“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness.
“Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Wilkins Micawber gives this piece of advice to David Copperfield in the Charles Dickens novel.
Economists would like us to read Dickens again. Or at least pay attention to the keen observations of Mr Micawber.
Even though the novel dates back to 1850, its lessons are as relevant today as they were then.
That’s why we nowadays speak of the Micawber principle, which is more or less defined as “saving is good, debt is bad”.
But saving is hard when banks only pay a measly 0.05% interest. And with inflation at 2.4%, we’re losing money in real terms even as it sits in the bank.
That’s why the Financial Conduct Authority (FCA) has thrown up a crazy idea: wouldn’t it be great if there were a basic savings rate?
The FCA is worried (and rightly so)
Mr Micawber faces adversity with remarkable optimism. “Something will turn up” is one of his famous phrases.
Something doesn’t always turn up, though, which is why he spends some time in debtors’ prison.
People who couldn’t pay off their debts were incarcerated in the Victorian era. Sometimes entire families were locked up together.
It’s a good thing debtors’ prisons no longer exist because they would overflow in the present day.
The poorest 10% of UK households spent two and a half times their disposable income last year, according to the Office for National Statistics.
UK unsecured debt (like car loans, credit card debt, overdrafts) has risen to £300bn, says PwC. That’s an average of £11,000 per household. The debt mountain is now 30% higher than before the crisis.
This is of course not only the fault of banks paying virtually no interest, but it certainly doesn’t help.
In addition to Brits piling on debt to maintain their spending habits, a non-paying savings account leads to all kinds of other problems as well.
Brits are withdrawing money from their savings accounts “at the fastest rate ever”. So not only are households borrowing more, they’re also saving less.
It’s a logical consequence of rising prices and falling real wages. People have to bridge that gap one way or another.
At the same time people are putting more money in riskier assets, like stocks or cryptocurrencies, in search for better yields.
You can hardly blame them for doing whatever they can to grow their money. The problem is that they may end up with even less money for a rainy day if these investments don’t pan out.
For a while now the FCA has tried to help Brits with their savings.
The financial services referee has encouraged people to switch savings accounts so they’d get higher rates, but that sorted little effect. Most people don’t care for the hassle of comparing and switching banks.
Now the UK regulator has proposed something else: why not force banks to set a minimum interest rate?
This basic savings rate (BSR) should ensure that even savers who stay loyal to their bank or building society aren’t getting a raw deal.
A small price to avoid misery
Brits are losing the habit of saving.
The savings ratio (the percentage of our disposable income we save) was as high as 14.7% in the 1990s. Now it’s at 4.1%.
“If there is a rainy day ahead, we are not preparing for it because for many people the rainy day is now,” notes BBC economics editor Kamal Ahmed.
A basic savings rate could help remedy this situation.
The FCA says it would allow people in the UK to collectively earn £480m a year more than they get now.
This could make a big difference to people’s lives. It would encourage them to save more, put less money in riskier assets, and take on less debt.
And there’s no doubt banks can afford it.
The “big four” UK banks – HSBC, Barclays, Lloyds, and Royal Bank of Scotland – all increased their pre-tax profits last year. Together they made more than £11bn in net profit.
Even if banks were obliged to pay £480m more interest, it would still leave plenty of profit to spend on shareholders and build up cash reserves.
It’s a small price to pay for a healthier economy where people are incentivised to save rather than borrow.
The result would be “happiness” rather than “misery”, as Mr Micawber would joyously exclaim.
Heck, imposing a basic savings rate would almost force banks to become socially responsible businesses!
In practice things are never that easy.
Assuming the FCA wouldn’t go for the nuclear option of setting an industry-wide minimum interest rate itself, banks would inevitably set this rate as low as possible.
Oh well. We can always read more Dickens and hope that something will turn up.