The prudent among us can’t expect much reward from the Budget
Three years ago, when the Bank of England embarked on its first £200 billion round of quantitative easing (QE), most of us — including some Bank officials — hadn’t a clue how this relatively untried policy would work. There were dire predictions from monetarist critics that ‘printing money’, as it was colloquially called, could only result in Zimbabwe-style inflation.
That prediction has so far not been realised, largely because the economy has been operating so far below potential and the repair work, after Labour’s great boom of 1997-2007, is still going on. In that period banks, corporations, private equity spivs, households and sovereign nations loaded themselves up with cheap debt. But when the wheels came off in 2008, supplies of credit went into reverse, corporations and households started to jettison debt, and growth in the money supply came to a grinding halt. So far, even though price levels have elevated, the horrors of Zimbabwe and Weimar Germany have been avoided. But the impact on savers has been grotesque. And there is no reason to believe that the plight of this largely silent majority will carry much weight when Chancellor George Osborne opens his Budget box next Wednesday.
Even though QE may have helped the economy out of the ditch in 2009-2010, it has not been an unqualified success. Rather, it has been a necessity because Labour’s profligate legacy has made it extraordinarily difficult for the Chancellor to rescue the economy through traditional means. Instead of an extension of the VAT break, so irritatingly demanded by Ed Balls, Osborne gave us a 20 per cent VAT rate which has been a big contributor to the Exchequer as well as to higher consumer prices.
The biggest victims of the pact between Osborne and Bank of England governor Sir Mervyn King, under which fiscal policy would be tightened and monetary action engaged, have been ordinary households — and savers in particular.
Households have suffered the biggest squeeze since the 1920s as wages have been held flat while prices have shot up as a result of tax rises (such as VAT), soaring energy costs (partly because of the green agenda) and a 20 per cent or so devaluation of the pound which pushed up import prices.
The biggest impact of all, however, has been on that section of the population that over the decades has been most prudent. I don’t mean people with whopping great mortgages, who have benefited (until the last few weeks) from some of the lowest mortgage rates on record. I refer of course to savers, who outnumber borrowers by seven times, and have been left high and dry. Similarly, companies running pensions on behalf of staff, and would-be retirees obliged to buy annuities designed to fund them until death us do part, have suffered an enormous loss of income and expectations.
If savers and pensioners had hoped that the authorities might be sympathetic to their plight, they have been horribly disappointed. In the first week of March Paul Tucker, deputy governor of the Bank and the most likely internal candidate to succeed King, told the Commons Treasury Select Committee: ‘If we had not been running an easy monetary policy over the last three years or so, the economy would have been destroyed. I know the rate of interest on deposit accounts is low and I understand and have great sympathy for the effects of that on savers because many of them did nothing to bring about the present crisis… But I promise you they would have been worse off if we had not supported demand.’
Tucker had a point. If the Bank had not lent the banking system unlimited funds, lowered interest rates to 0.5 per cent and engaged in QE, then almost certainly, like savers in Argentina after its default and devaluation in 2001-2002, UK savers would have been wiped out. Nevertheless, the pain has been appalling and the Tories, supposedly the party of thrift, have so far done very little to lift that burden. Over the past three years the impact on savings and deposit accounts has been little short of devastating.
The average return paid by banks, building societies and government-backed National Savings and Investments has been just
In times of high prices borrowers benefit because the worth of the sum borrowed is eroded by inflation. The corollary is that people holding cash savings invariably lose especially if interest rates are below the rate of consumer price rises, which has been the case consistently over the last few years.
Just as significantly, pensions have been decimated by QE and low rates. The National Association of Pension Funds estimates that the fall in gilt yields, which are used to calculate the future value of pension funds, has caused a £90 billion widening of the black hole in company pensions.
At the same time, pension pots buy much less attractive annuities than had been predicted before QE began. Saga director-general Dr Ros Altmann (ironically one of Mervyn King’s former PhD students) accuses the Bank of England of ‘taking far more money from people’s pensions than Robert Maxwell ever did’.
Budgets traditionally offer governments the chance to redress such inequities. But with Osborne under pressure from his LibDem colleagues to withdraw higher-rate tax relief on pensions, thereby raising billions more from the better off, extra punishment for future retirees may be on the way, rather than help. Yet there are a couple of simple things that Osborne could do.
He could take the shackles off National Savings and Investments and allow them to offer savings bonds which at the very least match inflation, and he could increase the Isa tax-free allowance of £10,680 by significantly more than inflation, to compensate savers for their sacrifice.
Of course the best thing of all would be to steer the economy back to growth and normality so the Bank can stop printing money. The markets are already starting to anticipate that, and interbank and future swap interest rates have started to edge up, leading to slightly better savings deals. But there is still an enormous distance to travel.
Alex Brummer is City Editor of the Daily Mail.