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Savings crisis might be over as Britons put away more money than we thought

British families are putting aside more money than was previously thought, indicating that the savings crisis may not be as acute as feared.

Business Matters
By Business Matters
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The average household saved 8.4 per cent of their income in 2015, new estimates from the Office for National Statistics (ONS) indicate, substantially higher than the 6.5 per cent previously estimated, the Telegraph reports.

It means that in an average year from 1997 to 2015 households saved £11.5bn more than previously thought, and so should have a bigger buffer to use if they get into trouble financially, lose a job, or if prices rise rapidly.

“These figures provide further evidence that the gloom about household savings levels may have been overdone. On this new measure, savings levels in 2015 were barely changed over the previous 12 years, whereas the old figures suggested a sharp fall over the same period,” said Steve Webb, the former pensions minister who is now a director at Royal London.

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“Coming on top of evidence that more recent falls in the savings ratio may not be evidence of a collapse in household savings, this is further reason to treat this single headline figure with great caution when reading the runes about the state of the economy.”

The revision arose because of shifts in the structure of the economy.

More people are self employed than ever before and a growing number of those have incorporated as businesses.

As a result they pay themselves dividends rather than salaries, and this shift means the ONS can now increase its estimates for household incomes.

As the savings ratio is calculated by taking estimates of incomes and removing estimates of expenditure, this indicates households are saving more than previously thought.

In the average year from 1997 to 2015 the savings ratio was 0.8 percentage points higher than previously thought, with a larger gap in recent years.

The savings ratio still fell sharply after the financial crisis – families try to save more when times are tough and the risk of losing a job rises – but by less than feared.

In 2010 households saved 11.1 per cent of their incomes, falling to 8.4 per cent by 2015. This is still higher than the ratio of between 6.9 per cent to 8.1 per cent, which was seen from 2002 to 2008 in the boom years before the financial crisis.

Recently fears have grown that households have had to slash their savings to support spending in the face of weak wage growth and rising inflation.

In the first quarter of 2017 the savings ratio plummeted to just 1.7 per cent, indicating households have little room to cope with higher price rises or a jump in unemployment.

The new methodology has not yet been applied to this number, but if it followed the pattern of the years from 1997 to 2015, the average adjustment would indicate the “real” ratio is 2.5 per cent – still a very low figure by historical standards, but half as high again as the initial estimate from the ONS.

Another factor is that the ONS has changed the way it measures bond interest and share dividend income, also pushing up average household income and so improving the savings ratio.

However this has a bigger effect on the current account deficit, as the revised figures indicate foreign investors are benefitting from a bigger flow of income from their UK assets.

As a result the deficit in 2015 stood at £98.1bn, well above the £80.2bn previously estimated.

On average the annual current account deficit was £10.1bn larger than previously thought in each year from 1997 to 2015.

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