Why is it that UK Governments seem determined to motivate people to behave badly? The Welfare System frequently makes it impractical for the unemployed to go back to work and continually tempts the low paid worker to quit his job and join the black economy. This a problem which Frank Field attempted to tackle in 1997 and which Ian Duncan Smith is now trying to resolve. It is proving an intractable problem and one which is worthy of in-depth analysis – but not here, not yet.
The purpose of this article is to explore another area where good intentions are again sending entirely the wrong message. Interest rates have been held at 0.5% for many months. The main reason is fear that, if interest rates rise, large numbers of mortgage holders will find they are unable to pay the interest on their loans. Many could lose their homes. Understandably, the Government would like to avoid such a situation.
As a result, those with savings are earning far less interest than they need, even to compensate for inflation. Those on incomes derived solely from interest on savings have seen their standard of living slashed by 50% or more. This has hit middle-income pensioners particularly hard. When those who are employed complain about small increases in their wages/salaries or pay freezes, they should spare a thought for those who have seen a cataclysmic decline in their income, erosion of their capital and, because they are retired, no means of improving their circumstances.
So, what we are seeing, at the macro-economic level, is a systematic transfer of money from those who have saved to those who have borrowed.
In many cases, those who have borrowed have taken on debt which they could not afford. We should not blame them too severely. The previous government encouraged the public to think that the days of boom and bust had gone forever; the banks were only too happy to lend more and more to create ever greater numbers of ‘debt-serfs’; and the people, with the connivance and encouragementof the banks, responded by borrowing as much as the banks would lend, almost regardless of the income they would need to pay the interest, let alone repay the capital.
What is the message we now sending out? The message would seem to be that we run a system where those who are sensible andresponsible must be penalised and those who have been reckless and irresponsible must be rewarded. The banks must be bailed out, although in many cases they entirely failed in their duty of care to depositors. Those bankers responsible, far from facing punishment and penalty, continue to milk the system. And those whom they helped to dupe into taking out loans they could not afford are now being protected against the consequences of their ill-advised and foolhardy actions by artificially low interest rates, financed out of the savings of depositors.
Surely we need a system that rewards those who act in a way that benefits society; and penalises those who damage society - not the other way round!