The UK’s splash-the-cash summer has a distribution problem

It’s fair to have assumptions about how the British economy might reset after the Covid crisis, but at the moment, it feels a little like we’re flying blind. For every expert touting the death of commercial real estate, you’ll find a punter exalting the delights of the commuter life. The same goes for infrastructure spending, or the welfare state.

One thing is more certain though — in aggregate, household balance sheets are bursting, with Morgan Stanley analysts reckoning that the excess savings available to spend will be around £170bn once the UK re-emerges from lockdown at the end of the second quarter (barring any more nasty surprises).

It’s to be expected. No one has been able to go out and spend on consumer goods and services — whether it’s nightclubs, tattoo parlours or zoos (FT Alphaville’s favourites, of course) — so there’s a decent change you’ve been sitting on your tod and watching your bank balance grow. Even if you’ve been unfortunate enough to be furloughed.

But to what extent? Well here’s a neat chart from Morgan Stanley, showing just how aggressive saving has been versus the long-run trend over the past year:

So the economy is sorted then right? Surely, as soon as we’re out of Covid cages, the British public will be sinking their cash into all sorts of goods, which will flow through tills, down to wages and profits, and back out again in a virtuous cycle of summer splashing out.

There’s a slight wrinkle here, however: those savings are rather unevenly distributed. At the risk of sounding like a pinko in these pink pixels: the rich have got richer, and the poor have got poorer.

Here’s Morgan Stanley again:

So more than one-third of those unfortunate higher-income and retiree households have reported an increase in savings, while those on lower incomes have seen their balance sheets weaken. The unemployed, inevitably, have suffered the most.

That’s a problem because despite the British public’s clear proclivity to spend, it’s a well-known fact that it’s hard to spend sterling that you don’t have. Here’s the relevant blurb from the MS note (with our emphasis):

Still, there are two main reasons why we expect a relatively cautious approach to using the excess savings: i) The rise in the unemployment rate will amplify any ‘confidence scarring’, ie cautious behaviour due to a more uncertain outlook following two large crises over the past decade, and will thus result in higher desired levels of savings; and ii) The distributional inequality of the accumulated excess funds means that it is largely middle-to-high income earners who hold the elevated ‘forced’ savings, ie, consumers with lower propensity to spend. Consumers with higher propensity to spend — i.e., those on lower incomes and younger workers — were disproportionately affected by furlough, which while it capped the job losses, still resulted in only an 80% replacement rate for workers furloughed.

It’s a major issue — how to get those who have no immediate need to spend to splash? Back in December, UK chancellor and part-time PR experiment Rishi Sunak called for households to spend “the built-up savings” from the crisis to help the UK economy. Yet it wasn’t clear why they would be convinced by this request, nor even whether Sunak, with his estimated net worth of £200m, would be leading the charge.

FT Alphaville has an idea, but it does feel quite old-fashioned. Issue a “Covid victory” bond that pays an interest rate notably above its equivalent UK gilt, and make it exclusively accessible to private individuals. That money can then be allocated to those with a higher marginal propensity to spend, either in the form of wage-linked cash transfers or via subtler short-term tweaks to tax rates, such as raising the personal income tax allowance.

If anyone has any better ideas, we’re keen to hear them. But given a wealth tax still seems more a pipe dream than a reality, our Covid victory bonds at least seem a remotely feasible option to get the economy moving again. And they have a nice ring to them too. Patriotic.

Thoughts and comments welcome below.

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