Disposable Income Drop Sees Savings Hit Record Low

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How much of your income do you save? Because, according to the Office of National Statistics (ONS), savings are now at a record low.

The ONS state that the savings ratio – which measures the difference between household incomings and outgoings – now stands at just 1.7%. That’s a major drop over the last three months; in the previous quarter, the savings ratio stood at 3.3%. Given that the savings ratio has consistently fallen over 12 months, economists and financial experts are going to be concerned about the rapid drop over the course of Quarter 2.

So, why are we seeing a drop in the savings ratio?

The primary factor is a dramatic fall in disposable income. High costs of living and high inflation rates mean that we all have far less disposable income – and what money we do have is now being concentrated on essential purchases, like food, clothing and fuel, rather than perceived ‘luxury’ goods. That fall also means people feel they simply can’t afford to stash some of their income in savings.

Linked to this are low interest rates for savings accounts. Indeed, nine out of ten consumer saving accounts pay less than 1% interest, while a third of those accounts don’t even offer the current 0.25% base rate. And when potential savers see that their money just isn’t really working for them, they question the worth of saving in the first place.

However, the ONS suggest that another reason for the savings ratio drop: The timing of tax payments. Currently, the first quarter of the year see gross savings of £5.6 billion; a massive drop from previous quarter’s £11 billion, and the three months before that, where gross savings stood at £17.7 billion.

Addressing that concern, Darren Morgan, the Office of National Statistics’ head of GDP, said:

‘The saving ratio has fallen again this quarter to a new record low, partly as a result of higher tax payments reducing disposable income. Some of the fall could be as a result of the timing of those payments, but the underlying trend is for a continued fall in the saving ratio.’

It’s certainly not all bad new, with the ONS highlighting a 0.2% growth in the UK economy over the first three months – although that’s still down from 0.7% in 2016. It seems that the business and finance sectors are also helping to combat that worrying decrease in consumer spending.

But that fall in savings will no doubt focus the minds of both financial experts and UK households. Tom McPhail, head of policy at financial service company Hargreaves Lansdown, was one just expert, stating that the ONS’ figures were ‘likely to set alarm bells ringing.’

He added:

‘Whether this is in fact evidence of a confident economy or peak complacency remains to be seen. The fall in the household savings ratio is undoubtedly in large part due to the squeeze on disposable income caused by a combination of flat average earnings and rising prices. Savings rates tend to fall when the economy prospers, and to rise in times of recession and uncertainty, as households cut back on consumption to build a rainy-day reserve. Monetary policy and the low returns available on cash may well be a factor here too. We need to develop a stronger culture of saving and investing – this is something to which the Government needs to devote more attention.’

Whatever the causes, whatever the solution, the fact remains that we’re now putting aside less now than we ever have in 54 years. The worry will be that, despite wider economic uncertainty and instability, we risk placing ourselves in an unstable position should we need money for an emergency, or even just planning for our futures of the comfortable variety.  

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