When Saving Becomes a Danger for the Economy

The increased savings rate of people in Austria, recently at 11.8 percent, has been a recurring topic in light of the recession. After all, money in savings accounts hardly helps the economy. The Momentum Institute, which is close to the Chamber of Labor, has now presented approaches that, in its view, could reduce the savings rate and stimulate the economy. It mainly revolves around a redistribution from rich to poor to support the demand of lower incomes and thus the economy.

"Wealthy households" save, the economy lacks money

Vienna. Because while "wealthy households can save a lot," "expenses exceed income for the poor," according to a Momentum statement. The savings rate increased from 8.7 to 11.8 percent from 2023 to 2024 in this country, while it was 8.4 percent in the Eurozone last year. Thus, local households saved almost 34 billion euros last year, more than 10 billion more than in 2023. "The additionally saved income alone corresponds to over two percent of economic output and is missing in consumption," the institute stated.

Income increases recently went directly into savings

The savings rate measures what portion of disposable net income households set aside. From an overall economic perspective, incomes in Austria increased by 3.5 percent in real terms in 2024. Consumption, however, grew by only 0.1 percent according to Momentum. "The local population thus saved almost all their income increases from the previous year in 2024 on average."

"This harms the economy because instead of the money reaching companies and stimulating the economy, it ends up in savings accounts or with the particularly wealthy in stocks and funds," said Momentum economist Miriam Frauenlob. "However, it is important not to generalize all households. Those who already have to spend more to make ends meet cannot be blamed for the sluggish economy because too much is being saved."

Households in the lower income brackets could hardly save. The poorest have a negative savings rate, unable to make ends meet with their disposable income. Wealthier individuals save more, which is lacking in consumer spending. Only from the fourth decile can an average of 63 euros per month be saved in small volumes. In comparison, a household in the top decile saves 33 times as much with more than 2,000 euros.

Therefore, from the perspective of economists close to employee representation, the lower-income deciles should be strengthened. The suspension of the valorization of family benefits affects lower-income households much more strongly. "In the lower income half, almost the entire disposable income goes into consumption. If they have less, less also ends up with companies and ultimately less with the state due to missing tax revenues," says Frauenlob.

Measures Against "Precautionary Saving"

There are many economic policy measures that can be used to reduce the savings rate. "First and foremost, a redistribution downwards would almost automatically lower the savings rate, as the top deciles have a low propensity to consume." Furthermore, "precautionary saving" can be minimized "by the government reducing the fear of unemployment, for example through short-time work, employment foundations, employment initiatives for the long-term unemployed, and a job guarantee." Additionally, an increase in the net replacement rate for unemployment benefits from the current 55 to 70 percent is appropriate - a long-standing demand of the Chamber of Labor and the union.

Instead of freezing family and social benefits, wealth and inheritance taxes should be reintroduced, according to the Momentum Institute. This could maintain consumer demand from lower-income individuals and families while simultaneously reducing the savings rate of the wealthiest.

The capital gains tax should be increased. This would achieve progressivity in taxation. Raising the tax rate to 30 percent, as in Sweden, could generate 560 million euros per year in additional revenue. The corporate tax should be increased again. For this, one-time payments and over-subsidization must be abolished and subsidies reduced.

(APA/Red)

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