For savers, last week brought good news and bad. The Tories promised to free
their nest eggs from tax but the Bank of England cut interest rates yet
again.
The first news was good only if you believe that the Conservatives will win
the election. You would also have to trust them to implement the pledge and
you could be forgiven if you didn’t. With the economy deteriorating so fast
and so unpredictably, what strikes the Conservatives today as the best thing
to do might look different in the near future and the money they have
identified now to fund the commitment might by then have disappeared.
The Tory move intensified the contrast between the parties. David Cameron
hopes to win by portraying Gordon Brown as spendthrift and irresponsible.
Supporting savers emphasises how different Cameron is. But it also suggests
the Tories are reverting to type. The week before last they were back to
talking about the euro. Now they are making a blatant pitch to pensioners.
Again they are focusing on voters who support them already. During this
crisis they have not been able to reach new clusters of electors as they did
when Cameron took on the leadership.
The pledge to take savings out of tax is not new. Indeed, I promised it in
2001 when I was shadow chancellor. There is a basic injustice that people
who have paid tax on earned income then pay a second time if they decide not
to splurge it at once. In normal times, at least, it seems bizarre that the
government discourages prudence.
Still, my experience with the pledge was not a happy one. It made no positive
impact. I doubt whether it was in any voter’s mind by polling day. The
benefit for an individual would be modest, except for a rich one, but the
cost to the exchequer would be large. It opened up all those tiresome
questions about what “cuts” would fund it.
Perhaps the Tories’ main reason for exhuming the pledge was that it gave them
something to say. You might think it evident that in this recession nobody
knows what to do and so anything that the government does is as likely to be
wrong as right. Even so, the mood in business and the media is for action.
The Conservatives, being in opposition, cannot act but are under pressure to
make statements. Throughout the crisis they haven’t managed to find as many
things to say as the government has found to do and so have paid the price
in the polls.
There is also an undertone to Cameron’s move. This crisis has economic and
moral dimensions. Numerous commentators hope that a more ethical capitalism
will emerge after the slump. They yearn for a moral renewal.
That was evident in the Christmas messages from churchmen. The Catholic
Cardinal Cormac Murphy-O’Connor declared that there had been a breakdown in
trust because of financiers’ behaviour. He looked for a “globalisation of
solidarity” with the earth’s poorest, while the Archbishop of Canterbury
hoped that we would all help each other more. The Pope warned that “if
people look to their own interests, our world will fall apart”. Even the
Queen urged us to acquire “a new perspective” and reflected that those who
lead “outgoing and unselfish lives” are happiest.
The Conservatives are apparently using the same hymn sheet. They cannot bear
the thought that those who have “done the right thing” by making provision
for their future should be unjustly penalised by falling interest rates.
Such people have also been hit by the impact of lower share values on their
portfolios and pension funds.
The government’s lack of sentimentality towards savers is, in a way,
impressive. With apparent disregard for the pensioner vote, it has leant on
the Bank of England to make one cut after another, so returns on savings are
close to zero and substantially negative in real terms. Far from seeking
moral renewal, Brown believes economic recovery depends on individuals and
the government borrowing and spending.
By and large those who got us into this mess are not going to pay the forfeit.
Some have lost fortunes, to be sure, and a few bank chief executives and
chairmen have left the boardroom. However, most of the gamblers and those
who failed to oversee them will remain in their posts and the banks who
employ them have been saved from bankruptcy by the taxpayer.
We may rant against the injustice of the bailout, but that is hot air. To have
allowed the banks to fail would have been catastrophic, especially for
savers. Neither churchmen nor the Tories can make a rounded moral case for
rewarding the virtuous and penalising the miscreants. They must also
recognise that since savers are being victimised and speculators protected,
the chance that moral renewal will result from this cataclysm is slim.
The need to do something – anything – probably explains the latest rate cut,
too. There is little sign that the reductions that preceded it have
benefited mortgage payers much nor improved the flow of credit to businesses.
However murky the morality of interest rate cuts, the economics are cloudier
still. If the government succeeds in driving depositors away from banks and
building societies, they will have less money to lend. That blinding insight
led the Nationwide to defy the government, keeping up the interest on
deposits and failing to pass on rate cuts to borrowers with “tracker”
mortgages.
Nor is it clear how banks and building societies can be solvent if they lend
at minimal rates of interest. Not surprisingly, as rates have come down,
many mortgage holders have found that when they renew their contracts they
have to pay the same as before or more.
There is a fundamental incoherence about a government that condemns excessive
lending but wants banks to lend as much as in recent years, and that
supplies the banks with expensive finance yet wants them to lend cheaply.
That muddle ought to provide a good opening for the Conservatives. But Barack
Obama’s statement last week, promising more federal spending and borrowing,
is a real problem for them. However confused Brown’s policy may seem, Obama
is firmly on his side of the argument. With all the hopes riding on the new
president, to push against that tide will be tough for Cameron.
Some British economists go even further than Brown has. For example, Anatole
Kaletsky believes that our hopes for recovery depend so much on forcing
savers to move their money off deposit and into something “productive” that
he favours cutting interest rates to zero and even taxing savings accounts
to drive out the money.
Apart from the moral question, that way of thinking – and the government’s,
too – misunderstands the psychology of savers. Those who have put money
aside, resisting the temptations of the consumer society, have a deeply
ingrained desire for security. Their nature or upbringing conditions them to
provide for a rainy day. There is no likelihood that they will now go on a
spending spree. Even if their money is losing value, even if a future tax on
savings whittles it away faster, cash is tangible. They will not convert it
into goods, services, shares or property.
Everything the government has done has reinforced their determination to cling
on. Interest rate cuts convince them that the economic outlook is dire. The
government’s abandonment of its own borrowing rules intensifies their sense
of crisis. With each warning of deflation, they clutch their hoard more
closely. Falling prices offer them hope.
It is not, perhaps, surprising that an economist should overlook this
psychology, but to a politician such as Brown – the son of a clergyman! – it
should be obvious.
The other news last week was that the government was considering “printing
money” – taking steps to boost the money supply. That increases the risk
that after deflation we will return to inflation. At last the government
will have its revenge on the recalcitrant thrifty.
Martin Ivens is away
