However, retaining jobs and stopping a rise in unemployment are merely a means to an end. The true goal of Rishi Sunak’s initiatives is to create an economy of “spend, spend, spend”, where the government hopes to fuel a demand-driven road out of recession. The more people consume, the more supplies will be needed, hence driving up production of goods and delivery of services. In this rush to drive the economy and create growth, who are the forgotten people in our economy?
Preserving jobs and creating opportunities for people to spend money now, is good for those earning their income through employment, but not so great for those relying on savings and investments. There are over 6.6 million people over 65 who continue to pay taxes. Many of these individuals have retired and rely on the income from their capital to meet their living expenses. Coronavirus and the impact of the government's response have badly damaged the income of these people and their ability to spend.
At the start of the pandemic, the base interest rate was cut to 0.25% and then slashed to just 0.1%. This was the first measure to persuade people to spend rather than save. After you take out the effects of inflation, the spending power of savings is falling. This makes it more attractive to spend today, rather than to hold off spending until some future date when you'll get less for your money.
Those who no longer earn income from employment have another; and more important concern; how do they make sure that they keep enough capital to provide a reasonable income for the rest of their lives? A shortfall in income today can be supplemented by using some of the capital, but this means the remaining capital will have to work harder to produce even greater returns in the future, to continue to meet living expenses.
Savers are suffering from a reduction in income in other areas and not just the cut in interest rates. Companies reacting to the coronavirus have suspended or cut the dividends that they pay to shareholders. Over half of the top hundred leading dividend producers in the UK have already done this. This move severely reduces the natural income from investments and this will have a long-term effect upon future returns. This lack of income from investments leaves savers with a large hole in funding for their spending plans.
At first glance, this might seem to be a problem for the wealthy with a portfolio of stocks and bonds, but it affects many other people too. Anyone with a pension plan or with an ISA, will need to save a lot more going forward just to achieve the level of income they had planned and hoped for.
A prudent course of action for those relying on income from their capital might be to cut their spending for the time being, however, things are going to get harder as we go forward. The government response has increased debt by £160 billion to date, bringing total borrowing to 109% of our national GDP. At some point, the Chancellor will need to find ways of reducing that debt and this will almost certainly mean raising taxes. Increased taxation will mean less disposable income for everyone.
Rishi Sunaks measures will go some way to keeping jobs and to restoring consumer confidence in the short term. They will drive spending by those who have a job and earned income. But they will do nothing for those who are no longer earning and who rely on income from their savings.
The information in this article or any response to comments should not be regarded as financial advice. Remember that the value of investments can go down as well as up, and could be worth less than what was paid in. The information is based on our understanding in July 2020.