Leading article: We cannot afford to ignore the interests of savers

After years of being neglected, Britain's beleaguered savers suddenly find themselves besieged by political suitors. The Tory leader David Cameron yesterday pledged to help "the innocent victims" of recession by abolishing the tax on savings for basic rate taxpayers and raising the tax free personal allowance for pensioners. The Conservatives are not alone in turning their attention to those with some money in the bank. Gordon Brown said at the weekend that he plans to do "more to help savers" in the run up to March's Budget.

It is quite right that our politicians should pay some attention to this particular constituency. Savers have had a wretched time of late. The Bank of England has been busy cutting interest rates in recent months. The Bank's base rate is now below the level of inflation, making it cheaper (in theory) to borrow money than to save it. Those who live off their savings and those buying annuities are being particularly hard hit.

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Falling interest rates for savers also seem to offend our sense of natural economic justice. This economic crisis is, in part, a consequence of businesses and households loading up on cheap borrowing. The near collapse of the global financial system last October has taught us that an economy fuelled by debt is simply unsustainable. As a country, we need to start living within our means.

And yet there are big problems in trying to right the wrongs of the years of excess in a sudden burst of economic prudence, especially in the present environment of collapsing consumer confidence. Banks, businesses and households are in a state of deep shock at the bursting of the credit bubble. All these economic actors are retrenching frantically, reducing their lending, cutting their outgoings and paying off their borrowing. After years of reckless spending, they are furiously saving.

This might seem rational to each of them, but the consequence of this collective prudence is that spending power is being sucked out of the economy at a destabilising rate. Collapsing demand is likely to make this downturn even longer and more painful than it otherwise would be.

If ministers were to attempt to take drastic action to make saving more attractive, for instance by seizing back control of interest rates from the Bank of England and putting them up, it would crucify the wider economy. And savers would suffer as much in those circumstances as those who borrowed recklessly in the boom. It is also worth bearing in mind that if deflation were to take a grip on the UK this year (something many economists are predicting) the value of people's savings would actually increase in relative terms. There is a danger that Government action to help savers could end up being counter-productive.

There should, however, be a middle way. In the immediate term, the Government could do more to protect the investments of savers, particularly those who rely on their investments to live, without undermining demand still further. Tax relief, as the Tories are advocating, could be the answer (although there is an inevitable risk that the extra income will simply be saved rather than spent).

It will be a difficult balancing act. And there will be powerful influences calling for the ministers to forget savers and focus exclusively on maintaining spending and employment. That would be a mistake. We need to get out of this economic hole, but, when that is done, the hard work of building a sustainable economy begins. We will need savers for that task ahead.