Bank of England report highlights uncertain outlook

22/09/2009

People could actually end up with lower wealth levels even if they spend less and save more as a money problems solution, the Bank of England suggested in a new report released yesterday (September 21st).

In the institution's latest quarterly review, the possibility of the UK facing the common recession scenario of "the paradox of thrift" was pointed out.

This occurs when, in tough times, people decide to increase their savings levels and reduce their borrowing in order to improve their financial position.

However, the Bank pointed out that this can result in people spending less money overall on goods and services - resulting in a less strong recovery in the economy as a whole.

In turn, this can limit the amount of money in people's pockets over time - and result in people saving less than they would have done otherwise.

The report explained: "Any attempt to reduce consumption is likely to push down on output and hence household incomes.

"That could actually make it harder for households to increase their saving."

Despite this finding, the Bank pointed out that the outlook for the UK is "uncertain".

Commenting on the report, EuroDebt director Kevin Still said: "It is fairly easy for consumers to be confused by such comments, as there are few incentives to save and a natural disposition to stop spending on non-essential expenditure. Repaying debts is an obvious choice, especially the unsecured credit agreements with high interest rates, like credit cards where average rates are now over 18 per cent.

"I wouldn't expect many households to be looker at the 'big picture' when considering their own financial arrangements, especially so if you are struggling with debt and meeting priority payments like mortgage, rent, council tax and utility bills."

He added: "As a debt solution provider, EuroDebt advocates non-borrowing solutions and to tighten household budgets to an affordable level. If someone is unable to meet contractual payments and needs help managing their unsecured debts then we would look at managed services like a DMP or an IVA."

Tags; Current UK Economy, Credit Card Lifestyle, Recent Graduate Debt,

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