Savings are a key reference point in the increasingly globalised world of economy.
Savings can be examined in its many strands:
- In terms of entities: countries, families (people) and companies;
- In terms of maturities (short and medium term and long-term savings);
- At an instrumental level, since there is a variety of savings instruments, from the more simple and mainstream (for e.g., term deposits, investment funds, postal service certificates) to the more complex and innovative ones (derivatives, futures, options, interest rate swaps, etc.);
- And in terms of risk (for e.g., buying shares involves more risk to the investor than making term deposits). However, in this case the risk is inversely proportional to the potential earnings, i.e., greater risk means higher yields. So consumers need to be well-informed about the savings they make, as often they may be at risk of losing, wholly or in part, the money invested.
Moreover, what we must remember is the main effects of savings in the economic world and on the various operators /entities, and also from a taxation point of view.
So, if we look at people/families, savings are mostly the result of their income from work, or are obtained from other sources (inheritances, donations, etc.). They are usually kept in Credit Institutions (banks).
The role of savings in the banking activity and in economy in general is crucial, in that banks attract savings and pay their holders (interest, various forms of yields) and lend those amounts to companies, to the State and also to private individuals, thus granting credit to the economy – e.g., investment credit (companies/State and consumer credit/mortgage loans (private clients), paying those entities the interest rates negotiated with those banks, on the basis of credit risk and other criteria. This is known as the leverage effect of savings in the economy.
The difference between the interest paid by banks for their clients’ savings and the interest they charge for the loans granted is known as the brokerage margin, which directly affects the operating accounts and profits of banks. We must not forget that the entire banking activity must be regulated, and that Banco de Portugal plays a key role in this regard, in that it is the supervisory entity, i.e., it monitors the banks’ activities, requires banking secrecy and compliance with prudential rules in the management thereof and, therefore, in the granting of credits, so that there are no significant imbalances likely to cause systemic crises in the financial world, which obviously has a direct impact on the economy.
In some measure, this is what happened to the 2008 crisis, resulting in the Spartan situation now endured by families and States. In other words, because States (governments), companies and families borrowed heavily, beyond reasonable, and serious mistakes were made by Credit Institutions (banks) and also by supervisory entities (e.g., Banco de Portugal), the Banks had to rush the so-called financial deleveraging, as they had reached a cut-off point of having no money to lend the economy (lack of liquidity), at considerable risk to its own survival, as the credits granted far exceeded the clients’ deposits (sometimes almost doubling the value). This was further exacerbated by the fact that much of the credit granted was considered bad loans, or overdue credit, since many clients are unable to pay them. This lack of liquidity and the deteriorating risk credit caused the financial situation and soundness of Banks to be questioned, the economy shrunk and people have begun to consume less, because many companies have closed down, forcing people into the social scourge of unemployment.
Finally, a brief note on taxation (tax) on savings. Private individuals and companies pay tax on their savings income (e.g., the State charges 28% on term deposit interest of private clients … and 25% to companies). This tax has increased in recent years to address the lack of liquidity of central and local government entities, i.e., the State, as a result of all the errors made by its rulers and governors).
This means that, once again, employees will suffer the most with the crises, that is, the middle class. This forces us to rethink and address a new paradigm for the State and society in general.
One final thought: the taxpayer pays taxes on labour (IRS/ IRC – Income Tax and Corporate Tax), excise duties (VAT, IMT – Value Added Tax and Municipal Property Tax) and even pays tax on savings, which, despite having been completely depleted thereof, still manages to save (IRS/(IRC). Behold, the State in all its glory!
By Dr. António Araújo