Figures don't add up

Apr 26 2005 By Helen Logan Evening Gazette

Urgent action is needed to make UK consumers start saving more money, an influential forecasting group has claimed.

The Ernst & Young Item Club, which bases its predictions on the Treasury's model of the economy, said the country's low savings rate was affecting the balance of the economy.

The group's spring forecast painted a strong picture of the economy in the short term, with consumer confidence high and economic growth on track for the next year. But it warned issues such as savings and the country's pensions deficit would prove a strain in the longer term.

It said there were fewer incentives to persuade people to put cash aside and that action was required to resolve the problem "as a matter of urgency".

Peter Spencer, chief economic adviser to the Item Club, said: "We are simply saving too little as a nation. Our savings culture has all but disappeared and this is affecting the balance of the economy."

But I think there are good reasons why people are not stashing cash away for a rainy day.

The mantra that interest rates are at their lowest for several decades seems to be spouted repeatedly when talking about people "never having it so good".

But what does not seem to be highlighted at the same time is that house prices have spiralled.

So while the interest charged on a loan is at a historic low, the amount people are having to take out in a mortgage is much bigger compared with just a few years ago. And surely this equation must leave most people with little spare money to put aside in savings.

The first house I bought was a roomy three-bedroom 1910 terrace which cost £18,500 in 1987. Today the same type of properties are selling for more than £80,000. On a national scale, the average first-time buyer is these days likely to have a loan of around £100,000.

And wage increases have not kept pace with surging house prices to maintain people's levels of spare cash.