Saving and the National Economy

Economics focuses on choices that people make and the factors that influence them. Most of these choices are micro-economic in character- decisions to purchase one good rather than another good. But there are two choices which have clear and direct implications for the whole economy. The first is the choice between work and leisure and the second is the choice between consumption and saving.<br />

The choice between work and leisure is a proximate determinant of the level of economic activity. In a small open economy, such as the UK, the amount of capital employed per worker is determined internationally by rates of return in capital markets; thus, for any given level of overall productivity it is fair to say that the work/leisure choices normally determines output.<br />

By contrast the consumption/saving choice has little influence on output in the short term, if the economy is not suffering from recessionary unemployment. But in the longer term it determines how much of the domestic capital stock is owned by domestic residents rather than by foreigners. If the capital stock is owned by foreigners property income has to be paid to them out of domestic output, so that national income is lower than domestic output. Conversely if domestic saving runs ahead of the need to finance the domestic capital stock the country will be a net recipient of income from abroad and income will exceed output. In either case it is fair to say that, while saving has no impact on output it does determine future national income and thus consumption opportunities.<br />

Over the last twenty-five years policy-makers' attention has been focused on policies designed to alter the balance between work and leisure; indeed the government has an explicit aim of delivering high labour force participation from people of working age. By contrast it has no explicit policy with reference to overall saving in the economy although policy has referred to some specific forms of saving by households (such as pension saving) and the government's macro-economic framework established clear target rules for government saving, i.e. the surplus or deficit on the government's current account.<br />

For the government to adopt overall saving as a formal policy goal would mean that it would have to settle on an appropriate definition of saving. As this paper shows, there are several possible definitions of saving. However, for a government taking a long-term view of the nation's affairs, this report argues that of some of the possible definitions are unsuitable, facilitating the choices which might be made for a policy goal.<br />

This report begins by discussing different measures of saving and, in particular the way in which they treat capital gains. The UK's saving record is then put in an international context and more detailed sectoral and historical data are discussed. The concept of savings adequacy is then explored. Finally conclusions are drawn.