No one can accuse Rishi Sunak of a stingy response to the Covid-19 crisis. With £280bn or roughly 14 per cent of national income disbursed protecting lives, livelihoods and businesses, the UK chancellor is vulnerable to criticism for allocating money to the wrong projects, such as the summer Eat Out to Help Out scheme, but not for the total amount spent.
Having played Santa for much of this year, the chancellor recently let slip what was top of his wish list for 2021. He wants households to spend the “built up savings” accumulated this year, ensuring a strong economic recovery. There is no doubt Mr Sunak will fight for the right to party.
There is an obvious question about the safety of such a plan, especially after the own goal of the summer: ministerial demands that people mix socially, get back on public transport and go to work were followed by a second wave of Covid-19. But assuming the vaccine rollout makes the strategy advisable, the question is whether British households will want to go on a massive spending spree next year.
There is no doubt about the scope for significantly higher spending. In the latest detailed national accounts, the Office for National Statistics recorded that UK households saved 16.9 per cent of their incomes in the third quarter, much more than the long-term average of 8 per cent. This increase in the household savings ratio came entirely from lower spending, with available resources the same as in the fourth quarter of 2019. Expenditure was down an annualised £140bn in the third quarter, suggesting a rebound would significantly help to restore national income to pre-pandemic levels.
Similar signs of stronger household balance sheets are evident in the Bank of England’s lending data, with outstanding consumer credit 5.6 per cent lower in October than a year earlier, the sharpest drop in borrowing since equivalent records began in 1994. Borrowing on credit cards was 13 per cent down.
In normal times, these figures would suggest significant pent-up demand, but this fails to take account of the fact that the Covid-19 crisis has changed so much. Next year, the savings ratio will fall, but this will be achieved either through spending rises or through falling incomes. Part of the adjustment to normality will, unfortunately involve the latter, as the government withdraws public spending supports such as the furlough scheme or because some jobs are no longer viable after the crisis.
Even if Mr Sunak could control all household incomes, which he cannot, he has reasons to fear household spending will not simply bounce back once the pandemic is over.
First, there is a question of who cut their spending most in 2020. All studies on this so far show that it was richer households, with poorer people on average saying their finances had deteriorated. No one should expect a rebound in spending on basic services therefore.
The next question is what will the extra money, largely controlled by richer households, be spent on? If it is fancier restaurants and theatre trips, that will provide exactly the boost Mr Sunak wants. But it might easily be splashed out as deposits on property — which simply increases the wealth of the vendors — or spent on fancy cars and holidays, which will improve the output of other countries.
Third, there is the question of whether households feel comfortable spending more. To the extent that they have been shocked by the pandemic into understanding the benefits of more resilient finances, there is likely to be a persistent increase in the savings ratio, slowing the recovery.
These are all natural responses to the pandemic and explain why economists have been less full of Christmas cheer than many market analysts. Everyone thinks there will be a strong recovery when the threats from the virus subside. But don’t expect things to get back to normal quickly. The shock of the crisis will change working and spending patterns. And that will damp our desires to party in 2021.
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