Caution takes the wheel: Households save, debt mounts, choice narrow

Transcript

Hello. My name's Simon Oates, and welcome to the Public Economics podcast. I'm joined today in the room by Barak Palin. Pelosi, chief economist, and Andy Haldane, senior economic advisor to the firm, also joined online by an external guest for today's pod fat Oshkosh.

Fattore. She is head of public debt management and financial markets at the OECD. And we're very excited to have her joining us today.

We're going to split today's conversation into two parts. Firstly, we're going to have a conversation about the UK economy, and the macroeconomic outlook as we run into the end of November budget. And then we're going to have a bit of a deep dive into a conversation around debt levels.

Both in the UK but also across the broader OECD, and the implications and consequences of that for the growth outlook. Yeah,

So last time we met, it was in late summer. We're now well into autumn and have a more complete view of the economic performance of the UK for most of the year. From a UK perspective, autumn is also very exciting month, with the Chancellor about to announce her budget at the end of November. Speculation has already started on it.

Will touch a little bit that here, but it's a bit of a mug's game. Guessing, what's going to be in a in a budget so we won't get into too much detail, but we'll try and paint a broader picture. But related to that, it's also very interesting how the economic focus, particularly from the IMF, world Bank meetings of a few weeks back have actually shifted to issues surrounding public debt.

And so very pleased today that we're also joined, by Fat Ash as well as Barrett and Andy. In fact, ash will talk to us a little bit about these public debt markets, and we'll turn to her, later on as we move through the pod. But I'm going to start, with our very own, Barrett Capellan.

And I'm going to talk a little bit. Barrett. I want you to talk, sorry, a little bit about the, UK Economic Update report, which you have published recently. A link to that is available in the show notes. Found it very interesting. Personally, you took a lot in that about the UK savings ratio. I actually worked on the UK savings ratio.

As a young grad, when I was, a Treasury economist and we always worried about how low it was. I think that's a position that's actually flipped quite markedly. And I'd like you to, to give a listen. It's a little bit of an update, on that and in particular, what that means, what the consequences of where our savings ratio is at the moment, for the UK economy and our growth prospects.

Plenty to unpick there, Simon. So I suppose the first question is why are we focusing on the savings ratio? And the main reason for that, which is, not commonly known, it's the fact that households are the biggest driver of economic activity in the UK. And will continue to be the biggest driver of economic activity in the UK and most advanced economies, just because of its sheer size and what we've seen in the UK, post pandemic in indirect comparison to the other G7 economies, is that the savings ratio was elevated during the pandemic and it's remained high, so that if you go through the report, we analyse the reasons why that's the case and

It has to do with a few, technical factors. So the risk free rate is higher. There's a bit of uncertainty in the economy. House prices are also linked to the savings ratio. But the main point is that if you have a high savings ratio, it implies that households aren't spending as fast as we would like, which then means that economic activity is subdued.

Now we know that everyone wants faster economic growth. So if you want to get faster economic growth in the UK economy, one of the more tangible and short term factors you can actually, go for is, is gradually reduce that savings ratio. And the analysis we've done is pretty interesting actually. We've sort of said if the UK savings ratio gradually does fall down to sort of, prepend the make levels consistent to, to the other G7 economies, you could boost UK economic activity by about 0.4 percentage points.

Now, I know that doesn't sound a lot, but actually in the context of about 11.2 growth percent growth rates that we get now, it is pretty significant. I think you're a bit a bit close to the numbers there, but I think I think a 0.4, basis point kind of boost in growth would certainly be something we would, would be very glad and the government would be very glad to get their, their hands on.

They would be. And actually, if you look at, if you sort of extend the business angle into, into this point, one of the things that we're seeing through our public consumer survey, which is a, I think three times a year, is that, yes, consumer slash households have been spending on essentials, but they are quite cautious on their discretionary spending.

So big ticket items is something that they're quite wary of. So if you want to unlock growth fast in the short term, it's worth focusing on that factor. Brilliant. Fantastic kind of way to to kind of start us off on a really interesting kind of fact there, and just shows quite how important consumer confidence is to economic growth.

And if I can just turn to you and ask a very similar broad, broad question, and what's your sense of, the short term outlook, for the UK economy and, and since we last spoke in summer, gosh, dare I even ask the question, do you see any improvement, any green shoots for what's happening in terms of that that UK economic outlook?

We did ask Simon. So, I mean, I think the short answer is, since we last spoke on this pulled, I think, caution has kicked in in the first half of this year in the UK, growth of around 1% was pretty good, actually. And there were grounds, for a degree of cautious optimism, I think looking to the second half of the, that cautious optimism has been replaced with caution.

Hence consumers are choosing to save rather than spend. And actually we see the self-same happening for businesses as well. We find both consumers and businesses, the two engines of the private sector, both, receiving income more than are spending, in other words, running financial surpluses. And that's a reflection of them pressing the pause button on spending, given the uncertainties, which are many in various but the one that's come into the foreground moving into the second half of the year has been the budget.

You mentioned, in the UK, at the end of November, the speculation we've had around that hasn't been helpful. Speculation. It's been largely about where will the axe fall? Will it take the form of lower spending or of higher taxation? I think given that uncertainty, it's understandable. The surveys back, this up that both the consumer and businesses have pressed pause.

And the flip side of that of higher savings is lower spending and somewhat weaker growth into the second half of the year. Wow. Tough outlook. And I think that that does bring us pardon me directly onto this question that that I said we're not going to go into the specifics, but we can't avoid the elephant in the room.

We're sat here in late October, about a month out from the budget. Lots of speculation is, as you say, Andy, not all positive. But I'm going to be a little bit cheeky and say, have you got something kind of original that you're prepared to say a kind of month out in terms of sort of that, that that landscape for the Chancellor as she prepares for the, for the end of November, fiscal statement.

Well, I think I will start with an anecdote, actually, which is that I think this could be an exciting budget. And the barometer of this was, my barber. So when I went to get my haircut around a week ago, he actually was quite interested about what was going to happen in the budget, which sort of shows the significance of, you know, usually a budget is something that's, much more an area of focus for economists and policymakers.

But actually, you can see the general public and I businesses as well, small businesses are really interested about the, November budget. So I think we can paint some of the contours of what could make this budget exciting. And there's sort of two angles to it. Now, we know that the so-called headroom against the fiscal rules has been eliminated because of a variety of factors.

That's been, well, reported slower, slower future growth, some policy U-turns, higher funding costs and so on and so forth. But there's a couple of questions that that I have which, are going to be intriguing. To, to see, on on the day. The first one is what policy levers do you pull to actually eliminate that fiscal shortfall?

Do you go for a couple of big tax revenue raising policy measures, something like, the income tax, for example, or do you go for, smaller measures, but quite a few of them, which could be disruptive for, for households or businesses. So that is probably the first thing I would watch out for. Are we going to see a big change in a few policy levers, or a lot of changes in quite a few, policy levers?

The second question in my mind is by how much will we see a policy change? And to elaborate on that point, back in October, the fiscal headroom was about 10 billion. Then that that got eroded. And then in the spring budget, the Chancellor opted to bring that up to 10 billion. Now the question I've got is, is she going to bring it back to 10 billion again, or is she actually going to go for higher fiscal tightening to build the bigger headroom?

And that's an interesting question actually, because I can see the benefits of doing that. Which would be if you've got a bigger, bigger fiscal buffer in the future, that most likely means that you won't have to change your policy that much in the future, which could breed a bit of certainty in the economy. But to do so means that you will actually carry out big changes which might not be, the best or the most optimal from a political point of view.

So these are the two big questions I've been grappling with, and it will be interesting to see what the Chancellor chooses on the day. Okay, well, whether we have an exciting budget that we'll have, we'll have to wait and see. But I think a highly, anticipated and watched budget for certain. And you've been, quite vocal in terms of what, what you think could, could potentially pushes out of, of the current, frankly, negative spiral of higher taxes, lower growth.

Would you like to elaborate a little bit more on that? And I know we said we wouldn't get into detail speculation on the budget, but anything that you would, you would kind of foreshadow for, for people to be watching out for. Well, I'm stepping aside from specifics. What might we wish for on the 26th of November? I mean, the great redeemer of the UK's debt problems and not just the UK's debt problems is growth.

So this budget will have failed if we don't emerge from it thinking this is a fillip to growth. Rather than a detractor from growth. What would do that? Well, first thing we touched upon this is, the speculation since last year's budget has been quite unhelpful, I would say a significant, headwind to growth. I leave an estimate.

I reckon that's put back growth by between a half and one half percent. Given the scale of the pick up of uncertainty since that period. So we need to emerge from this budget without the continuous stream of speculation about what next. This wasn't enough. What will be the next tax to rise? What's the next category of spending to be cut?

And that does mean having more flex in the system than has been the case, hitherto. And that's one of the things I'd like to see emerging from this with greater flex in the fiscal, framework. The second thing would be if we are, to do some rebalancing fiscally, which is almost inevitable, let's ensure that at least some of that comes from the spending side.

Rather, the taxation side. The focus so far as been the lion's share of the hole being filled with tax rises that would make it hard for it to be growth friendly. A stronger skew towards spending cuts make it more credible in the eyes of the market, and more growth friendly. And those two things are quite closely related. Final point to the extent the tax rises are needed, I think everyone thinks that some tax rises are needed.

Let's make them also as growth and as business friendly as possible. The same could not be said of last year's budget. I would say, but picking those categories of tax, which have the least chance of putting confidence among businesses and consumers even more on the back foot, I think, are absolutely, fundamental. So that's not, specifics, but as the contours we need from this budget to make it growth friendly and to make the debt issues that will come on to with fetish not more acute rather than, unless then I think those are the area is Rachel will need to focus.

Brilliant. Thank you very much. And what a great kind of pivot point to that real focus on the need for growth, the need for optimism. Against this backdrop of where we sit in terms of, frankly, the levels of a public and, and private debt and as you as you mentioned, we have a joined today, in our discussions by Fatf from the OECD.

And in fact, she was one of the authors, of the recent global debt report looking at, debt trends across, OECD countries, both, both public and private. And one of the things that that really stood out in that is, is quite how rapidly over recent years that debt to GDP ratio, has been, increasing.

And I think it's maybe the first question I'd just like to put chief first, I'm also going to invite kind of Andy and Barack's really, privilege to be to be joined by you today to kind of feed him with our questions as we go through this part of the podcast as well. But my kind of first question is, is this trajectory which is thinking you all in your report?

Forecasting, debt to GDP to increase to potentially 85%, across many of the OECD countries, is that trajectory sustainable? And what realistic options do, governments have to stabilise and even reduce that level of debt?

Thank you. Simon. Well, short answer is yes, but not without risk. Both. And in that just, mentioned low saving rates of fiscal choices, both from spending and revenue side. And this I agree that burden it was highlighted for UK, but the UK is not, alone in this I'd say. I mean the rising debt to GDP, part, is coming, you know, seedy, area in countries.

It's, it's not something new. Also, it's a, it's a legacy of the 2008 financial crisis and the Covid 19 pandemic. When we look at the G7 countries, especially, for example, none of these countries, so their debt to GDP ratio has dropped to pre-pandemic levels. A few countries, namely Germany, Italy, Japan, they made efforts, so to speak, to, to, to, decrease this number in a gradual decline we have seen after the pandemic.

But, but such a decline was not observed in UK, in US, for example. So, the level is high in terms of debt to GDP in and is not inherently unsustainable. I would say. But it's certainly fragile. It's because of the refinancing risk. It's, I mean, when we look at the, refinancing needs going forward because of this high outstanding level of debt and also the current level of, interest rates, it's clear that, the, the refinancing risk is, is a concern, for, for many countries and, only, I would say forward looking high return buyer that you can just justify, that, in this, in this current environment,

Can I just ask you to say a little bit more because I think you've kind of hit on the point that certainly, concerns me when I, when I look at, at that trend, which is, is that the historic cost of that debt build up have actually been pretty low, but are increasingly more expensive.

And I think that that is the sort of inflection point that, that, that we're at. I don't know if there's a little bit more you'd like to say for, for kind of listeners about that trend, about how you see that, continuing and potentially reversing and, just bring to life some of the risks. If it doesn't, if it doesn't, diminish.

So to I think now the governments are paying more to service the existing debt and to it's simply indeed, we talked about the, the government, bonds, all spending levels today it's around between 55 trillion to 6 trillion outstanding, level of government securities.

And they don't really reflect the prevailing cost of new borrowing since the stock is largely a legacy of of the low interest rate periods, most outstanding debt carries a cost that is much lower than the current market rates, and it's likely to be lower than the cost of borrowing going forward. Since the, since the total outstanding has been issued at and will mature over decades increases, I would say in the interest payments tend to be gradual.

Nonetheless, between 2021 and 2024, interest cost to GDP increased from the lowest to highest level. And then the last 20 years. This is something and it's reflecting the speed of there is some changes. And what we observed indeed is just that the at the end of 2024, over half of government securities, had interest costs below this premium rates.

And the ratio is now 60% of investment grade for book, corporate debt and 70%, 74% for Non-Investment. Grade corporate debt, which is also very, very high. So when we just, concentrate on the all government securities, it's almost half of this will mature by 2027. This includes one third of fixed rate that and 60% of which was issued before the post 2020 tightening cycle.

And this high near term refinancing profile is partially as a result of the increased issuance of the Treasury bills. Why Treasury bills? Because of the, the, shape of the curve. Indeed, governments had this difficult choice between issuing the short end of the yield curve with low rates and the long end of the yield curve in mid high rates, and with the, steepened, slope.

It's a tough choice. I would say.

So if we look at the huge spending demands and the bat, they feel free to it's kind of leaping and share your views. Would be great to see the three of you kind of sparking off each other here.

There's huge spending demands for climate transition. The UK is not alone in having, a ageing population. How can governments balance those spending priorities with the system without being able to carry on with these historically high debt levels? But you've also painted the conundrum that that at the cost, that they will have in future.

It doesn't feel sustainable. What's I mean, this is must be what our chancellor and other chancellors are considering at the moment. But how the governments navigate this.

Well, to be honest, the answer is it will it will be extremely difficult. But again, not impossible. Of course, with the right the strategy, as it says, looking forward, governments face massive pressures climate mitigation, adaptation and ageing populations, health care, education and digital transformation. It's just there is this needs for additional, kind of spending.

And you're right, the question is can governments credibly balanced these priorities with already settled with high debt. And I think the answer is the prioritisation and sequencing because there are things need to be done first. Of course, in the medium term, structural reforms. Right. And because focusing just only today's problems with today's interest rates, today's markets, conditions, of course, this is something that we have to deal with in the short term.

But in the medium term, long term, we have to have some credible policies showing investments and investors. That's just like there is this credible, policy framework, consistent frame realistic. So it's,

begin with no regret. Climate investments. I say energy efficiency pays back. And this is, one thing and essential health and social spending and, and maybe, a bit of delay or phasing, lower priority programs, might, might help.

And also leveraging private capital, public private partnerships could be, you know, some sort of solutions, depending on the country's own conditions, of course. But definitely, what we advise to governments is just please consider intergenerational fairness and debt transparency. Governments must communicate the choices they do to transparently ensuring younger generations see the benefits of investments and understand that implications.

This is, this is really, really important. As we just mentioned, everybody is just is interested in all of today's problems, especially they eyes are on the budget. And that figures because they know that it will have implications for future generations. So in effect the area the era of borrowing first and reform later has closed. There is no such thing now.

It's just the balancing act requires credibility, discipline, fiscal frameworks and political will.

That's lovely. Really nice kind of analogy and kind of bringing to life that that, that need for reform and that clear, policy pathway.

For investors through, through the situation we're in at the moment. And I'm going to just turn to you and ask kind of any, any reactions to that and maybe even any observations around where other countries seem to be doing it better than us, or even actually where we're doing it better in other countries, but things where you feel that we're starting to get that right, or where we need to just double down to, it's a really improve the UK outlook.

Yeah. I mean, not to add to the agony, but no one's mentioned defence. And that will be a further area where we all collectively will need to step up and that's already started. But, you know, if we're all going to hit the NATO target of 5% defence spending, that's going to add a couple of percentage points, of GDP, to the fiscal deficit on a sustained basis, on average, for most countries.

Does that make it a council of despair? It needs not to actually invest for some glimmers or examples of countries that have navigate this path. And let me give you a couple, actually, from Europe. One is Greece, the ones Italy. You have to back up too many years, about a decade, actually, to a time when people thought Greece in debt terms was a complete basket case, but borne out of crisis in the Greek case was the political will to make a change.

And they have run, primary fiscal surpluses. That's, taking out the interest cost they have been, receiving in more than they've been paying out for a decade now. And in consequence, we've seen the Greek economy, stabilise and begin to grow and debt costs, in Greece have come down extremely sharply. And the same is true literally as well.

Not as dramatically, not as, over a longer period. But Italy will probably now run a primary fiscal surplus this year for the first time since anyone, frankly, can remember. So this can be done with the political will that that or, mentions, what it will require, of course, is for governments to credibly gain control of the spending envelope, but to do so in a way that doesn't snuff out growth.

And that means really making the cuts that are needed into current spending rather than capital spending that the woods to preserve, ideally to enhance investment, public investment, which we know to be one of the keys to growth, picking up at the same time as achieving that fiscal consolidation by making sharper inroads, into the current spending. That's the path that the Greeks and Italians have taken.

And that is the path that France, which is in a rather more cute bind than we are at the moment in the UK. But the UK too, will need to follow, to get us back to a position into that. The opposite of the doom loop you described earlier on Simon, where, growth is picking up borrowing costs, ticking down and debt is no longer a signature issue, for financial markets, but actually also for politicians that that's possible.

The path is narrow. The starting position is fragile. But we can take some comfort from others recent experience, including in Europe. So look, I think that could well be the point at which we should, draw this conversation to a close. As I say, we've done pretty well in touching on the forthcoming budget, but without being, drawn into to kind of speculation, which will no doubt be on the wrong side of, I think what we have framed is that the Chancellor absolutely needs to leave the country after that budget with your words and the sense that the government has credible control of that spending envelope.

But critically, back to kind of Barrett and that off his point about where consumer and business confidence is, do so in a way that leaves the country feeling, more optimistic and leaves are, investors and business, leaders feeling, more pro-growth pro investment than they were left after, the last, major event in October of last year.

Our next, podcast will be out in early December. We're going to wait till, a week or so after the budget so that we can, digest it, and have hopefully, some more refined, thinking, and I will say by, by pitching it at that point, we will also try and ensure that we give you some real insights on the outlook for 2026.

Fattori, thank you so much for joining us, Andy Barrett, as ever, it was a pleasure to talk to you all. Thank you very much.