£60bn fear over UK savings slump

ATTEMPTS by the Government to make people save more for their retirement could backfire and blow a £60 billion black hole in public finances, a top economist has warned.

Taxes would have to soar as result of the recommendations of the Sandler review into long-term savings and the Pickering report on pensions.

Maurice Fitzpatrick, head of economics at City accountant Tenon, said that the only way the Government could plug the hole would be to slash expenditure - or double the basic rate of income tax.

He said that over the past five years there had been a sharp fall in savings. The amount of income that households invest has fallen from ten% to 3.75% in the past five years.

This fall has had the effect of boosting spending, output and economic growth over the same period.

But if consumer spending is curbed as people save more, the negative impact on economic growth would severely hamper Government spending plans as less tax flowed into the Treasury.

Fitzpatrick said: 'Assuming that savings remain static between now and 2007, GDP growth would be only 7.3% rather than the predicted 12.75%. On current-predictions, there would be a shortfall of about £50 billion.'

But if savings climb back to the ten% ratio, the black hole would rise to £60 billion, Fitzpatrick said.

'These figures illustrate the scale of the problem facing the Government, which has grown used to people saving less and spending more.'

A Treasury spokesman said: 'There will be no black hole in public finances.

'We plan fiscal policy on the basis of cautious and prudent assumptions and we are predicting that we will be in surplus for every year of the forecast.'