Contact tutor2u Our Development Partners: |
