Saving is a decision by people to postpone their consumption
- Saving is disposable income that is not spent
- There are many ways in which money can be saved ranging from accounts in bank and building society accounts to savings in pensions and the stock market
- The savings ratio is the % of disposable income saved rather than spent e.g. if a person has an annual income of £25,000 and saves £2500 of this, then the savings ratio is 10%
- A high savings ratio (other factors remaining equal) lowers consumption and aggregate demand
What factors affect how much of their income people save?
- Real interest rate on savings deposits – i.e. the return on savings adjusted for inflation
- Expectations of future income and job security / all linked to consumer confidence
- Availability of credit – borrowing to finance extra spending counts as dis-saving
- Taxation of saving e.g. tax efficient savings schemes and tax relief on occupational pensions such may encourage people to put away more of their disposable income
- The need to save to repay debt – e.g. property owners stuck in negative equity where their house is worth less than their mortgage debt or families that need to cut their debts on credit cards
- A need to save to build up a deposit for a mortgage, pay school and university fees, and save for retirement in an occupational pension scheme
- The availability of savings institutions such as banks and our trust in those institutions. The UK government guarantees deposits in UK banks but in other countries including Cyprus in 2013, large-scale depositors were hit by an unexpected tax as part of the Cyprus emergency bail-out.
Evaluating the importance of saving for an economy
Decisions by people and by businesses about how much to save have a powerful effect on economic performance – here are some reasons:
- Corporate savings provide a cushion during a recession when demand and profits fall. Business savings can be used as finance for takeovers and for capital investment projects
- Savings by families flow into financial institutions
- Banks need deposits as capital from which they can lend. Many small businesses have complained about the difficulty in getting loans in the aftermath of the global financial crisis
- Savings flow into pension funds – these can be reinvested in stock markets providing funds for businesses that need to raise capital to finance expansion plans.
The Paradox of Thrift
- The paradox of thrift is an important idea from Keynesian economics. Saving is regarded as positive because it provides the funds to finance the capital investment needed to promote long-term growth
- But if many people start saving more at the same time, this causes a drop in consumer demand and an even deeper recession
- What might be rational and virtuous for an individual might be damaging for the economy as a whole
Household savings ratio for European Union countries
|Savings rate of households in selected countries worldwide 2009-2013|
|% of disposable income|
This exam coaching and revision workshop is designed to support A2 Economics students in the final phase of their preparation for exams in June 2015. The workshop combines exam technique advice with coverage of our selection of core business economics (micro) and macroeconomics topics.