Savers need rewards too

The government wishes to get the UK out of extreme debt. So far on its watch the private sector has done its bit. It has reined in credit card excesses, and gone soft on mortgage borrowing. The banks won’t lend 100% of a property any more, and many people are circumspect about taking on high debts to support high home prices. Many people have saved from their incomes so they have something to fall back on if things get worse.

Meanwhile the public sector has carried on with near record borrowing, whilst talking about cuts. It has made some, but overall it has raised its spending more. It has kept official interest rates at record lows, as it suits the government to be able to borrow at very cheap rates. The government has continued policies of taxing those who might save more at high levels, reducing their saving rate.

It has continued the past government policies of taxing pension savings more, confirming the death of many a private sector pension fund. The very low rates of interest on offficial debt have also been a death blow to pensions, as the pension funds rely on government bond income to purchase annuities to pay the pensions. The large deficits today are in no small measure the direct result of low government bond interest rates, as funds need to buy so many more government bonds to get the income they need to pay the pensions.

The way out of excessive debt is to save more. The way out of excessive dependence on state welfare is for more people to have savings and future pensions they can rely on, so they do not need so much money from the state. In order to encourage more self reliance and less state and individual debt, saings need to be more rewarding. We are at the point where the very low interest rate policies are doing damage to this wider social and moral issue. We need to make savings worthwhile. If it cannot be done by realistic interest rates, it needs to be done by sensible tax breaks. A balanced economy needs plenty of private savings, and wortwhile ways of investing them. A healthy society needs more families providing for themselves, where savings have a role to play.

Some of you have written in to say you do n ot agree with encouragement to people to buy their own home. The big advantage of home ownership coems before you retire, on the day your mortgage is paid off. Surely it is good to look forward to an old age where you do not have to pay rent? It is cheaper over the typical adult lifetime to buy your home than to rent it, even if renting from the subsidised public sector.

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145 Comments

  1. lifelogic
    Posted January 9, 2012 at 6:35 am | Permalink

    It is indeed usually cheaper to buy over a lifetime but only if you do not move to much and with jobs being less secure (and as your needs change) this might not always be possible. Stamp duty at up to 5% does not help either. Best stratagy is perhaps only to buy when you are confident you will be staying there for many years.

    The banks won’t lend 100% of a property any more – indeed often on development, commercial or investment property they are reluctant to lend even 50% and then only with a arm and a leg.

    It is reported today that Cameron/Osbourne will retain the 50% rate, that clearly raises no extra tax and costs many jobs. This just for political reasons. I trust those rendered unemployed will appreciate this futile gesture.

    What a great statesman Cameron is proving to be – after all in politics now is often time for a futile and damaging political gesture. He also says he will veto the absurd Tobin tax unless it is worldwide. Why on earth would we want it even if it is worldwide?

    • Andrew Smith
      Posted January 9, 2012 at 8:22 am | Permalink

      Stamp Duty like all transactions taxes is a bad idea and together with fatuous energy questionnaires and other boated costs the equation is not as obvious as it was during John’s younger years when the cost moving home could be done within a month’s salary.

      It seems to me that taking obstacles out of the way of home buying helps achieve a good in itself – the security and sense of personal responsibility.

      There are only two alternatives to growing home ownerhip: social housing in which tax payers spend more and more and the undeserving get cheap homes in places we cannot afford to live, and constantly clamour for more, second private landlords.

      The development of private rented housing operated for profit based medium sized businesses ought to be a policy objective as they can provide a demonstration of how to efficiently build and manage housing stock – the social sector surely needs a master class on that!

      • Iain Gill
        Posted January 9, 2012 at 9:13 am | Permalink

        yep the system should be neutral to big companies owning and operating private rented housing. I’d like to see companies like Virgin doing it. They cannot do it at the moment for many reasons including unfair competition from the state sector. we would all benefit from improvements in the quality of private landlords, and more competitive pressure for all landlords to improve.

        • zorro
          Posted January 9, 2012 at 9:30 pm | Permalink

          This is something which we don’t often immediately associate with the principle of housing (probably conditioning)…but why not Tesco/Virgin/other utilities considering running housing services and let the market find the right level with competing providers?

          Why do they not do it now?…not enough potential profit or a rigged market? It may even be a better way to invest in housing through owning shares in a property investment/services company rather than going into BTL?

          They would certainly do a better job than some of the social landlords/housing associations we have now who certainly seem to spend a lot of money poorly and whose ancillary services seem very inefficient.

          zorro

    • lifelogic
      Posted January 9, 2012 at 9:19 am | Permalink

      Yes the tax system is actually rather against home ownership (due to stamp duty, inheritance tax rules and no interest relief any more) and should be neutral or even perhaps slightly in favour. Slightly in favour as it forces saving onto people and often makes them more responsible for themselves.

      My advice would be only to buy for the long term. Do not buy a one bed flat if you will need a bigger place very soon. Do not buy a big house if you will need a smaller one on a single level soon. Do not buy if your job may move or disappear soon. With stamp duty on expensive houses at up to 5% you are likely to pay more than 100% of your income in total taxes for the year you buy this is absurd!

      • lifelogic
        Posted January 9, 2012 at 2:08 pm | Permalink

        I see that yet another report from the Netherland reported by civitas and the telegraph shows that Windfarms are likely to produce more C02 than the fosil fuel alternatives, when you take into account the need for having fossel power stations in reserve. Since wind costs so much more per KWH, destroys the countryside, need huge subsidy, huge capital investment, requires back up and produces more C02, could Huhne explain why he is still so attached to them? Is it that, rather like 50% income tax, that they would rather do positive harm to jobs and the environmental than to upset their misguided political supporters a little?

      • Mark
        Posted January 9, 2012 at 4:40 pm | Permalink

        Full interest rate relief is available to BTL landlords. If this were not so, rents would be somewhat higher. It is one the factors that has propelled the BTL sector.

        • alan jutson
          Posted January 9, 2012 at 7:35 pm | Permalink

          Mark

          Another factor in BTL has been Housing Benefit and the massive subsidy this has given the industry.

          Stop housing Benefit, or at least reduce it to sensible levels, and then see rents and property prices tumble as they find a real level where people can afford to pay out of wages.

          A recent press release suggests nearly 1,000,000 people may have to move to lower priced accomodation when it is shortly to be limited to £400 per week maximum.!

          That or landlords are going to have to re-think rents.

          • zorro
            Posted January 9, 2012 at 9:36 pm | Permalink

            Yes we shall how the market reacts to this policy and I think that rents will fall. However, you still get Labour and others saying that the recent rise in rents has something to do with this policy announcement even before it is implemented!

            zorro

        • sm
          Posted January 9, 2012 at 10:52 pm | Permalink

          Full tax relief for BTL has probably aided investors to compete and win/buy existing properties in order to rent to those who can no longer afford to buy.

          We could consider restricting BTL interest relief 1) to new-construction only, 2)time limited period 3) maximum leverage permitted. Existing BTL interest relief should be slowly removed over the next 10 years or so.

        • lifelogic
          Posted January 10, 2012 at 7:39 am | Permalink

          Of course you need interest relief for landlords you cannot tax them on profits they have not actually made – unless you want no landlords other than cash rich ones? All business get relief for bank interest the interest is then taxable as part of the bank profits!

      • peter mercier
        Posted January 9, 2012 at 4:49 pm | Permalink

        hi lifelogic

        i think the tax-free status of any capitral gain on one’s primary residence is a pretty large tax benefit.

        • Mark
          Posted January 9, 2012 at 7:13 pm | Permalink

          Think of the exemption as a lifetime deferral of wealth tax that is taken if you become rich enough in the form of IHT. CGT is no longer a tax on real capital gain – it is a tax on the realisation of long held wealth. Taxing nominal gains in house prices would in any case simply force people to rent out their property if they had to move, so as not to crystallise the tax.

        • alan jutson
          Posted January 9, 2012 at 7:38 pm | Permalink

          Peter

          “Primary residence”

          Indeed as it should be, otherwise people cannot/would not move or trade down, as there would be absolutely no point.

        • lifelogic
          Posted January 10, 2012 at 7:42 am | Permalink

          Yes but it is not given to Landlords so is a slight bias towards purchase – anyway their should not be any CGT or IHT for anyone in a sensible tax system. Income and Sales taxes are more than enough.

    • Disaffected
      Posted January 9, 2012 at 10:01 am | Permalink

      It would be financially better for all workers and taxpayers if people worked and owned their own home as you suggest John. Unfortunately incompetent ministers and politicians fail to grasp the basics of running a budget.

      Cameron is not going to scrap the 50% tax before 2015. People tend to forget there is another 12% on top for NI. It is a false representation to say 50%, it is 62%. Why on earth is it right that the government should take more of anyones salary than they do? This is the case for people with lower incomes (£35K plus) on 40% tax and 12% NI, again they get less of their salary than the government. It is simply ridiculous.

      Welfare lifers get more and pay nothing. It does NOT pay to work under this or the previous government. Clegg, Cable and Huhne simply do not understand what motivates a person or a prosperous business to create growth. Left wing socialists spouting theoretical nonsense.

      This socialist taxation system has to stop. It was reported today that IDS wants to oppose 200 families who receive over £61,000 on benefits where no adult works. This is a net figure. For goodness sake this is why our taxes are so high. They will also live in the same care home in their old age as their neighbour who will have to sell their house to pay for their care. I object to taxes being taken from me to waste in this way. Why should people who choose to be idle receive the same, and in a lot of cases better, rewards without having to work or worry in the safe knowledge other will pay for it. This equally applies to Johnny Foreigner. An artificial increase in the population and those who do not work has caused the state pension age to increase. I suggest this is the substantial reason for increasing the pension age not because we are living longer. That is a political spin to get the public to accept the bad message.

      Daniel Hannan reports how Barrosso and Rampouy visited Russia separately for the same meeting in two private jets paid for by the taxpayers of the EU. They left the same destination within a four gap of each other. I object to paying taxes that are so wastefully used by incompetent politicians who could not run a sweet shop. We need out of the EU now. No renegotiation or repatriation of powers is going to take place. It is a straight forward in or out and the public should have its say irrespective of what EU fanatic Clegg wants.

      I actually agree with the Taxed Enough Already part of the TEA party. Not only is income taxed too high but also everything else including NI, VAT, community charge etc etc . We are taxed too much and it is on everything.

      Cameron is so discredited in his remarks. Over the weekend he says, again, that the economy is his number one priority. It simply cannot be. He just signed off the energy policy of Huhne which is economic lunacy and will damage industry being competitive, loss of jobs and increase residential energy prices. Canada has the right idea it has opted out from Huhne’s last climate change proposals (despite his misleading sophistry what a success it was) because it is not economically viable. I think the UK is the only country to uphold the laws relating to climate change, most view it as ridiculous unproven science.

      If we paid less tax we could all save much better for our old age.

  2. Antisthenes
    Posted January 9, 2012 at 7:05 am | Permalink

    You are quite right savings and investments for rainy days and old age is of utmost importance and there should be in place an environment that encourages it. An environment that almost leaves no other choice. How that is to be achieved in the short term under present economic circumstances is problematic especially as it has now become so urgent as state provision is becoming increasingly under pressure. I agree with you that home ownership should be encouraged. It is cheaper in the long run than renting and does have the advantage that if the mortgage is paid off before retirement it leaves more disposable income. However encouraging home ownership as an investment is wrong it leads to all sorts of distortions which we have already found out to our cost. Subsidised housing should be stopped in its current form market place rents should be paid in all instances and only those in need be given help according to their need with paying their rent. Universality has to stop unless there is a mechanism that claws back from those who have no need.

    • javelin
      Posted January 9, 2012 at 9:09 am | Permalink

      Saving are mainly done in bond or the equity markets.

      For those in the equity markets where the FTSE hasn’t shifted in years must surely be deeply concerned at directors giving themselves such huge pay rises. Capitalism and savings cannot work whilst this *horrific* anti-market greed and corruption continues. I say that as somebody who has worked on top tier trading floors all their life and is deeply faithful to market capitalism. I currently work at a hedge fund.

      *** The current state of directors pay rises is nothing short of Orwells’ Animal Farm ***

      A simple law to pass is that shareholders SHOULD ALWAYS have the option of voting for directors payrises in line with a 3 year rolling average of profits or earnings. If each director in turn wishes to argue for higher payrises then let them do it in public in full view. Every other employee has to have a pay review it is only fair that directors do the same to their shareholders.

      • A different Simon
        Posted January 9, 2012 at 10:54 am | Permalink

        All well and good Javelin but the major shareholders are typically big institutions which also pay their executives massive amounts .

        Those major shareholders could clamp down on excessive remuneration for poor performance today if they wanted – couldn’t they ?

        What the small shareholder want’s doesn’t count .

        I had not realise until recently how much the rules governing trading of even simple instruments like shares , ostensibly to protect unsophisticated investors , are in reality just designed to make easy money for insiders .

        Take rights of pre-emption to prevent your position in a company being diluted . Great in theory but because it’s far more expensive to do a rights issue to all shareholders due to legal requirements to produce a prospectus companies do placings to institutional investors at vast discounts instead . You take the risk and someone overrides your pre-emptive rights and takes the rewards at mates-rates .

        Take ISA’s –
        – Transactions for foreign shares have to be settled in sterling . A nice little restriction to guarantee the administrators 1.5% on FX transactions .
        – AIM and smaller exchange shares cannot be put in a ISA . This makes it more difficult for small companies to obtain funding .

      • sm
        Posted January 9, 2012 at 1:13 pm | Permalink

        Agreed.

        I also note the incentives for large takeover deals usually favour the respective managements,the advisors,banks and financiers, sometimes the shareholder but generally competition suffers.

        Even if one was able to save, where would it be safe?

        So much is wrong about where we are now….but what has been done.

        The economic signals given to those on low incomes/benefits is counterproductive and burdensome, it can overcome moral judgement. What i fail to understand is the logic that applies to the top does not seem to apply at the bottom and vice versa. This in the public and private sector.

        I hear lots of words but little action from the coalition.

      • Alan Wheatley
        Posted January 9, 2012 at 1:34 pm | Permalink

        How about the Remuneration Committee being set up and answerable to the Shareholders? And only them.

      • Mark
        Posted January 9, 2012 at 4:42 pm | Permalink

        Can we do the same for qunagocrats and senior civil servants and BBC employees?

      • forthurst
        Posted January 9, 2012 at 5:36 pm | Permalink

        Companies operating in finance set a very poor example to the rest of the market.

        The situation has deteriorated in recent years as remuneration committees of non-execs employ external remuneration consultants to establish ‘fair’ compensation. Rates are invariably set based upon comparisons with the highest comparable external package resulting in piggy back increases all round.

        The financial ‘industry’ also has caused substantial distortions to the market by demonstrating zero interest in the long term performance of companies; companies taking a long view can be punished by being subjected to leverage buyouts. This is also related to the concept of ‘total’ return, an amount highly susceptible to market manipulation and company short termism as against a measure of performance based upon growth in earnings per share over a sensible timescale as you suggest.

        Many shares are owned by external nominee accounts which prevent beneficial owners (or are they simply creditors?) voting, as against short term owners who may be trying to achieve a capital gain through a takeover.

        I believe that the equity markets should primarily serve businesses to launch and grow and the interests of long term savers through pensions and other vehicles rather than financial companies acting for themselves. That is hardly likely to happen when the conservative party derives a significant proportion of its income from hedge fund operators.

  3. Alan Radford
    Posted January 9, 2012 at 7:16 am | Permalink

    Come on, John. You’re suggesting the State should have a smaller role in the economy. Every Sir Humphrey knows that a lazy government job with a fat pension at the end of it is unavaialble elsewhere. And every politician knows that a life in Parliament is the easiest and most risk-free way to get rich. And as for the EU – you’ve really hit the jackpot if you can get into that one. So no, it’s high taxes, high spending and expanding government. That’s the only way forward.

    • waramess
      Posted January 9, 2012 at 10:25 am | Permalink

      That’s certainly how it looks from here. No effort at all to cut government spending and with a 12 billion Olympic farce and now a 35 billion high speed train to Birmingham (of all places) to pay for it looks like the socialist big spenders are still at the helm.

      Allways a reason to spend big bucks and never a sound reason to cut spending seems to be the attitude. Loks like the spenders are in charge and they will keep spending.

    • APL
      Posted January 9, 2012 at 9:28 pm | Permalink

      Alan Radford: “And every politician knows that a life in Parliament is the easiest and most risk-free way to get rich.”

      Exhibit No1. ‘Lord’ [snigger] Kinnock.
      Exhibit No2. ‘Lord’ [chortle] Mandleson.
      Exhibit No3. ‘Lord’ [snikker, sunk without trace] Springburn of Govan.

      But the lot of then still on the public payroll.

  4. Mike Stallard
    Posted January 9, 2012 at 7:23 am | Permalink

    Me, I have lived in rented accommodation for ten years; I have lived in a house which went with the job for about twenty years and I have mortgaged too.

    The trouble with renting is that you can be kicked out at a moment’s notice. Also, of course, you are usually paying off someone else’s mortgage. You aren’t really expected to look after rented property in the sense that adding buildings, painting, repair work are forbidden. You feel that you are not really free.

    Mortgaging, however, eats a lot of income. Repairs can be deadly. But you are, in a way, in charge of your house. Of course, you have very little money left to play the stock market or invest in a new business.

    I think, myself, that professional people especially the Police and Teachers ought to live locally. This means a house should be provided. In the 1970s, these houses were more or less all sold, more’s the pity, because the professionals wanted to have some time off. A lot was lost then.

  5. john w
    Posted January 9, 2012 at 7:27 am | Permalink

    John,i would like interest rates to be around 5% but i dont want to crucify people paying big mortgages who would be made homeless.I think a few adjustments to the tax system could help everyone.As much as i would like interest rates for savers to track inflation levels.I would not be happy if the government had to pay 5% to borrow.I would like to find out about everything that labour did to destroy our economy.I would like this info before i am dead.The 30 year rule means this is very unlikely.

    • Mick Anderson
      Posted January 9, 2012 at 8:35 am | Permalink

      I agree that interest rates should rise, but am sanguine about the fate of those with large mortgages. If you want to encourage savings, the rates offered by typical High Street banks should be high enough for my savings to not be eroded by inflation. Of course, that raises the question of “What is the true rate of inflation?”….

      When I took out a mortgage, my calculations on affordability included whether I could survive interest rates at 15%. The rate I had to pay way 8%, but the higher rate had been shown possible by the problems caused by the ERM departure, relatively recent at the time.

      So, anyone who had taken a mortgage out that they can only afford at an unsustainably low rate only has themselves to blame if they can’t afford repayments when rates become more sensible. It was a predictable scenario. They always have the option of moving to a cheaper house or defaulting on their committment, if they can’t improve their income.

      The same applies to that annoying woman who was complaining to Mr Cameron about the loss of subsidy to the solar cell industry. If your business (or charity) depends on state handouts, it isn’t sustainable and should be given a quiet burial.

      • alan jutson
        Posted January 9, 2012 at 9:53 am | Permalink

        Mick

        Agreed we need a sensible balance for both savers and borrowers.

      • john w
        Posted January 9, 2012 at 10:07 am | Permalink

        15% and the ERM is something that many of the people with massive mortgages have no experience of.A 90 hour week was needed to pay for that lot.I was lucky that there were no laws to stop me doing the hours.

      • electro-kevin
        Posted January 9, 2012 at 12:30 pm | Permalink

        agreed

        • electro-kevin
          Posted January 9, 2012 at 12:52 pm | Permalink

          The current proposals are that the eligibility – in terms of salary – to remain in council accommodation should be REDUCED to £99k pa !

          If £99,000 pa renders someone worthy of assistance then what of people struggling on the average salary of £26k ? Or those paying 40% tax on £45k ?

          This is the true measure of inflation and why even MPs struggled to manage on their allowances despite telling us that inflation was at a record low.

  6. Gary
    Posted January 9, 2012 at 7:37 am | Permalink

    Home ownership is a terrible way to save. All the capital gets plowed into a non productive house, and the productive economy dies. You only have to look at the Germans. They calculate that if you plow your savings into a business and rent a house, then you stand a very good chance of making much more money, employ others, you earn the country foreign exchange and you leave your children the means to earn a living.

    We prefer to gamble on casino finance , property ponzi schemes and foreign wars of plunder as an economic policy. It does not work, but we seem genetically incapable of changing. That is why our financial sector debt is 650% of gdp. This is in iceland territory and it is going to end very badly. We are going to end up back in the arms of the IMF.

    • lifelogic
      Posted January 9, 2012 at 9:29 am | Permalink

      You say “Home ownership is a terrible way to save. All the capital gets plowed into a non productive house, and the productive economy dies.” This is a silly BBC/Libdem type of argument. Workers have to live somewhere – they either rent a house or they rent the money (as a mortgage) and buy one. The house is not unproductive as it is needed to enable them to live and work. Any more than the canteen at the factory is unproductive. The money used to buy it goes to the seller anyway who can use it for something else – it does not go into a black hole to be wasted.

      Only the BBC and Libdems could think this way. It takes but a moments thought to see it is pure nonsense.

      Perhaps a huge house with duck ponds, swimming pools, tennis courts, horse padocks etc. is a little unproductive but not normal ones. And if people want these things why not, it is their money after all.

      • lifelogic
        Posted January 9, 2012 at 9:32 am | Permalink

        Also the capital gain exemption on principal private residences makes it a fairly good way to save given the absurd rate of CGT tax now enforced on (often not even real) gains. Especially if you rent a room or two out with the rent a room scheme.

        • Mark
          Posted January 9, 2012 at 4:46 pm | Permalink

          CGT exemption may not look so clever with falling prices, as you can’t use the loss to offset against gains elsewhere. Tax driven saving is often a bad idea – and at the moment investing in houses for tax reasons is more likely to result in unrelieved losses until the bubble prices have unwound.

      • Gary
        Posted January 9, 2012 at 10:55 am | Permalink

        You are fond of meaningless political labels. Capital almost ENTIRELY deployed into houses(which is what we have in the UK) MUST cause a drain on businesses that employ people so that they are able to pay the rent/mortgage on those houses. You don’t make rent money selling each other houses, at least not in any sustainable way. It only lasts as long as rates fall and property property prices rise. That is a finite progression, not least because rate are bound by zero below.

      • sm
        Posted January 9, 2012 at 1:49 pm | Permalink

        IMHO property, housing and most assets are overvalued , driven by unsustainable cheap leverage, immigration,housing benefit and QE/ZIRP.

        Cheap leverage is only available via government fiat or policy favours.

        If your only options are
        1) rent in the private market or 2) take a highly geared loan it is not much of a choice. Its like being a rat on a wheel- no income left.

        Both are excessive to actual build cost and in relation to incomes and are therefore unproductive in the sense they suffocate spending elsewhere. Local authorities via S106 agreements increase the cost of private homes to provide low cost housing?

        How can you not see this is non-productive and has been caused by creating debt money out of thin air, which has proved a one way bet for some.

        A house provides shelter, a basic human need , remember Maslow?

        By raising its cost by ‘thinair or fiat’ debt-finance its akin to a tax but who gets the interest?

        Its non productive in the sense the debt finance could have been used for other needs.They however may not be basic needs and therefore are more responsive to price/competition.

        Housing /property costs must be managed down by acting on supply and demand and removing the monopoly rights of banks to create self-interested debtmoney. Its a tax and it should rest with the treasury,boe and parliament(weak as it is).

    • Winston Smith
      Posted January 9, 2012 at 9:35 am | Permalink

      Your comparison with Germany is irrelevant. Rents are as high as 25yr mortgage repayments. So the propensity to save is the same, and your payments will produce a valuable asset, once the mortgage is repaid.

      • Gary
        Posted January 9, 2012 at 10:37 am | Permalink

        No, it is not the rent vs mortgage repayments that is the crux, the crux is that you are borrowing a lump sum of capital and/or using your savings as a lump sum of capital that you are then deploying into a non-productive house, instead of using this to build a business. People cannot see past the rent vs mortgage payments, it is the capital upfront that is mis-allocated into houses.

        In addition, you also plough your savings or loan loan capital to TRADE-UP the property ladder , that is when you are fueling the unsustainable , non-productive property bubble. That is what happens in a ponzi scheme. You then rely on enough new entrants coming onto the ladder to enable those higher the ladder to sell to those coming up below and trade-up . It is a fools game. And in such a situation even though rates may stay low if the central bank is accommodating this bubble your mortgage will usually increase as you trade up. This is done with the frenzy that you are missing out on capitals gains that ratchet up higher by the week. Of course , as in all ponzi’s , it all ends badly with nothing to show for it, and negative equity all around.

        At least when you instead create a business with your savings or bank loan you provide yourself with a job, your family with a job, possibly your descendants with a job, others outside your family with a job, the country gains revenue and your income is only constrained by your own entrepreneurship. Problem is it takes damn hard work, a long term plan and short term sacrifice. Traits in short supply in this country.

        • Gary
          Posted January 9, 2012 at 11:04 am | Permalink

          And if you don’t, won’t, can’t, start a business of your own, deploying your savings into other businesses can be a far more productive thing to do than trading houses

          • libertarian
            Posted January 9, 2012 at 9:28 pm | Permalink

            What is the nature of the business you started and run gary? How much capital did it take you to start it and what are your returns like Oh and where exactly did you live while you were doing that?

          • Bob
            Posted January 9, 2012 at 11:14 pm | Permalink

            Someone has to own the house.

        • Winston Smith
          Posted January 10, 2012 at 10:22 am | Permalink

          You talk as if we all live in 19thC America, where people just arrive and start a business from scratch with meagre savings. Just another, theoretical academic or student, I suspect. Starting and running a profitable business is very hard and risky. Personally, I’d love to run my own business if teh opportunity arose. Meanwhile, I continue to work for someone else and provide security, comfort and support for my family, whilst slowly reducing my mortgage.

          I look forward to hearing your ideas on any business opportunities that you have. As for your advice on investing in equities, I think I’ll pass. The FTSE 100 is 20% down on its 2000 high. Even with dividends, less tax, the long-term returns are poor. Plus, many experts are predicting long term declines or a static market.

    • MickC
      Posted January 9, 2012 at 2:12 pm | Permalink

      I have never understood the comparison with Germany.

      If some people are tenants, paying rent, then there must be a landlord somewhere receiving rent. It must pay the landlord to be a landlord (i.e. a proper return on his capital) because otherwise he would sell the freehold and invest for a greater return. The value of the freeholds would then drop until they produced an acceptable return.

      If the freehold produces an acceptable return for the landlord, it must surely be sensible for tenants to buy freeholds.

      Does anyone know the real situation? I detect government interference in the market somewhere.

      • Winston Smith
        Posted January 10, 2012 at 10:26 am | Permalink

        Generally, those promoting renting over ownership desire more socialist corporatism in the hosing market. So housing is owned by the State and large corporations. Its all about controlling the prols and fixing the market.

  7. Pete the Bike
    Posted January 9, 2012 at 7:50 am | Permalink

    The only we’ll get more savers, more investment in productive enterprise, more prosperity (or even keep what we’ve got) is for government to be smaller in every way. Large government means market distortions, massive taxation and economic stagnation. The other route is to go for fiscal fascism like Italy has had imposed. http://www.zerohedge.com/news/guest-post-has-italy-gone-fascist

    • Mark
      Posted January 9, 2012 at 4:52 pm | Permalink

      Italy might as well shut the banks and reduce all deposit balances by 90% right now. That report is truly quite scary.

  8. StevenL
    Posted January 9, 2012 at 7:56 am | Permalink

    Well, the way I see it is this:

    1) We have had a 30 year bull market in government bonds, or 30 years of falling interest rates which have fuelled land price inflation. Now we are seeing previously thought safe bonds crash. First mortgage-backed bonds, now first world government bonds like in Italy. There is no good reason to think ‘official’ UK bonds will never crash, forcing interest rates up.

    2) We have an ageing demographic. Older folk are net repayers of debt, and in monetary terms this is deflationary. The monetary inflation over the last 30 years, and land price inflation, was largely the result of this generation being net borrowers. This trend is reversing.

    3) ‘Official’ 10 year bonds yield about 2%, houses in nice parts of the south yield 4 or 5%. Lots of quality blue chip multinational stocks yield 8 to 12% gross. Equities look very cheap from this point of view.

    4) UK housing (bar the most prime London housing) has no exposure to the faster growing economies of the world, whereas UK/EU/US listed multinationals do.

    5) Wage inflation in the UK is not keeping with price inflation. This trend looks set to continue until we become competitive in my view. The current generation of homeowners benefitted from price/wage inflation reducing the value of the mortgages. Price inflation with no wage inflation just puts more pressure on debtors.

    So, if I suddenly had the £100k I would need as a mortgage deposit to buy anything where I work, I think it would be a better idea to buy blue chip equities with it. I reckon I could expect to earn 3.5% per annum this year, and that the income would rise faster than UK growth, inflation, wages or rents. Even if UK houses were a better bet over the last 25 years, I don’t think they will be over the next 25 years.

    • Winston Smith
      Posted January 9, 2012 at 9:46 am | Permalink

      Except, if you were paying, say £1500/mth in rent, you’d have a real net loss of £14,500. House prices may grow much slower, but eventually you’ll own a valuable asset. Property ownership encourages long-term stability and also better care for the local environment.

      • StevenL
        Posted January 10, 2012 at 5:43 am | Permalink

        You’re plucking silly figures from the air. I’m working on a £175k house, borrowing £75k, as borrowing more would be a silly thing to do on my salary and banks wouldn’t let you anyway.

        Your £18k per year rent (at 4.5% yields) is a £400k house. On my £175 example that’s £656 rent vs £312 mortgage interest (@5%) and the loss of £292 in dividends per month. You’re only marginally better off in cash terms, but that doesn’t take into account your stocks yield say 9% gross and your house 4.5% gross.

        • Winston Smith
          Posted January 10, 2012 at 10:38 am | Permalink

          You’d be foolish to put your £100k in equities. Even in a widely spread fund you are at the mercy of too many outside influences. A little research shows a wide range of future predictions on performance. Then, you have the high admin charges on the fund and the tax.

    • Bob
      Posted January 9, 2012 at 11:25 pm | Permalink

      As I said before you will be taxed 10% on dividends, even in an ISA.
      Also, it is the executives in large companies that get the fat and the perks, the shareholders are left with the crumbs (look at the bank bonuses). Until and unless there is greater protection for minority shareholders the “crony capitalists” will continue to prosper at the expense of shareholders.

      You need to be on the inside.

      • StevenL
        Posted January 10, 2012 at 5:46 am | Permalink

        Well yes, your company is most likely taxed in all sorts of ways, but at current prices a lot of good companies are still yielding 8% or more gross.

        It’s people with attitudes like yours that keep equities cheap for everyone else! Thanks!

        • Bob
          Posted January 10, 2012 at 1:34 pm | Permalink

          You’re welcome.

  9. Javelin
    Posted January 9, 2012 at 8:03 am | Permalink

    I have and always will make the argument strongly that interest rates should remain at AT LEAST 2%.

    Zero interest rates encourage a huge over abundance of investment in assets (eg houses, oil and gold) to get a return on “safe” investments. This creates a difficult environment for business and the public to live. In fact it’s a non real false environment. At low interest rates market forces stop working and Government policies become more important – the market economy stops functioning.

    • javelin
      Posted January 9, 2012 at 9:21 am | Permalink

      Thinking about this a little more. Low interest rates are in line with (the false belief) that Governments offer the lowest risk assets. If you believe this then as a Government you naturally hit rock bottom with your rates.

      In the EZ we are expecting a full scale sovereign credit downgrade. So this assumption does not hold.

      If you believe sovereign debt is really the lowest debt – you should consider the case that you are wrong – and think what market abberations will follow from your misplaced assumption. I think we are seeing these abberations in the market today. With flights from EZ sovereign bonds and unsafe collateral being parked in the ECB and a flight to safe sovereigns. I think you are seeing continued attempts to breath life into the equity markets failing because investors would rather park their cash in safe bonds than equities. This is being done because investors are relying on QE (sub zero interest rates) to drive investment and not saving. We are creating an environment where capital for the equity markets is drying up – ironically – because sovereign interest rates are too low. This may seem counterintuitive. I would have expected low bond rates to attract money to equities due to opportunity cost – but that is not the way the markets are working in this heavily regulated world. Goldman Sachs pointed out that it is Government policy that is driving the equity markets today. If bond rates were higher Governments would have less influence and money would flow into the equity markets.

    • javelin
      Posted January 9, 2012 at 4:29 pm | Permalink

      The hypothesis that “normal” saving and lending has broken down in the money markets with such low interest rates on sovereigns is illustrated today by Reuters (see below). They are saying that CORPORATES are now lending 25% of money to banks – rather than the other way round.

      So what is going on? With such low interest rates (and high debts caused by them) banks are no longer trust worthy counterparties for other banks. Cash rich companies are finding profits in the overnight money markets.

      Meanwhile only (4-6% ) of the ECB LTRO ever found its way to the markets – so I presume cash is drying up for those cmopanies with liquidity problems.

      *** The fact remains that financial institutions, rules are regulations are set up to manage a world where flows of capital and money happen with interest rates over 2%. As soon as interest rates drop below 2% the financial world does not work. Im not saying capitalism doesnt work – just that the market is not setup the for low interest rates ***

      http://www.reuters.com/article/2012/01/09/us-banks-companies-repo-idUSTRE80813T20120109?feedType=RSS&feedName=businessNews&utm_source=dlvr.it&utm_medium=twitter&dlvrit=56943

      • Mark
        Posted January 10, 2012 at 12:06 am | Permalink

        Neither a borrower nor a lender be;
        For loan oft loses both itself and friend,
        And borrowing dulls the edge of husbandry.
        This above all: to thine ownself be true,
        And it must follow, as the night the day,
        Thou canst not then be false to any man.

    • javelin
      Posted January 9, 2012 at 5:13 pm | Permalink

      I’ve lost track of how many Merkozy summits there have been, but remember none have succeeded.

      I’ve also lost track of the number of days before each have been written off. I do remember that the first summit took 21 days to unwind – it then reduced – until before christmas when the LTRO unwound the next day.

      Today – it looks like the summit’s success didnt last until the afternoon tea break. If you look at the 10 year Italian bonds they dropped from 7.15 at 8am to 7.05 at 2pm then rose back up over 7.15 as the leaders gave their summing up status at market close.

      Another roaring success from the great leaders across the channel !!

      • David Price
        Posted January 10, 2012 at 8:59 am | Permalink

        What was it Einstein said about expecting different outcomes from identical circumstances .. perhaps Merkel & co have sided with the wrong partner.

    • javelin
      Posted January 9, 2012 at 5:23 pm | Permalink

      Unicredit – the bank I tipped to break the Euro – share price continues in free fall. Today recording EIGHT halts to trading. The rights issue gave a hint at the state of the Unicredit books. .

      If the 7bn it raised by Unicredits has led to its share price halving how are the other EZ banks going to raise the 107bn needed by June?

  10. Brian Tomkinson
    Posted January 9, 2012 at 8:25 am | Permalink

    Quite clearly the coalition government prefers spending money than saving it and is happy to raise taxation and have negative real rates of interest. The prudent are being made to pay for the irresponsible and profligate. What will the government do when they have finally “killed the goose that laid the golden egg” and the prudent have had all their money taken? What example are they giving to the younger generations? After all the calamitous government actions over spending, private pensions and savings it is clearly government that is the problem not the solution.

    • alan jutson
      Posted January 9, 2012 at 9:13 am | Permalink

      Brian

      I so agree.

    • sm
      Posted January 9, 2012 at 2:13 pm | Permalink

      Suppose a cynical banker might then lend money to a chosen investors when he thinks the bottom has been reached. The banker (probably wont lose) and the chosen investor might gain.

      “I sincerely believe the banking institutions having the issuing power of
      money, are more dangerous to liberty than standing armies.”
      Thomas Jefferson

      Permit me to issue and control the money of a nation,
      and I care not who makes its laws.
      Mayer Amschel Rothschild

    • Bob
      Posted January 9, 2012 at 11:28 pm | Permalink

      @Brian,
      “What will the government do when they have finally “killed the goose that laid the golden egg?””

      Eat the goose?

  11. JimF
    Posted January 9, 2012 at 8:39 am | Permalink

    “A balanced economy needs plenty of private savings, and wortwhile ways of investing them.”

    You haven’t mentioned AT ALL the direct conflict between a goverment which is borrowing money and has every incentive to keep interest rates low, and a private sector which would be saving money. It strikes me that the only way to achieve what you want here is for the government to be the first and foremost saver, by cutting debt by any means WHICH IT HAS SIGNALLY FAILED TO DO. Until this happens your wish for more savers is just that, a wish.

    • Mark
      Posted January 9, 2012 at 4:59 pm | Permalink

      At present the government is not borrowing any money. It’s simply printing it – and more than its deficit spending. Basically it is hoping that it – and the country at large – can get away with soft default via inflation. The process is throwing up inequities such as those we are discussing – subsidies for imprudent borrowers, inflationary theft from savers – and risks coming to a sudden halt, or dissolving into hyperinflation.

  12. JimF
    Posted January 9, 2012 at 8:46 am | Permalink

    As for house ownership, yes, fine, but how do we know that the goalposts won’t be moved?
    Mansion tax on 2 bed apartments in London?
    Residential properties allowed in SIPPS then suddenly they’re not. (admittedly under Labour).
    Dodgy shared ownership schemes being encouraged?

    Everybody knows that either a sharp downward correction in prices or a strong bout of consumer price inflation is needed to make the residential housing market sensible again, and the only question is which will appear first.

  13. Steve Cox
    Posted January 9, 2012 at 8:48 am | Permalink

    I moved to live in Thailand over 7 years ago, and I have been renting a condo there. Last year I decided that enough was enough with the high negative real interest rate nonsense in the UK. If you have, say, £100K to £150K in the bank earning 1% after tax and inflation is running at 5%, you’re not doing yourself any favours leaving it there. Paying the monthly rent was also quite annoying, especially with no prospect of a recovery in Sterling, and possibly further devaluation still to come (all government policy, of course), so I decided to purchase a house here in Thailand. We completed that last month and I am now the proud owner of a lovely bungalow with a gorgeous tropical garden, including a waterfall, in a gated village not far from the town centre, but far enough to be nice and quiet. So no more monthly rent payments for me, I am happy to say, and I have found my place in the sun. Thank you very much Messrs. Cameron, Osborne and King for providing me with the incentive to make this change. However, I find it hard to see how it helps the British economy for savers like myself to effectively be forced to buy assets overseas to protect themselves from the government’s zero interest rate and high inflation policies? It certainly doesn’t help the bank that was holding my money, and probably lending it out at some usurious rate of interest whilst paying me a pittance in return. I wonder how many other retied or retiring Baby Boomers will already have done something similar, or else are contemplating it? A healthy society with a strong incentive to save for retirement and a rainy day MUST pay a decent positive real rate of interest, or nobody will bother saving with all the negative implications that has both for social stability and future government finances. It’s hard to understand how a nominally Conservative-led government can happily preside over such damaging policies. The mess may have been caused by a decade of Gordon Brown’s hubris and myopia, but cutting the deficit solely by tax increases, debt monetisation (aka QE), and high inflation will not solve the problems being built up by the coalition’s current policies.

  14. James Reade
    Posted January 9, 2012 at 8:56 am | Permalink

    Hmm, so the government only borrows at the rate the Bank of England sets? I thought you knew a little more about economics than that. If that were the case, you should get on the phone to the ECB, they could sort out all of the problems the PIIGS are facing!

    How interesting that you’re now advocating “sensible” tax cuts. I thought the public sector was supposed to be sorting itself out, not borrowing more?

    I am glad though that you’re not seriously suggesting we jack up interest rates at the moment – particularly now that inflation is starting to fall, as always predicted, now the VAT rise has run its course. I do find the complaint that low interest rates hurt savers a little short sighted. Would savers really do any better if the economy was crippled by high interest rates? Did savers jump for joy when your administration hiked rates to 15% in 1992?

    Finally, I do want to call you on home ownership, particularly since it was a Conservative government in the 1980s that encouraged home ownership so much. Why is it so attractive to have a workforce more tied down than ever to a particular geographic location? Shouldn’t you be encouraging people to be getting “on their bikes” to go to the places where jobs are, instead of sitting on their backsides lamenting as there are no jobs near to where they bought that house 5 years ago? The key to a flexible workforce is not having them all owning homes.

    Reply: The official rate anchors the short term end of the curve of government borrowing costs.
    Of course I am not advocating a return to 15% rates, brought I seem to remember by membership of the ERM which you doubtless supported at the time. The tax cuts I have recommened would lead to more revenue.

    • backofanenvelope
      Posted January 9, 2012 at 9:34 am | Permalink

      In answer to James Reade – the key to a flexible workforce is to make it easy to buy and sell houses. And to build more houses if required.

      • electro-kevin
        Posted January 9, 2012 at 5:08 pm | Permalink

        Back of an Envelope: Of course people love nothing more than having to move from job-to-job and area-to-area.

        The property owning culture is, in fact, a brake on employee flexibility. Mrs Thatcher’s ideal of a property owning society was, in fact, to create a more responsible and compliant workforce.

        We have a problem whereby the cost of housing – particularly private rent – is way too high.

        • Bob
          Posted January 9, 2012 at 11:38 pm | Permalink

          Do away with punitive stamp duty and the housing market would pick up. At the moment it’s stagnant.

          A loft conversion or extension can be built for about the same as the moving costs (stamp duty, lawyers, agents, renovations).

    • Winston Smith
      Posted January 9, 2012 at 9:58 am | Permalink

      Most of those out of work, including the 1m young people are not home owners. Home ownership does not make a workforce inflexible, if the house transaction process is efficient and not over-regulated and over-taxed by the State. I often find those that promote renting over ownership do from the comfort of their own mortgaged property.

    • libertarian
      Posted January 9, 2012 at 9:31 pm | Permalink

      Well james you clearly have no idea. This whole mess was created by ultra low interest rates. A rate of 5% would be perfect at the moment and would start things growing nicely

      • James Reade
        Posted February 3, 2012 at 9:36 am | Permalink

        Haha thanks “libertarian”. You’re right, I clearly have no idea.

        What I actually do is look in somewhat more detail into the causes of the “mess” than you do. We might actually agree on some things if instead of you insulting me you were constructive. For example, we might agree that government interference in the competitiveness in the financial sector caused many of the problems – why were there just three credit ratings agencies that gave the AAA ratings to subprime bundles?

        But you’re right, I really have no idea.

    • James Reade
      Posted February 3, 2012 at 9:37 am | Permalink

      Actually John, I was a little too young to have taken a position at the time on the ERM, and actually I wouldn’t have supported it. I don’t quite understand why politicians are always so keen to deflect attention away from themselves by making accusations on others?

      Reply: Try looking in a mmirror – why do you always personalise everything to me?

  15. Iain Gill
    Posted January 9, 2012 at 9:09 am | Permalink

    Re “Some of you have written in to say you do not agree with encouragement to people to buy their own home” I support home ownership. I just don’t think home ownership should have perks or incentives from the government which in reality are just cross subsidies from the rest of the population. Given that council/housing association housing is heavily subsidised, and that buying a house has many incentives attached in the current setup, it is really all those people in private rented accommodation who are paying to subsidise everyone else!
    Private sector tenants are voters too. Many rent for good reasons, a good one being they work in an occupation which means they need to move around frequently, they do not have the luxury of settling down in one place and buying a house. Most private sector tenants are good people and the Conservative party would do well to listen to their issues and look at the world through their eyes, there is a big electoral gain to be made if policies were sorted out taking into account such feedback.
    It is also poor advice to tell everyone to buy a house. You need a stable job which is likely to stay in one location to make house buying sensible (suits the public sector workforce). We need a flexible mobile workforce! Renting helps this! Many people have only been able to stay in work through the years by being able to up sticks and move house quickly when a new job opportunity came along, they should be applauded!
    And yes we do need to encourage saving more. If someone has rented to stay mobile and stay in work and has some savings towards a house when they retire I don’t see why that should be counted against them when it comes to claiming benefit versus someone with no savings but lots of equity in a house.
    And savers should not be subsiding mortgage holders as they are currently! This is not good for any of us longer term.
    In general the government should not do social engineering, it has a bad record of deciding who should live where in what kind of house. There should be a level playing field for all types of home occupier and there should be a level playing field for savers and borrowers.
    Which is not to say we cannot encourage prudence and so on.

    • electro-kevin
      Posted January 9, 2012 at 10:22 am | Permalink

      Many I know who wish to buy houses are paying such high rents that they can’t save up deposits. This is even on good income and in areas of high unemployment.

  16. Caterpillar
    Posted January 9, 2012 at 9:12 am | Permalink

    Fundamentally I agree that Govt policy has ignored savers and the role of saving for too long. With the media’s obsessive focus on demand (- though not on its destruction by inflation) and the so-called-paradox of thrift the importance of savings feeding through to investment seems ignored. It may be naive but I hold onto the idea of giving up some consumption now so that resource isn’t consumed but is directed to a productivity increasing investment and the gains from this being divided.

    So when do I get concerned?

    When simple signs indicate that resource has not been flowing to productivity enhancing investments. (When median house prices grow faster than nominal GDP, when pensions cannot keep up with nominal GDP,when borrowing outstrips growth.)

    When opinion gives ethical priority to mortgagees over savers who are renting.

    When a Govt that presumably wants a flexible population has a liquidity tax in preference to treating all assets the same (Why have stamp duty but capital gains relief on the house you live in?)

  17. Caterpillar
    Posted January 9, 2012 at 9:12 am | Permalink

    “It is cheaper over the typical adult lifetime to buy your home than to rent it”

    What is the underlying reason for this? I can appreciate that renting ought to be somewhat more expensive ideally due to the add flexibility; being able to move for work, not having organize the maintenance etc. But I am not convinced that the price difference reflects truly reflects this – given the PM’s concerns with market failure – is there a market failure here?

    • Caterpillar
      Posted January 9, 2012 at 9:47 am | Permalink

      One other thing on houses, which I appreciate isn’t an original comment:-

      If houses are to be seen as a savings vehicle in the UK wouldn’t it be reasonable to introduce a countercyclical dynamic LTV constraint, so that loan-to-value is high in troughs and loan-to-value is low in peaks?

    • Robert Christopher
      Posted January 9, 2012 at 11:59 am | Permalink

      If you own your home:
      * you don’t have to pay someone to ‘manage’ it;
      * you don’t HAVE to pay someone to fix anything that goes wrong, only those things that need skills you don’t have.
      *) you don’t always have to get problems fixed or replaced ASAP, sometimes it is worth making do with a slightly broken item, knowing how, by pushing, squeezing, turning it in a special way, it STILL WORKS!
      *) there is an incentive to purchase the most cost effective items/repairs in a timely manner. Spending time thinking what to do usually has little incremental cost
      *) there are no travelling expenses to get to the work place
      *) there is an incentive to purchase only want you need, rather than what you want or would like to have.
      *) there are usually less restrictions, like can you put up curtains in the windows or paint your front door purple and yellow?
      *) the self employed can be hired, often at better rates, because they have less overheads than a large organisation. Finding a good tradesman (gold dust!) costs you time, but rarely much money.
      *) relatives/friends are able to fix things ‘for free’ (if you are lucky to have relatives/friends, that they are skilled and that they are willing to do it for nothing.)
      *) your time that you spend does not have inflicted on it: income tax, VAT (though any purchases made will) and any other taxes.
      *) if you own your home, the value to you will be that you have somewhere to live that costs you very little, no matter that the currency markets do.

      If your home currency becomes worthless (or increases in value) you still have a home. To use investment income to rent a house is similar to having your investments in a different currency/economy to where you are living, like for example living in Spain and keeping all your wealth (investments, pensions) in Sterling. Sometimes you are onto a winner, but then it can go the other way!

      The only negative aspect is that it takes responsibility and EFFORT, which is scarce commodity!

      • Caterpillar
        Posted January 9, 2012 at 10:54 pm | Permalink

        Thank you. I think I see that you have mostly extended the list of why buying is cheaper than renting (though fairly some of the points act in the other direction), but what I am interested in is whether these differences quantitatively justify the difference or whether the difference is larger than might be expected. Are there any clues to market failures (beyond the grey economy of repair).?

        • Robert Christopher
          Posted January 10, 2012 at 7:02 pm | Permalink

          My list does not explain why buying is cheaper than renting. It is a list of how the cost of owning a home can be kept as low as possible.

          Renting requires less capital outlay, less long term responsibility, less commitment and less effort. That is why it is more expensive. All these cost money and are required to build a house and to ensure it is used efficiently.

          If you owned your own home and outsourced all maintenance work, I think you would find the costs are not so different, apart from the cost of the capital outlay, which depends on economic factors such as the relative value of currencies, land and the state of the economy.
          Another reason why buying a house is cheaper is that the financial risk, particularly the short term risk, of living in a property you don’t own and owning shares or having cash in a bank to the same value is REMOVED.
          Therefore, this cost is also removed from the equation.

  18. alan jutson
    Posted January 9, 2012 at 9:50 am | Permalink

    House ownership ?

    Yes if you can afford it, but do not do your calculations on todays interest rates, do them at, at least double the present, then make your choice.

    Yes home ownership does give you a stake and interest in the local area, yes it does make you feel perhaps more settled, but it comes at a cost with regard to maintainance etc.

    High Stamp duty on house purchase (as many have posted) is a disincentive to move regularly, either up or down.
    Thus choosing an area to live, and getting it right for the long term, for schooling employment, and social interests, is doubly important.

    As for savings, if one did know know better, it could be assumed that successive governments (certainly over the last 15 years) appear to not want people to save, as almost every government policy discourages it.

    General Interest rates/returns are Low.
    Government Inflation proofed savings Certificates were limited as to value you could hold.
    Government Inflation proof Savings Certificates were then withdrawn.
    Interest on Savings is taxed.
    Capital Gains are taxed.
    Inheritance tax is greater than the basic rate of income tax.
    Pensions providers were taxed.
    Pension investment performance is (in most cases) low.
    Pension capital is locked in, so is not available in an emergency.
    Annuity rates are low.
    Most Benefits are means tested, so savings means you are excluded.
    Council tax is means tested, so savings means you are excluded.
    Long term Unemployment Benefit is means tested, so savings means you are excluded.
    Housing Benefit is available if you rent, not sure if this is means tested.
    Nursing home care is means tested, so savings means you are excluded.

    Thus those who save absolutely diddly squat, and blow all of their money, can get help from the taxpayer, in some cases up to many hundreds of pounds per week.

    Politicians need to ask themselves a very simple question.

    If we were to design a welfare system from scratch today, would we have anything like the same system as we have now ?.

    If the answer is NO, then for gods sake CHANGE IT.

    If the answer is YES, then please be honest and tell us that taxes will have to rise even further to pay for it.
    But please do not be surprised if those who save, decline in numbers.

  19. electro-kevin
    Posted January 9, 2012 at 10:17 am | Permalink

    “It is cheaper over the typical adult lifetime to buy your home than to rent it”

    By far the cheapest way to live is to have a council funded house. Blow all your money having a good time. Rely totally on the state in retirement whilst laughing at the person in the care home who is next to you on a depleted pension and who has had to sell their home to subsidise your bed.

    Don’t bother sending your kids to university and incurring the debt to do so. Get them on the welfare teat too.

    If you’re mindset allows you to be like this then Britain is a great country to live in.

    It is not the unemployed people who are anxious about being thrown on to the streets. It’s those who are struggling to buy their own houses.

    • Bazman
      Posted January 9, 2012 at 8:59 pm | Permalink

      You assume they have a choice. In effect you are putting middle class ideals on non middle class people. As stupid as comparing third world or historic living standards on modern Britain. We are much better off then two thousand years ago despite everyone being more feckless because they fear less for their lives. Expand this stupidity. I fully intend to do this if I am ever invited to dinner party of middle class polite conversation. I might also insult everyone after drinking Scotch and fall asleep with my face in my dinner.

      • electro-kevin
        Posted January 9, 2012 at 9:57 pm | Permalink

        Bazman – If you’re a Scotch drinker then you’d be in good company with me.

        However, you won’t meet me at a middle-class dinner party. I happen to be working class.

        Of ‘choice’:

        Under the present system option of dropping out is sorely tempting, I have to admit.

        • electro-kevin
          Posted January 9, 2012 at 10:07 pm | Permalink

          Incase you didn’t get my point I’m saying (in terms more polite than yours to me) that the problem isn’t really the feckless:

          It’s the disincentivising effect that our system is having on the people who strive to make this country work.

          I defended you against insult a few posts back. A bit of respect please.

          • Bazman
            Posted January 10, 2012 at 5:54 pm | Permalink

            They will be given an incentive by making the desperate even more more desperate? I think not. Often this worked the other way by making them give up totally. Having a SKY dish does not mean you are living anything above subsistence levels in this country. All you will do is drive the problem to greater levels and further underground. The incentive to participate in low level crime such as petty theft or soft drug dealing may well be increased, but they would not decide to become respectable for sure. Often the problem is that even if they got a job low level crime is seen an additional income. Despite many protestations from all quarters.

          • electro-kevin
            Posted January 10, 2012 at 10:16 pm | Permalink

            Bazman – The ones I’m talking of are not desperate.

            A Sky dish is certainly more than I’m prepared to have at the moment for fear of unecessary debt and I’m on a good wage.

            They are talking of reducing (REDUCING) benefits to £500 per week. That equates to a gross wage of £800 per week – not very many workers achieve anything like that.

            It’s unfortunate that you seem unable to get my point. It’s not your fault. In light of this I shall resist all temptation to call you stupid.

          • electro-kevin
            Posted January 10, 2012 at 10:37 pm | Permalink

            http://www.lht.co.uk/Pages/Article.aspx?id=86

            See ‘Changes in 2013’

            I can only assume that the policymakers have forgotten that the maximum benefits of £500 equate to far higher than national average income because a worker must pay tax on those earning.

            Either that or they are deceiving us. And we must remember that, presently, the maximum allowed is far higher than this.

          • alan jutson
            Posted January 11, 2012 at 12:45 pm | Permalink

            e Kevin

            I do not have a sky dish either !

            Simply too expensive on a monthly basis.

            Have Freeview and FreeSat though, no subscriptions at all.

          • Bazman
            Posted January 11, 2012 at 6:55 pm | Permalink

            Can’t afford SKY as you might get into debt even though you are on a good wage? You must be doing something wrong then or have done in the past? SKY is a bit stiff I admit, but much more expensive than the license fee. You would like to reduce the income of people who can afford SKY because they are on benefits? I see. The problem is that to get very high level of benefits you have to have a large number of children 5 or more, and not spend all the money on the children. Which is what happens. How do you propose to stop this and not make the problem worse. Food stamps sterilisation? A pay cut for someone else is not a pay rise for you. Do bear this in mind, as you would, when talking about taxing the rich.

  20. StrongholdBarricades
    Posted January 9, 2012 at 10:25 am | Permalink

    Technicaly I would agree with the assertion about buying your own home.

    The problem I now have with the assertion is that the central financial tenet of the 3rd Way was the investment in house prices, the introduction of much of the means testing etc to facilitate the supposed transfer of people from the state to their own means for Social care. It would appear that the exact opposite has occured in human behaviour (savings down etc), plus the fact that Liebour needed high house prices to make this policy work meant that they tied up the tri-umvirate that were supposed to be watching fo bubbles and thus we have an enormous financial bust.

    The only piece of the housing market that appears to be working still is the buy-to-let because of the rental income. The rest is stagnating, and slowly drifting down through inflation although household incomes are not rising to take the opportunities.

  21. Colin
    Posted January 9, 2012 at 10:42 am | Permalink

    When all taxation is taken into account a private sector employee does not start to earn any income for themselves until day two hundred and eight of the financial year.
    Then you have mortgages, rent, council tax, (of which I now understand in some cases about half of it goes to bureaucrats pensions,shocking figure), and bills to pay on top of that.
    Hardly surprising no one saves any more is it?
    I for example have only just began to save in the last few years now that I have nearly paid of the mortgage ,even then not as much as I could if I was not being “shaken down” by inefficient big government.

  22. oldtimer
    Posted January 9, 2012 at 10:58 am | Permalink

    The problem starts with profligate governments who overspend. This Coalition government seems to be little different from its predecessors; it too is a tax and spend monster. Scarcely a week goes by without some minister or other, Messrs Cable and Clegg have particular form here, calling for more taxes and new taxes. Their Conservative counterparts seem happy to pocket the proceeds of past tax regimes and to carry on spending and borrowing.

    Up until c1997 the UK savings ratio was a reasonably healthy 9% of GDP. Since then it has collapsed. So far all we have seen from the Coalition is tinkering with the problem with no coherent solution to the morass that is the UK tax code and the distortions that disfigure it. Unless and until public spending and debt are brought under control there will be no hope or relief for savers, and little incentive for them to invest in the UK. It needs but a brief review of the relative returns available in the UK versus other growing economies around the world to realise why.

  23. Ralph Musgrave
    Posted January 9, 2012 at 10:59 am | Permalink

    Government debt at low interest rates is almost indistinguishable from money. A £20 note is ostensibly a debt (which pays no interest) owed by the Bank of England to the holder of the note.

    Milton Friedman (plus some other economists) argued that all government debt is a nonsense, and that government should issue just money. I agree. See his paragraph starting “Under the proposal…” (p.250) here:

    http://nb.vse.cz/~BARTONP/mae911/friedman.pdf

    • zorro
      Posted January 9, 2012 at 10:07 pm | Permalink

      Interesting read….unfortunately whenever US presidents try and look at/attempt to implement similar measures which threaten private banking interests or the payment of interest on money creation, it never goes well for them…..

      zorro

  24. Peter T
    Posted January 9, 2012 at 11:17 am | Permalink

    For a Bank to lend money to a customer and expect the loan to be paid back at a lower Interest Rate than the current Inflation Rate means that that Bank will go out of business. It just does not happen. Why then does the Bank of England and all other Banks treat Savers this way and consider this policy equitable? It is a Policy of Madness bordering on criminal. Criminal treatment of the Saver by the Government that is. The sort of thing one would expect from a Labour Government but the Conservatives have left this policy in place. They should be ashamed.

  25. Martin
    Posted January 9, 2012 at 11:21 am | Permalink

    Savers have been badly treated over the years. The present set up with negative real interest rates is a disgrace. As savers are a small minority there is no reason any political party does them any favours.

    Saving for a pension is another bad investment – annuity returns are pathetic.

    In Britain the home purchase culture means that governments keep interest rates low to punish savers and reward borrowers. Indeed the present government boasts about low interest rates keeping mortgages cheap.

    As a result of all this flat broke Britain is just that. No savings, lots of debt. The government supporting press (and others!) reduced to giving commentaries on Spanish bond auctions to try and distract attention.

  26. Damien
    Posted January 9, 2012 at 1:11 pm | Permalink

    Having seen the raid on pensions, pathetic returns on savings and record falling property prices I would expect that younger investors would be reluctant to commit in the same way previous generations have. Add to that we will have future generations of young people leaving university with large debts. The ageing population in England means that there will be a steady stream of older people down sizing with a smaller younger population able and willing to buy given a continued trend of lowering property prices.

    The multi billion pound social housing scheme in the UK is a massive Ponzi scheme in my opinion. The idea that new home buyers will continue to have to pay a 50% mark up to cover the developers social housing provision on each new build development is unrealistic and unsustainable. It also distorts the market so that buyers and lenders cannot truly know the value of the property on-sale. Why should we subsidise the building of these properties, pay stamp duty on our own purchases and then subsidise the rent on these social houses for generations to come? We saw what happened to Fannie Mae in the US.

    The future for those of us who have assets at retirement is that they will be expected to finance the growing public spending on healthcare for the elderly, for the majority of whom never contributed though taxes in their lifetime. The EU means that in the same way our pensioners can retire in Spain millions more will seek the comfort of retirement in the UK.

    I see Ireland has just lowered it stamp duty on commercial property leases from 6% to just 2%. The stamp duty on domestic property remains at a very competitive 1% on all property up to one million euros.

  27. libertarian
    Posted January 9, 2012 at 1:15 pm | Permalink

    Excellent blog John.

    I have been asking for higher interest rates to kick start the economy for the last two years.

    Better returns on savings is how first time buyers can save towards a deposit on buying a home ( despite what a few on here want to believe, still by far the best way of acquiring a place to live)

    Better returns on savings is how more retired people will be able to make ends meet

    Better returns on savings will mean stronger balance sheets for banks

    Better returns on savings will mean more money to be lent to business

  28. Michael Read
    Posted January 9, 2012 at 1:47 pm | Permalink

    Come off it. Savers recoup at best 3.1%, to mitigate against inflation stripping them of 5% and any damn fool knows that inflation is the government’s stealthy tool to pay down debt. Worse, there’s a chance we’ll wake up one sunny morning this year to find the whole fiat banking system has collapsed. Everyone is hanging on in a blind faith belief that property is a secure asset but a couple of ticks up in interest rates and that whole pile of delusion is going over, led by the 40% of property owners who have interest-only mortgages. The UK has got to make things again.

    Read Mr Liam Halligan, economics commentator at the Daily Telegraph, or Bill Gross, Pimco chief, describing the world’s “paranormal” economy.

  29. David John Wilson
    Posted January 9, 2012 at 2:04 pm | Permalink

    There is an immediate need to introduce two or three higher bands of council tax. These should replace any government plans for a mansion tax and thus not place an undue penalty on people living in London and other city centres.
    The income tax free band of savings interest should be re-introduced thus helping those trying to save a deposit.
    Similarly stamp duty should be removed from all transactions as quickly as possible. This could be paid for by extending the range of capital gains tax.
    Capital gains tax should be aligned with income tax thus reducing one opportunity for tax avoidance.

    • alan jutson
      Posted January 9, 2012 at 10:28 pm | Permalink

      David

      Do you mean raise the level of value of the council tax bands?

      Thus existing houses fall into a lower catagory than now.

      I assume you are not calling for additional and newer level of bands, so that council taxes increase for some in existing properties.

  30. Alan Wheatley
    Posted January 9, 2012 at 2:14 pm | Permalink

    An alternative of moving to where the jobs are is to move the jobs to where the people are. Probably a mixture of the two would work well. This would be reflected in the balance between rented and owner occupation.

    From a government perspective, it is not so much a case of moving the jobs to the people as enabling jobs to be sustained and grown where the people are. Often they do the reverse. There are lots of examples where the government decides that certain parts of the country are to be administered in a way that gives priority to their “national” importance above that of local people. The National Parks are a good case in point. This undermines local peoples ability to create jobs, and also discourages outside investment.

    Another example is the Chilterns, where the government have decided that their primary purpose is as a means for enabling people in London to get to and from Birmingham a bit quicker.

    I think we would all be better off if the number of man hours spent commuting was on a downward trend.

  31. George Hedley
    Posted January 9, 2012 at 3:05 pm | Permalink

    Why would anyone want to save?

    It is a simple enough question. Take the following situations.

    1.A family is buying their own home, and the main breadwinner loses their job.
    Help from the government is minimal, and eventually, the home is lost together with most of their investment in the foreclosure. The family loses.
    2.A family is saving for the deposit to buy their own home (now 50%), and the main breadwinner loses their job. Because they have savings, there will be minimal help from the government.
    3.A family spends everything, nice clothes, nice holidays, and the main breadwinner loses their job. Maximum assistance from the government.
    4.A family has bought their house, the children have left, and one partner needs to go into a nursing / care home. The Office of the Public Guardian steps in, seizes all assets, and charges an annual fee. The fitter partner is given an allowance to live on, and, if the assets are insufficient, a lien is placed on the house.
    5.Official inflation 5%, bank interest a taxed 0.5%.
    6.Bank of England Quantitative Easing, debasing the value of money.
    7.The MF Global (a US Company) failure, showed that ‘protected’ accounts can be used to pay the hypothecated creditors with the best lawyers. Can this happen in the UK? Probably.
    8.Any savings in the Bank, belong to the Bank! The agreement is that they will pay you your principal sum back with interest after an agreed period. If more than 10% of depositors demand their money back, the Bank collapses. Remember the queues at Northern Rock.

    Why would anyone want to save?

  32. Mark
    Posted January 9, 2012 at 3:29 pm | Permalink

    House purchase is not always the best option. It depends on the real price, and on the real burden of a mortgage over time. I did a lot of analysis just as the market was peaking in 2007 using the long run Nationwide index that goes back to 1952, coupling in RPI inflation and mortgage interest rates. The best time to have bought was in 1958, when prices were low in real terms and interest rates affordable. However, in 2007 money, the real cost of purchasing a house including servicing the mortgage (I assumed 25 year term) was actually remarkably constant for purchases up to about 1970. After that, they start to rise significantly, with a boom and bust and boom cycle in the 1970s. High nominal interest rates on the back of Healey’s IMF trip made mortgages hard to afford for new buyers for a year or two before inflation slashed the real burden. The big Lawson/double MIRAS relief bubble of the late 1980s propelled prices to a fresh peak. Very high interest rates in real and nominal terms added substantially to the cost for anyone who bought at the peak of that bubble. Prices fell a little even in nominal terms (in reality, there were much sharper falls in London and the SE as the regional sub indices show), and interest rates fell back post ERM, providing a dip that bottomed out in 1995.

    The boom that peaked in 2007 far exceeded the 1989 peak, and assuming that the average mortgage charges 2% real over the balance of its life, gives a real burden that is more than 5 times as great as someone who bought in 1958. It is very unlikely that such purchases will look like a good deal in the years to come. Instead, they will suck up funds that should have been saved productively towards pensions.

    Perhaps as important is the fact that until 2000, mortgages were funded by UK banks out of domestic deposits. After that, they started wholesale borrowing overseas to fund mortgage lending, culminating in a customer funding gap of about £800bn by the time of the Lehmans bankruptcy. That is, we have as a nation borrowed abroad to fund our mortgage addiction. It makes the country poorer as we pay the interest abroad.

    • alan jutson
      Posted January 9, 2012 at 10:32 pm | Permalink

      Mark

      I was with you up until you suggested pensions were a good investment.

      Investment performance over the last 10 years ?

      Equitable Life ?

      At least you can live in a house, when the finacial system collapses, you can still live in a house.

      • Mark
        Posted January 10, 2012 at 12:44 am | Permalink

        I wasn’t suggesting that pensions have been a good investment, but rather that if you don’t want to live in penury in retirement you need to (be able to afford to) save adequately for a pension. If you take a level income in real terms over a 40 year career you need to save about 15% of it to generate a pension of 50% that covers a retirement expected to last 20 years if the investment yield is 2% in real terms throughout. If you buy a property for six years’ earnings rather than three (inclusive of mortgage interest), that’s 7.5% of your career earnings more – halving your prospective pension, or otherwise cramping your lifestyle and family size.

        The pension disasters of Brown’s raid and failure of funds’ investment performance are a separate matter – though they are not helped by governments that insist on malinvestments such as HS2, windmills, rebuilding almost new schools, scrapping cars and vans before the end of their economic lives and so forth, and choking the productive economy with regulation and taxes to subsidise welfare on a grand scale.

        • alan jutson
          Posted January 10, 2012 at 9:17 am | Permalink

          Mark

          I agree a diversity of savings, to provide for a rainy day or old age, but Pensions schemes, not a good track record to date if you are having to fund it with all of your own money (self employed)

          If a member of a company scheme where they make a substantial contribution, then yes I agree go the pension route, but also save elsewhere as well, so that all eggs not in the same basket.

  33. Simon Rose
    Posted January 9, 2012 at 3:40 pm | Permalink

    Thank you not just for highlighting the current plight of savers, but for pointing out the dangers for the future health of the country if saving is not rewarding. Many of those who scrimped to save for their future must be wondering why they bothered, after nearly three years of negligible interest rates and the plight of private pensions.

    Where will a new generation of savers come from, however, given how shabbily existing savers have been treated in recent years?

    http://www.saveoursavers.co.uk

  34. Pericles
    Posted January 9, 2012 at 4:29 pm | Permalink

    Those that allude to Keynes and Adam Smith, whether for or against, usually evince no sign of having read either.  What adherents to the theory – ‘no-one should owe any-one anything’ – that has become fashionable in the world of economics in the last decade seem to overlook is that paying off debt and reducing deficits are dependent on economic activity.  Roosevelt realized this ;  but, then, he was a Tory … not a nouveau Conservative.

    These austere measures pursued by governments across the World serve only to reduce the level of the one thing that sustains the economy and can therefore bring about the recovery that will deal with both sovereign debt and the slump :  confidence.  Academics are fond of devising all manner of theories to explain the economy – largely because the more complicated they make it appear the more likely they are to keep their jobs and to receive grants to continue their ‘research’ – but the reality is that economic activity is just a reflexion of confidence.

    I don’t suggest that government expenditure is the answer to all the problems but infrastructure projects do offer means of generating (1) demand in the present and (2) assets for the future.  To say that all government expenditure is a waste, as so many do, is absurd.

    ~ · ~

    So what is the effect of this austerity ?  All that is happening is that we are chasing our own butts down the lavatory.

    The Prime Minister says that he ‘gets’ the problems facing the unemployed.  …  Does he imagine that the adoption of plebeian diction makes up for economic ignorance ?  …  Well, perhaps he does sympathize.  What he seems not to understand, however, is that H.M. Government’s fiddling around with the supply side will not bring about economic recovery :  only demand will drive that and it is not something a single government can achieve.  The governments of the World’s major economies must act in concert, if they’re to bring about a rise in confidence ;  their continuing this chase to the bottom of the economic tree will achieve nothing.

    The idea that low interest rates will generate a demand for loans is misguided ;  firms borrow money to invest in plant, inventory and staff for the purpose of meeting perceived demand :  no demand, no borrowing.  The banks are not to blame for not lending to SMEs :  the businesses to which they would love to lend don’t want to borrow ;  they’d be castigated, however, for lending to many of those that do want to borrow – seeking funds to tide them over in the hope of recovery.

    ΠΞ

  35. David in Kent
    Posted January 9, 2012 at 4:33 pm | Permalink

    There is a big advantage for young people, just starting out, in buying a house on a mortgage. You can buy a house in poor condition and fix it up yourself. The ‘sweat equity’ you put in is effectively untaxed income.

  36. Julian
    Posted January 9, 2012 at 4:49 pm | Permalink

    I have always assumed that since the Mirror/Maxwell pensions scandal and the subsequent failure of both main parties to encourage and protect company pensions that the money went instead into property/buy to let hence the growth of house prices since 1995. Has this been researched?

    • alan jutson
      Posted January 9, 2012 at 7:49 pm | Permalink

      Julian

      I think you have a valid point.

  37. william
    Posted January 9, 2012 at 6:03 pm | Permalink

    The utterly bizarre policy of QE,to save the banks and their over borrowed house/property borrowers,is a wealth tax on those with savings(it is called inflation) to subsidise the imprudent borrowers who tend to be younger.If the MPC was serious about inflation,base at 3 percent would meet inflation falling from 5.5 percent.King has been the worst Governor since 1694.A responsible government would simultaneously CUT public expenditure,whilst maintaining aggregate demand by massively reducing tax and NI for the lower paid.In due course,the private sector would produce GROWTH and the cake gets bigger.House prices might fall 20 percent, and the first time house buyer,in employment, would no longer be an endangered species.Forcing the banks to foreclose on their old duff property loans would over time get the economy going as one man’s pain is another man’s chance of gain.Politically, very unpopular for two years,but financial orthodoxy cannot be postponed ad infinitum.A certain lady pulled off this act in 8 years,give or take.Is Cameron a coward?

  38. forthurst
    Posted January 9, 2012 at 6:18 pm | Permalink

    Historically, housing has been the primary vehicle for major private investment as capital increases have far outstripped inflation, and for the layman, viewing a house is easier than viewing a public company or other investment vehicle. However, housing is now overvalued so needs to be viewed as a longer term investment than in the past when simply getting on the housing ladder was generally a failsafe strategy.

    This government should be encouraging independence as the previous government encouraged dependency. So far the policies of this government are making prudent provision and its reward almost unachievable as sinners including the government are rewarded with low interest rates and savers are correspondingly punished.

    Being taxed on interest rates well below inflation is unfair, but when the government is unable or unwilling to control its own profligacy it is inevitable that savings will be raided to feed the insatiable.

  39. Barbara Stevens
    Posted January 9, 2012 at 6:53 pm | Permalink

    Well we bought our own house and we’ve no regrets. We also encouraged our two children to buy their own homes, and now the thought of paying £650 per month to give someone else makes them realise what we were telling them from the beginning. Yes, the fear of redundancy is living with them, and it’s terrible when you’ve struggled and worked hard to lose your home. We have also given the ethos of saving and not have debt. We are now in our 70’s and we have no debt at all. Its nice to be able to say that. Its not been easy, and we’ve struggled especially in the 1980’s when times were complete hardship. I’ve known the time when I’ve had shoes with holes in, and nothing to eat at the end of the week, those are hard times.
    However I’d still say buy your own home it’s worth it in the end, and it’s an incentive to work hard, and save. You can look back and say, I did it my way. Pride, self respect.
    My arguement on several occasions on this blog as been living by those who don’t respect and have the same thinking. I’m living by such people. Its not nice, it’s annoying, and the council refuse to have any thing to do with it, yet its the enviroment that’s suffering too. We need laws to make vendors and private renting properties keep them respectable for those who live by them and the tenants who rent them. May I suggest, the letting licence should not be allowed until the propeties are respectable and complaints should make the council look closer. We all have to live in this country and where one lives, it’s surroundings effects us all, we therefore have a duty to keep properties in the right order. I believe in Germany rented or owned properties have these laws in place, and most properties are kept in good order, why can’t we have the same here? Is it worth bothering, yes, but it depends where you live, but legislation can make life easier for everyone, if it’s put in place. In this country we don’t seem to bother till its to late. May be that’s why people’s attitudes are now, so lapse.

  40. Jon
    Posted January 9, 2012 at 6:58 pm | Permalink

    Brown not only taxed pensions knowing that we were an ageing population but he did a couple of other things.

    Force DB pension funds to weight heavily in bonds/gilts no doubt to fund his borrowing. A further accounting rule change and DB schemes were history.

    He killed off the cheap regular tax efficient savings vehicles that used to be there. They gained tax efficient status if the regular premiums were kept up for 10 or more years. This forced people to continue them. Many years ago I remember people my age now having these £20 £30pm savings plans mature and they would pay off their mortgage, another one would mature and they would buy a new car, another one would mature and they would put their kid through Uni etc.

    ISA’s do not compel someone to keep their regular contribution going in order to get the tax efficiency applied. Indeed many so called ISA mortgages saw the ISA savings part stop as there was no requirement to keep it going from a regulatory side nor a tax side.

    Hence savings (inc pension) for the last 15 years have remained level at around £1.5 trn instead of being 2 to 3 times that amount. Remember, much of that would be re invested in UK companies.

  41. Jon
    Posted January 9, 2012 at 7:06 pm | Permalink

    Whilst you mention pensions how many I wonder are infact invested in Italian Gilts.

    One could criticise for investing in some of these 10 year “Gilts” today but how many were bought 5 or so years ago?

    How many troubled and pressured fund managers may be supplementing their returns by buying some now even?

    The EU Solvency 11 legislation in the offing I see as being lifted from Gordon Brown’s actions here. Force pension funds to buy sovereign debt.

  42. Bernard Otway
    Posted January 9, 2012 at 7:09 pm | Permalink

    There is a place I get 7% interest on savings,I am not going to tell where,BUT believe me I do
    people are not creative enough in looking.
    Even judiciously forward buying your household non perishable items is a way of getting interest at the rate of inflation [say 5%] AND FREE OF TAX,much better than the miserable rates on offer. Last year I bought on special 30 cases of wine at a price of about £4 a bottle
    which now is over £5 a bottle,SHHHHHHH don,t tell the PARASITICAL POLITICIANS
    that I have made a return of 25% on my investment TAX FREE,this is but ONE example.
    On my household expenditure,and there are only 2 of us,on my spend of around £ 8000 pa
    a 5% return tax free is £400,that taxes the cars. I actively have looked at ways of BEATING the PARASITICAL CLASS for the last 35 years LEGALLY,when explaining this to a top politician in South Africa,I threatened to publish my way on the web,you should have seen the LOOK on his face,the BUZZ I got was PRICELESS.

    • Michael Read
      Posted January 9, 2012 at 8:57 pm | Permalink

      Excuse me, Mr Otway, I am a representative of Her Majesty’s Revenue and Customs and I believe you are taking part in activities which are taxable and therefore of interest.

      If you would be so kind, as to empty your pockets of any items which might impede my search, I will escort you to our local nick where I can complete a more thorough examination of your person.

      Don’t attempt to drink the plonk.

      • forthurst
        Posted January 9, 2012 at 10:08 pm | Permalink

        “Don’t attempt to drink the plonk.”

        I think you may be too late.

  43. APL
    Posted January 9, 2012 at 9:00 pm | Permalink

    Our Prime minister (snigger) is trying a little PR on us.

    http://www.dailymail.co.uk/news/article-2084226/Cameron-calls-Cabinet-meeting-2012-Olympic-Park-200-days-Games-begin.html

    I guess one compensation for not being in the cabinet Mr Redwood, must be that you don’t have to participate in this sort of goon show.

    • forthurst
      Posted January 9, 2012 at 10:21 pm | Permalink

      but will Boris launch a counter attack to re-occupy his territory?

      • APL
        Posted January 10, 2012 at 10:06 am | Permalink

        forthurst: “but will Boris launch a counter attack to re-occupy his territory?”

        Who knows, the Maldives have beaten us to the idea of an underwater cabinet session, so maybe Boris will hold his London assembly meeting on as many ‘Boris bikes’ as it takes to accommodate all the participants. Somewhere big?

        Eureaka! The London assembly on ‘Boris bikes’ in in the Olympic velodrome.

        I expect he would have paid tens of thousands to his spin meister/publicity man for that scenario, I’ll offer it for £10 +VAT.

    • zorro
      Posted January 9, 2012 at 10:23 pm | Permalink

      How odd did it look with them sitting at the table in a sports hall?….I was half expecting some huskies to come out on the prime ministerial sledge or for some wind turbines to rise out of the seats!

      zorro

      • alan jutson
        Posted January 10, 2012 at 9:21 am | Permalink

        Zoro

        PR pure PR.

        Cameron is quite good at that, unfortunately we need substance as well.

        Agree it did look silly, so a PR failure this time as well !

  44. Bazman
    Posted January 9, 2012 at 9:03 pm | Permalink

    The savers and investors might get some reward if their investment profits where not paying bankers and banking fees. Where does anyone think these massive profits and bonuses come from? The taxpayer, the worker and the saver. Where else?

  45. Sue L
    Posted January 10, 2012 at 11:40 am | Permalink

    John – Thank you for raising the current negative environment for savers in your recent blog. Whilst it would be desirable for savers to receive a tax incentive to save, I am assuming that anything which might erode HMT’s tax take might be received negatively. But savers could be helped in other ways:

    • Fees, admin costs and exit charges on ISAs, pension funds and tracker investments are not always transparent and erode investment returns over time. More competition and transparency will help bring these costs down and help improve returns.
    • Whilst investment options have improved for personal pension funds, there are still severe limits on what you can do with funds. For example, whilst I understand the need to ring fence these savings, it is perverse that an individual saver can secure (say) 4.7% on a fixed term deposit using a best buy table at a bank / building society but can only hope to secure money market rates (<1%) through a pension fund (assuming that you want a cash equivalent investment in view of this current economic environment). Furthermore, for deposits of up to £85,000, you may be able to avail yourself the protection from the FSCS compensation scheme when depositing directly with a bank / building society whereas this protection is not available on the underlying investments in a pension fund deposited via a fund in the money market.
    • Consolidation of some aspects of pension fund and ISA tax relief plus a facility to carry forward or back ISA amounts not utilised in a particular period would enable more savers to plan more flexibly – particularly as this economic environment might enforce “career breaks” and / or periods of reduced income.

  46. Conrad Jones (Cheam)
    Posted January 13, 2012 at 1:30 am | Permalink

    Mr Redwood,

    “The way out of excessive debt is to save more. The way out of excessive dependence on state welfare is for more people to have savings and future pensions they can rely on, so they do not need so much money from the state”

    Given our current monetary system where our money supply shrinks as people save more and pay off or take out less debt – what do you think would happen to the economy if we were to reduce Public and Private debt ?

    I believe you know the answer to this because you are also saying to people that they should buy their own homes – which increases debt. I would be interested in your response.

    I would also be interested to know how long you think Quantitative Easing is likely to last if there is no significant increases in either personal or government debt?

    Reply: The money supply does n ot necessarily shrink if more people save and invest. For every mortgage a new buyer takes out, an old buyer is paying one off.

    • Conrad Jones (Cheam)
      Posted January 13, 2012 at 9:48 am | Permalink

      Mr Redwood,

      Thank you for your reply.

      Can we really allow people to save more and borrow less in todays economic conditions of falling money supply when the situation is so serious that the Bank of England has deemed it necessary to add another £75 billion – via the Banks; to the economy inorder to allow Banks to increase their lending and thereby; increase the indebtedness of the Country?

      Inorder to encourage more savings, interest rates have to go up; if they do; the current repayments of borrowers will increase and new loans will be reduced. Has the Government got policies which will adequately solve this problem for the long term – and not just a short term solution.

      We cannot afford to take out more debt but we also cannot afford to let the Banks fail or reduce their lending, but new regulations are designed to increase the Capital reserves of Banks which will force them to do the opposite of what the current system requires – more lending inorder to maintain the money supply. Government policy also is targeting reducing Government Spending which will further reduce the amount of credit in the system. David Cameron held off from saying that we should all reduce our debt as if we all reduced our debt levels the economy could tail spin into a further recession.

      Are we in a Catch 22 situation, where; if we act more prudently by reducing our debt levels and live within our Budget, we reduce the amount of credit in the economy thereby strangling the economy?

      Is there a long term solution to this problem or do we have to hope that more people will increase their borrowing?

      Reply: We hope solvent people and companies will increase their borrowing for sensible purposes, as they do in normal growign economies,. We hope overborrowed companies and people will reduce their borrowings. I hope that more people will build up savings, giving them more options in retirement.

      • Conrad Jones (Cheam)
        Posted January 13, 2012 at 1:32 pm | Permalink

        Thank you for your reply.

        Can you foresee the United Kingdom – given our current monetary system; ever reducing our total personal and public debt?

        Given a hypethetical zero growth GDP, would the current system be able to operate without increasing debt (Either Public or Private)?

        I’m partly referring to Bank of England Govenor, Mervyn King’s quote – “Of all the many ways of organising banking, the worst is the one we have today.”
        (http://www.economist.com/node/17363435)

        What do you believe Mervyn King was referring to when he made this statement? (I believe he’s right – and he has a lot of support and respect amongst leading economists and financial experts).

        Savers blame Mervyn King for keeping interest rates low – as I did; but I now accept that he has no choice; he cannot raise interest rates as it would reduce debt, without debt; we have no money. It is also unfair to blame the Banks – who operate within the current monetary system. They – afterall; create 97% of our money supply; they have devised ever increasingly clever ways of keeping our money supply expanding inorder to keep the economy going. It is the monetary system itself; which is to blame – in my opinion.

        Are policy makers considering alternatives to our current monetary system to reduce the dependence on debt (currently 97% of the entire money supply in the UK) ?

        Thank you.

        reply: the private sector larger corporates have cut their borrowings in the last three years. The private sector as a whole has increased its savings ratio. NO, policy makers are not looking at radical alternatives to fractional reserve banking.

        • Conrad Jones (Cheam)
          Posted January 15, 2012 at 12:44 am | Permalink

          Do you think that Fractional Reserve Lending is a successful way of creating our money supply? Do you think that policy makers should be looking at alternatives to Fractional Reserve Banking (Radical or not)? Do you think that the Govvernment should create more of the Nation’s currency – say 15-20%, as was the case between 1870 and 1970?

          From your Article: “High inflation undermines growth”
          (October 19, 2011)

          “In the 1970s this country learned a very expensive lesson. It could not keep on borrowing and inflating its way out of debt. Then inflation was considerably higher than today. There were high levels of public borrowing.”

          There is a link between reducing Government created money and high inflation. The Government usually gets the blame for high inflation, but it is the Private Sector creation of money (through lending) that has escaped scrutiny for many decades. The government does contribute – through treasury Bond Issues (it’s way of borrowing money) but not to the extent of the rest of the economy. The Government usually rides to the rescue when all else fails – and pumps money into the System to boost confidence and help generate further borrowing from the rest of the economy.

          I believe you have stated that the bailing out of Banks was a mistake and has proved a loss to taxpayers – I agree; but unfortunately there is no choice – if Banks fail we lose our money supply.

          What I believe you should be arguing for is to prevent Governments from Nationalising the Banks – and to prevent Banks from Privatising our money supply. The Conservative 1844 Bank Charter Act was aimed at preventing Banks from creating the National Currency. I believe the Conservatives in 1844 were a bit more savvy than they appear to be now.

    • Conrad Jones (Cheam)
      Posted January 13, 2012 at 10:35 am | Permalink

      Thank you for your reply.

      “For every mortgage a new buyer takes out, an old buyer is paying one off.”

      Is this what you mean by a balanced economy? For each debt that is paid off, a new debt is created, to replace it? Inorder for this to work, is it necessary to increase the level of debt each year, inorder to have sufficient money in the system to pay the the interest payments – which are not created at the time of the loan?

      thank you.

      Reply: It may be necessary to increase total debt as the economy grows – but you are also growing the asset base which supports the debts.

      • Conrad Jones (Cheam)
        Posted January 15, 2012 at 9:06 pm | Permalink

        Are you sure about that?

  47. Ralph Corderoy
    Posted January 14, 2012 at 6:12 pm | Permalink

    It is cheaper over the typical adult lifetime to buy your home than to rent it

    John, does that assume a single long-term family home? Perhaps that’s practical in London; job changes result in a different commute but it’s still within the capital. For a lot of us though job changes, forced or chosen, mean a relocation, and these changes can be every few years. The transaction costs of house purchases are too high to support this; stamp duty land tax of 3% for those over £250K plus 1%+ estate agents fees plus removal fees and incidental charges, e.g. minor changes to the new house. Getting on for £15K from net income for a £300K house.

    Those that haven’t bought because they need the flexibility of location that renting provides may have saved instead but they’re faced with a house price bubble that’s yet to burst. The banks are being particularly soft on borrowers who are having trouble paying because they’re in no hurry to solidify losses on their balance sheets. The Government is in cahoots with the BoE’s “independent” (half chosen by the Chancellor) MPC to keep the base rate low so the indebted Gov. and indebted public, AKA voters, have their debts eroded as much as possible by high inflation. Who would want to stump up their savings as a mortgage deposit and be in negative equity in a couple of years’ time, just in time for the next job move?

    Reply: As a person gets around 20 years on average in retirement these days, surely it is better to spend that paying no rent with the mortgage paid off?

    • Conrad Jones (Cheam)
      Posted January 15, 2012 at 12:12 am | Permalink

      “As a person gets around 20 years on average in retirement these days, surely it is better to spend that paying no rent with the mortgage paid off?”

      Yes – that does sound reasonable, but doesn’t that apply to people who bought their Houses more than 30 years ago, before such Financial Products as “Interest Only”, “Self Certified Income” and ‘110% of the House Price’ mortgages.which contributed to the Housing Bubble and greater risk of a default? Why else are Interest Rates being held so low?

      The next generation may have to rely on excessive inflation to erode their debts. The Endowement element of an “Interest Only” mortgage relies on the investment in the Financial Markets – perhaps for a savvy Trader, that’s fine – but how many people understand how the Stock Market Works. The point being that they may not have enough in their investment to pay off their House debt at the end of the mortgage period. The price of stocks and shares may not be falling in price but are they maintaining their value?

  48. Ralph Corderoy
    Posted January 18, 2012 at 11:30 am | Permalink

    John Stevenson, MP for Carlisle, suggests a change to stamp duty. http://www.moneyweek.com/blog/should-the-seller-pay-the-stamp-duty-57117

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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