Fresh warning on saving shortfall

URGENT action is needed to make UK consumers start saving more money if Gordon Brown's sums on the UK economy are to add up, a report warned today.

Influential forecasting group Ernst & Young Item Club, which bases its predictions on the Treasury's model of the economy, said the country's low savings rate was affecting the balance of the economy.

The group's spring forecast painted a strong picture of the economy in the short term, with consumer confidence high and economic growth on track for the next year. It predicted growth of 2.7% this year followed by 2.4% in 2006.

But it warned issues such as savings and the country's pensions deficit would prove a strain in the longer term.

It said there were fewer incentives to persuade people to put cash aside and that action was required to resolve the problem 'as a matter of urgency'.

Peter Spencer, chief economic adviser to the Item club, said: 'We are simply saving to little as a nation. Our savings culture has all but disappeared and this is affecting the balance of the economy.'

Household savings rates had collapsed since 1998 and the occupational pensions system was 'seriously degraded', he added.The report said: 'As well as easing the tax burden in the medium term, an increase in savings would help rebalance the economy in the short term.'

It also repeated warnings that the Chancellor's 'golden rule' on the economy was likely to be breached and that tax rises would be necessary at the next Budget as a result. It forecast a budget deficit of £12bn for 2005-06 against the Chancellor's prediction of £6bn.

The report highlighted the danger of the UK's weak trade performance, adding: 'If the next government ducks these issues, it will be very hard to handle the strain on the tax system in future decades.'

Meanwhile, Item continued to believe that any decline in house prices would be modest, with no sign of a serious downturn. It said it was very hard to see a major weakening in the housing market or the High Street against the background of the current stable economy.