The windfall - spend it or save it for a rainy day?

It's the biggest cash hand-out this country has known. What we do with it will shape not only our personal fortunes but our whole society
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The Independent Online
Feeling richer today? One million people this week learned that they will get payouts of pounds 1,400 apiece - the members of the Northern Rock building society. This year some 16 million Britons - one-third of the adult population - will receive a total of more than pounds 20bn from the floats of building societies on the stock market. The biggest, the Halifax/Leeds, will affect 8.5 million people; the Alliance and Leicester and the Woolwich, another 5 million.

These are big numbers - the largest transfer of cash that has ever taken place in this country, far larger than any "give-away" budgets. What we do with the money - in particular whether we spend it or save it - will obviously have a profound impact on the economy. But even more important, it will tell us something about social behaviour, and about a potentially devastating new fissure in our society.

The working assumption of most economists is that the bulk of the windfall will be saved in the first year; the Bank of England reckons only 5-10 per cent will be spent. This sounds a bit optimistic (or pessimistic depending on your point of view), for the results of a Mori survey suggest that people will spend 10-25 per cent of the windfall, mainly on holidays. Were the spending at the top end of the range it would add 1 per cent to consumer spending, big enough to feel. But we really will not know what people will do with their money until they have it in their bank accounts, and then not for a few years. Maybe people won't spend it in year one, but then the car needs a new clutch and ....

The only comparable UK experience was in the late 1980s, when house prices boomed and the new expression "equity take-out" entered the language. People cashed in part of the additional value of their home by increasing their mortgage and then spending the difference. But that other, and less agreeable, expression "negative equity" entered the language shortly afterwards. Maybe that experience will change behaviour. Will the new insecurity encourage people to save?

US experience is interesting. Americans have become much richer in the past three years, not from windfall gains from building society conversions, but from the general rise in the stock market. This wealth is spread quite a way down the income scale, thanks to the practice in the US of using accounts with mutual funds - unit trusts - for regular saving, rather in the way we use bank or building society accounts.

It seems that, far from spending their Wall Street bunce, US citizens are saving it. Back in the middle 1980s, the annual rise in US consumption hit 6 per cent. Through the middle 1990s, it has been a little over 2 per cent and it does not seem to have risen at all with the boom of the last three years. Maybe Americans instinctively don't trust the boom on Wall Street.

Were this reluctance to spend to happen in the UK, from a general economic point of view it would be very encouraging. If people save, then the economy is less likely to get overheated, and the Government is less likely to have to stick up interest rates to cool it down. The US investment bank Salomon Brothers, which has done some work on the economic impact of the windfalls, reckons that, provided the cash is mainly saved, interest rates will only go up 0.5 per cent this summer and stay below 7 per cent next year.

There is, however, another and more disturbing aspect. People who have money will save it, which is fine. But what of the people who don't? It is great that one-third of the adult population of the country is getting these gains, but that means two-thirds are not. And the problem is not just between one group of people who are a thousand or two richer than the other group. It is between one group who through their lifetime will tend to be savers and another who will tend not to be. It is a division as stark as that between home-owners and council tenants, and it is going to grow.

It is going to grow because governments have little option but to encourage people to save more for their old age. This is not a Tory/Labour division, though the rhetoric the parties adopt may be different. The harsh arithmetic of a smaller population of working age paying for a large one of retired age means that governments have to try to persuade as many people as possible to save for their own pensions.

At the moment there are just over four people of working age in the UK for every pensioner. By 2030, when the typical 30-year-old Independent reader of today will be thinking of drawing his or her pension, there will be just over two-and-a-half. By 2040, when these people will be in their energetic 70s, there will be fewer still.

And of course the cost is not just in pensions. It is also in health care for the very elderly, the over-80s, who are increasing in numbers even faster.

So expect enormous pressure to save. Governments of both parties will spend the next 30 years devising new ways of encouraging us, maybe bullying us, to put aside as much money as we can. It will not just be a new individual savings account, as suggested by New Labour. I would expect the UK to have a compulsory savings scheme, with money deducted from wages, by the year 2005, whichever parties win the next two elections.

But we cannot all save very much. Successful young professionals can run a smaller car or forego the third holiday. People in less well paid jobs can't save so much. People not in jobs can't save at all.

Besides, what do you do with people who could save, but won't? It is a great ethical dilemma. You could have two people on identical incomes all their lives, one who saves steadily, the other who spends up to their income. Should the saver pay taxes to support the spender in old age? If you say yes, you are agreeing to punish the prudent and reward the feckless. If you say no, you risk widening divisions in society, widening the gap between the quite rich and the pretty poor.

For that is what these windfalls do. They reward the richest one-third of the country. Nearly half the two highest socio-economic groups will get pay-outs, whereas only 17 per cent of the two lowest will get them.

There is no easy solution. We have to persuade people to save more, which means rewarding savers so that they become richer. But we have also to persuade those people who have become rich through their own hard work and prudence to accept that some of the fruits of their labour will be taken away. The glue that holds society together depends on it.