The Coronavirus crisis has, quite rightly, brought close attention to excess deaths but excess savings have received less attention. An analysis that I co-authored with Dan Corry, a former Treasury and Downing Street economic adviser and Peter Kenway, Director of the New Policy Institute, and briefly reported in the Guardian earlier this month, calculated that during the three months of lockdown the 20% highest earning households saved in the order of £23billion or £4,200 for each of the 5.5 million households. Contrary to popular belief deposited savings are not turned by banks into the much needed investment that our economy will need. There is therefore a challenge – how do we get those savings to be economically productive and help the various build back better campaigns ?
First, let us be clear about the need to do this. As Emily Maitlis articulated so very well, the tragedy that is Covid-19, and which of course has touched us all to some degree, has not been the leveller that was expected. We now know that the burden of responsibility for dealing with the pandemic has been shouldered by essential, often low paid, workers; that it has disproportionately affected BAME, women and poorer communities; and hit hardest in the under-funded, under-prioritised and under-respected social care sector. It is also becoming increasingly clear that the economic impact will be massive, likely creating levels of unemployment not seen since the ‘80s and impacting on areas of the country already recognised as requiring urgent “levelling up”.
Next, let us be in no doubt that savings do present a challenge for economists, policy makers and ultimately politicians. UK savings have been so strong that Goldman Sachs shut a saving scheme for the wealthiest and as has been reported ‘half of Britain is broke and the other half is richer than ever’. Nobody resents what have been enforced savings – and some of these will have been used in various ways including paying down debt – but the balance between investment and savings are very important at the macro-economic level. In happier times Dan, Peter and I advocated a New Golden Rule alarmed as we were post 2010 by corporate ‘hoarding’. Now our focus needs to be on household savings – which we estimate to be as high as £37billion for the top 40% of households – because if this is not invested in the economy the recession will be deeper and longer, more U shaped that V.
So what are the options? Many including Richard Murphy argue that this is a time to reset income tax rates so they are more progressive: not increase the overall tax take by the state but reprofile tax rates so they are fairer. Prima facie, those paying tax at the 40% and 45% rates (payable on income above £50k and £150k respectively) can afford a tax rise: 5p on both would raise something like £6bn per year in 20/21, £9bn in 21/22 – quite considerably more than the £32 million raised by Captain Tom Moore in charitable donations for the NHS. This could be redistributed via tax cuts, and benefit increases, for the lowest paid given that half of our frontline care workers don’t receive the real Living Wage. This makes perfect sense to economists – take the ‘unproductive’ money in bank deposits and put it in the hands of those who will actually spend – but will politicians have the courage to seriously consider this? Certainly, if the Government do propose tax rises in response to the rising deficit, there is compelling evidence that this should be on the higher tax rates not the standard rate or VAT.
There is also a compelling case to look again at bonds. Government should try to persuade better off households to lend it their money so that they can then use it on employment creation and shovel-ready infrastructure projects. Bonds would create a safe and economically useful place for the public to put their savings through a specific new product– say a Coronavirus Bond – appealing to people’s sense of social solidarity and with a guaranteed interest rate just above that offered by banks currently. They could also be hypothecated to fund specific issues of popular concern, for example a CV Green Deal Bond, a CV Social Care Improvement Bond or a Levelling Up Bond. As the House of Commons Library have also recently highlighted Local Government also have the power to issue bonds, so far with some uptake including Warrington, Aberdeen and the GLA, and it is therefore possible to imagine a Greater Manchester Bond, East Anglia Bond or Northern Powerhouse Bond.
Has the time come to turn imagination into swift action?
Steve Barwick, Director of DevoConnect